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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 June 30, 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)
DELAWARE 52-1910135
---------- ------------
(State or jurisdiction of (IRS Employer
Incorporation or Organization) Identification Number)
---------------------------------------------
666 ELEVENTH STREET, NW, SUITE 200, WASHINGTON, D.C. 20001
--------------------------------
(Address and telephone number of principal executive offices)
(202) 639-0732
-------------------------
(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 June 30, 1999: 3,536,755 shares of Common Stock.
Transitional Small Business Disclosure Format (check one) Yes ___ No _X_
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<PAGE>
COMPLETE WELLNESS CENTERS, INC.
FORM 10-QSB
INDEX
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)........................ 3
CONDENSED CONSOLIDATED BALANCE SHEETS
JUNE 30, 1999 AND December 31, 1998................ 3
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THREE AND SIX MONTHS ENDED JUNE 30, 1999 AND
JUNE 30, 1998 ..................................... 4
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR SIX ENDED JUNE 30, 1999 AND
JUNE 30,1998....................................... 5
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS......................................... 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS................ 10
PART II. OTHER INFORMATION....................................... 16
ITEM 1 LEGAL PROCEEDINGS....................................... 16
ITEM 2 CHANGES IN SECURITIES AND USE OF PROCEEDS............... 17
ITEM 3 DEFAULTS UPON SENIOR SECURITIES......................... 17
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS..... 17
ITEM 5 OTHER INFORMATION....................................... 17
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K........................ 17
SIGNATURES ........................................................ 18
<PAGE>
ITEM 1 -- FINANCIAL STATEMENTS
COMPLETE WELLNESS CENTERS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
------------------------------
(Unaudited) (Audited)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 547,137 $ 444,963
Patient receivables, net of allowance for
Doubtful accounts of $7,103,296 and $6,255,238 6,928,245 5,766,369
Inventory 46,228 53,405
Prepaid expenses 5,171 9,661
Other assets 42,716 49,774
------------------------------
Total current assets 7,569,497 6,324,172
Furniture and equipment, net 309,399 369,583
Deposits 29,683 31,983
------------------------------
Total assets $ 7,908,579 $ 6,725,738
==============================
LIABILITIES AND STOCKHOLDERS' EQUITY/( DEFICIT)
Current liabilities:
Current portion of notes payable $ 569,000 -
Accounts payable and accrued expenses 6,122,161 $ 6,693,321
Accrued management fees and leases 3,951,599 4,020,288
-------------------------------
Total current liabilities 10,642,760 10,713,609
Note payable 350,000 392,000
Stockholders' equity/(deficit):
Common Stock,$.0001665 par value per share
50,000,000 shares authorized, 3,536,755
shares issued and outstanding 588 409
Convertible Preferred Stock, $.01 par value
per share, 8% Cumulative, 115,239 shares
currently issued and outstanding 5,294,278 5,016,620
Additional capital 7,245,614 6,119,833
Accumulated deficit (15,624,661) (15,516,733)
-------------------------------
Total stockholders' deficit (3,084,181) (4,379,871)
-------------------------------
Total liabilities and stockholders' equity/(deficit) $ 7,908,579 $ 6,725,738
===============================
</TABLE>
Note: The Balance Sheet at December 31, 1998 has been extracted from the
audited financial statements at that date.
See notes to condensed consolidated financial statements.
3
<PAGE>
COMPLETE WELLNESS CENTERS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
1999 1998 1999 1998
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Revenue:
Integrated medical clinics $3,652,850 $5,144,177 $8,155,762 $10,018,316
Weight management centers 0 2,935,295 0 5,303,951
Other income 30,428 66,085 115,600 151,767
----------- ---------- ---------- -----------
Total operating revenue 3,683,278 8,145,557 8,271,362 15,474,034
Direct expenses:
Salary and consulting costs 633,507 2,218,061 1,439,192 3,739,895
Management fees 1,627,785 2,371,113 4,810,524 4,998,003
Cost of revenues 716 612,203 7,178 1,081,679
Rent 37,879 745,140 79,350 1,253,714
Advertising and marketing 4,852 396,090 7,999 605,853
Bad debt expense 605,990 1,122,304 761,939 2,169,540
----------- ---------- ---------- -----------
Total direct expenses 2,910,729 7,464,911 7,106,182 13,848,684
Network development cost 0 224,018 0 427,676
General and administrative 631,291 1,007,155 905,651 2,125,743
Depreciation and amortization 31,646 24,125 63,300 109,908
----------- ---------- ---------- -----------
Operating gain/loss 109,612 (574,652) 196,229 (1,037,977)
Interest expense 20,000 0 29,500 1,523
Interest income 1,813 4,947 3,000 26,810
----------- ---------- ---------- -----------
Net income/loss before income taxes 91,425 (569,705) 169,729 (1,005,511)
Income taxes 0 1,045 0 1,045
----------- ---------- ---------- -----------
Net income/loss after income taxes $91,425 ($570,750) $169,729 ($1,006,556)
=========== ========== ========== ===========
Income/loss per share - basic $0.03 ($0.22) $0.05 ($0.40)
=========== ========== ========== ===========
- diluted $0.01 ($0.22) $0.03 ($0.40)
=========== ========== ========== ===========
Weighted avg. common shares - basic 3,536,755 2,543,610 3,536,755 2,539,020
=========== ========== ========== ===========
- diluted 6,829,298 2,543,610 6,806,177 2,539,020
=========== ========== ========== ===========
</TABLE>
See notes to condensed consolidated financial statements.
4
<PAGE>
COMPLETE WELLNESS CENTERS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, JUNE 30,
1999 1998
------------------------------
(Unaudited) (Unaudited)
<S> <C> <C>
Operating activities
Net income/loss $ 169,729 ($1,006,556)
Adjustments to reconcile net income/loss to net
cash used in operating activities:
Minority interest 0 (7,179)
Depreciation and amortization 63,300 109,908
Provision for bad debt 761,939 2,169,540
Recognition of compensatory granting
non-qualified stock options 0 67,083
Recognition of the issuance of common
stock warrants an options 0 38,059
Changes in operating assets and
liabilities:
Accounts receivables (1,923,815) (4,414,841)
Other current assets 21,025 (683,460)
Deferred taxes 0 0
Accounts payable and other current (289,848) 956,493
liabilities
------------------------------
Net cash used in operating activities (1,197,670) (2,770,953)
Investing activities
Purchase of equipment (3,116) (61,506)
Acquisition Costs 0 (120,805)
------------------------------
Net cash used in investing activities (3,116) (182,311)
Financing activities
Payment of notes 0 (505,006)
Proceeds from sale of common stock 1,125,960 2,909
Proceeds from sale of preferred stock 0 4,532,320
Proceeds from notes payable 177,000 0
------------------------------
Net cash provided by financing activities 1,302,960 4,010,229
------------------------------
Net increase in cash and cash equivalents 102,174 1,056,965
Cash and cash equivalents at beginning
of year 444,963 804,924
------------------------------
Cash and cash equivalents at end of period $ 547,137 $1,861,889
==============================
</TABLE>
See notes to condensed consolidated financial statements.
5
<PAGE>
COMPLETE WELLNESS CENTERS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMETNS
(UNAUDITED)
JUNE 30, 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 and six month periods ended June 30, 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
June 30, 1998.
6
<PAGE>
In accordance with SFAS No. 128, the table below presents both basic
and dilutive income/(loss) per share:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30, June 30, June 30,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Net Income/(Loss) $ 91,425 $ (570,750) $ 169,729 $(1,006,511)
Weighted avg. shares
outstanding - Basic 3,536,755 2,543,610 3,536,755 2,539,020
Incremental shares under
stock option plans - - 135,537 -
Conversion of 8% Senior
Convertible Preferred Stock 3,292,543 - 3,292,543 -
Weighted average shares
outstanding - diluted 6,829,298 2,543,610 6,806,177 2,539,020
Basic income/(loss) per share $0.03 $(0.22) $0.05 $(0.40)
Diluted income/(loss) per share $0.01 $(0.22) $0.03 $(0.40)
</TABLE>
NOTE C - FINANCING
On January 26, 1999 the Company received $77,000 from Wexford Partners,
LLP ("Wexford") which constituted the last installment to be loaned under 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 principals 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
7
<PAGE>
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 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.
On April 21, 1999 the Company's Board of Directors approved a plan to
raise up to $1,000,000 through a private placement of the Company's securities.
The plan consisted of the issuance of up to 1,000,000 shares of the Company's
common stock priced at $1.00 per share. Through June 30, 1999 the Company
received $587,000 through the private placement of which $152,000 was used to
cover costs of the offering. Unless otherwise extended by the Company's Board,
the private placement is scheduled to close August 31, 1999.
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 filed
the formal Chapter 7 documents on July 6, 1999 in Trenton, New Jersey.
As of the date of the 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
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.
8
<PAGE>
On April 1, 1999 the Company reached a settlement with Hiam Zitman. Mr.
Zitman had sued the Company for breach of his employment agreement with Complete
Wellness Weight Management, Inc., a subsidiary of the Company. The settlement
terms are that Mr. Zitman will receive $80,000 in value of the Company's common
stock, valued at the date the common stock is registered with the SEC. If the
Company fails to register the common shares underlying the common stock awarded
Mr. Zitman in the settlement, the Company has 180 days from the date of the
settlement to pay Mr. Zitman $80,000 in cash.
On May 1, 1999, as a result of the failure to pay the minimum royalty
fee of approximately $26,000 to the founding shareholders of Smokenders, the
Company reached an agreement with those shareholders to transfer all licenses,
patients, copyrights, trademarks, inventory and other assets back to them as of
July 1, 1999 for no consideration and a release of debt on the royalty fee due
as well as the assumption of certain liabilities. The Company will include the
results of operations of Smokenders through June 30, 1999 in its consolidated
results from operations.
On June 30, 1999 the Company filed a registration statement on Form S-3
with the SEC. On July 14, 1999 the SEC contacted the Company by letter and
informed the Company that it did not intend to review the filing and invited the
Company to request acceleration of the effectiveness of the filing. The Company
amended the registration statement and filed the final amendment on August 4,
1999. On August 4, 1999 the Company made a formal request to the SEC for an
acceleration of the effective date for the filing and such request was granted.
On July 6, 1999 the Company filed a Chapter 7 bankruptcy petition for
Complete Wellness Weight Management, Inc. a subsidiary of the Company. The
filing took place in Trenton, NJ.
On July 25, 1999 the Company's Board of Directors appointed Mr. Sergio
Vallejo as President of the Company as a result of the resignation of Dr. Eric
Kaplan from that position. Mr. Vallejo also serves as Chief Operating Officer
and is a Board member. Dr. Kaplan remains a Board member.
On July 27, 1999 Mr. Frederick Simon resigned from the Company's Board
of Directors. Mr. Simon is a Senior Vice President of Wexford Management, LLC.
Wexford is the owner of 103,861 of the Company's preferred shares and has
extended to the Company a senior secured loan in the amount of $472,000.
9
<PAGE>
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 June 30, 1999 the Company has directly formed 90 medical
corporations representing 112 clinics, of which 63 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, 1999 and June 30,
1998 the Company, as a result of its medical operations, had revenues of
$8,155,762 and $10,018,316 respectively.
Included in the Company's June 30, 1999 consolidated financial
statements are the results of operations of Smokenders. At June 30, 1999 and
June 30, 1998 Smokenders, as a result of its operations, had revenues of $61,216
and $103,645 respectively. The Company divested itself of Smokenders at June 30,
1999.
The closings, divestitures and spin-offs of non-profitable or unrelated
business units, such as Complete Wellness Weight Management, Inc., Smokenders
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. The Company anticipates that the weight loss programs offered by
CWWM and the smoking cessation programs offered by Smokenders will continue to
be offered by its Integrated Medical Centers.
RESULTS FROM OPERATIONS
THREE AND SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO
THREE MONTHS ENDED JUNE 30, 1998
Revenue. During the three and six months ended June 30, 1999 the
Company had revenues of $3,683,278 and $8,271,362 respectively, as compared to
$8,145,557 and $15,474,034 for the three and six months
10
<PAGE>
ended June 30, 1998. The decrease of $4,462,279 and $7,202,672 for the three and
six months was due primarily to Complete Wellness Weight Management being idle
in 1999. CWWM revenues for the three and six months ended June 30, 1998 were
$2,935,295 and $5,303,951. Integrated Medical Center revenues for the three and
six months ended June 30, 1999 were $3,652,850 and $8,155,762 respectively, as
compared to $5,144,177 and $10,018,316 for the three and six months ended June
30, 1998. The decrease of $1,491,327 and $1,862,554 for the three and six months
was attributable to the lack of growth of the existing 63 Integrated Medical
Centers and a net reduction of 21 Integrated Medical Centers after June 30,
1998. During the three and six months ended June 30, 1999 Smokenders had
revenues of $22,194 and $61,216 respectively, as compared to $58,093 and
$103,645 for the three months ended June 30, 1998. The decrease of $35,899 and
$42,429 was due to a slow down in the seminar programs and a winding down of the
business.
Salary and Consulting Costs. During the three and six months ended
June 30, 1999 the Company incurred salary and consulting costs of $633,507 and
$1,439,192 respectively, as compared to $2,218,061 and $3,739,895 for the three
and six months ended June 30, 1998. The decrease of $1,584,554 and $2,300,703
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 and six months ended June 30, 1999 the
Company incurred management fees of $1,627,785 and $4,810,524 respectively, as
compared to $2,371,113 and $4,998,003 for the three and six months ended June
30, 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 decrease of $743,328 and $187,479 was due primarily to reduced
revenues in the medical clinics, contractual changes in 18 of the 63 medical
clinics and a reduction of 21 clinics after June 30, 1998.
Rent. During the three and six months ended June 30, 1999 the
Company incurred rent expenses of $37,879 and $79,350 respectively, as compared
to $745,140 and $1,253,714 for the three and six months ended June 30, 1998.
Rent consists of amounts incurred for administrative, medical office space and
certain equipment leased by the Company at corporate headquarters and the
medical clinics. The decrease of $707,261 and $1,174,364 was due primarily to
Complete Wellness Weight Management being idle in 1999.
Advertising and Marketing. During the three and six months ended June 30,
1999 the Company incurred advertising and marketing expenses of $4,852 and
$7,999 respectively, as compared to $396,090 and $605,853 for the three and six
months ended June 30, 1998. The decrease of $391,238 and $597,854 is
attributable to Complete Wellness Weight Management being idle in 1999.
Bad Debt Expense. During the three and six months ended June 30,1999 the
Company had bad debt expenses of $605,990 and $761,939 respectively, as compared
to $1,122,304 and $2,169,540 for the three and six months ended June 30, 1998.
The decrease of $516,314 and $1,407,601 was primarily due to the decrease in
revenue of the medical clinics for the periods, the increase in collections of
outstanding accounts receivable and a reduction in the percentage used to
calculate the reserve based on historical experience.
11
<PAGE>
Network Development Costs. All network development costs relate to the
activities of Optimum Health Services, Inc. During the three and six months
ended June 30, 1998 the Company's OHS subsidiary experienced network development
costs of $224,018 and $427,676 respectively. As a result of the spin-off of OHS
in November 1998 the Company will not incur any of these costs in 1999.
General and Administrative. During the three and six months ended
June 30, 1999, the Company incurred general and administrative expenses of
$631,291 and $905,651 respectively, as compared to $1,007,155 and $2,125,743 for
the three and six months ended June 30, 1998. The decrease of $375,864 and
$1,220,092 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 and six months ended June
30, 1999, the Company incurred depreciation and amortization expense of $31,646
and $63,300 respectively, as compared to $24,125 and $109,908 for the three and
six months ended June 30, 1998. The increase of $7,521 for the three month
period is attributable to the accelerated write down of idle assets. The
decrease of $46,608 for the six month period is attributable to the previous
write down of idle assets in 1998.
Operating Income. The consolidated operating income of the Company was
$109,612 and $196,229 for the three and six months ended June 30, 1999 as
compared to a consolidated operating loss of $574,652 and $1,037,977 for the
three and six months ended June 30, 1998. The increase resulted from improved
operations at the Company's medical centers and benefited from the
discontinuance of the operations of OHS, CWWM and CBI. Additionally, the Company
has significantly reduced corporate overhead and has adjusted the calculations
for certain reserves based on historical experience.
Interest Expense. During the three and six months ended June 30, 1999 the
Company had interest expense of $20,000 and $29,500 respectively, as compared to
$0 and $1,523 for the three and six months ended June 30, 1998. The increase of
$20,000 and $27,977 resulted from the interest due on notes entered into after
June 30, 1998.
Interest Income. During the three and six months ended June 30, 1999, the
Company had interest income of $1,813 and $3,000 respectively, as compared to
$4,947 and $26,810 for the three and six months ended June 30, 1998. The
decrease of $3,134 and $23,810 resulted from a lower amount of invested funds in
1999 as compared to the same periods in 1998.
LIQUIDITY AND CAPITAL RESOURCES
Until 1999 the Company had experienced net losses, negative cash flow
from operations and an accumulated deficit since its inception. For the three
and six months ended June 30, 1999, the Company had net income of $91,425 and
$169,729 as compared to a net loss of $570,751 and
12
<PAGE>
$1,006,556 for the three and six months ended June 30, 1998. At June 30, 1999,
the Company had working capital of $(3,073,263) and an accumulated deficit of
$15,484,111. Net cash used in operations for the six months ended June 30, 1999
was $1,197,670, as compared to $2,770,953 for six months ended June 30, 1998.
Negative cash flows are attributable primarily to net losses in 1998 and
increases in cash flows for the three and six months ended June 30, 1999 are
attributable primarily to increases in accounts receivable net of accounts
payable and other current liabilities. For the six months ended June 30, 1999
the Company used $3,116, as compared to $61,506 for the six months ended June
30, 1998, for the purchase of equipment.
The Company intends to develop approximately 15 additional medical
clinics by December 31, 1999. The average cost to the Company to develop a
medical clinic is approximately $15,000.
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 three 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 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.
13
<PAGE>
The third matter involves an action initiated by James Renegar, a
massage therapist, in Penellas 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.
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 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,
14
<PAGE>
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. Through June 30, 1999 the Company has
sold 587,000 shares of its common stock pursuant to the private placement and
has received $435,000 net of related expenses. The Company anticipates
continuing to 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 June 30, 1999, the process of
evaluation the Company's services, products and internal systems was, in the
Company's determination, complete. 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 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.
15
<PAGE>
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 three 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 Penellas 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.
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.
16
<PAGE>
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
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
17
<PAGE>
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: August 13, 1999 By /s/ Michael T. Brigante
---------------------------
Michael T. Brigante
Chief Financial Officer
18
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