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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 13 OF 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
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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)
<TABLE>
<S> <C>
DELAWARE 52-1910135
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(State or jurisdiction of Incorporation or Organization) (IRS Employer Identification Number)
</TABLE>
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666 ELEVENTH STREET, NW, SUITE 200, 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 shares outstanding of each of the issuer's classes of common
equity, at March 31, 1999: 2,949,755 shares of Common Stock.
Transitional Small Business Disclosure Format (check one) Yes No X
--- ---
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COMPLETE WELLNESS CENTERS, INC.
FORM 10-QSB
INDEX
<TABLE>
<S> <C>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
CONDENSED CONSOLIDATED BALANCE SHEETS
MARCH 31, 1999 AND DECEMBER 31, 1998................ 3
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THREE MONTHS ENDED MARCH 31, 1999 AND
MARCH 31, 1998 ..................................... 4
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THREE MONTHS ENDED MARCH 31, 1999 AND
MARCH 31,1998....................................... 5
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS.......................................... 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS................. 9
PART II. OTHER INFORMATION........................................ 15
ITEM 1 LEGAL PROCEEDINGS........................................ 15
ITEM 2 CHANGES IN SECURITIES AND USE OF PROCEEDS................ 16
ITEM 3 DEFAULTS UPON SENIOR SECURITIES.......................... 16
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS...... 16
ITEM 5 OTHER INFORMATION........................................ 16
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K......................... 17
SIGNATURES ......................................................... 17
</TABLE>
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ITEM 1 -- FINANCIAL STATEMENTS
COMPLETE WELLNESS CENTERS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
-------------------------------------
(Unaudited) (Audited)
ASSETS
<S> <C> <C>
Current Assets:
Cash and cash equivalents $630,706 $444,963
Patient receivables, net of allowance for
Doubtful accounts of $6,502,614 and $6,255,238 6,915,445 5,766,369
Inventory 46,943 53,405
Prepaid expenses 2,475 9,661
Other assets 45,615 49,774
-------------------------------------
Total current assets 7,641,184 6,324,172
Furniture and equipment, net 339,014 369,583
Deposits 31,983 31,983
-------------------------------------
Total assets $8,012,181 $6,725,738
=====================================
LIABILITIES AND STOCKHOLDERS' EQUITY/( DEFICIT)
Current liabilities:
Current portion of notes payable $ 569,000 $ 0
Accounts payable and accrued expenses 5,992,891 6,693,321
Accrued management fees and leases 4,714,301 4,020,288
-------------------------------------
Total current liabilities 11,276,192 10,713,609
Note payable 350,000 392,000
Stockholders' equity/(deficit):
Common Stock,$.0001665 par value per share
10,000,000 shares authorized, 2,949,755
shares issued and outstanding 490 409
Convertible Preferred Stock, $.01 par value
per share, 8% Cumulative, 112,428 shares
currently issued and outstanding 5,153,728 5,016,620
Additional capital 6,807,307 6,119,833
Accumulated deficit (15,575,536) (15,516,733)
-------------------------------------
Total stockholders' deficit (3,614,011) (4,379,871)
-------------------------------------
Total liabilities and stockholders' equity/(deficit) $8,012,181 $6,725,738
=====================================
</TABLE>
See notes to condensed consolidated financial statements.
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COMPLETE WELLNESS CENTERS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
MARCH 31, MARCH 31,
1999 1998
-------------------------------------
(Unaudited) (Unaudited)
<S> <C> <C>
Revenue:
Integrated medical clinics $4,502,912 $4,874,139
Weight management centers 0 2,368,656
Other income 85,173 85,682
-------------------------------------
Total operating revenue 4,588,085 7,328,477
Direct expenses:
Salary and consulting costs 803,541 1,521,834
Management fees 3,184,923 2,626,890
Cost of revenues 6,462 469,476
Rent 41,471 508,574
Advertising and marketing 3,147 209,763
Bad debt expense 155,949 1,047,236
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Total direct expenses 4,195,493 6,383,773
Network development cost 0 203,658
General and administrative 274,322 1,118,588
Depreciation and amortization 31,653 85,783
-------------------------------------
Operating gain/loss 86,617 (463,325)
Interest expense 9,500 1,523
Interest income 1,187 21,863
Minority interest 0 7,179
-------------------------------------
Net income/loss before income taxes 78,304 (435,806)
Income taxes 0 0
-------------------------------------
Net income/loss after income taxes $78,304 ($435,806)
=====================================
Income/loss per share - basic $0.03 ($0.19)
=====================================
- diluted $0.01 ($0.19)
=====================================
Weighted average common shares - basic 2,949,755 2,534,430
=====================================
- diluted 6,219,177 2,534,430
=====================================
</TABLE>
See notes to condensed consolidated financial statements.
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COMPLETE WELLNESS CENTERS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
MARCH 31, MARCH 31,
1999 1998
-------------------------------------
(Unaudited) (Unaudited)
<S> <C> <C>
Operating activities
Net gain/loss $78,304 ($435,806)
Adjustments to reconcile net gain/loss to net
cash used in operating activities:
Minority interest 0 (7,179)
Depreciation and amortization 31,653 89,245
Provision for bad debt 155,949 1,047,236
Recognition of compensatory granting
non-qualified stock options 0 931
Recognition of the issuance of common
stock warrants an options 0 14,426
Changes in operating assets and
liabilities:
Accounts receivables (1,305,024) (2,238,926)
Other current assets 17,807 (713,925)
Deferred taxes 0 0
Accounts payable and other current
liabilities 343,583 288,566
-------------------------------------
Net cash used in operating activities (677,728) (1,955,432)
Investing activities
Purchase of equipment (1,084) (97,729)
-------------------------------------
Net cash used in investing activities (1,084) (97,729)
Financing activities
Payment of notes 0 (505,006)
Proceeds from sale of common stock 687,555 0
Proceeds from sale of preferred stock 0 4,532,320
Proceeds from notes payable 177,000 0
-------------------------------------
Net cash provided by financing activities 864,555 4,027,314
-------------------------------------
Net increase in cash and cash equivalents 185,743 1,974,153
Cash and cash equivalents at beginning
of year 444,963 804,924
-------------------------------------
Cash and cash equivalents at end of period $630,706 $2,779,077
=====================================
</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)
MARCH 31, 1999
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 three month period ended March 31, 1999 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1999.
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 dated March 31, 1999, for the period ended
December 31, 1998. Certain prior period amounts have been reclassified to
conform with the current period presentation.
NOTE B - NET INCOME/(LOSS) PER SHARE
The Company's net income/(loss) per share calculations are based upon
the weighted average number of shares of Common Stock outstanding. 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 the 8% Senior Convertible Preferred
Stock (the "Senior Convertible Preferred Stock") have been excluded from the
computation because the effect of their inclusion would be anti-dilutive for
March 31, 1998.
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In accordance with SFAS No. 128, the table below presents both basic and
dilutive income/(loss) per share:
<TABLE>
<CAPTION>
Three Months Ended
March 31, March 31,
1999 1998
<S> <C> <C>
Net Income/(Loss) $78,304 $(435,806)
========= =========
Weighted average shares outstanding - Basic 2,949,755 2,534,430
Incremental shares under stock option plans 135,537 -
Conversion of 8% Senior Convertible
Preferred Stock 3,133,885 -
--------- ---------
Weighted average shares outstanding - diluted 6,219,177 2,534,430
========= =========
Basic income/(loss) per share $0.03 $(0.19)
========= =========
Diluted income/(loss) per share $0.01 $(0.19)
========= =========
</TABLE>
NOTE C - FINANCING
On January 26, 1999 the Company received $77,000 from Wexford Partners,
LLP ("Wexford") which constituted the last part of the $472,000 loan agreement
between the Company and Wexford.
On February 22, 1999 the Company received a loan of $100,000 from RVR
Consulting ("RVR"). Two of the principles of RVR are Joseph J. Raymond, Jr., the
Chairman and CEO of the Company and Sergio Vallejo, the Chief Operating Officer
of the Company. The loan has no stated interest rate, nor does it include a
term.
On March 4, 1999 the Board of Directors modified a consulting agreement,
previously approved by the Board, between the Company and Structure Management,
Inc. ("Structure"). Structure has a consulting agreement with the Company to
provide consulting services related to operations and financing of the Company.
Under the existing consulting agreement, Structure was granted warrants to
purchase 120,000 shares of common stock at a price of $2.00 each. The Board
approved the conversion of such warrants to options for the purchase of common
stock of the Company priced at $2.00 per share. Following the conversion, the
options were exercised and the shares have been issued. The Company received
$240,000 for the exercise of these options.
Additionally, the Board of Directors approved the establishment of a
consultants stock option plan (the "1999 Consultants Stock Option Plan"). The
Company made a grant to Jeffrey Raymond of 117,500 options to purchase common
stock in the Company, pursuant to the 1999 Consultants Stock Option Plan, at the
intraday trading low of the Company's common stock on March 9, 1999 or $1.25.
Following the grant of such options, Mr. Jeffrey Raymond exercised those options
and shares were issued. The Company received $146,875 for the exercise of such
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options. Mr. Jeff Raymond is the brother of Mr. Joseph Raymond, Jr., Chairman
and CEO of the Company. The Board also made a grant of 237,500 options, from the
1999 Consultants Stock Option Plan, to purchase common stock in the Company at
the intraday low trading price on March 9, 1999 or $1.25 to John Trevisan, a
principal owner of Texas International Investment, Inc. Following the grant of
such options, Mr. Trevisan exercised his options and shares were issued. The
Company received $296,875 for the exercise of these options.
NOTE D - DISCONTINUANCE OF CERTAIN LINES OF BUSINESS
On November 13, 1998, the Company's Board of Directors voted to sell,
close and/or otherwise divest the operations of Complete Wellness Weight
Management, Inc., ("CWWM"), one of its wholly owned subsidiaries.
On April 21, 1999 the Company's Board of Directors approved a formal
plan for CWWM to file for Chapter 7 bankruptcy proceedings. The Company
anticipates that the formal filing for such proceedings will take place prior to
the end of May 1999.
At the date of bankruptcy filing, this subsidiary will no longer be
included in the Company's consolidated financial results. The Company's
investment in this subsidiary will be adjusted to reflect those liabilities that
are guaranteed by the Company. The remaining liabilities of the subsidiary,
approximately $4,509,000, will be adjusted through changes to additional paid in
capital of the Company.
NOTE E - OTHER TRANSACTIONS
On October 1, 1998 the Company filed a registration statement with the
Securities and Exchange Commission ("SEC") to comply with the exercise of
certain demand registration rights by the holders of shares of its Common
Stock. Such shares of Common Stock were acquired upon conversion of shares of
the Senior Convertible Preferred Stock. Subsequent to the filing, the Company
arranged for a private sale of the Common Stock to twelve purchasers. On
January 20, 1999 the Company amended the registration statement to respond to
SEC comments on the first filing in addition to adding shares of Common Stock
to the registration statement.
On February 10, 1999 the Company asked the SEC to formally withdraw the
amended registration statement as the Company's Board of Directors could not
reach unanimous agreement as to its filing. It is currently the Company's plan,
assuming Board of Director approval, to file a new registration statement prior
to June 30, 1999. If filed, the Senior Convertible Preferred Stock holders and
certain other Common Stock holders will be the selling shareholders. This
registration statement is expected to increase the number of fully tradable
shares, if certain warrants are exercised, by approximately 1,250,000 shares if
and when declared effective.
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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.
Through March 31, 1999 the Company has directly formed 93 medical
corporations representing 122 clinics, of which 81 are in operation as of that
date. The operations of all the operating medical corporations are included in
the consolidated financial statements of the Company. At March 31, 1999, the
Company, as a result of its medical operations, had revenues of $4,537,631 and
income from operations of $107,311, without regard to certain corporate overhead
allocations.
Included in the Company's March 31, 1999 consolidated financial
statements are the results of operations of Complete Wellness Smoking
Cessation, Inc. ("Smokenders"). For the three months ended March 31, 1999,
Smokenders had revenue of $39,022 and losses from operations of $29,007.
The closings, divestitures and spin-offs of non-profitable or unrelated
business units, such as Optimum Health Services, Inc., Complete Wellness Weight
Management, Inc. and Complete Billing Inc., are expected to allow management to
focus on the Company's core business, integrating traditional and
complementary/alternative medical centers, and significantly improve the
Company's operating results in future periods.
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RESULTS FROM OPERATIONS
THREE MONTHS ENDED MARCH 31, 1999 COMPARED TO
THREE MONTHS ENDED MARCH 31, 1998
Revenue. During the three months ended March 31, 1999 the Company had
revenues of $4,588,085 as compared to $7,328,477 for the three months ended
March 31, 1998. The decrease of $2,740,392 was due primarily to Complete
Wellness Weight Management being idle in 1999. CWWM revenues for the three month
period ended March 31, 1998 were $2,368,656. Integrated Medical Center revenues
for the three months ended March 31, 1999 were $4,502,912 as compared to
$4,874,139 for the three months ended March 31, 1998. The decrease of $371,227
was attributable to the lack of growth of the existing 81 Integrated Medical
Centers. The Company had a net reduction of 4 Integrated Medical Centers after
March 31, 1998. During the three months ended March 31, 1999 Smokenders had
revenues of $39,022 as compared to $45,552 for the three months ended March 31,
1998. The decrease of $6,530 was due to a slow down in the seminar programs,
which the Company believes will be continual.
Salary and Consulting Costs. During the three months ended March 31,
1999 the Company incurred salary and consulting costs of $803,541 as compared to
$1,521,834 three months ended March 31, 1998. The decrease of $718,293 was
primarily due to Complete Wellness Weight Management being idle in 1999 and the
reduction of personnel at the corporate headquarters.
Management Fees. During the three months ended March 31, 1999 the
Company incurred management fees of $3,184,923 as compared to $2,626,890 for the
three months ended March 31, 1998. These are fees that are paid to the
affiliated chiropractors' admincorps for managing the day to day operations of
the Integrated Medical Centers. The increase of $558,033 for the three month
period ended March 31, 1999 was due primarily to reduced fees due CWC as a
result of contract changes in 22 of the existing 81 Integrated Medical Centers.
Rent. During the three months ended March 31, 1999 the Company incurred
rent expenses of $41,471 as compared to $508,574 for the three months ended
March 31, 1998. Rent consists of amounts incurred for administrative and
medical office space and certain equipment leased by the Company at corporate
headquarters and the medical clinics. The decrease of $467,103 was due primarily
to Complete Wellness Weight Management being idle in 1999.
Advertising and Marketing. During the three months ended March 31, 1999
the Company incurred advertising and marketing expenses of $3,147 as compared to
$209,763 for the three months ended March 31, 1998. The decrease of $206,616 is
primarily attributable to Complete Wellness Weight Management being idle in
1999.
Bad Debt Expense. During the three months ended March 31,1999 the
Company had bad debt expenses of $155,949 as compared to $1,047,236 for the
three months ended March 31, 1998. The decrease of $891,287 was primarily due to
the decrease in revenue of the medical clinics for the period and the increase
in collections of outstanding accounts receivable.
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Network Development Costs. All network development costs related to the
activities of Optimum Health Services, Inc. During the three months ended March
31, 1998 the Company's OHS subsidiary experienced network development costs of
$203,658. As a result of the spin-off of OHS in November 1999 the Company will
not incur any of these costs in 1999.
General and Administrative. During the three month period ended March
31, 1999, the Company incurred general and administrative expenses of $274,322
as compared to $1,118,588 for the three months ended March 31, 1998. The
decrease of $844,266 was due primarily to Complete Wellness Weight Management
being idle in 1999 and the reduction of corporate overhead in such categories as
insurance costs, legal and accounting costs, travel and entertainment costs and
various other corporate costs such as automobile, telephone, postage and
printing and reproduction, equipment rental, supplies, professional development,
recruiting and repairs.
Depreciation and Amortization. During the three months ended March 31,
1999, the Company incurred depreciation and amortization expense of $31,653 as
compared to $85,783 for the three months ended March 31, 1998. The decrease of
$54,130 resulted from the previous write down of idle assets.
Operating Income. The consolidated operating income of the Company was
$78,304 for the three months ended March 31, 1999 as compared to a consolidated
loss of $463,325 for the three months ended March 31, 1998. The increase
resulted from improved corporation overhead reductions, operations at the
Company's medical centers and benefited from the discontinuance of the
operations of OHS, CWWM and CBI.
Interest Expense. During the three months ended March 31, 1999 the
Company had interest expense of $9,500 as compared to $1,523 for the three
months ended March 31, 1998. The increase of $7,977 resulted from the interest
due on notes payable.
Interest Income. During the three months ended March 31, 1999, the
Company had interest income of $1,187 as compared to $21,863 for the three
months ended March 31, 1998. The decrease of $20,676 resulted from a lower
amount of invested funds in 1999 as compared to the same periods in 1998.
LIQUIDITY AND CAPITAL RESOURCES
The Company has experienced net losses, negative cash flow from
operations and an accumulated deficit since its inception. For the three months
ended March 31, 1999, the Company had net income of $78,304 as compared to a net
loss of $435,806 for the three months ended March 31, 1998. At March 31, 1999,
the Company had working capital of $(3,635,008) and an accumulated deficit of
$15,575,536. Net cash used in operations for the three months ended March 31,
1999 was $(677,728), as compared to $(1,955,432) for the three months ended
March 31, 1998. Negative cash flows are attributable primarily to net losses in
1998 and increases in cash flows for the three months ended March 31, 1999 are
attributable primarily to increases in accounts receivable net of accounts
payable and other current liabilities. For the three months
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ended March 31, 1999 the Company used $1,084, as compared to $97,729 for the
three months ended March 31,1998, for the purchase of equipment.
The Company intends to develop no fewer than 21 additional medical
clinics by December 31, 1999. The average cost to the Company to develop a
medical clinic is approximately $15,000.
The Company had previously committed to fund future working capital
requirements of Smokenders totaling $98,000 which has been totally funded
through December 31, 1998 and is reflected in the accompanying condensed
consolidated financial statements. In addition, the Company is obligated to pay
royalty fees of 5% of total revenues to Oxford Health Plan and a minimum of
$26,000 per annum to the founders of Smokenders as a result of its acquisition
of Smokenders. This obligation is payable in annual installments over a 10 year
period.
The Company has entered into employment agreements with certain key
employees which generally provide for continued employment through August 31,
2000 at an aggregate annual compensation level of $400,000. In the event the
employees subject to such agreements were terminated by the Company for reasons
other than "with cause", the employees would receive 6 to 12 months compensation
and benefits upon separation. The Company has not obtained key man life
insurance for employees subject to such employment agreements.
In addition, the Company has entered into various consulting agreements
which generally provide for payment of "finders fees" of $1,500 to $4,000 for
each chiropractic clinic identified by the consultant and integrated by the
Company subject to certain maximum amounts ranging from up to $1,000,000 per
consultant. Certain consulting agreements also provide for the Company to pay
royalties ranging from 1% to 10% of gross collections at Integrated Medical
Centers identified by the consultant for periods ranging from 5 to 25 years
after integration. One consulting contract also provides for the payment of 1%
of any increases in gross cash collections over the preceding 12 month period,
at any Integrated Medical Center which the consultant provides specific services
to.
The Company and its affiliates are involved in the following material
legal proceedings:
Complete Wellness Centers, Inc. is currently involved in four material
legal proceedings. The first matter is an action brought in Sarasota Florida in
July 1997 by Jeffrey Friedlander, a medical doctor, against the Company for
alleged back wages owed him by the Company for work he performed at an
Integrated Medical Center in Florida. The case was tried by a jury in March,
1999, and a verdict was entered against the Company in the amount of $141,000,
which includes $100,000 in punitive damages. The Company contests the jury
finding and has appealed the decision. The Company expects to settle this matter
on terms favorable to the Company.
The second matter is a breach of contract action brought by
Comprehensive Billing Services, Inc., a medical billing company, against the
Company and one of the Integrated Medical Centers in Tampa, Florida, in May 1998
alleging a breach of contract and seeking damages of approximately $14,500. The
Company has submitted its answer and
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discovery is currently underway. The Company intends to defend the suit
vigorously.
The third matter involves an action initiated by James Renegar, a
massage therapist, in Pinellas County, Florida in May 1998 against the Company
for an unspecified amount of back wages which the therapist alleges is owed him.
He has sued the Company and the Integrated Medical Center for the wages,
alleging an oral contract with the Company. The Company denies that he was an
employee of the Company and is vigorously defending the action.
The fourth matter involves a suit by the former president, Hiam Zittman,
of a Company subsidiary, Complete Wellness Weight Management, Inc. in Federal
Court in the Southern District of New York in October 1998, alleging breach of
his employment contract by the Company. Mr. Zittman was terminated for cause in
April, 1998, and filed a breach of contract action seeking damages under the
contract. The Company intends to defend the action vigorously and has filed an
answer in the matter.
In addition to the matters described above, the Company's subsidiaries
are involved in the following legal matters:
Complete Wellness Weight Management, Inc.("CWWM"), a wholly-owned
subsidiary of the Company, ceased operations in December, 1998. At the time, it
vacated the various store locations which it had rented to conduct business. In
vacating the premises, CWWM had outstanding lease obligations, which were not
guaranteed by the Company. Many of the landlords of those various locations have
brought suit against CWWM seeking to recover damages under the leases, for past
and future rent and associated charges. The Company has not opposed those
collection actions, and several such suits have proceeded to judgment against
CWWM. Although no plaintiffs in such suits have obtained judgments against the
Company, any attempt by any such creditor of CWWM to impose any liability on the
Company will be promptly and vigorously defended by the Company. Likewise,
certain other creditors, including vendors to various CWWM facilities, have
brought collection actions against CWWM. Once again, although no such suits have
obtained judgments against the Company, any attempt by any such creditor of CWWM
to impose any liability on the Company will be promptly and vigorously defended
by the Company.
The Company has a number of ongoing disputes with former employees,
vendors and Integrated Medical Center Doctors. The Company believes these
disputes are in the normal course of business and are not material. The Company
endeavors to settle such disputes in a timely manner.
In November 1997, various facilities of the Company's operations were
searched by federal authorities pursuant to search warrants, and the government
removed various computer equipment, records and documents. During 1998, various
employees of the Company and certain subsidiaries were served with subpoenas
requesting records and documents related to billing and claims coding, clinical
relationships and corporate records. The Company believes it may be a target in
this investigation. Only one employee has received a target letter stating that
the employee is a subject of the investigation. While it is too early to predict
the outcome of any of the ongoing investigations of the
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Company or the initiation of any additional investigations, were the Company to
be found in violation of federal or state laws relating to Medicare, Medicaid,
CHAMPUS or similar programs, the Company could be subject to substantial
monetary fines, civil and criminal penalties and exclusion from participation in
the Medicare, Medicaid or CHAMPUS programs and similar other reimbursement
programs. Any such sanctions could have a material adverse effect on the
Company's financial position and results of operations.
The Company is currently seeking additional financing in the form of a
private placement of up to 1,000,000 shares of its common stock, the net
proceeds of which are expected to repay current debt, fund the development of
additional Integrated Medical Centers, and to fund general corporate working
capital requirements. The Company anticipates utilizing the services of one or
more investment advisors/bankers to assist the Company in consummating this
financing.
Year 2000 Issue
The Year 2000 issue is the result of computer programs being written
using two digits rather than four to define the applicable year. Any of the
Company's operational equipment or internal computer software that have
time-sensitive programs may recognize a date using "00" as the year 1900 rather
than the year 2000. This could result in a system failure or miscalculations
causing disruption of operations, including, among other things, a temporary
inability to process transactions, send invoices, or engage in similar normal
business activities. Similar failures in the Company's medical clinics could
result in an impairment of revenue recognition due to significant future
obligations, impairment of future services provided by the Company's
subsidiaries, or potential other liability.
The Company has been and is continuing to assess the implications on its
operations of the Year 2000 issue. At March 31, 1999, the process of evaluation
of the Company's services, products and internal systems was underway and is
expected to be completed by June 30, 1999. At this time, the Company is
satisfied that all of its major vendors have or are in the process of verifying
to the Company their Year 2000 compliance. The Company's internal systems have
been updated, where appropriate, to accomplish Year 2000 compliance. Any actual
impact of Year 2000 compliance on the Company's future results of operations,
capital spending, and business operations is not expected to be material.
Net Operating Loss Carryforward
At December 31, 1998, the Company and its wholly owned subsidiaries had
combined net operating loss carryforwards for income tax purposes of
approximately $3,030,000, which expire between 2010 and 2011. The Company files
a consolidated federal tax return with its wholly owned subsidiaries. CWC, LLC
was not included in this tax return through May 1998. CWC, LLC is treated as a
partnership for tax purposes and its gains and losses are reflected at each
member's level as of that date. In addition, these carryforwards may be
significantly limited under the Internal Revenue Code of 1986, as amended, as a
result of ownership changes resulting from the Company's Preferred Stock
financing and other equity offerings. A valuation allowance of approximately
$4,546,000 has been established at December 31, 1998 to offset any
14
<PAGE> 15
benefit from the net operating loss carryforwards, as it cannot be determined
when or if the Company will be able to utilize the net operating losses.
Utilization of the net operating loss carryforwards may be significantly
limited, based on changes in the Company's ownership.
Seasonality
The Company believes that the patient volumes at its Integrated Medical
Centers are not significantly affected by seasonality.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company and its affiliates are involved in the following material
legal proceedings:
Complete Wellness Centers, Inc. is currently involved in four material
legal proceedings. The first matter is an action brought in Sarasota Florida in
July 1997 by Jeffrey Friedlander, a medical doctor, against the Company for
alleged back wages owed him by the Company for work he performed at an
Integrated Medical Center in Florida. The case was tried by a jury in March,
1999, and a verdict was entered against the Company in the amount of $141,000,
which includes $100,000 in punitive damages. The Company contests the jury
finding and has appealed the decision. The Company expects to settle this matter
on terms favorable to the Company.
The second matter is a breach of contract action brought by
Comprehensive Billing Services, Inc., a medical billing company, against the
Company and one of the Integrated Medical Centers in Tampa, Florida, in May 1998
alleging a breach of contract and seeking damages of approximately $14,500. The
Company has submitted its answer and discovery is currently underway. The
Company intends to defend the suit vigorously.
The third matter involves an action initiated by James Renegar, a
massage therapist, in Pinellas County, Florida in May 1998 against the Company
for an unspecified amount of back wages which the therapist alleges is owed him.
He has sued the Company and the Integrated Medical Center for the wages,
alleging an oral contract with the Company. The Company denies that he was an
employee of the Company and is vigorously defending the action.
The fourth matter involves a suit by the former president, Hiam Zittman,
of a Company subsidiary, Complete Wellness Weight Management, Inc. in Federal
Court in the Southern District of New York in October 1998, alleging breach of
his employment contract by the Company. Mr. Zittman was terminated for cause in
April, 1998, and filed a breach of contract action seeking damages under the
contract. The Company intends to defend the action vigorously and has filed an
answer in the matter.
15
<PAGE> 16
In addition to the matters described above, the Company's subsidiaries
are involved in the following legal matters:
Complete Wellness Weight Management, Inc.("CWWM"), a wholly-owned
subsidiary of the Company, ceased operations in December, 1998. At the time, it
vacated the various store locations which it had rented to conduct business. In
vacating the premises, CWWM had outstanding lease obligations, which were not
guaranteed by the Company. Many of the landlords of those various locations have
brought suit against CWWM seeking to recover damages under the leases, for past
and future rent and associated charges. The Company has not opposed those
collection actions, and several such suits have proceeded to judgment against
CWWM. Although no such suits have obtained judgments against the Company, any
attempt by any such creditor of CWWM to impose any liability on the Company will
be promptly and vigorously defended by the Company. Likewise, certain other
creditors, including vendors to various CWWM facilities, have brought collection
actions against CWWM. Although no plaintiffs in such suits have obtained
judgments against the Company, any attempt by any such creditor of CWWM to
impose any liability on the Company will be promptly and vigorously defended by
the Company.
The Company has a number of ongoing disputes with former employees,
vendors and Integrated Medical Center Doctors. The Company believes these
disputes are in the normal course of business and are not material. The Company
endeavors to settle such disputes in a timely manner.
In November 1997, various facilities of the Company's operations were
searched by federal authorities pursuant to search warrants, and the government
removed various computer equipment, records and documents. During 1998, various
employees of the Company and certain subsidiaries were served with subpoenas
requesting records and documents related to billing and claims coding, clinical
relationships and corporate records. The Company believes it may be a target in
this investigation. Only one employee has received a target letter stating that
the employee is a subject of the investigation. While it is too early to predict
the outcome of any of the ongoing investigations of the Company or the
initiation of any additional investigations, were the Company to be found in
violation of federal or state laws relating to Medicare, Medicaid, CHAMPUS or
similar programs, the Company could be subject to substantial monetary fines,
civil and criminal penalties and exclusion from participation in the Medicare,
Medicaid or CHAMPUS programs and similar other reimbursement programs. Any such
sanctions could have a material adverse effect on the Company's financial
position and results of operations.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
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
16
<PAGE> 17
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits filed: None
(b) Reports on Form 8-K
3/15/99 Item 5 Change in Registrant's Certifying Accountant
Item 7 Exhibits
3/12/99 Item 5 Change in Registrant's Certifying Accountant
Item 7 Exhibits
3/09/99 Item 1 Change in Control of Registrant
Item 7 Exhibits
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
Complete Wellness Centers, Inc.
Date: May 13, 1999 By /s/ Michael T. Brigante
---------------------------
Michael T. Brigante
Chief Financial Officer
17
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