<PAGE> 1
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------------------------
FORM 10-QSBA
QUARTERLY REPORT UNDER SECTION 13 OF 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1999
--------------------------------------------
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
(State or jurisdiction of Incorporation or Organization) (IRS Employer Identification Number)
</TABLE>
---------------------------------------------
1964 HOWELL BRANCH ROAD, SUITE 202, WINTER PARK, FL 32792
--------------------------------
(Address and telephone number of principal executive offices)
(407) 673-3073
-------------------------
(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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COMPLETE WELLNESS CENTERS, INC.
FORM 10-QSBA
INDEX
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
CONDENSED CONSOLIDATED BALANCE SHEETS
JUNE 30, 1999 AND December 31, 1998
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THREE AND SIX MONTHS ENDED JUNE 30, 1999 AND JUNE 30, 1998
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR SIX MONTHS ENDED JUNE 30, 1999 AND JUNE 30,1998
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
PART II. OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS
ITEM 2 CHANGES IN SECURITIES AND USE OF PROCEEDS
ITEM 3 DEFAULTS UPON SENIOR SECURITIES
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
ITEM 5 OTHER INFORMATION
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
SIGNATURES
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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 $ 545,728 $ 444,963
Patient receivables, net of
allowance for
doubtful accounts of
$7,079,796 and $6,255,238 6,489,645 5,766,369
Inventory 46,228 53,405
Prepaid expenses 5,171 9,661
Other assets 42,715 49,774
----------------- --------------
Total current assets 7,129,487 6,324,172
Furniture and equipment, net 309,399 369,583
Deposits 29,683 31,983
----------------- --------------
Total assets $ 7,468,569 $ 6,725,738
================= ==============
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY/( DEFICIT)
Current liabilities:
Current portion of notes
payable $ 366,050 $0
Accounts payable and accrued
expenses 6,122,161 6,693,321
Accrued management fees and
leases 4,440,648 4,020,288
----------------- --------------
Total current liabilities 10,928,859 10,713,609
Note payable 552,950 392,000
Stockholders' equity/(deficit):
Common Stock,$.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 (16,553,720) (15,516,733)
----------------- --------------
Total stockholders' deficit (4,013,240) (4,379,871)
----------------- --------------
Total liabilities and
stockholders' equity/(deficit) $ 7,468,569 $ 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
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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 $2,530,352 $5,144,177 $7,025,214 $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 2,560,780 8,145,557 7,140,814 15,474,034
Direct expenses:
Salary and consulting
costs 605,557 2,218,061 1,407,952 3,739,895
Management fees 1,295,201 2,371,113 4,609,124 4,998,003
Cost of revenues 0 612,203 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 2,549,479 7,464,911 6,873,542 13,848,684
Network development cost 0 224,018 0 427,676
General and administrative 661,276 1,007,155 927,976 2,125,743
Depreciation and amortization 31,646 24,125 63,300 109,908
----------- ------------ ------------ -------------
Operating gain/loss (681,621) (574,652) (724,004) (1,037,977)
Interest expense 28,825 0 38,325 1,523
Interest income 1,813 4,947 3,000 26,810
----------- ------------ ------------ -------------
Net income/loss before
income taxes (708,633) (569,705) (759,329) (1,005,511)
Income taxes 0 1,045 0 1,045
----------- ------------ ------------ -------------
Net income/loss after income
taxes ($708,633) ($570,750) ($759,329) ($1,006,556)
=========== ============ ============ =============
Income/loss per share -
basic ($0.22) ($0.22) ($0.24) ($0.40)
=========== ============ ============ =============
- diluted ($0.22) ($0.22) ($0.24) ($0.40)
=========== ============ ============ =============
Weighted avg. common shares
- - basic 3,243,255 2,543,610 3,108,407 2,539,020
=========== ============ ============ =============
- diluted 3,243,255 2,543,610 3,108,407 2,539,020
=========== ============ ============ =============
</TABLE>
See notes to condensed consolidated financial statements.
A
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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 ($759,329) ($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 6,810 67,083
Recognition of the issuance of common
stock warrants an options 0 38,059
Changes in operating assets and
liabilities:
Accounts receivables (1,485,215) (4,414,841)
Other current assets 21,027 (683,460)
Accounts payable and other current 199,200 956,493
liabilities
--------------------------
Net cash used in operating activities (1,192,267) (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 435,000 2,909
Proceeds from sale of stock options 684,148 0
Proceeds from sale of preferred stock 0 4,532,320
Proceeds from notes payable 177,000 0
--------------------------
Net cash provided by financing activities 1,296,148 4,010,229
--------------------------
Net increase in cash and cash equivalents 100,765 1,056,965
Cash and cash equivalents at beginning
of year 444,963 804,924
--------------------------
Cash and cash equivalents at end of period $545,728 $1,861,889
==========================
</TABLE>
See notes to condensed consolidated financial statements.
5
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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 and June 30, 1999.
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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 Six Months Ended
June 30, June 30, June 30, June 30,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Net Income/(Loss) $(708,633) $(570,750) $(759,329) $(1,006,556)
Weighted avg. shares 3,243,255 2,543,610 3,108,407 2,539,020
outstanding - Basic
Incremental shares 0 0 0 0
under stock option plans
Conversion of 8% Senior 0 0 0 0
Convertible Preferred
Stock
Weighted average shares 3,243,255 2,543,610 3,108,407 2,539,020
outstanding - diluted
Basic income/(loss) per $(0.22) $(0.22) $(0.24) $(0.40)
share
Diluted income/(loss) $(0.22) $(0.22) $(0.24) $(0.40)
per share
</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 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 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
7
<PAGE> 8
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.
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.
NOTE F - RESTATEMENT OF QUARTERLY INFORMATION
As a result of the discontinuation of certain contractual relationships
with Integrated Medical Centers, accruals of liabilities and certain
estimation processes utilized by the company, we have restated the quarterly
results for the period ended June 30, 1999. The restatement for the three
and six months ended June 30, 1999 required an increase in operating expenses
and a decrease in net revenue, creating a net loss of ($708,633) and
($759,329), respectively or ($0.22) and ($0.24) per share respectively. The
restated results for the periods ended June 30, 1999 are as follows and may
be compared to the previously reported quarterly results.
For the three months ended June 30, 1999
<TABLE>
<CAPTION>
Restated Results Previously Reported
Results
<S> <C> <C>
Net Revenue $2,560,780 $3,683,278
Net Income (Loss) $ (708,633) $ 91,425
Net Income (Loss) Per Share -
Basic $ (0.22) $ 0.03
Weighted Avg. Shares
Outstanding - Basic 3,243,255 3,536,755
</TABLE>
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<PAGE> 9
For the six months ended June 30, 1999
<TABLE>
<CAPTION>
Restated Results Previously Reported
Results
<S> <C> <C>
Net Revenue $7,140,814 $ 8,271,363
Net Income (Loss) $ (759,329) $ 169,729
Net Income (Loss) Per Share -
Basic $ (0.24) $ 0.05
Weighted Avg. Shares
Outstanding - Basic 3,108,407 3,536,755
</TABLE>
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
$7,025,214 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 AND SIX MONTHS
ENDED JUNE 30, 1998
Revenue. During the three and six months ended June 30, 1999 the
Company had revenues of $2,560,780 and $7,140,814 respectively, as compared
to $8,145,557 and $15,474,034 for the three and six months ended June 30,
1998. The decrease of $5,584,777 and $8,333,220 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 $2,530,352 and $7,025,214;
respectively, as compared to $5,144,177 and $10,018,316 for the three and six
months ended June 30, 1998. The decrease of $2,613,825 and $2,993,102 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 $605,557 and
$1,407,952 respectively, as compared to $2,218,061 and $3,739,895 for the
three and six months ended June 30, 1998. The decrease of $1,612,504 and
$2,331,943 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
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<PAGE> 10
$1,295,201 and $4,609,124 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
$1,075,912 and $388,879 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.
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
$661,276 and $927,976 respectively, as compared to $1,007,155 and $2,125,743
for the three and six months ended June 30, 1998. The decrease of $345,879
and $1,197,767 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 loss of the Company was
$681,621 and $724,004 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 $28,825 and $38,325 respectively, as
compared to $0 and $1,523 for the three and six months ended June 30, 1998.
The increase of $28,825 and $36,802 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
The Company has 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 loss of $708,633 and
$759,329 as compared to a net loss of $570,750 and $1,006,556 for the three
and six months ended June 30, 1998. At June 30, 1999, the Company had working
capital of $(3,799,372) and an accumulated deficit of $16,553,720. Net cash
used in operations for the six months ended June 30, 1999 was $1,192,267, 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
10
<PAGE> 11
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 in investing activities $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.
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.
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
11
<PAGE> 12
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. 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
utilize 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.
12
<PAGE> 13
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 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.
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
13
<PAGE> 14
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 10, 2000 By /s/ Rebecca R. Irish
---------------------------
Rebecca R. Irish
Chief Financial Officer
14
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<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
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<SECURITIES> 0
<RECEIVABLES> 13,569,441
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5,294,278
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<TOTAL-LIABILITY-AND-EQUITY> 7,468,569
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