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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 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.
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(Exact name of small business issuer as specified in its charter)
DELAWARE 52-191035
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(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
666 11TH STREET, N.W., WASHINGTON, D.C. 20001
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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/A
INDEX
<TABLE>
<CAPTION>
PAGE
<S> <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............................................................................ 6
PART II. OTHER INFORMATION........................................................................ 11
SIGNATURES............................................................................... 12
</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,
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
$4,872,994 and $3,825,708................................. 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 outstanding.. 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)
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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.
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COMPLETE WELLNESS CENTERS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
UNAUDITED
<TABLE>
<CAPTION>
THREE MONTHS ENDED
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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.......... 2,368,656 0
Other income....................... 85,682 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)
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Loss per share -- basic.............. $ (0.19) $ (0.32)
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Weighted average common shares --
basic................................ 2,534,430 1,575,043
========== ==========
</TABLE>
See notes to condensed consolidated financial statements.
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COMPLETE WELLNESS CENTERS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED
<TABLE>
<CAPTION>
THREE MONTHS ENDED
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MARCH 31, MARCH 31,
1998 1997
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(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:
Minority interest..................................... (7,179) 0
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............................... (2,238,926) (439,694)
Advances to officers and other current assets...... (713,925) (47,436)
Deferred taxes..................................... 0 (18,000)
Accounts payable and other current................. 288,566 209,917
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Net cash used in operating activities................... (1,955,432) (564,372)
INVESTING ACTIVITIES
Purchase of equipment................................... (97,729) (54,778)
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Net cash used in investing activities................... (97,729) (54,778)
FINANCING ACTIVITIES
Payment of Notes........................................ (505,006) 0
Payment of bridge loan.................................. 0 (1,100,000)
Proceeds from sale of preferred stock................... 4,532,320 0
Proceeds from notes payable............................. 0 17,481
Proceeds from sale of equity in Complete Wellness
Centers, LLC.......................................... 0 4,699,749
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Net cash provided by financing activities............... 4,027,314 3,617,230
----------- -----------
Net increase in cash and cash equivalents............... 1,974,153 2,998,080
Cash and cash equivalents at beginning of period........ 804,924 298,509
----------- -----------
Cash and cash equivalents at end of period.............. $ 2,779,077 $ 3,296,589
=========== ===========
</TABLE>
See notes to condensed consolidated financial statements.
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COMPLETE WELLNESS CENTERS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(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. 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 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
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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 -- 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 continual 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. As a result of
this acquisition, the Company, through CWWM, has increased its inventories by
approximately $675,000 as of March 31, 1998. Such increase is primarily
attributable to food, nutritional supplements and other retail products
consistent with the operations of the weight management centers. 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 losses from operations of
$6,457,210 and $878,769 respectively, during the period from February 1, 1998
(acquisition date) to September 30, 1998.
NOTE E -- 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.
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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 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.
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
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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 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 $4,874,139 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.
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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 increase of $828,575 was due to an increase in reserves for
doubtful accounts for the medical clinics related to the increase in revenues
for the period and continued aging of the Company's accounts receivable. The
Company evaluates its consolidated patient accounts receivable, by payer, age of
such receivables, nature of services provided, average collection rates across
all clinics, and expected ultimate realization of its patient accounts
receivable.
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.
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
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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.
Inventory. The Company's inventory has increased from $39,483 to $716,991
during 1998, primarily due to the acquisition and operations of CWWM.
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, 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.
The Company has committed to fund future working capital requirements of
Smokenders totaling $98,000, of which none has been funded through March 31,
1998. In addition, the Company is obligated to pay a royalty fee of 5% of total
revenues to Oxford Health Plan and the $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 though various
dates in 1999 at an aggregate annual compensation level of approximately
$550,000. 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 employment agreements.
The Company or its affiliates currently have three legal proceedings in
various stages of litigation. A doctor has initiated action against an
Integrated Medical Center and the Company for contested back wages. Also, a
therapist has initiated a proceeding against another Medical Center for
contested back wages. The Company has initiated legal action against two
Florida doctors for breach of their agreement with the Company. In addition,
judgments have been rendered in actions against several locations of the
Company's weight management subsidiary.
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Another case currently in litigation is an action brought by an attorney
seeking damages against the Company for unpaid legal fees in an amount of
$13,500. The Company contests the validity and reasonableness of the fees
incurred and intends to defend the action. The final action currently in
litigation is a subrogation action related to a fire loss in California. In that
matter, an Affiliated Chiropractor's Admincorp entered a lease for certain
property that was later destroyed by fire. The Landlord's property insurer has
brought an action against the Company and a repairman hired by the Admincorp,
seeking subrogated recovery for losses related to the fire. The Company has
retained counsel and intends to vigorously defend the action.
The Company has initiated legal action against two Florida doctors for
breach of their agreement with the Company. Though its Compliance Program, the
Company has initiated legal action to acquire the patient records from four (4)
Administrators of Integrated Medical Centers which were operated under contracts
that have been terminated for cause.
The Company is currently under a federal investigation whose ultimate
outcome can not be reasonably predicated at this time. If the Company is found
to be in violation of federal or state laws, the Company could be subject to
substantial monetary fines, civil and criminal penalties, and exclusion from
federal and state reimbursement programs. The ultimate cost to the Company to
defend itself and any settlement, fine, or penalty imposed could have a material
adverse effect on the Company's financial position, results of operations and
liquidity.
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. The Company
does not currently have an external source of liquidity. The Company believes
its existing working capital and operations will provide sufficient funds to
meet its short term liquidity requirements.
The Company is in the process of completing its analysis of the Year 2000
("Y2K") issue. The Company has not completed this analysis or received Y2K
certification back from the telephone companies, insurance companies, and the
principal bank that it deals with. The Company is currently examining its
internal operations and those of its clinics to determine whether any
applications are running on old equipment or with DOS or Windows v3.1 operating
systems which may be subject to clock problems associated with the Y2K. This
could cause the computer and the software running on the computer that depend on
the system clock to stop functioning. Some of the Company's clinics are expected
to be required to update the computer platforms on which the clinic management
information software operates. These clinics will be identified and notices will
be prepared to complete the upgrade. The clinic software will be updated and is
expected to be through the beta test and ready for rollout prior to December
1998. Negotiations are underway with the clinic software vendor for such
rollout.
The Company's accounting and data base software is being reviewed and is
expected to be Y2K compliant. The Company anticipates acquiring a new telephone
system which will also be compliant with Y2K requirements. This is key to assure
that telephone and voice mail logs are accurately created based on time and
date.
The Company expects to complete its Y2K analysis before the end of the
first quarter of 1999 and expects to receive certification from vendors that the
software and hardware used by it is Y2K compliant. At that time, the Company's
Board of Directors will be briefed and will be given certification that the
Company is Y2K compliant.
Net Operating Loss
At December 31, 1997, the Company and CWC, LLC's wholly owned
subsidiaries had combined net operating loss carryforwards for income tax
purposes of approximately $2,571,922, which expire $192,000 in 2010, $921,000 in
2011, and $1,458,922 in 2012. The Company files a consolidated federal tax
return with its wholly owned subsidiaries. CWC, LLC is not included in this tax
return. CWC, LLC is treated as a partnership for tax purposes and its gains and
losses are reflected on each member's individual federal and state income tax
returns. Further, CWC, LLC does not file a consolidated tax return with its
subsidiaries. Accordingly, the use of substantially all of the combined net
operating loss carryforwards will be limited to use to offset future taxable
income of each separate subsidiary in proportion to its share of the tax losses
generated to 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 $457,592 has been established
at December 31, 1997 to offset any 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.
Seasonality. The Company believes that the patient volumes at its
Integrated Medical Centers are not significantly affected by Seasonality.
However, the weight loss subsidiary does experience significant decreases in
patient volumes of up to 50% during the summer months of June through September.
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PART II -- OTHER INFORMATION
<TABLE>
<S> <C>
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
</TABLE>
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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
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