<PAGE> 1
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------------------------
FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 13 OF 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2000
--------------------------------------------
COMMISSION FILE NUMBER 0-22115
--------------------------------------------
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 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 March 31, 2000: 5,088,292 shares of Common Stock.
Transitional Small Business Disclosure Format (check one) Yes No X .
---- ---------
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COMPLETE WELLNESS CENTERS, INC.
FORM 10-QSB
INDEX
Part I. Financial Information
Item 1. Financial Statements (unaudited)
Condensed Consolidated Balance Sheets
March 31, 2000 and December 31, 1999
Condensed Consolidated Statement of Operations
For Three Months Ended March 31, 2000 and March 31, 1999
Condensed Consolidated Statements of Cash Flows
For Three Months Ended March 31, 2000 and March 31, 1999
Notes to Condensed Consolidated Financial Statements
Independent Accountants' Review Report
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
2
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PART I. FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS
COMPLETE WELLNESS CENTERS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
--------------------------
(Unaudited)
ASSETS
<S> <C> <C>
Current Assets:
Cash and cash equivalents $291,203 $272,034
Certificate of deposit, restricted 111,002 111,002
Patient receivables, net of allowance for
doubtful accounts of $5,937,914 and
$5,270,361 at 5,019,768 5,485,901
March 31, 2000 and December 31, 1999,
respectively
Prepaid expenses 40,837 46,667
Other current assets 0 1,555
--------------------------
Total current assets 5,462,810 5,917,159
Furniture and equipment, net 203,977 225,978
Other assets 1,400 1,400
--------------------------
Total assets $5,668,187 $6,144,537
==========================
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY / DEFICIT
<S> <C> <C>
Current Liabilities:
Current portion of notes payable 819,101 582,525
Accounts payable and accrued expenses 2,622,064 2,729,786
Accrued management fees 1,999,254 2,573,463
--------------------------
Total current liabilities 5,440,419 5,885,774
Note payable net 298,740 314,475
Stockholders' equity:
Common Stock,$.0001665 par value per share
50,000,000 shares authorized,
5,088,292 and 4,881,149
shares issued and outstanding at
March 31, 2000 and
December 31, 1999, respectively 846 813
Senior Convertible Preferred Stock, $.01
par value per share,
2,000,000 shares authorized, 8%
cumulative,124,135 and 121,107
issued and outstanding at
March 31, 2000 and December 31,
1999, respectively 1,241 1,211
Junior Convertible Preferred Stock, $.01
par value per share,
2,122 shares authorized, 8%
cumulative, 2,122 and 2,071 shares
issued and outstanding at March
31, 2000 and December 31, 1999,
respectively 21 21
Additional paid in capital 19,374,008 18,838,475
Accumulated deficit (19,447,088) (18,896,232)
--------------------------
Total stockholders' equity/(deficit) (70,972) (55,712)
--------------------------
Total liabilities and stockholders'
equity/(deficit) $5,668,187 $6,144,537
==========================
</TABLE>
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 THREE MONTHS
ENDED ENDED
MARCH 31, MARCH 31,
2000 1999
---------------------------
(Unaudited) (Unaudited)
<S> <C> <C>
Revenue:
Integrated medical clinics $2,319,208 $4,494,861
Other income 85,173
---------------------------
Total operating revenue 2,319,208 4,580,034
Direct expenses:
Salary and consulting costs 608,104 802,395
Management fees 1,120,199 3,313,922
Cost of revenue 0 7,178
Rent 11,047 41,471
Advertising and marketing 3,647 3,147
Bad debt expense 670,736 155,949
---------------------------
Total direct expenses 2,413,733 4,324,062
General and administrative 256,173 266,701
Depreciation and amortization 22,000 31,653
---------------------------
Operating income/(loss) (372,698) (42,382)
Interest expense 25,233 9,500
Interest income 1,047 1,187
---------------------------
Net income/(loss) before income taxes (396,884) (50,695)
Income taxes 0 0
---------------------------
Net income/(loss) after income taxes ($396,884) ($50,695)
===========================
Income/(loss) per share - basic ($0.08) ($0.02)
===========================
Weighted average common shares - basic 4,984,721 2,703,862
===========================
</TABLE>
See notes to condensed consolidated financial statements.
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COMPLETE WELLNESS CENTERS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS
ENDED ENDED
MARCH 31, MARCH 31,
2000 1999
------------------------------
(Unaudited) (Unaudited)
<S> <C> <C>
OPERATING ACTIVITIES
Net income/(loss) ($396,884) ($50,695)
Adjustments to reconcile net income/(loss) to
net cash used in operating activities:
Depreciation and amortization 22,000 31,653
Provision for bad debt 670,736 155,949
Recognition of compensatory granting
non-qualified stock options 0 3,405
Recognition of the granting of common
stock warrants and options 95,426 0
Changes in operating assets and
liabilities:
Accounts receivables (204,602) (1,305,025)
Other current assets 7,385 17,808
Accounts payable, accrued expenses,
and accrued management fees (681,933) 472,584
------------------------------
Net cash used in operating activities: (487,872) (674,321)
INVESTING ACTIVITIES
Purchase of equipment 0 (1,084)
------------------------------
Net Cash used in investing activities 0 (1,084)
FINANCING ACTIVITIES
Payment of notes (18,159) 0
Proceeds from exercise of stock
options 225,200 684,148
Proceeds from notes payable 300,000 177,000
------------------------------
Net cash provided by financing activities 507,041 861,148
------------------------------
Net increase in cash and cash equivalents 19,196 185,743
Cash and cash equivalents at beginning of year 272,034 444,963
------------------------------
Cash and cash equivalents at end of period $291,203 $630,706
==============================
SUMMARY OF SUPPLEMENTARY CASH FLOWS DISCLOSURES:
Interest paid 0 0
Income taxes paid 0 0
</TABLE>
Significant non-cash transactions completed by the Company during the three
months ended March 31, 2000 include the following:
Payment of preferred stock dividends with shares of preferred stock $153,973
See notes to condensed consolidated financial statements.
5
<PAGE> 6
COMPLETE WELLNESS CENTERS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
MARCH 31, 2000
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the instructions to
Form 10-QSB and Article 10 of Regulation S-X. The financial statement
information was derived from unaudited financial statements unless indicated
otherwise. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements.
In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have been
included in the accompanying condensed consolidated financial statements.
Operating results for the three-month period ended March 31, 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 B - NET INCOME/(LOSS) PER SHARE
The Company's net income/(loss) per share calculations are based upon
the weighted average number of shares of Common Stock outstanding. Pursuant
to the requirements of the Securities and Exchange Commission (SEC) staff
accounting bulletin No. 98, the Company considers all potentially dilutive
securities issued for nominal consideration prior to the Company's initial
public offering as outstanding for all periods presented. Other shares
issuable upon the exercise of stock options or conversion of the 8% Senior
Convertible Preferred Stock (the "Senior Convertible Preferred Stock") have
been excluded from the computation because the effect of their inclusion
would be anti-dilutive for March 31, 1999 and 2000.
The following table sets forth the computation of basic loss per share:
<TABLE>
<CAPTION>
Three Months Ended
March 31,2000 March 31,1999
-------------- --------------
<S> <C> <C>
Net Income/(Loss) ($396,884) ($50,695)
Weighted average shares outstanding - Basic 4,984,721 2,703,862
Basic income/(loss) per share ($0.08) ($0.02)
</TABLE>
6
<PAGE> 7
NOTE C - FINANCINGS AND STOCKHOLDERS' EQUITY
On July 14, 1999, we entered into a Separation and Release Agreement
with Eric S. Kaplan, our former president 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.
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 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 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.
The Company's common stock and warrants are 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 March 31, 2000. The Company received notification
from the NASDAQ SmallCap Listing Qualifications Division for the purpose of
deficiencies in the minimum listing requirements of the NASDAQ SmallCap
Market. The Company formally responded to the inquiry, developed and
submitted a plan and timeline through which such minimum requirement would be
met. There can be no assurance that NASDAQ will allow the Company's shares
to remain listed while it works to regain compliance. Consequently, the
Company's shares could be delisted from the NASDAQ SmallCap Market at any
time. In the event that the Company's shares are delisted from the NASDAQ
SmallCap Market, they could continue to trade on the NASDAQ "Bulletin Board".
NOTE D - CERTAIN RELATIONSHIPS and TRANSACTIONS
On March 23, 2000, and April 3, 2000, cwc.com, borrowed $300,000 and
$250,000, respectively from DrAlt 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 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
7
<PAGE> 8
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.
8
<PAGE> 9
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 March 31, 2000, and the related
condensed consolidated statement of operations for the three-month period
ended March 31, 2000, and condensed consolidated statement of cash flows for
the three-month period ended March 31, 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.
AMPER, POLITZINER & MATTIA P.A.
May 9, 2000
Edison, New Jersey
9
<PAGE> 10
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.
As of March 31, 2000, the Company was managing 40 operational
Integrated Medical Centers in 12 states. The Company also managed 2
Integrated Medical Centers in 1 state, which became inactive during the three
months ended March 31, 2000. The operations of all the medical corporations
are included in the consolidated financial statements of the Company. At
March 31, 2000, the Company, as a result of its medical operations, had
revenues of $2,309,000.
The closings, divestitures and spin-offs of non-profitable or unrelated
business units, such as Complete Wellness Weight Management, Inc. and
Complete Billing Inc., are expected to allow management to focus on the
Company's core business, integrating traditional and
complementary/alternative medical centers, and significantly improve the
Company's operating results in future periods.
RESULTS FROM OPERATIONS
THREE MONTHS ENDED MARCH 31, 2000 COMPARED TO THREE MONTHS ENDED MARCH 31,
1999
Revenue. During the three months ended March 31, 2000 the Company had
revenues of $2,319,000 as compared to $4,580,000 for the three months ended
March 31, 1999, a decrease of $2,261,000. During the three months ended
December 31, 1999, the Company had revenue of $2,931,000 and reduced the
number of its active Integrated Medical Centers from 56 to 42. The Company
had 81 active Integrated Medical Centers under contract at March 31, 1999
compared to 40 at March 31, 2000. We and certain Integrated Medical Centers
have mutually agreed to discontinue contractual obligations related to
certain operations.
Salary and Consulting Costs. During the three months ended March 31,
2000, the Company incurred salary and consulting costs of $608,000 as
compared to $802,000 three months ended March 31, 1999. The decrease of
$194,000 was primarily due to the reduction of personnel due to the
consolidation of corporate operations.
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. 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 months ended March 31, 2000, the Company incurred
combined management fees and bad debt expense of $1,791,000 as compared to
$3,470,000 for the three months ended March 31, 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 vary directly with revenue and gross
patient accounts receivable. The combined provision was 77% of revenue for
both periods. The combined accrued management fee liability and allowance
for doubtful accounts as a percentage of gross accounts receivable was 72% at
March 31, 2000 compared to 73% at March 31, 1999.
Rent. During the three months ended March 31, 2000 the Company
incurred rent expenses of $11,000 as compared to $41,000 for the three months
ended March 31, 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 decrease of $30,000 was due
primarily to the consolidation of corporate operations in mid-year 1999.
10
<PAGE> 11
General and Administrative. During the three month period ended March
31, 2000, the Company incurred general and administrative expenses of
$256,000 as compared to $267,000 for the three months ended March 31, 1999.
The decrease of $11,000 was due primarily to reduction of costs from the
consolidation of corporate operations, net of increased legal fees during the
three months ended March 31, 2000 resulting from $41,000 in fees and legal
costs associated with ongoing matters, financings and acquisitions.
Depreciation and Amortization. During the three months ended March 31,
2000, the Company incurred depreciation and amortization expense of $22,000
as compared to $32,000 for the three months ended March 31, 1999. The
decrease of $10,000 resulted from the previous write down of idle assets.
Operating Loss. The consolidated operating loss of the Company was
$373,000 for the three months ended March 31, 2000 compared to a consolidated
operating loss of $42,000 for the three months ended March 31, 1999. The
increase of the loss of $331,000, resulted primarily from a 48% reduction in
revenues derived from the closure or inactivity of 41 Integrated Medical
Centers since March 31, 1999 coupled with fees and legal costs associated
with ongoing matters, financings and acquisitions.
Interest Expense. During the three months ended March 31, 2000, the
Company had interest expense of $25,000 compared to $10,000 for the three
months ended March 31, 1999. The increase of $15,000 resulted from the
interest accrued on outstanding notes payable for each period.
Interest Income. During the three months ended March 31, 2000, the
Company had interest income of $1,000 as compared to $1,000 for the three
months ended March 31, 1999. The decrease of $140 resulted from a lower
amount of invested funds in 2000 compared to the same period in 1999.
LIQUIDITY AND CAPITAL RESOURCES
The Company has experienced net losses, negative cash flow from
operations and an accumulated deficit since its inception. For the three
months ended March 31, 2000, the Company had a net loss of $397,000 as
compared to a net loss of $51,000 for the three months ended March 31, 1999.
At March 31, 2000, the Company had working capital of $22,000 and an
accumulated deficit of $19,447,000. Net cash used in operations for the three
months ended March 31, 2000 was $488,000, as compared to $674,000 for the
three months ended March 31, 1999. Negative cash flows are attributable
primarily to net losses and an increase in operating liabilities of $682,000
for the three months ended March 31, 2000 compared to the three months ended
March 31, 1999 when accounts receivable increased $1,305,000 and operating
liabilities decreased $473,000.
We are currently dependent on advances from investors to meet our day
to day cash needs. 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.
On March 23, 2000, and April 3, 2000, cwc.com, borrowed $300,000 and
$250,000, respectively from DrAlt 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 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 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 and its affiliates are involved in the following material
legal proceedings:
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<PAGE> 12
As of May 11, 2000, we or our affiliates currently have seven legal
proceedings in various stages of litigation. Four of these actions involve
suits brought by former employees or vendors of various Integrated Medical
Centers or chiropractors' management companies, seeking recovery of monies
allegedly owed for wages, goods or services rendered to the Integrated
Medical Center or management company. We believe that three of these disputes
with former employees, vendors and Integrated Medical Center Doctors are not
material. We are defending all such actions and believe none is meritorious.
The fourth case is with CWC, the plaintiff having penetrated the corporate
boundary between the Integrated Medical Center and ourselves. The $147,292
judgment for wages and damages and a subsequent judgment for related legal
fees of $37,712 were rendered against us. We have appealed the decisions and
have obtained a bond in the amount of $222,005 for satisfaction of the
judgments, which is backed by an irrevocable letter of credit for $111,002,
against which we have pledged a certificate of deposit of $111,002. The full
amount of the judgment has been previously accrued for.
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. We believe the
action has no merit but have attempted to arrive at a settlement agreement
with Mr. McMillen without success. In addition to defending this action, we
have filed a counterclaim seeking judgment for damages and costs. No
hearings or depositions are scheduled at this time.
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 are two suits pending related to landlord claims under the
bankruptcy, both of 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 of rents and fees due under a sub-lease plus attorney's fees. The
Company has settled the claim. The full amount of the settlement has been
previously accrued for.
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.
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.
The Company's common stock and warrants are 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 March 31, 2000. The Company received notification
from the NASDAQ SmallCap Listing Qualifications Division for the purpose of
deficiencies in the minimum listing requirements of the NASDAQ SmallCap
Market. The Company formally responded to the inquiry, developed and
submitted a plan and timeline through which such minimum requirement would be
met. There can be no assurance that NASDAQ will allow the Company's shares
to remain listed while it works to regain compliance. Consequently, the
Company's shares could be delisted from the NASDAQ SmallCap Market at any
time. In the event that the Company's shares are delisted from the NASDAQ
SmallCap Market, they could continue to trade on the NASDAQ "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.
12
<PAGE> 13
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 May 11, 2000, we or our affiliates currently have seven legal
proceedings in various stages of litigation. Four of these actions involve
suits brought by former employees or vendors of various Integrated Medical
Centers or chiropractors' management companies, seeking recovery of monies
allegedly owed for wages, goods or services rendered to the Integrated
Medical Center or management company. We believe that three of these disputes
with former employees, vendors and Integrated Medical Center Doctors are not
material. We are defending all such actions and believe none is meritorious.
The fourth case is with CWC, the plaintiff having penetrated the corporate
boundary between the Integrated Medical Center and ourselves. The $147,292
judgment for wages and damages and a subsequent judgment for related legal
fees of $37,712 were rendered against us. We have appealed the decisions and
have obtained a bond in the amount of $222,005 for satisfaction of the
judgments, which is backed by an irrevocable letter of credit for $111,002,
against which we have pledged a certificate of deposit of $111,002. The full
amount of the judgment has been previously accrued for.
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. We believe the
action has no merit but have attempted to arrive at a settlement agreement
with Mr. McMillen without success. In addition to defending this action, we
have filed a counterclaim seeking judgment for damages and costs. No
hearings or depositions are scheduled at this time.
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 are two suits pending related to landlord claims under the
bankruptcy, both of 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 of rents and fees due under a sub-lease plus attorney's fees. The
Company has settled the claim. The full amount of the settlement has been
previously accrued for.
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
13
<PAGE> 14
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.
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: None
14
<PAGE> 15
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 15, 2000 By /s/ Rebecca R. Irish
---------------------------
Rebecca R. Irish
Chief Financial Officer
15
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