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 SEPTEMBER 30, 2000
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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 Identification Number)
Incorporation or Organization)
---------------------------------------------
1964 HOWELL BRANCH ROAD, SUITE 201, 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 September 30, 2000: 5,787,178 shares of Common Stock.
Transitional Small Business Disclosure Format (check one) Yes No X
--- ---
<PAGE>
COMPLETE WELLNESS CENTERS, INC.
FORM 10-QSB
INDEX
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
CONDENSED CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2000 AND DECEMBER 31, 1999
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2000 AND
SEPTEMBER 30, 1999
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR NINE MONTHS ENDED SEPTEMBER 30, 2000 AND SEPTEMBER 30, 1999
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
<PAGE>
ITEM 1 -- FINANCIAL STATEMENTS
COMPLETE WELLNESS CENTERS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
----- ----
(Unaudited) (Audited)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 4,645 $ 272,034
Certificate of deposit, restricted 111,002
Patient receivables, net of allowance for
doubtful accounts of $7,239,000 and
$5,270,000 at September 30, 2000 and
December 31, 1999, respectively 2,285,321 5,485,901
Prepaid expenses 29,167 46,667
Other assets 1,555
----------- -----------
Total current assets 2,319,133 5,917,159
Furniture and equipment, net 159,977 225,978
Deposits 1,400 1,400
----------- -----------
Total assets $ 2,480,510 $ 6,144,537
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY/( DEFICIT)
Current liabilities:
Current portion of notes payable $ 1,142,148 $ 582,525
Accounts payable and accrued expenses 2,814,436 2,729,786
Accrued management fees 2,035,268 2,573,463
----------- -----------
Total current liabilities 5,991,852 5,885,774
Note payable 298,740 314,475
Stockholders' equity/(deficit):
Common Stock,$.0001665 par value per share
50,000,000 shares authorized, 5,787,178 and
4,881,149 shares issued and outstanding at
September 30, 2000 and December 31, 1999,
respectively 963 813
Senior Convertible Preferred Stock, $.01 par
value per share, 8% Cumulative, and 116,727
and 121,107 shares issued and outstanding at
September 30, 2000 and December 31, 1999,
respectively 1,167 1,211
Junior Convertible Preferred Stock, $.01 par
value per share, 8% cumulative, 2,230
and 2,071 shares issued and outstanding at
September 30, 2000 and December 31, 1999,
respectively 22 21
Additional capital 19,922,312 18,838,475
Accumulated deficit (23,734,546) (18,896,232)
----------- -----------
Total stockholders' deficit (3,810,082) (55,712)
----------- -----------
Total liabilities and stockholders' equity/(deficit) $ 2,480,510 $ 6,144,537
=========== ===========
</TABLE>
Note: The Balance Sheet at December 31, 1999 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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------------- ---------------------------------
2000 1999 2000 1999
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Revenue:
Operating income $ 48,950 $ 2,867,828 $ 4,445,080 $ 10,008,641
------------ ------------ ------------ ------------
Total operating revenue 48,950 2,867,828 4,445,080 10,008,641
Direct expenses:
Salary and consulting costs 275,348 858,032 1,235,575 2,265,984
Management fees 1,669,780 2,776,132 6,278,904
Cost of revenues 7,178
Rent 4,990 31,801 26,037 111,151
Advertising and marketing 6,536 3,798 14,534
Bad debt expense 2,138,141 430,398 3,697,485 1,192,337
------------ ------------ ------------ ------------
Total direct expenses 2,418,479 2,996,547 7,739,027 9,870,088
General and administrative 144,341 576,098 822,432 1,504,074
Depreciation and amortization 22,001 30,620 66,001 93,920
------------ ------------ ------------ ------------
Operating gain/loss (2,535,871) (735,437) (4,182,380) (1,459,441)
Interest expense 75,432 12,683 211,535 51,008
Interest income 0 643 2,347 3,643
------------ ------------ ------------ ------------
Net income/loss before income taxes (2,611,303) (747,477) (4,391,568) (1,506,806)
Income taxes
------------ ------------ ------------ ------------
Net income/loss after income taxes $ (2,611,303) $ (747,477) $ (4,391,568) $ (1,506,806)
============ ============ ============ ============
Income/loss per share - basic
$ (0.45) $ (0.19) $ (0.83) $ (0.44)
============ ============ ============ ============
- diluted $ (0.45) $ (0.19) $ (0.83) $ (0.44)
============ ============ ============ ============
Weighted avg. common shares - basic 5,756,178 3,951,250 5,283,089 3,462,404
============ ============ ============ ============
- diluted 5,756,178 3,951,250 5,283,089 3,462,404
============ ============ ============ ============
</TABLE>
See notes to condensed consolidated financial statements.
4
<PAGE>
COMPLETE WELLNESS CENTERS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------------
2000 1999
--------------------------------
(Unaudited) (Unaudited)
<S> <C> <C>
OPERATING ACTIVITIES
Net income/loss ($4,391,568) ($1,506,806)
Adjustments to reconcile net income/loss to net
Cash used in operating activities:
Allocated proceeds of debt issued 111,000 0
Depreciation and amortization 66,001 93,920
Provision for bad debt 3,697,485 1,192,337
Recognition of compensatory granting
non-qualified stock options 49,228 109,209
Recognition of the issuance of common
stock warrants an options 95,826 0
Changes in operating assets and liabilities:
Accounts receivables (496,905) (1,681,851)
Other current assets 19,055 (17,496)
Accounts payable and other current
liabilities (278,601) 39,268
-------------- -------------
NET CASH USED IN OPERATING ACTIVITIES (1,128,479) (1,481,419)
INVESTING ACTIVITIES
Purchase of Equipment (3,116)
Purchase of Certificate of Deposit (111,002)
Proceeds from Sale of Certificate of Deposit 111,002
-------------- -------------
NET CASH USED IN INVESTING ACTIVITIES 111,002 (114,118)
FINANCING ACTIVITIES
Payment of notes (31,112) (23,000)
Proceeds from sale of common stock 1,558,750
Proceeds from sale of stock options 225,200
Proceeds from notes payable 556,000 200,000
-------------- -------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 750,088 1,735,750
-------------- -------------
NET INCREASE (DECREASE) IN CASH AND CASH (267,389) 140,213
EQUIVALENTS
Cash and cash equivalents at beginning of 272,034 444,963
year
-------------- -------------
Cash and cash equivalents at end of period $ 4,645 $ 585,176
============== =============
SUMMARY OF SUPPLEMENTARY CASH FLOWS DISCLOSURES:
Interest paid 0 0
Income taxes paid 0 0
Significant non-cash transactions completed by the Company
during the nine months ended September 30, 2000 include the following:
Payment of preferred stock dividends with shares of preferred stock $446,746
See notes to condensed consolidated financial statements.
</TABLE>
5
<PAGE>
COMPLETE WELLNESS CENTERS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SEPTEMBER 30, 2000
NOTE A - LIQUIDITY
The consolidated financial statements of Complete Wellness Centers,
Inc., (the "Company") have been presented on the basis that the Company is a
going concern, which contemplates the realization of assets and the satisfaction
of liabilities in the normal course of business. For the year ended December 31,
1999, the Company had recurring loss from operations of $2,805,000, and total
stockholders' deficiency of $56,000. The current ratio at December 31, 1999 was
1.01. For the nine months ended September 30, 2000, the Company had recurring
loss from operations of $4,392,000, and total stockholders' deficiency of
$3,810,000. The current ratio at September 30, 2000 was 0.39.
The Company has undergone significant restructuring of its operations
to reduce overhead costs, has renegotiated many of its contractual relationships
with its current customers and is attempting to renegotiate new agreements with
31 customers. As has been the Company's practice, as certain contractual
relationships cease to be honored, such lack of ability to control the
operations of the customer have been reflected in the financial statements
herein with adjusted for proper reflection in the consolidated financial
statements. During the three months ended September 30, 2000, the Company and
the Integrated Medical Centers reached mutual agreements to terminate ownership
of the operational Integrated Medical Centers it was managing. The operations of
all the medical corporations are included in the consolidated financial
statements of the Company until the point of contractual termination. Concurrent
with signing termination agreements, fifteen clinics agreed to new consulting
agreements with the Company. The revenues from these consulting contracts and
the related costs are included in the operating results for the three and nine
months ended September 30, 2000.
It is the Company's plan to seek relief from its creditors through debt
forgiveness and/or long-term payment plans as the Company cannot meet its
current obligations. Unless and until such relief is obtained, additional
capital infusion from investors will be unlikely. Agreements have been made with
substantially all of the creditors, however, the effect of such relief is not
reflected in these financial statements as the agreements have not been
consummated. As of October 24, 2000, the accounts receivable of the Company were
assigned to its secured creditors, Wexford Spectrum Investors, LLC and Imprimis
Investors, LLC, pursuant to their lien against those receivables.
On September 27, 2000, the Company announced that it had entered into a
binding letter of intent to merge with Cyfit.com, Inc. ("Cyfit"), a private
Delaware corporation, in a tax-free exchange of shares. Cyfit is in the business
of interactive health and fitness emphasizing a healthy lifestyle based on
exercise, nutrition, weight management, wellness and sports training that is
delivered through multiple distribution channels. For more information about
Cyfit, please visit its web site at WWW.CYFIT.COM. The merger is subject to,
among other things, preparation of definitive agreements, completion of due
diligence reviews, restructuring of debt and equity and approval by the
companies' shareholders at special meetings to be held in late December 2000 or
early January 2001, when the merger is expected to close. After closing,
Complete Wellness Centers will be the surviving entity and will then change its
name to Cyfit, Inc. Management believes the joining of CWC and Cyfit provides
the operating environment for the new entity to deliver a complete wellness
package to its members and constituents through existing channels and future
distribution methods. CWC also announced that, in connection with the merger,
the investment-banking firm of Hornblower & Weeks, Inc. has made a firm
commitment to underwrite an equity offering of a minimum of $4,000,000 and a
maximum of $9,000,000. The merger, including the contemplated restructuring of
debt and equity, and the related investment banking commitment are two of the
steps the Company is taking to strengthen its business and financial position
and condition in order to enhance shareholder value.
As of September 30, 2000, the Company's common stock and warrants were
listed on the NASDAQ SmallCap Market and the Company must meet certain
requirements in order to maintain this listing. The requirements for continued
listing include satisfying one of the following conditions: (a) net tangible
assets of at least $2,000,000 (b) market capitalization of at least $35,000,000
or (c) net income of at least $500,000 in the most recent fiscal year or in two
of the last three fiscal years. The Company does not meet any of the criteria as
of December 31, 1999 or as of September 30, 2000. On October 27, 2000 the
Company was notified by The NASDAQ that its shares had been delisted on the
Small Cap Market effective with the opening of business Monday, October 30,
2000. The Company had sought additional time to effect its plan to regain
compliance with the NASDAQ's listing requirements. The NASDAQ Review Panel was
unwilling to grant the Company additional time to remedy the $1.00 minimum bid
price deficiency based on the fact that it was tied to the consummation of the
proposed merger with Cyfit. The Panel also believed that the Company's plan to
regain compliance with the $2,000,000 net tangible assets requirement by means
of consummating the proposed merger with Cyfit is not yet definitive in nature
and will require significant time to implement.
6
<PAGE>
COMPLETE WELLNESS CENTERS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SEPTEMBER 30, 2000
NOTE A - LIQUIDITY (continued)
The NASDAQ letter stated that the review panel is of the opinion that the
previously announced proposed merger with Cyfit will result in a change of
control, a change in financial structure, and possibly a change in business,
thereby requiring the post-merger entity to immediately satisfy the initial
inclusion requirements upon consummation of the merger. An exemption has been
granted to permit a broker-dealer to publish in, or submit for publication in, a
quotation medium, quotations for the Company's securities. The Company's
securities can be found under the symbols CMWL.OB and CMWLW.OB on the OTC
Bulletin Board.
NOTE B - 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 nine month periods ended September 30, 2000
are not necessarily indicative of the results that may be expected for the year
ending December 31, 2000.
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 28, 2000, for the period ended
December 31, 1999. Certain prior period amounts have been reclassified to
conform to the current period presentation.
NOTE C - 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") or conversion of the
8% Junior Convertible Preferred Stock (the "Junior Convertible Preferred Stock")
have been excluded from the computation because the effect of their inclusion
would be anti-dilutive for September 30, 1999 and 2000.
The following table sets forth the computation of basic loss per share:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30, September 30, September 30,
2000 1999 2000 1999
---- ---- ---- -----
<S> <C> <C> <C> <C>
Net Income/(Loss) ($2,611,303) ($ 747,477) ($4,391,568) ($1,506,806)
Weighted avg. shares outstanding -
Basic 5,756,178 3,951,250 5,283,089 3,462,404
Incremental shares under stock 0 0 0 0
option plans
Conversion of 8% Senior 0 0 0 0
Convertible Preferred Stock
Conversion of 8% Junior 0 0 0 0
Convertible Preferred Stock
Weighted average shares
outstanding - diluted 5,756,178 3,951,250 5,283,089 3,462,404
Basic income/(loss) per share ($ 0.45) ($ 0.19) ($ 0.83) ($ 0.44)
</TABLE>
7
<PAGE>
COMPLETE WELLNESS CENTERS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SEPTEMBER 30, 2000
NOTE D - FINANCINGS AND STOCKHOLDERS' EQUITY
On July 14, 1999, we entered into a Separation and Release Agreement
with Eric S. Kaplan, our former president , chief operating officer and
director, made effective as of July 21, 1999. In return and as consideration of
Mr. Kaplan's resignation and release of the Company from all employment claims
or actions, we agreed to: (i) indemnify him for actions taken by the Company or
by him as an officer or director of the Company; (ii) continue liability
coverage for as long as the applicable statute of limitations of claims shall
run; (iii) transfer to him $200,000 in market value of the Company's common
stock at a rate of 5,000 shares per month through stock issuances or stock
option grants; (iv) reimburse a portion of his attorney fees in the amount of
$6,000; and (v) pay him the sum of $10,000 in cash. We accelerated the vesting
of the remaining options during the three months ended March 31, 2000.
Subsequently, Dr. Kaplan exercised an aggregate of 60,000 options, the value of
which was recorded as compensation expense. As final settlement of the remaining
amounts owed Dr. Kaplan under this Agreement, on August 4, 2000, Dr. Kaplan was
granted 62,000 options from two of the Company's stock option plans to purchase
62,000 shares of the Company's common stock at $0.01 per share and Dr. Kaplan
also accepted a non-interest bearing promissory note from the Company for
$19,000. Dr. Kaplan exercised these options upon receipt.
In January 2000, the Board made a grant of 20,000 options, from the
1996 Stock Option Plan, to purchase common stock in the Company at $0.01 per
share for the equal benefit of Nico Pronk and Wayne Horne, principals of Noble
Financial Group, Inc. Following the grant of such options, both exercised their
options and shares were issued. The Company received $200 for the exercise of
these options.
On January 4, 2000, the Company made a grant to Mrs. Joan Raymond of
100,000 options to purchase common stock in the Company, pursuant to the 1996
Stock Option Plan, at $1.25 per share. Following the grant of such options, Mrs.
Raymond exercised those options and shares were issued. The Company received
$125,000 for the exercise of such options. Mrs. Raymond is the sister-in-law of
Mr. Joseph Raymond, Jr., Chairman and CEO (at that time) of the Company.
On February 23, 2000, the Company also made a grant of 57,143 options,
from the 1999 Consultants Stock Option Plan, to purchase common stock in the
Company at $1.75 per share to Structure Management, Inc. Following the grant of
such options, Structure Management, Inc. exercised its options and shares were
issued. The Company received $100,000 for the exercise of these options. Mr.
Jeffrey Raymond is a principal in Structure Management, Inc. and Mr. Raymond is
the brother of Mr. Joseph Raymond, Jr., Chairman and CEO (at that time) of the
Company.
On March 23, 2000, Completewellness.com, Inc. ("cwc.com"), a wholly
owned subsidiary of the Company received $300,000 from DrAlt.com Corporation
("DrAlt"). The loan carries a 9% interest rate and is payable in full on
September 23, 2000. In addition, DrAlt was awarded five-year warrants to
purchase 150,000 shares of common stock of Complete Wellness Centers, Inc. at
$2.00 per share.
On April 3, 2000, cwc.com received $250,000 from DrAlt. The loan
carries a 9% interest rate is payable in full on October 3, 2000. In addition,
DrAlt was awarded five-year warrants to purchase 125,000 shares of common stock
of Complete Wellness Centers, Inc. at $2.00 per share.
On May 1, 2000, the holders of Senior Convertible Preferred Stock
submitted a request to convert 13,156 shares of Senior Convertible Preferred
Stock to 524,101 shares of common stock; such shares were issued on May 4, 2000.
On June 15, 2000, Raintree Systems, Inc. exercised 40,000 options to
purchase 40,000 shares of the Company's common stock at $0.01 per share.
On July 26, 2000, the Board of Directors voted to reprice certain stock
options as shown below. Mr. Raymond agreed to forfeit his rights to 50,000
vested options for the purchase of 50,000 shares of the Company's common stock
at $1.50 per share in return for the lower exercise price on his remaining
50,000 vested options.
1996 Stock Option Plan
Joseph J. Raymond, Jr. From $1.50 per share to $0.4375 per
share on 50,000 shares
1998 Outside Directors Stock Option Plan
Directors From $1.25 per share to $0.4375 per
share on 52,500 shares
8
<PAGE>
COMPLETE WELLNESS CENTERS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SEPTEMBER 30, 2000
NOTE D - FINANCINGS AND STOCKHOLDERS' EQUITY (continued)
On September 26, 2000, the Board of Directors voted to reprice 125,000
additional stock options at prices ranging from $1.50 to $3.38 per share to
$0.5625 per share. The Company recorded compensation expense for the difference
between the new grant price and the closing market price on September 30, 2000
of $49,228 in the three months ended September 30, 2000.
As of September 30, 2000, the Company's common stock and warrants were
listed on the NASDAQ SmallCap Market and the Company must meet certain
requirements in order to maintain this listing. The requirements for continued
listing include satisfying one of the following conditions: (a) net tangible
assets of at least $2,000,000 (b) market capitalization of at least $35,000,000
or (c) net income of at least $500,000 in the most recent fiscal year or in two
of the last three fiscal years. The Company does not meet any of the criteria as
of December 31, 1999 or as of September 30, 2000. On October 27, 2000 the
Company was notified by The NASDAQ that its shares had been delisted on the
Small Cap Market effective with the opening of business Monday, October 30,
2000. The Company had sought additional time to effect its plan to regain
compliance with the NASDAQ's listing requirements. The NASDAQ Review Panel was
unwilling to grant the Company additional time to remedy the $1.00 minimum bid
price deficiency based on the fact that it was tied to the consummation of the
proposed merger with Cyfit. The Panel also believed that the Company's plan to
regain compliance with the $2,000,000 net tangible assets requirement by means
of consummating the proposed merger with Cyfit is not yet definitive in nature
and will require significant time to implement. The NASDAQ letter stated that
the review panel is of the opinion that the previously announced proposed merger
with Cyfit will result in a change of control, a change in financial structure,
and possibly a change in business, thereby requiring the post-merger entity to
immediately satisfy the initial inclusion requirements upon consummation of the
merger. An exemption has been granted to permit a broker-dealer to publish in,
or submit for publication in, a quotation medium, quotations for the Company's
securities. The Company's securities can be found under the symbols CMWL.OB and
CMWLW.OB on the OTC Bulletin Board.
NOTE E - CERTAIN RELATIONSHIPS AND TRANSACTIONS
On March 23, 2000, and April 3, 2000, cwc.com, a subsidiary of the
Company, borrowed $300,000 and $250,000, respectively from DrAlt.com Corporation
("DrAlt") on an unsecured basis at a 9% interest rate for six (6) months. On the
same dates, as additional consideration for the loans, the Company granted DrAlt
five-year warrants to purchase 150,000 and 125,000 warrants respectively, to
purchase shares of common stock of the Company at $2.00 per share. These notes
were pursuant to a five-year services agreement made on March 7, 2000, by and
between the Company, its subsidiary cwc.com and DrAlt whereby the parties would
together provide alternative medicine information and products to practitioners
and consumers through the Companies web site, WWW.COMPLETEWELLNESS.COM. The
Company, cwc.com and DrAlt had certain duties and compensation in the
relationship based on their respective abilities and expertise. On March 7,
2000, the Company also signed a non-binding letter of intent to complete a
tax-free merger with DrAlt. The Company would be the surviving entity and would
issue to the shareholders of DrAlt, such number of fully paid and non-assessable
shares of the Company's common stock as would result in the shareholders of
DrAlt collectively owning immediately after the closing of such merger, fifty
(50) percent of the common equity of the Company on a fully diluted basis except
for any outstanding warrants. DrAlt shareholders would surrender their DrAlt
shares to the Company at closing. There were significant contingencies involved
in the agreement, including but not limited to completion of proper due
diligence, conversion of the preferred shareholders to common shareholders,
additional funding of the Company through a private placement and approval of
the transaction by the shareholders of each company. The non-binding letter of
intent and related services agreement with DrAlt were terminated on May 4, 2000.
NOTE F - CONTINGENCIES
As of August 8, 2000, the Company is in default on the interest
payments due related to the notes payable to DrAlt.com Corporation described
above and is in default on the payments due related to the note payable to Bowne
Publishing Company.
As of November 15, 2000, we or our affiliates currently have nine legal
proceedings in various stages of litigation. Two of these actions involve suits
brought by former employees seeking recovery of monies allegedly owed for wages
and fringe benefits. Two of these actions involve suits brought by a former
employee of an Integrated Medical Centers seeking recovery of monies allegedly
owed for wages and a vendor of an Integrated Medical Center seeking monies
allegedly owed for goods or services. We believe that two of these disputes are
not material.
9
<PAGE>
COMPLETE WELLNESS CENTERS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SEPTEMBER 30, 2000
NOTE F - CONTINGENCIES (continued)
A plaintiff penetrated the corporate boundary between the Integrated
Medical Center and the Company, Complete Wellness Centers, Inc. The Court
awarded $147,292 for wages and damages with a subsequent award for related legal
fees of $37,712 were rendered against us. We appealed the decisions and obtained
a bond in the amount of $222,005 for satisfaction of the judgments, which was
backed by an irrevocable letter of credit for $111,002, against which we pledged
a certificate of deposit of $111,002. The full amount of the judgment had been
previously accrued for. In July 2000, the Company was informed it had lost the
appeal and would be required to pay the judgment. On July 17, 2000, a petition
was filed by the plaintiff seeking an award of an additional $62,200 in
attorney's fees and $7,031 in costs for work surrounding the garnishments and
appeal. On October 4, 2000, the Court awarded $43,331 in attorney's fees and
costs for work surrounding the garnishments and appeal. The bonding company was
notified of the original verdict being upheld and proceeded accordingly with
their duties and rights under the bond agreement, which included seizure of the
certificate of deposit pledged against the bond.
The Company was named in a lawsuit filed in Orange County, Florida on
July 24, 2000 by Michael T. Brigante, former Chief Financial Officer of the
Company, for alleged failure to pay $37,503 pursuant to a separation agreement
between Mr. Brigante and the Company dated November 30, 1999. The full amount of
the claim has been previously accrued in the Company's financial statements.
In July 1999, Complete Wellness Weight Management, Inc., a wholly owned
subsidiary, filed for Chapter 7 bankruptcy protection. An initial hearing of the
creditors was held and one creditor appeared to be heard on September 29, 1999.
There is one suit pending in New York State related to a landlord claim under
the bankruptcy, which we are defending.
The Company was named in a lawsuit filed in Washington, D.C. on
December 15, 1999 by Crestar Bank, a landlord, for alleged failure to pay
$108,981 in rent and fees due under a sub-lease plus attorney's fees. The
Company has settled the claim by way of a consent judgment. The full amount of
the settlement has been previously accrued in the Company's financial
statements, however, the Company is in default of the payment agreement as of
June 30, 2000 and subsequently.
In November 1997, three of our facilities were searched by federal
authorities pursuant to search warrants, and the federal authorities removed
computer records and written documents in connection with an investigation of
alleged healthcare fraud. In June 1998, Complete Wellness Centers and several of
its employees, including its former Chief Executive Officer, were served with
subpoenas requesting records and documents related to billing and claims coding,
clinical relationships and corporate records. We believe that we could be a
target in this investigation. One employee received a letter dated January 13,
1998 from the United States Attorney General's Office stating that the employee
was a subject of the investigation. The investigation appears to be focused on
two clinics in Virginia. No charges have been filed against us or any of our
employees to date. However, any such charges could have a material adverse
effect on our future financial position and results of operations.
On October 9, 2000, Deborah Green, an attorney who was retained by
Complete Wellness Centers, Inc. to perform work and services as the Company's
attorney filed suit in Orlando, Orange County, Florida seeking $107,698.75 plus
interest, attorney's fees and costs allegedly due her for legal services
performed between August of 1996 and May of 1997. The Company attempted to
resolve Ms. Green's claim early in 2000 by way of an issuance of authorized but
previously unissued shares of common stock of the Company with a contingency
that the stock would be registered by September 30, 2000 or the Company would
repurchase the shares. The Company was unable to register the stock by September
30, 2000 and is not in the position to repurchase the shares. The full amount of
this claim has been previously accrued in the Company's financial statements.
10
<PAGE>
COMPLETE WELLNESS CENTERS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SEPTEMBER 30, 2000
NOTE F - CONTINGENCIES (continued)
On November 12, 1999, C. Thomas McMillen, our former Chairman and Chief
Executive Officer filed suit in Superior Court for the District of Columbia
seeking damages resulting from the termination of his employment agreement with
us. Mr. McMillen alleges that we breached our employment contract with him and
that we breached a covenant of good faith and fair dealing, which the suit
alleges was implied in the agreement. He seeks salary, vacation, bonus pool,
stock options, office space, secretarial support, cellular phone and benefits
including health insurance from the date of termination, February 18, 1999,
through August 31, 2000. He seeks judgment in the amount of $500,000 plus
pre-judgment interest, the costs of his suit, attorney's fees and any further
relief that the court deems just and proper. In addition to defending this
action, we filed a counterclaim seeking judgment for damages and costs. On
September 26, 2000, Complete Wellness Centers, Inc. and Mr. McMillen entered
into an agreement whereby Mr. McMillen dismissed his suit against the Company in
exchange for the transfer of 266,736 ten-year warrants to purchase 266,736
common shares of Webhealthy, Inc. (formerly Optimum Health Services) owned by
the Company.
From time to time in the course of Complete Wellness Centers carrying
out its business, we encounter threatened litigation, none of which is presently
considered to be material.
11
<PAGE>
Independent Accountants' Review Report
The Board of Directors
Complete Wellness Centers, Inc.
We have reviewed the accompanying condensed consolidated balance sheet of
Complete Wellness Centers, Inc. as of September 30, 2000, and the related
condensed consolidated statement of operations, and condensed consolidated
statement of cash flows for the three-month and nine-month periods ended
September 30, 2000. These financial statements are the responsibility of the
company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, the objective of which is the
expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the accompanying financial statements for them to be in conformity
with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet as of December 31, 1999, and the
related consolidated statement of operations, stockholders' deficiency, and cash
flows for the year then ended (not presented herein); and in our report dated
March 28, 2000, we expressed an unqualified opinion on those financial
statements. In our opinion, the information set forth in the accompanying
condensed consolidated balance sheet as of December 31, 1999, is fairly stated,
in all material respects, in relation to the consolidated balance sheet from
which it has been derived.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note A to the
financial statements, the Company has suffered recurring losses from operations
and has an accumulated deficit, which raise substantial doubt about its ability
to continue as a going concern. Management's plans regarding those matters also
are described in Note A. The financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
AMPER, POLITZINER & MATTIA P.A.
November 20, 2000
Edison, New Jersey
12
<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.
The Company has undergone significant restructuring of its operations
to reduce overhead costs, has renegotiated many of its contractual relationships
with its current customers and is attempting to renegotiate new agreements with
31 customers. As has been the Company's practice, as certain contractual
relationships cease to be honored, such lack of ability to control the
operations of the customer have been reflected in the financial statements
herein with adjusted for proper reflection in the consolidated financial
statements. During the three months ended September 30, 2000, the Company and
the Integrated Medical Centers reached mutual agreements to terminate ownership
of the operational Integrated Medical Centers it was managing. The operations of
all the medical corporations are included in the consolidated financial
statements of the Company until the point of contractual termination. Concurrent
with signing termination agreements, fifteen clinics agreed to new consulting
agreements with the Company. The revenues from these consulting contracts and
the related costs are included in the operating results for the three and nine
months ended September 30, 2000.
It is the Company's plan to seek relief from its creditors through debt
forgiveness and/or long-term payment plans as the Company cannot meet its
current obligations. Unless and until such relief is obtained, additional
capital infusion from investors will be unlikely. Agreements have been made with
substantially all of the creditors; however, the effect of such relief is not
reflected in these financial statements as the agreements have not been
consummated. As of October 24, 2000, the accounts receivable of the Company were
assigned to its secured creditors, Wexford Spectrum Investors, LLC and Imprimis
Investors, LLC, pursuant to their lien against those receivables.
On September 27, 2000, the Company announced that it had entered into a
binding letter of intent to merge with Cyfit.com, Inc. ("Cyfit"), a private
Delaware corporation, in a tax-free exchange of shares. Cyfit is in the business
of interactive health and fitness emphasizing a healthy lifestyle based on
exercise, nutrition, weight management, wellness and sports training that is
delivered through multiple distribution channels. For more information about
Cyfit, please visit its web site at WWW.CYFIT.COM. The merger is subject to,
among other things, preparation of definitive agreements, completion of due
diligence reviews, restructuring of debt and equity and approval by the
companies' shareholders at special meetings to be held in late December 2000 or
early January 2001, when the merger is expected to close. After closing,
Complete Wellness Centers will be the surviving entity and will then change its
name to Cyfit, Inc. Management believes the joining of CWC and Cyfit provides
the operating environment for the new entity to deliver a complete wellness
package to its members and constituents through existing channels and future
distribution methods. CWC also announced that, in connection with the merger,
the investment-banking firm of Hornblower & Weeks, Inc. has made a firm
commitment to underwrite an equity offering of a minimum of $4,000,000 and a
maximum of $9,000,000. The merger, including the contemplated restructuring of
debt and equity, and the related investment banking commitment are two of the
steps the Company is taking to strengthen its business and financial position
and condition in order to enhance shareholder value.
13
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL (continued)
As of September 30, 2000, the Company's common stock and warrants were
listed on the NASDAQ SmallCap Market and the Company must meet certain
requirements in order to maintain this listing. The requirements for continued
listing include satisfying one of the following conditions: (a) net tangible
assets of at least $2,000,000 (b) market capitalization of at least $35,000,000
or (c) net income of at least $500,000 in the most recent fiscal year or in two
of the last three fiscal years. The Company does not meet any of the criteria as
of December 31, 1999 or as of September 30, 2000. On October 27, 2000 the
Company was notified by The NASDAQ that its shares had been delisted on the
Small Cap Market effective with the opening of business Monday, October 30,
2000. The Company had sought additional time to effect its plan to regain
compliance with the NASDAQ's listing requirements. The NASDAQ Review Panel was
unwilling to grant the Company additional time to remedy the $1.00 minimum bid
price deficiency based on the fact that it was tied to the consummation of the
proposed merger with Cyfit. The Panel also believed that the Company's plan to
regain compliance with the $2,000,000 net tangible assets requirement by means
of consummating the proposed merger with Cyfit is not yet definitive in nature
and will require significant time to implement.
The NASDAQ letter stated that the review panel is of the opinion that the
previously announced proposed merger with Cyfit will result in a change of
control, a change in financial structure, and possibly a change in business,
thereby requiring the post-merger entity to immediately satisfy the initial
inclusion requirements upon consummation of the merger. An exemption has been
granted to permit a broker-dealer to publish in, or submit for publication in, a
quotation medium, quotations for the Company's securities. The Company's
securities can be found under the symbols CMWL.OB and CMWLW.OB on the OTC
Bulletin Board.
RESULTS FROM OPERATIONS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THREE AND NINE MONTHS
ENDED SEPTEMBER 30, 1999
Revenue. During the three and nine months ended September 30, 2000 the
Company had revenues of $49,000 and $4,445,000 respectively, as compared to
$2,868,000 and $10,009,000 for the three and nine months ended September 30,
1999. The decreases of $2,819,000 and $5,564,000, respectively were due to the
discontinuance of contractual relationships with certain customers. The Company
had 63 active Integrated Medical Centers under contract at September 30, 1999
compared to 33 at June 30, 2000. After June 30, 2000, fifteen clinics agreed to
new consulting agreements with the Company providing for monthly consulting
services only.
Salary and Consulting Costs. During the three and nine months ended
September 30, 2000, the Company incurred salary and consulting costs of $275,000
and $1,236,000 respectively, as compared to $858,000 and $2,266,000 for the
three and nine months ended September 30, 1999. The decreases of $583,000 and
$1,030,000 respectively, were primarily due to the reduction of personnel due to
the consolidation of corporate operations after September 30, 1999 and the
reduction in staffing at the corporate offices in June 2000.
Management Fees and Bad Debt Expense. Contractually, the Company's
patient accounts receivable balances at the Integrated Medical Centers and the
cash expended by those centers affect the Company's remaining liability for
management of the centers and the allowance for doubtful accounts. As these
agreements have been terminated at various dates during the year, coupled with
the Company's inability to exercise control over the remaining Integrated
Medical Centers, the receivables and related management fees payable have been
written off, resulting in a charge to bad debt expense of $2,138,000 for the
three months ended September 30, 2000. The accrued management fee and the
allowance for doubtful accounts should be evaluated on a combined basis as an
offset to gross patient accounts receivable to arrive at net collectible patient
accounts receivable for the Company. During the three and nine months ended
September 30, 2000, the Company incurred combined management fees and bad debt
expense of $2,138,000 and $6,474,000 respectively, as compared to $2,100,000 and
$7,471,000 for the three and nine months ended September 30, 1999. The
management fees are paid to the affiliated chiropractors' administrative
entities for managing the day-to-day operations of the Integrated Medical
Centers. The combined management fees and bad debt expense should vary directly
with revenue and gross patient accounts receivable. The combined provision was
4,363% and 146% of revenue for the three and nine months ended September 30,
2000, respectively, compared to 73% and 75% for the three and nine months ended
September 30, 1999. Due to the Company's changes to existing customer's
contractual arrangements, its cash flow difficulties and willingness to discount
receivables in favor of cash, significant
14
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - Continued
additional bad debt expense and related accounts receivable reserves have been
recorded in the three months ended September 30, 2000. The combined accrued
management fee liability combined with the allowance for doubtful accounts as a
percentage of gross patient accounts receivable was 97% at September 30, 2000
and 73% at December 31, 1999. As of October 24, 2000, the accounts receivable of
the Company were assigned to its secured creditors, Wexford Spectrum Investors,
LLC and Imprimis Investors, LLC, pursuant to their lien against those
receivables.
Rent. During the three and nine months ended September 30, 2000, the
Company incurred rent expense of $5,000 and $26,000 respectively, as compared to
$32,000 and $111,000 for the three and nine months ended September 30, 1999.
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 decreases of $27,000 and $85,000 respectively, were due
primarily to the consolidation of corporate operations in mid-year 1999.
General and Administrative. During the three and nine months ended
September 30, 2000, the Company incurred general and administrative expenses of
$144,000 and $822,000 respectively, as compared to $576,000 and $1,504,000 for
the three and nine months ended September 30, 1999. The decreases of $432,000
and $682,000 were due primarily to reduction of costs from the consolidation and
discontinuation of corporate operations.
Depreciation and Amortization. During the three and nine months ended
September 30, 2000, the Company incurred depreciation and amortization expense
of $22,000 and $66,000 respectively, as compared to $31,000 and $94,000 for the
three and nine months ended September 30, 1999. The decreases of $9,000 and
$28,000 respectively, resulted from the previous write down of idle assets.
Operating Loss. The consolidated operating losses of the Company were
$2,611,000 and $4,392,000 for the three and nine months ended September 30, 2000
respectively, compared to consolidated operating losses of $747,000 and
$1,507,000 for the three and nine months ended September 30, 1999. The losses
resulted primarily from a 56% reduction in revenues derived from the termination
of the operating contracts with the active Integrated Medical Centers from
September 30, 1999 through the various termination dates in 2000, coupled with
fees and legal costs associated with ongoing matters, financings and
acquisitions present during the three and nine months ended September 30, 2000.
Interest Expense. During the three and nine months ended September 30,
2000, the Company had interest expense of $75,000 and $212,000 compared to
$13,000 and $51,000 for the nine months ended September 30, 1999. The increases
of $62,000 and $161,000 resulted from the interest accrued on outstanding notes
payable for each period, primarily the effective cost of the warrants issued
along with the notes payable to DrAlt.com Corporation that originated in late
March 2000.
Interest Income. During the three and nine months ended September 30,
2000, the Company had interest income of $0 and $2,000 respectively, as compared
to $643 and $4,000 for the three and nine months ended September 30, 1999. The
decreases are from a lower amount of invested funds in 2000 compared to the same
periods in 1999.
Earnings Per Share. During the three and nine months ended September
30, 2000, the Company had losses per share of $0.45 and $0.83 respectively,
compared to $0.19 and $0.44 for the three and nine months ended September 30,
1999. The number of shares outstanding increased 46% for the three months and
53% for the nine months ended September 30, 2000, respectively compared to the
same periods in 1999 due to the conversions of preferred stock to common stock,
stock option exercises, common stock issued as payment for debts and new shares
issued in private placements after September 30, 1999. The weighted average
shares outstanding on a basic and fully diluted basis for the three and nine
months ended September 30, 2000 were 5,756,000 and 5,283,000, respectively.
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
nine months ended September 30, 2000, the Company had net losses of $2,611,000
and $4,392,000 respectively, as compared to net losses of $747,000 and
$1,507,000 for the three and nine months ended September 30, 1999. At September
30, 2000, the Company had negative working capital of $3,673,000 and an
accumulated deficit of $23,735,000. Net cash used in operations for the nine
months ended September 30, 2000 was $1,128,000 compared to $1,481,000 for the
nine months ended September 30, 1999. Negative cash flows are attributable
primarily to net losses and decreases in accounts receivable of $497,000, net of
the increased provision for bad debts of $3,697,000 for the nine months ended
September 30, 2000 compared to the nine months ended September 30, 1999 when
accounts receivable increased $1,682,000 and operating liabilities increased
$39,000.
15
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - Continued
LIQUIDITY AND CAPITAL RESOURCES (continued)
It is the Company's plan to seek relief from its creditors through debt
forgiveness and/or long-term payment plans as the Company cannot meet its
current obligations. Unless and until such relief is obtained, additional
capital infusion from investors will be unlikely. Agreements have been made with
substantially all of the creditors, however, the effect of such relief is not
reflected in these financial statements as the agreements have not been
consummated. As of October 24, 2000, the accounts receivable of the Company were
assigned to its secured creditors, Wexford Spectrum Investors, LLC and Imprimis
Investors, LLC, pursuant to their lien against those receivables.
On September 27, 2000, the Company announced that it had entered into a
binding letter of intent to merge with Cyfit.com, Inc. ("Cyfit"), a private
Delaware corporation, in a tax-free exchange of shares. Cyfit is in the business
of interactive health and fitness emphasizing a healthy lifestyle based on
exercise, nutrition, weight management, wellness and sports training that is
delivered through multiple distribution channels. For more information about
Cyfit, please visit its web site at WWW.CYFIT.COM. The merger is subject to,
among other things, preparation of definitive agreements, completion of due
diligence reviews, restructuring of debt and equity and approval by the
companies' shareholders at special meetings to be held in late December 2000 or
early January 2001, when the merger is expected to close. After closing,
Complete Wellness Centers will be the surviving entity and will then change its
name to Cyfit, Inc. Management believes the joining of CWC and Cyfit provides
the operating environment for the new entity to deliver a complete wellness
package to its members and constituents through existing channels and future
distribution methods. CWC also announced that, in connection with the merger,
the investment- banking firm of Hornblower & Weeks, Inc. has made a firm
commitment to underwrite an equity offering of a minimum of $4,000,000 and a
maximum of $9,000,000. The merger, including the contemplated restructuring of
debt and equity, and the related investment banking commitment are two of the
steps the Company is taking to strengthen its business and financial position
and condition in order to enhance shareholder value.
As of September 30, 2000, the Company's common stock and warrants were
listed on the NASDAQ SmallCap Market and the Company must meet certain
requirements in order to maintain this listing. The requirements for continued
listing include satisfying one of the following conditions: (a) net tangible
assets of at least $2,000,000 (b) market capitalization of at least $35,000,000
or (c) net income of at least $500,000 in the most recent fiscal year or in two
of the last three fiscal years. The Company does not meet any of the criteria as
of December 31, 1999 or as of September 30, 2000. On October 27, 2000 the
Company was notified by The NASDAQ that its shares had been delisted on the
Small Cap Market effective with the opening of business Monday, October 30,
2000. The Company had sought additional time to effect its plan to regain
compliance with the NASDAQ's listing requirements. The NASDAQ Review Panel was
unwilling to grant the Company additional time to remedy the $1.00 minimum bid
price deficiency based on the fact that it was tied to the consummation of the
proposed merger with Cyfit. The Panel also believed that the Company's plan to
regain compliance with the $2,000,000 net tangible assets requirement by means
of consummating the proposed merger with Cyfit is not yet definitive in nature
and will require significant time to implement. The NASDAQ letter stated that
the review panel is of the opinion that the previously announced proposed merger
with Cyfit will result in a change of control, a change in financial structure,
and possibly a change in business, thereby requiring the post-merger entity to
immediately satisfy the initial inclusion requirements upon consummation of the
merger. An exemption has been granted to permit a broker-dealer to publish in,
or submit for publication in, a quotation medium, quotations for the Company's
securities. The Company's securities can be found under the symbols CMWL.OB and
CMWLW.OB on the OTC Bulletin Board.
We are currently dependent on advances from investors to meet our
day-to-day cash needs. Operating expenses have been reduced to a minimum level
as of September 30, 2000. As a result, we must identify other sources of cash
immediately in order to remain in business. Failure to immediately identify
other sources of cash could result in insolvency.
16
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - Continued
LIQUIDITY AND CAPITAL RESOURCES (continued)
On March 23, 2000, and April 3, 2000, cwc.com, borrowed $300,000 and
$250,000, respectively from DrAlt on an unsecured basis at a 9% interest rate
for six (6) months. On the same dates, as additional consideration for the
loans, the Company granted DrAlt five-year warrants to purchase 150,000 and
125,000 warrants respectively, to purchase shares of common stock of the Company
at $2.00 per share. These notes were pursuant to a five-year services agreement
made on March 7, 2000, by and between the Company, its subsidiary cwc.com and
DrAlt whereby the parties would together provide alternative medicine
information and products to practitioners and consumers through the Company's
web site, WWW.COMPLETEWELLNESS.COM. The Company, cwc.com and DrAlt had certain
duties and compensation in the relationship based on the respective abilities
and expertise. On March 7, 2000, the Company also signed a non-binding letter of
intent to complete a tax-free merger with DrAlt. The Company would be the
surviving entity and would issue to the shareholders of DrAlt, such number of
fully paid and non-assessable shares of the Company's common stock as would
result in the shareholders of DrAlt collectively owning immediately after the
closing of such merger, fifty (50) percent of the common equity of the Company
on a fully diluted basis except for any outstanding warrants. DrAlt shareholders
would surrender their DrAlt shares to the Company at closing. There were
significant contingencies involved in the agreement, including but not limited
to completion of proper due diligence, conversion of the preferred shareholders
to common shareholders, additional funding of the Company through a private
placement and approval of the transaction by the shareholders of each company.
The non-binding letter of intent and related services agreement with DrAlt.com
Corporation were terminated on May 4, 2000. The Company is in default of the
required payment terms of the notes payable with DrAlt described herein as of
August 8, 2000.
The Company has entered into employment agreements with certain key
employees. Each of the employment agreements requires the full-time services of
the employees, are for specified periods of time and specify the compensation
and termination terms. The agreements also contain covenants restricting the
employees from engaging in any activities competitive with our business during
the term of the agreement and for a period of one year thereafter, and
prohibiting the employee from disclosing confidential information regarding our
business. The Company has not met its obligations for cash payments under these
agreements. As of September 29, 2000, all of the Company's officers and
personnel had resigned. On September 26, 2000, the Board of Directors appointed
Mr. E. Eugene Sharer, a director, to the positions of Interim President and
Chief Financial Officer.
The Company and its affiliates are involved in the following material
legal proceedings:
As of November 15, 2000, we or our affiliates currently have nine legal
proceedings in various stages of litigation. Two of these actions involve suits
brought by former employees seeking recovery of monies allegedly owed for wages
and fringe benefits. Two of these actions involve suits brought by a former
employee of an Integrated Medical Centers seeking recovery of monies allegedly
owed for wages and a vendor of an Integrated Medical Center seeking monies
allegedly owed for goods or services. We believe that two of these disputes are
not material.
A plaintiff penetrated the corporate boundary between the Integrated
Medical Center and the Company, Complete Wellness Centers, Inc. The Court
awarded $147,292 for wages and damages with a subsequent award for related legal
fees of $37,712 were rendered against us. We appealed the decisions and obtained
a bond in the amount of $222,005 for satisfaction of the judgments, which was
backed by an irrevocable letter of credit for $111,002, against which we pledged
a certificate of deposit of $111,002. The full amount of the judgment had been
previously accrued for. In July 2000, the Company was informed it had lost the
appeal and would be required to pay the judgment. On July 17, 2000, a petition
was filed by the plaintiff seeking an award of an additional $62,200 in
attorney's fees and $7,031 in costs for work surrounding the garnishments and
appeal. On October 4, 2000, the Court awarded $43,331.00 in attorney's fees and
costs for work surrounding the garnishments and appeal. The bonding company was
notified of the original verdict being upheld and proceeded accordingly with
their duties and rights under the bond agreement, which included seizure of the
certificate of deposit pledged against the bond.
The Company was named in a lawsuit filed in Orange County, Florida on
July 24, 2000 by Michael T. Brigante, former Chief Financial Officer of the
Company, for alleged failure to pay $37,503 pursuant to a separation agreement
between Mr. Brigante and the Company dated November 30, 1999. The full amount of
the claim has been previously accrued in the Company's financial statements.
17
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - Continued
LIQUIDITY AND CAPITAL RESOURCES (continued)
In July 1999, Complete Wellness Weight Management, Inc., a wholly owned
subsidiary, filed for Chapter 7 bankruptcy protection. An initial hearing of the
creditors was held and one creditor appeared to be heard on September 29, 1999.
There is one suit pending in New York State related to a landlord claim under
the bankruptcy, which we are defending.
The Company was named in a lawsuit filed in Washington, D.C. on
December 15, 1999 by Crestar Bank, a landlord, for alleged failure to pay
$108,981 in rent and fees due under a sub-lease plus attorney's fees. The
Company has settled the claim by way of a consent judgment. The full amount of
the settlement has been previously accrued in the Company's financial
statements, however, the Company is in default of the payment agreement as of
June 30, 2000 and subsequently.
In November 1997, three of our facilities were searched by federal
authorities pursuant to search warrants, and the federal authorities removed
computer records and written documents in connection with an investigation of
alleged healthcare fraud. In June 1998, Complete Wellness Centers and several of
its employees, including its former Chief Executive Officer, were served with
subpoenas requesting records and documents related to billing and claims coding,
clinical relationships and corporate records. We believe that we could be a
target in this investigation. One employee received a letter dated January 13,
1998 from the United States Attorney General's Office stating that the employee
was a subject of the investigation. The investigation appears to be focused on
two clinics in Virginia. No charges have been filed against us or any of our
employees to date. However, any such charges could have a material adverse
effect on our future financial position and results of operations.
On October 9, 2000, Deborah Green, an attorney who was retained by
Complete Wellness Center, Inc. to perform work and services as the Company's
attorney filed suit in Orlando, Orange County, Florida seeking $107,698.75 plus
interest, attorney's fees and costs allegedly due her for legal services
performed between August of 1996 and May of 1997. The Company attempted to
resolve Ms. Green's claim early in 2000 by way of an issuance of authorized but
previously unissued shares of common stock of the Company with a contingency
that the stock would be registered by September 30, 2000 or the Company would
repurchase the shares. The Company was unable to register the stock by September
30, 2000 and is not in the position to repurchase the shares. The full amount of
this claim has been previously accrued in the Company's financial statements.
On November 12, 1999, C. Thomas McMillen, our former Chairman and Chief
Executive Officer filed suit in Superior Court for the District of Columbia
seeking damages resulting from the termination of his employment agreement with
us. Mr. McMillen alleges that we breached our employment contract with him and
that we breached a covenant of good faith and fair dealing, which the suit
alleges was implied in the agreement. He seeks salary, vacation, bonus pool,
stock options, office space, secretarial support, cellular phone and benefits
including health insurance from the date of termination, February 18, 1999,
through August 31, 2000. He seeks judgment in the amount of $500,000 plus
pre-judgment interest, the costs of his suit, attorney's fees and any further
relief that the court deems just and proper. In addition to defending this
action, we filed a counterclaim seeking judgment for damages and costs. On
September 26, 2000, Complete Wellness Center, Inc. and Mr. McMillen entered into
an agreement whereby Mr. McMillen dismissed his suit against the Company in
exchange for the transfer of 266,736 ten-year warrants to purchase 266,736
common shares of Webhealthy, Inc. (formerly Optimum Health Services) owned by
the Company.
From time to time in the course of Complete Wellness Centers carrying
out its business, we encounter threatened litigation, none of which is presently
considered to be material.
As of September 30, 2000, the Company's common stock and warrants were
listed on the NASDAQ SmallCap Market and the Company must meet certain
requirements in order to maintain this listing. The requirements for continued
listing include satisfying one of the following conditions: (a) net tangible
assets of at least $2,000,000 (b) market capitalization of at least $35,000,000
or (c) net income of at least $500,000 in the most recent fiscal year or in two
of the last three fiscal years. The Company does not meet any of the criteria as
of December 31, 1999 or as of September 30, 2000. On October 27, 2000 the
Company was notified by The NASDAQ that its shares had been delisted on the
Small Cap Market effective with the opening of business Monday, October 30,
2000. The Company had sought additional time to effect its plan to regain
compliance with the NASDAQ's listing requirements. The NASDAQ Review Panel was
unwilling to grant the Company additional time to remedy the $1.00 minimum bid
price deficiency based on the fact that it was tied to the consummation of the
proposed merger with Cyfit. The Panel also believed that the Company's plan to
regain compliance with the $2,000,000 net
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - Continued
LIQUIDITY AND CAPITAL RESOURCES (continued)
tangible assets requirement by means of consummating the proposed merger with
Cyfit is not yet definitive in nature and will require significant time to
implement. The NASDAQ letter stated that the review panel is of the opinion that
the previously announced proposed merger with Cyfit will result in a change of
control, a change in financial structure, and possibly a change in business,
thereby requiring the post-merger entity to immediately satisfy the initial
inclusion requirements upon consummation of the merger. An exemption has been
granted to permit a broker-dealer to publish in, or submit for publication in, a
quotation medium, quotations for the Company's securities. The Company's
securities can be found under the symbols CMWL.OB and CMWLW.OB on the OTC
Bulletin Board.
Year 2000 Issue
Many currently installed computer systems and software products are
coded to accept only two digit entries in the date code field. These systems and
products will need to accept four digit entries to distinguish 21st century
dates from 20th century dates. As a result, computer systems and software used
by many companies and government agencies may need to be updated to comply with
the year 2000 requirements or risk system failure or miscalculations causing
disruptions to business activities. All of the Company's internal operating
systems were compliant as of December 31, 1999; however, Year 2000 problems may
not surface until after January 1, 2000. Management estimates that the costs
associated with any additional activities will not have a material effect on the
Company's operations.
Net Operating Loss Carryforward
The Company files a consolidated federal tax return with its wholly owned
subsidiaries. At December 31, 1999, the Company had net operating loss
carryforwards for income tax purposes of approximately $8,713,000, which expire
between 2010 and 2012. Utilization of net operating loss carryforwards may be
significantly limited, based on changes in the Company's ownership. The use of
substantially all of the combined net operating loss carryforwards of CWC, LLC
will be limited to offset future taxable income of each separate subsidiary in
proportion to their share of the tax losses generated to date. In addition,
these carryforwards may be significantly limited under the Internal Revenue Code
as a result of ownership changes resulting from the Company's Senior and Junior
Convertible Preferred Stock financing and other equity offerings.
The Company has a cumulative pretax loss for financial reporting purposes.
Recognition of deferred tax assets will require generation of future taxable
income. There can be no assurance that the Company will generate earnings in
future years. Therefore, the Company established a valuation allowance on
deferred tax assets of approximately $5,415,000 as of December 31, 1999,
respectively.
Seasonality
The Company believes that the patient volumes at its Integrated Medical
Centers are not significantly affected by seasonality.
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company and its affiliates are involved in the following material
legal proceedings:
As of November 15, 2000, we or our affiliates currently have nine legal
proceedings in various stages of litigation. Two of these actions involve suits
brought by former employees seeking recovery of monies allegedly owed for wages
and fringe benefits. Two of these actions involve suits brought by a former
employee of an Integrated Medical Centers seeking recovery of monies allegedly
owed for wages and a vendor of an Integrated Medical Center seeking monies
allegedly owed for goods or services. We believe that two of these disputes are
not material.
A plaintiff penetrated the corporate boundary between the Integrated
Medical Center and the Company, Complete Wellness Centers, Inc. The Court
awarded $147,292 for wages and damages with a subsequent award for related legal
fees of $37,712 were rendered against us. We appealed the decisions and obtained
a bond in the amount of $222,005 for satisfaction of the judgments, which was
backed by an irrevocable letter of credit for $111,002, against which we pledged
a certificate of
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PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS (continued)
deposit of $111,002. The full amount of the judgment had been previously accrued
for. In July 2000, the Company was informed it had lost the appeal and would be
required to pay the judgment. On July 17, 2000, a petition was filed by the
plaintiff seeking an award of an additional $62,200 in attorney's fees and
$7,031 in costs for work surrounding the garnishments and appeal. On October 4,
2000, the Court awarded $43,331.00 in attorney's fees and costs for work
surrounding the garnishments and appeal. The bonding company was notified of the
original verdict being upheld and proceeded accordingly with their duties and
rights under the bond agreement, which included seizure of the certificate of
deposit pledged against the bond.
The Company was named in a lawsuit filed in Orange County, Florida on
July 24, 2000 by Michael T. Brigante, former Chief Financial Officer of the
Company, for alleged failure to pay $37,503 pursuant to a separation agreement
between Mr. Brigante and the Company dated November 30, 1999. The full amount of
the claim has been previously accrued in the Company's financial statements.
In July 1999, Complete Wellness Weight Management, Inc., a wholly owned
subsidiary, filed for Chapter 7 bankruptcy protection. An initial hearing of the
creditors was held and one creditor appeared to be heard on September 29, 1999.
There is one suit pending in New York State related to a landlord claim under
the bankruptcy, which we are defending.
The Company was named in a lawsuit filed in Washington, D.C. on
December 15, 1999 by Crestar Bank, a landlord, for alleged failure to pay
$108,981 in rent and fees due under a sub-lease plus attorney's fees. The
Company has settled the claim by way of a consent judgment. The full amount of
the settlement has been previously accrued in the Company's financial
statements, however, the Company is in default of the payment agreement as of
June 30, 2000 and subsequently.
In November 1997, three of our facilities were searched by federal
authorities pursuant to search warrants, and the federal authorities removed
computer records and written documents in connection with an investigation of
alleged healthcare fraud. In June 1998, Complete Wellness Centers and several of
its employees, including its former Chief Executive Officer, were served with
subpoenas requesting records and documents related to billing and claims coding,
clinical relationships and corporate records. We believe that we could be a
target in this investigation. One employee received a letter dated January 13,
1998 from the United States Attorney General's Office stating that the employee
was a subject of the investigation. The investigation appears to be focused on
two clinics in Virginia. No charges have been filed against us or any of our
employees to date. However, any such charges could have a material adverse
effect on our future financial position and results of operations.
On October 9, 2000, Deborah Green, an attorney who was retained by
Complete Wellness Center, Inc. to perform work and services as the Company's
attorney filed suit in Orlando, Orange County, Florida seeking $107,698.75 plus
interest, attorney's fees and costs allegedly due her for legal services
performed between August of 1996 and May of 1997. The Company attempted to
resolve Ms. Green's claim early in 2000 by way of an issuance of authorized but
previously unmissed shares of common stock of the Company with a contingency
that the stock would be registered by September 30, 2000 or the Company would
repurchase the shares. The Company was unable to register the stock by September
30, 2000 and is not in the position to repurchase the shares. The full amount of
this claim has been previously accrued in the Company's financial statements.
On November 12, 1999, C. Thomas McMillen, our former Chairman and Chief
Executive Officer filed suit in Superior Court for the District of Columbia
seeking damages resulting from the termination of his employment agreement with
us. Mr. McMillen alleges that we breached our employment contract with him and
that we breached a covenant of good faith and fair dealing, which the suit
alleges was implied in the agreement. He seeks salary, vacation, bonus pool,
stock options, office space, secretarial support, cellular phone and benefits
including health insurance from the date of termination, February 18, 1999,
through August 31, 2000. He seeks judgment in the amount of $500,000 plus
pre-judgment interest, the costs of his suit, attorney's fees and any further
relief that the court deems just and proper. In addition to defending this
action, we filed a counterclaim seeking judgment for damages and costs. On
September 26, 2000, Complete Wellness Center, Inc. and Mr. McMillen entered into
an agreement whereby Mr. McMillen dismissed his suit against the Company in
exchange for the transfer of 266,736 ten-year warrants to purchase 266,736
common shares of Webhealthy, Inc. (formerly Optimum Health Services) owned by
the Company.
From time to time in the course of Complete Wellness Centers carrying
out its business, we encounter threatened litigation, none of which is presently
considered to be material.
20
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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
Form 8-K as filed on July 7, 2000
Form 8-K as filed on October 10, 2000
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: November 20, 2000 By /s/ E. Eugene Sharer
----------------------------------
E. Eugene Sharer
Interim Chief Financial Officer
