-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, I6oUGDiWPt7Edn4Ujh5W08i3RPzKrMVN+1Ipq24IbjsXlfpT/GFRsDLw0s9QbV6g lG0SNpa6FuwPb49/XcEuPg== 0000950133-00-001541.txt : 20000417 0000950133-00-001541.hdr.sgml : 20000417 ACCESSION NUMBER: 0000950133-00-001541 CONFORMED SUBMISSION TYPE: 10KSB40 PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000414 FILER: COMPANY DATA: COMPANY CONFORMED NAME: COMPLETE WELLNESS CENTERS INC CENTRAL INDEX KEY: 0001022828 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-MISC HEALTH & ALLIED SERVICES, NEC [8090] IRS NUMBER: 521910135 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10KSB40 SEC ACT: SEC FILE NUMBER: 000-22115 FILM NUMBER: 602170 BUSINESS ADDRESS: STREET 1: 1964 HOWELL BRANCH ROAD STREET 2: SUITE 202 CITY: WINTER PARK STATE: FL ZIP: 32792 BUSINESS PHONE: 4076733073 MAIL ADDRESS: STREET 1: 666 11TH STREET N W STREET 2: SUITE 200 CITY: WASHINGTON STATE: DC ZIP: 20001 10KSB40 1 FORM 10-KSB 1 ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 ---------------- FORM 10-KSB (MARK ONE) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999 [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ______ TO ______ COMMISSION FILE NUMBER 0-22115 ------------------------ COMPLETE WELLNESS CENTERS, INC. (EXACT NAME OF SMALL BUSINESS ISSUER AS SPECIFIED IN ITS CHARTER) DELAWARE 52-1910135 (State or other jurisdiction of (IRS employer number) incorporation or organization) 1964 HOWELL BRANCH ROAD, SUITE 202, WINTER PARK, FL 32792 (Address of principal executive offices and zip code) www.completewellness.com (Issuer's web site address) (407) 673-3073 (Issuer's telephone number) SECURITIES REGISTERED UNDER SECTION 12(B) OF THE ACT: none SECURITIES REGISTERED UNDER SECTION 12(G) OF THE ACT: Common Stock, $.0001665 par value per share Redeemable Common Stock Purchase Warrants 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 [ ] Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B is not contained in this form, and no disclosure will be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. [X] The issuer's revenues for the year ended December 31, 1999 were $12,940,331. The aggregate market value of all of the voting stock held by non-affiliates outstanding at April 10, 2000, was $5,318,836. The amount was computed by reference to the average bid and asked prices of the Common Stock as of April 10, 2000. As of April 10, 2000, 4,703,561 shares of Common Stock were outstanding, and 1,036,776 Redeemable Common Stock Purchase Warrants were outstanding. DOCUMENTS INCORPORATED BY REFERENCE Not applicable. Transitional Small Business Disclosure Format (check one): Yes [ ] No [X] 1 2 TABLE OF CONTENTS PART I Item 1 Business Item 2 Properties Item 3 Legal Proceedings Item 4 Submission of Matters to a Vote of Security Holders PART II Item 5 Market for Common Equity and Related Stockholder Matters Item 6 Management's Discussion and Analysis Item 7 Financial Statements Item 8 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure PART III Item 9 Directors, Executive Officers, Promoters and Control Persons; Compliance with Section 16(a) of the Exchange Act Item 10 Executive Compensation Item 11 Security Ownership of Certain Beneficial Owners and Management Item 12 Certain Relationships and Related Party Transactions Item 13 Exhibits and Reports on Form 8-K 2 3 The Company operates through a series of wholly-owned and majority owned subsidiaries as follows: COMPLETE WELLNESS CENTERS, INC. COMPLETE WELLNESS MEDICAL CENTERS, INC.(1) COMPLETE WELLNESS WEIGHT MANAGEMENT, INC.(2) COMPLETE WELLNESS SMOKING CESSATION, INC.(3) COMPLETEWELLNESS.COM, INC.(4) COMPLETE WELLNESS EDUCATION, INC.(4) COMPLETE WELLNESS RESEARCH INSTITUTE, INC.(4) COMPLETE BILLING, INC.(5) (1) Represents 42 incorporated Integrated Medical Centers of which 14 are wholly owned by the Company and 28 are owned by Medical Doctors who are nominee owners on behalf of the Company. These are fully operational, Integrated Medical Centers as of December 31, 1999. The Company also operated an additional 42 Integrated Medical Centers in 10 states during 1999, which were closed or otherwise ceased operations prior to December 31, 1999. (2) Represents weight management centers which were acquired on January 31, 1998. Operations of all these centers ceased by December 31, 1998. Filed for Bankruptcy protection under Chapter 7 in July, 1999. (3) Returned to previous owners on July 1, 1999. (4) No operations in 1999. (5) Ceased operations in August 1998. - -------------------------------------------------
OPERATIONAL INTEGRATED MEDICAL STATE CENTERS - ----- ------------------ Florida 13 North Carolina 5 Illinois 6 California 5 Texas 2 Oregon 2 Tennessee 1 South Carolina 2 Iowa 2 Ohio 1 Georgia 1 Arkansas 2 ------ Total 42
3 4 PART I ITEM 1. BUSINESS (a) GENERAL DEVELOPMENT OF BUSINESS We develop, manage and own multidisciplinary medical centers, providing high quality, cost effective, integrative wellness medicine to our patients. These integrated medical centers combine, at one location, traditional healthcare providers, such as physicians and physical therapists, and complementary and alternative healthcare professionals, such as chiropractors, acupuncturists and massage therapists. Generally, we contract with a medical practitioner who has proven ability to build a practice. We then form a new medical entity, the new medical entity hires other healthcare professionals to work with the practitioner and we provide the tools, training, administrative systems and certain legal services for the new medical entity. As of December 31, 1999 we were managing 42 integrated multidisciplinary medical centers in 12 states. We believe the integration of traditional and complementary/alternative medicine is becoming more popular in the United States. In 1992, Congress required the National Institutes of Health to establish The Office of Alternative Medicine, the purpose of which was and remains to facilitate the evaluation of complementary medicine treatments to determine their effectiveness and help integrate them into traditional medicine. The Trends Research Institute of Rhinebeck, New York has identified the integration of traditional and complementary medicine as one of the top ten trends of the coming decade. We were incorporated in the State of Delaware in November 1994. Our principal executive offices are located at 1964 Howell Branch Road, Suite 202, Winter Park, Florida 32792 and our telephone number is (407) 673-3073. Our web site, which is constantly under improvement, is located at www.completewellness.com. The information on our web site is intended to utilize the internet as a distribution network to benefit our provider and patient base through providing educational information, patient interaction and the ability to purchase products for providers and patients. OUR INDUSTRY We believe the integration of traditional and complementary/alternative medicine is becoming more popular in the United States with more and more media focus on the subject. In 1992, Congress required the National Institutes of Health to establish The Office of Alternative Medicine, the purpose of which was and remains to facilitate the evaluation of complementary medicine treatments to determine their effectiveness and help integrate them into traditional medicine. The Trends Research Institute of Rhinebeck, New York has identified the integration of traditional and complementary medicine as one of the top ten trends of the coming decade. BUSINESS We develop, manage and own multi-disciplinary medical centers, providing high quality, cost effective, ethical, integrated wellness medicine. These integrated medical centers combine, at one location, traditional healthcare providers, such as physicians and physical therapists, and complementary and alternative healthcare professionals, such as chiropractors, acupuncturists and massage therapists. Generally, we contract with a practitioner who has proven the ability to build a practice and then we form a new medical entity, hire on behalf of the new entity a medical doctor and other healthcare professionals to work with the practitioner and provide the tools, training, administrative systems and certain legal services for the new medical entity. As of December 31, 1999, we were managing 42 operational Integrated Medical Centers in 12 states. The closings, divestitures and spin-offs of non-profitable or unrelated business units such as Complete Wellness Weight Management Inc., Complete Wellness Smoking Cessation, Inc., Optimum Health Services, Inc. and Complete Billing, Inc. are expected to allow management to focus on our core business which is integrating traditional and alternative/complementary medical centers, and significantly improving our operating results from prior periods. Brief descriptions of these transactions were as follows: o On July 7, 1998, we committed to a formal plan to exit the operations of Complete Billing, Inc., a medical billing and collections company. We ceased their operations on August 15, 1998 and converted all billing performed by them back to the respective clients. We ceased their collection operations on February 26, 1999 and converted their collection activities back to the respective clients. We do not expect to incur any further expenses as a result of this business closure. o On November 3, 1998, our Board of Directors adopted a formal plan to divest its interest in Optimum Health Services, Inc., a subsidiary developing managed care programs. Under the plan, we converted our investment, approximately $1,000,000, into 266,736 ten-year warrants for their stock at an exercise price of $0.01 per share. However, the warrants can not be exercised prior to one year or in an amount at any time such that our ownership of their common stock would represent greater than 49% of their total outstanding common stock. The current value recorded by the Company in relation to the 266,736 OHS warrants is zero. On March 31, 2000, the Company exercised its warrants with a cash payment of $2,667 and now owns 266,736 shares of OHS, approximately 6.7% of their outstanding shares at that time. 4 5 o On November 13, 1998, our Board of Directors voted to sell and/or otherwise divest of the operations of Complete Wellness Weight Management, Inc. They closed all of their weight loss centers at December 31, 1998 and transitioned their patients to a direct sales program or to an integrated medical center. As a result of its significant indebtedness, on April 21, 1999, our board of directors decided to enter and approved a formal plan of filing for bankruptcy. On July 6, 1999, a Chapter 7 bankruptcy filing for the Complete Wellness Weight Management, Inc. took place in Trenton, NJ. We do not expect to incur any material expenses as a result of this filing. o On April 1, 1999, as a result of the failure to pay an annual royalty of approximately $26,000, our subsidiary, Complete Wellness Smoking Cessation, Inc., breached its licensing agreement with the original founders of Smokenders. Under the agreement, we forfeited the use of the licensing rights, and on June 8, 1999, our Board of Directors voted to return all rights, contracts, inventory, records and materials to the original founders of Smokenders. We do not expect to incur any material expenses as a result of exiting this business. During 1996, the losses incurred by the consolidated Complete Wellness Centers, LLC allocable to the minority interest owners of the Complete Wellness Centers, LLC, eliminated all net equity of the minority interest owners. Accordingly, we have reflected 100% of the operations of the Complete Wellness Centers, LLC in our results of operations in 1997 and 1998, without allocation to the minority interest owners. In addition, our investments in Complete Wellness Smoking Cessation, Inc. represent 100% of the equity funding of that entity. We have reflected in our statements 100% of the operations, assets, and liabilities of the Complete Wellness Smoking Cessation, Inc. subsidiary due to the lack of minority interest investment. o In July 1998, the Company purchased Accident and Industrial Injury Associates ("AIIA"), a chiropractic preferred provider network of approximately 2,700 providers located throughout the United States in exchange for warrants to purchase 20,000 shares of its common stock for $3.31 per share which expire in 5 years and contain certain piggyback registration rights. The Company subsequently found that the acquisition was misrepresented and terminated the Purchase Agreement. POTENTIAL TRANSACTIONS AND RELATIONSHIPS On March 7, 2000, CWC and our wholly owned subsidiary, Completewellness.com ("cwc.com") signed a Services Agreement with Dr. Alt.com Corporation ("DrAlt") to provide alternative medicine information and products to practitioners and consumers through our web site, www.completewellness.com. CWC, cwc.com and DrAlt have certain duties and compensations in the relationship based on their abilities and expertise. The agreement is for 5 years. DrAlt has agreed to lend CWC $750,000 by May 1, 2000 and to consider lending an additional $250,000 at their discretion. As of April 10, 2000 CWC has executed 6 month promissory notes with DrAlt totaling $550,000 at the prime rate. CWC has granted to DrAlt a total of 275,000 five year warrants to purchase 275,000 shares of CWC Common Stock at $2 per share. These warrants constitute restricted securities under federal and state securities laws. Upon execution of the additional note for $200,000, anticipated on May 1, 2000, CWC will issue additional warrants for the purchase of 100,000 shares of our Common Stock with the same terms. On March 7, 2000, CWC also signed a non-binding letter of intent to complete a tax-free merger with DrAlt. The agreement provides for CWC to be the surviving entity. CWC would issue to the shareholders of DrAlt, such number of fully paid and non-assessable shares of CWC Common Stock as would result in the shareholders of DrAlt collectively owning immediately after the closing of the merger, fifty (50) percent of the common equity of CWC on a fully diluted basis except for any outstanding warrants. DrAlt shareholders would surrender their DrAlt shares to CWC at closing. There are significant contingencies involved in the agreement, including but not limited to proper due diligence, conversion of the preferred shareholders to common shareholders, additional funding of CWC through a private placement and approval of the transaction by the shareholders of each company. CWC is using its best efforts to effect the required actions to bring the merger to completion, but there is no guarantee the transaction will be completed as described. ADVERTISING AND MARKETING In seeking to attract new patients to the integrated medical centers, we advertise and market our services utilizing print advertising, our internet presence, and internal marketing promotions such as patient appreciation days. The management companies also advertise, with our assistance, the services of the integrated medical centers locally at their expense. Although we tailor our marketing efforts to the demands of a particular market, in appropriate circumstances, we focus our advertising and marketing efforts at the national and regional (county, metropolitan area or state) levels. Also, each of our integrated medical centers operates under a name that includes the words "Complete Wellness Medical Center" or "Complete Wellness Centers" and has signs bearing these words. We believe that this creation of a nationwide "chain" of multidisciplinary healthcare services, combined with our standardized credential, training and management standards for healthcare practitioners, will aid us in creating a reputation for high quality, uniform, dependable medical care among patients throughout the country. GOVERNMENT REGULATION Various federal, state and local laws regulate the relationship between providers of healthcare services and physicians, and, as a business in the healthcare industry, we are subject to these laws and regulations. We are also subject to laws and regulations relating to business corporations in general. Although many aspects of our business operations have not been the subject of state or federal regulatory interpretation, we believe our operations are in material compliance with applicable laws. There can be no assurance, however, that a review of our business practices or our integrated medical centers by courts or regulatory authorities would 5 6 not result in a determination that could adversely affect our operations or the integrated medical centers, or that the healthcare regulatory environment will not change so as to restrict our operation or our ability to expand. The laws of many states prohibit business corporations from engaging in the practice of medicine, such as through employment arrangements with physicians. These laws vary from state to state and are enforced by the state courts and regulatory authorities with broad discretion. Because the laws governing the corporate practice of medicine vary from state to state, any expansion of our operations to a state with strict corporate practice of medicine laws may require us to modify our operations with respect to one or more of such practices, which may result in increased financial risk to us. COMPETITION The managed healthcare industry, including the provider practice management industry, is highly competitive. We compete with other companies for physicians and other practitioners of healthcare services as well as for patients. We compete not only with national and regional provider practice management companies, but also with local providers, many of which are trying to combine their own services with those of other providers into integrated delivery networks. Certain of the companies are significantly larger, provide a wider variety of services, have greater financial and other resources, have greater experience furnishing provider practice management services, and have longer established relationships with buyers of these services, than us, and provide at least some of the services provided by us. In addition, companies with greater resources than ours that are not presently engaged in the provision of integrated provider practice management services could decide to enter the business and engage in activities similar to those in which we engage. EMPLOYEES As of December 31, 1999, we had 11 employees and our 42 operating integrated medical centers had a total of approximately 100 employees. Our 11 employees consisted of 5 in finance and administration and 6 in operations. Neither our employees nor those of the integrated medical centers are represented by any labor union. We believe that relations with our employees are satisfactory. FACILITIES We have relocated our principal executive offices to Winter Park, Florida, where we lease an aggregate of approximately 1,760 square feet of office space pursuant to two leases at an aggregate current monthly rent of $2,281. The leases expire in May 2000 for 795 square feet and September 2001 for 965 square feet. INSURANCE We believe that our insurance coverage is generally in accordance with industry standards and is adequate in light of our business and the risks to which we are now subject. We are dependent upon the active participation of our executive officers, particularly our Chairman and Chief Executive Officer, Joseph J. Raymond, Jr., and our President and Chief Operating Officer, Sergio R. Vallejo. The loss of the services of Mr. Raymond and/or Mr. Vallejo could have a material adverse effect on us. We have applied for "key-man" life insurance policies on the lives of Mr. Raymond and Mr. Vallejo in the amount of $1 million each, payable to us in the event of death. We have obtained directors' and officers' liability insurance. (b) NARRATIVE DESCRIPTION OF BUSINESS Our goal is to be the leading developer, manager and owner of multidisciplinary medical centers. In order to achieve this goal, we intend to implement the following strategies: - Contract with practitioners who possess the management skills necessary to run and grow multidisciplinary practices and teach them how to integrate other medical disciplines into their practices; - Develop a systematic approach to evaluate, to monitor and to provide developmental information to a medical practice; - Continually review and modify, if necessary, the practice setting to correspond with the changes in the healthcare market and service the needs of today's healthcare consumer; - Create a website to distribute our products, services and educational information to our patient base; - Open four hyperbaric oxygen treatment (pressurized oxygen chambers) centers in year 2000 and six more in 2001; and - Educate insurance companies and regulatory agencies on the benefits that multidisciplinary medicine brings to the insurance industry, so as to persuade such entities to expand their coverage of our wellness services to ultimately reduce health insurance claims. OUR INTEGRATED MEDICAL CENTERS Since we commenced operations in January 1995, we have developed our current business primarily by developing, managing and owning integrated medical centers. We believe that today's patients benefit from and desire treatments from a variety of medical and healthcare disciplines. We endeavor to provide these services at one convenient location, with all services provided under the 6 7 supervision of a medical doctor in order to assure patients of the medical soundness of the services they receive and to increase our likelihood of obtaining payment from third party payors such as insurance companies and HMOs. We are not authorized or qualified to engage in any activity which may be construed or be deemed to constitute the practice of medicine but are an independent supplier of non-medical services only. The practitioners are responsible for all aspects of the practice of medicine and chiropractic care and the delivery of medical and chiropractic services (subject to certain business guidelines determined in conjunction with us). Developing integrated medical centers generally involves affiliating ourselves with a practitioner who has an existing practice, incorporating a new entity to serve as the integrated medical center, providing management and administrative services to the integrated medical center, and assisting the integrated medical center to employ, credential and train the practitioners, medical doctor and other healthcare professionals. The following are our areas of concentration in our business development with respect to the Integrated Medical Centers: Affiliating with practitioners. We endeavor to enter into agreements with practitioners who have existing, thriving practices in locations convenient to large patient bases, and who have demonstrated the entrepreneurial skills to build a practice. We believe that these practitioners consider affiliation with us to be attractive because they may have greater access to managed care contracts in the future through us, will be relieved of certain managerial and administrative burdens, and may have the opportunity to increase their practice income through the expanded services that the integrated medical centers provide. We attempt to affiliate with practitioners located in regional clusters to maximize operational efficiency. For example, some of our medical doctors and other healthcare professionals are able to work part-time for each of several integrated medical centers due to their close proximity to each other. We affiliate with practitioners by entering into a contract with the practitioner in his individual capacity and with his existing practice (if a separate legal entity). The contract obligates him to work for the integrated medical center, once established, lease his office space and equipment to us for future sublease to the integrated medical center, incorporate a management company for his practice and cause that management company to enter into a management agreement with us regarding day-to-day administrative services of the integrated medical center. These contracts provide our integrated medical centers with immediate, established patient bases. Incorporating Integrated Medical Centers. We form the integrated medical centers as general business corporations wholly-owned by us in states in which general business corporations are permitted to own medical practices. In other states, we form the integrated medical centers as professional corporations owned by a medical doctor licensed under applicable state law as our nominee owner. In some cases, one of our medical corporate entities encompasses two or more integrated medical center practices. Incorporating our integrated medical center practices allows us to comply with varying state and local laws regarding the practice of medicine, while maintaining a degree of non-contractual control as beneficial shareholders. Providing management and administrative services. We enter into contracts with the integrated medical centers, under which we provide the following services to the integrated medical center: - consultation and seminars related to the management of the integrated medical center; - advice on capital, facilities and equipment; - computer software and training; - advertising and marketing programs; - certain legal and accounting services; and - assistance with the identification, recruiting and credentialing of medical doctors, chiropractors and other professional employees. We enter into separate management agreements with the practitioner's management company, under which it provides day-to-day administration of the integrated medical center, such as record keeping, billing and collection, supervision of personnel, facilities management, purchasing, and scheduling, and we sublease the practitioner's office space and equipment to the integrated medical center. We also provide a billing and medical information system software system to the integrated medical centers through an Intranet superimposed on the Internet. We receive management fees from the integrated medical centers, a significant portion of which we pass on to the practitioners' management companies. Employing, training and credentialing chiropractors, medical doctors and other healthcare professionals We assist the integrated medical centers with the recruiting and hiring of the chiropractors, medical doctors and other healthcare professionals, and credential them to verify such things as their education and professional licenses. We require each practitioner and certain other employees to attend two-day intensive integration seminars, at which they are taught the basic principles behind managing a multi-disciplinary medical clinic. We provide follow-up remote and, if necessary, on site training, together with telephone support thereafter. We routinely schedule and offer special topic seminars to the integrated medical centers' chiropractors, doctors, and administrative staff. These training and credentialing standards and protocols allow us to ensure high quality patient care through all of our integrated medical centers, which we expect will increase our patient base as our reputation grows. Our training routines also allow us to educate practitioners throughout our network of integrated medical centers on new medical and healthcare developments and provide a means to infuse new technology into the integrated medical centers. Adding medical doctors and other healthcare professionals to an existing chiropractic practice usually involves only minor equipment and supply adjustments and additions. Integrated medical centers that provide general medical practitioner services acquire certain medical equipment such as electrocardiogram machines, blood drawing equipment, and other specialized supplies. Integrated medical centers that employ the services of physical therapists sometimes acquire additional equipment such as free weights, hydrocolators (machines to heat hot packs), and other items. Although our chiropractors, medical doctors and other healthcare professionals are hired directly by the integrated medical centers and management companies, we have adopted our 1996 Stock Option Plan for Healthcare Professionals to provide incentive compensation to such healthcare professionals. OUR EXPANSION STRATEGY Our goal is to become the leading developer, manager and owner of multidisciplinary medical centers. We plan to acquire 10 Integrated Medical Centers within 12 months and to develop an average of 4 consulting relationships per month with practitioners to develop additional integrated medical centers. Key elements of our expansion strategy include the following: 7 8 -Affiliate with new practitioners. We plan to use our existing network of chiropractors, medical doctors and other healthcare professionals to sell the integrated concept to the more than 50,000 chiropractors in the country not currently offering fully integrated medical platforms. We believe that these healthcare professionals, through school affiliations, professional associations and informal relationships with their colleagues, will be able to assist us in identifying and targeting chiropractic practices for integration. We are augmenting the expansion efforts of our existing healthcare professionals and management staff with consulting arrangements with entities whose clients include numerous chiropractors and other healthcare professionals. The consultants' clients form the core of the candidate affiliations for the foreseeable future. In May 1999, we executed a one-year consulting agreement with Kats Management, LLC, a company that provides management and consulting services to over 1,100 chiropractic doctors. This agreement provides for Kats to be responsible for day-to-day integrated medical centers operations, answering questions and including consultations on a regular scheduled basis. This agreement augments our billing support staff, all of whom report to the chief operating officer. The agreement also provides for Kats to provide training services to our professional and administrative integrated medical centers' staff as well as interface with our sales division to integrate new integrated medical centers, and assist in the development of products and new health related services. An example of one such service is our recently implemented hyperbaric oxygen treatment which places the patient in a pressure chamber and administers pure oxygen in the treatment of anemia, ischemia, cerebral palsy, stroke and some poisonings. We also seek to enter into practice development agreements with practitioners who do not yet meet our requirements for integration regarding practice size and experience. Once we help them achieve our required standards, we proceed to integrate their practices under our standard contractual arrangements. -Create a website to provide information about our services and products. Our web site is intended to utilize the Internet as a distribution network to benefit our provider and patient base through providing educational information, patient interaction and the ability to purchase products for providers and patients. We will also provide information to prospective and current patients about our Integrated Medical Centers and wellness services. We plan to offer wellness-oriented products, services and health information to patients and others through our website. We expect that such products will include vitamins, herbs and educational information relative to certain illnesses and diseases. We also plan to use the website to facilitate communication with and management of our Integrated Medical Centers. -Expand patient base by increasing insurance companies' coverage of our services and the addition of managed care contracts. We plan to educate insurance companies on the benefits our multidisciplinary medical services bring to them by optimizing their clients' wellness and persuade such insurance companies to expand their coverage of our services, thereby increasing our patient base and rate of patient visits by making our services more affordable for such patients. We believe that, as a reputable, national provider of these services, we will have the credibility and leverage to persuade insurance companies and HMOs to increase their coverage of our services. We expect that such increased coverage will make regular visits more affordable for patients, and thus aid us in our efforts to expand our patient base. The term "CAM" for Complementary and Alternative Medicine has recently been coined and used by some of the insurers and professionals within the industry. We plan to negotiate managed care contracts with insurance companies, HMOs and other third party payors on behalf of the integrated medical centers. As a reputable, national provider of these services, we believe we have the credibility and leverage to negotiate such contracts on behalf of our integrated medical centers. We also believe that, as a single entity, we will enable managed care payors to more efficiently contract for the provision of healthcare services than would be the case if such payors had to contract on a case-by-case basis with each individual healthcare practitioner. ITEM 2. PROPERTIES The Company does not own any property. We relocated our principal executive offices to Winter Park, Florida, where we lease an aggregate of approximately 1,760 square feet of office space pursuant to two leases at an aggregate current monthly rent of $2,281. The leases expire May 2000 for 795 square feet and in September 2001 for 965 square feet. The facility is in satisfactory condition and is adequate for our use. ITEM 3. LEGAL PROCEEDINGS The Company or its subsidiaries currently have the following legal proceedings in various stages of litigation: As of April 10, 2000, we or our affiliates currently have eight legal proceedings in various stages of litigation. Five 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 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 successfully 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 accrued as of December 31, 1999. 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 8 9 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 have attempted to arrive at a settlement agreement with Mr. McMillen without success. We believe this action has no merit. 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, our 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 and as of December 31, 1999, has accrued $109,000 for payment of the settlement. 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 health care 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. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS At the Annual Meeting held on November 29, 1999, the following items were submitted to the security holders: 1. To elect a Board of five (5) Directors. 2. To consider and vote upon a proposal to add 50,000 shares of the Company's $.0001665 par value Common Stock to the 1998 Outside Directors Stock Option Plan for Outside Directors on the Company's Board of Directors; 3. To consider and vote upon a proposal to add 200,000 shares of the Company's $.0001665 par value Common Stock to the Company's 1996 Stock Option Plan. 4. To consider and vote upon a proposal to establish a 1999 Consultant's Stock Option Plan and to add 200,000 shares of the Company's $.0001665 par value Common Stock to the Company's 1999 Consultant's Stock Option. 5. To consider and vote upon a proposal to increase the number of shares of par value $0.01 per share Preferred Stock from 2,000,000 to 10,000,000 shares. 6. To ratify the selection of Amper, Politziner and Mattia, P.A. as independent accountants for the fiscal year ending December 31, 1999. 9 10 PART II ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS (a) MARKET INFORMATION The Company's Common Stock and Redeemable Common Stock Purchase Warrants are traded on the Nasdaq SmallCap Market (Nasdaq SCM). The following table states the high and low quotation information by quarter for the Company's Common Stock and Common Stock Warrants based on actual trading, as reported on Nasdaq SCM. The quotations reflect inter-dealer prices, without retail mark-up, markdown, or commission and may not represent actual transactions. COMMON STOCK
HIGH LOW ------- ------- 1st Quarter, 1999.... $4.063 $1.250 2nd Quarter, 1999... $3.375 $1.750 3rd Quarter, 1999.... $3.750 $1.500 4th Quarter, 1999.... $2.625 $1.125
WARRANTS
HIGH LOW ------- ------- 1st Quarter, 1999 .... $2.500 $1.000 2nd Quarter, 1999... $1.875 $1.188 3rd Quarter, 1999.... $1.688 $0.813 4th Quarter, 1999.... $1.688 $0.750
(b) HOLDERS As of December 31, 1999, there were approximately 900 holders of record of the Company's Common Stock and approximately 20 holders of record of its Redeemable Common Stock Purchase Warrants. (c) DIVIDENDS Holders of the Company's Common Stock are entitled to receive such dividends as may be declared by the Board of Directors out of funds legally available therefor. There has been no declaration of dividends to date, except as required by the Senior and Junior Convertible Preferred Stock (See Note 9 - Stockholders' Equity Deficit), and none is expected in the foreseeable future. The Company anticipates that future earnings will be retained to finance future operations and expansion. The payment of dividends is within the discretion of the Board of Directors of the Company and will depend on the Company's earnings, if any, capital requirements, financial condition, and such other factors as are considered to be relevant by the Board of Directors from time to time. ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS General Statements included in this "Management's Discussion and Analysis of Financial Condition and Results of Operations" Section, and in other sections of this Report and in prior and future filings by the Company with the Securities and Exchange Commission, in the Company's prior and future press releases and in oral statements made with the approval of an authorized executive which are not historical or current facts are "forward looking statements" made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and are subject to certain risks and uncertainties that could cause actual results to differ materially from those presently anticipated or projected. The Company wishes to caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made. There are important risk factors that in some cases have affected and in the future could affect the Company's actual results and could cause the Company's actual financial and operating performance to differ materially from that expressed in any forward-looking statement. The following discussion and analysis should be read in conjunction with the Financial Statements and notes appearing elsewhere in this report. The Company was established in November 1994. From its inception until March 1995, the Company raised funds privately and developed the corporate infrastructure, protocols, policies and procedures required to commence its plan to develop multi-disciplinary 10 11 medical clinics. In March 1995, the Company began implementing the initial stages of its business plan. The Company formed Complete Wellness Centers, L.L.C. ("CWC, LLC"), a Delaware limited liability company, as a vehicle for raising capital needed to open Integrated Medical Centers. The Company is the managing member of CWC, LLC and has a 1% equity interest. The Company has obtained irrevocable and permanent voting proxies from the holders of a majority of ownership interests in CWC, LLC. The Company consolidates the financial statements of CWC, LLC in its financial statements. The Company began pursuing its primary development strategy in early 1996. This strategy involves entering into an agreement with one or more chiropractors and their existing chiropractic practices and the chiropractor's corporation. The chiropractor or existing chiropractic practice leases the office space and equipment utilized by the existing chiropractic practice to the Company. The chiropractor then incorporates the "Admincorp", with which task the Company assists, and causes the Admincorp to ratify the agreement. In general, the Admincorp assumes responsibility for the daily management functions of the Integrated Medical Centers. The Company agrees to furnish the Admincorp certain services, such as assistance with advertising, other practice development activities, and medical doctor recruitment, to help the Admincorp perform daily management functions. The Company then forms the Integrated Medical Center and enters into a long-term management agreement with the Integrated Medical Center to provide certain administrative and management services. In addition, the Company subleases the existing chiropractic practice's office space and equipment to the Integrated Medical Center. The Integrated Medical Center employs the Affiliated Chiropractor(s) and one or more medical doctors. Depending on the needs of the patient base, the Integrated Medical Center may also employ one or more other traditional or alternative health care providers. The Company charges the Integrated Medical Center management fees for the goods and services it provides the Integrated Medical Center. Such fees are generally based on a periodic determination of the fair market value of such goods and services. The Company also subleases the office space and equipment to the Integrated Medical Center for estimated fair market value. With respect to Integrated Medical Centers that serve patients covered by any federal or state funded health care program and certain other Integrated Medical Centers, the management fees are pre-set for one year for flat dollar amounts that represent the fair market value of the goods and services the Company directly furnishes the Integrated Medical Center and of the services the Company indirectly furnishes the Integrated Medical Center through its arrangement with the Admincorp. The Admincorp charges the Company a monthly fee equal to the sum of the management fees and lease and rental fees for office space and equipment that the Company charges the Integrated Medical Center, less a specified fixed amount. In general, the Company charges the Admincorp a monthly integration fee that is, depending on various factors, 9% to 20% (if the initial term of the agreement is five years) or 10% to 15% (if the initial term of the agreement is ten years) equal to the sum of (i) the management fee and lease and rental fees for office space and equipment that the Company charges the Integrated Medical Center and (ii) the Integrated Medical Center's permissible expenses, until the sum reaches $300,000 to $500,000 in any one year, and 10% of the sum for the remainder of that year. With respect to Integrated Medical Centers that serve patients covered by federal or state funded health care programs and certain other Integrated Medical Centers, the integration fees are fixed dollar amounts equal to estimated fair market value of services provided by the Company to the Integrated Medical Centers, subject to a 15% cap. The Company also may charge certain Admincorps an operations fee of $250 per month, subject in certain cases to delayed or contingent effectiveness. Except for the operations fee, however, the fees are simply accrued, and actual payment of them is not required, unless and until, and then only to the extent, that the Integrated Medical Centers collect on their accounts receivable in excess of certain permitted expenses, such as payroll expenses. If the agreement with the Admincorp is terminated, the Admincorp is generally entitled to receive from the Company a severance, generally equal to 80% to 95% of the accounts receivable then due the Company from the Integrated Medical Center, less the balance then due the Company from the Admincorp, subject to the Integrated Medical Center collecting on its accounts receivable. In the case of certain Integrated Medical Centers, however, the Admincorp is entitled to a pro rata portion of the Integrated Medical Center's accounts receivable as of the date of termination, if and when collected. The Company's agreements with Affiliated Chiropractors and entities controlled by them relating to the operation and management of the Integrated Medical Centers are generally for initial terms of five or ten years. They may be renewed in five year increments, up to four times, by mutual consent. An Affiliated Chiropractor may terminate such an agreement if the Company materially breaches it and, if the breach is correctable, the Company fails to cure the breach within ten days after written notification. The start-up phase is generally three months following the Integration Date. The loss of a substantial number of such agreements, or the loss of a substantial number of Affiliated Chiropractors, would have a material adverse effect on the Company. As of December 31, 1999, the Company was managing 42 operational Integrated Medical Centers. The Company ceased operating 42 Integrated Medical Centers during 1999 and plans to dissolve the related corporations after having terminated its agreement with the Affiliated Chiropractors and Admincorps. The Company anticipates no material adverse financial effect as a result of such terminations. The Company integrated many of its existing Integrated Medical Centers within a few weeks after the Affiliated Chiropractors entered into agreements with the Company to develop such Integrated Medical Centers. The Company is now taking up to six months to integrate clinics due to our methodology of extensively evaluating the needs of each clinic in order to properly develop a sound foundation for truly integrative healthcare. The cost to the Company to develop an Integrated Medical Center not connected with a strategic alliance has averaged $15,000. This cost has consisted of such things as computer software, legal fees, professional credentialing, training, an administrative starter kit and travel. 11 12 The Company has from time to time advanced additional funds to the Integrated Medical Centers to fund working capital requirements. If the Company does make such an advance, the advance will bear interest (the current rate being 10% per annum), will be secured by such collateral as the Company deems appropriate, and will be repayable before the expiration of the initial term of the Company's agreement with the Affiliated Chiropractor and the Admincorp. In May 1999, we executed a one year consulting agreement with Kats Management, LLC whereby Kats has agreed to provide day to day integrated medical center operation services, provide training services to the integrated medical centers, integrate new integrated medical centers and assist in the development of products and new health related services. In consideration for such services, we have agreed, in part, to pay Kats (i) $19,000 per month, (ii) $300 per month for each new integrated medical center established by Kats, (iii) commissions averaging 5% of revenues generated by 16 existing integrated medical centers and (iv) an annual travel allowance of up to $5,000. In October 1999, the monthly cash payment was reduced by mutual agreement to $12,000. RESULTS OF OPERATIONS YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998: Revenue. During the year ended December 31, 1999 we had revenues of $12,940,000 as compared to $24,162,000 for the year ended December 31, 1998, a decrease of $11,222,000 or 46%, due primarily to the closing of Complete Wellness Weight Management, Inc. ("CWWM") in December 1998. CWWM revenues for the year ended December 31, 1998 were $6,574,000. Integrated Medical Center revenues for the year ended December 31, 1999 were $12,940,000 as compared to $17,132,000 for the year ended December 31, 1998, a decrease of $4,192,000 or 24% deemed attributable to the lack of growth of the number of Integrated Medical Centers and a reduction from 84 integrated medical centers as of December 31, 1998 to 42 integrated medical centers as of December 31, 1999. We and certain Integrated Medical Centers have mutually agreed to discontinue contractual obligations related to certain operations. Salary and Consulting Costs. During the year ended December 31, 1999, we incurred salary and consulting costs of $3,358,000 as compared to $7,066,000 for the year ended December 31, 1998, a decrease of $3,708,000 or 52%, primarily due to the closing of CWWM in December 1998 and the reduction of personnel at the corporate headquarters. Management Fees. These are fees that are paid to the affiliated practitioners' management corporations for managing the day to day operations of the Integrated Medical Centers. During the year ended December 31, 1999 we incurred management fees of $7,908,000 as compared to $8,641,000 for the year ended December 31, 1998, a decrease of $733,000 or 8%, due primarily to reduced revenues in the inactive integrated medical centers, contractual restructuring of some of the relationships with integrated medical centers and the reduction of operational centers described above. Cost of Revenue. All cost of revenue amounts relates to the activities of Smokenders. As a result of the cessation of operations of this subsidiary in 1998, we only incurred $7,000 in such related costs in 1999. Rent. Rent consists of amounts incurred for administrative, medical office space and certain equipment leased by us at our corporate headquarters and the Integrated Medical Centers. During the year ended December 31, 1999 we incurred rent expenses of $209,000 as compared to $5,141,000, for the year ended December 31, 1998, a decrease of $4,932,000 or 96%, due primarily to the closing of CWWM in December 1998. Advertising and Marketing. During the year ended December 31, 1999, we incurred advertising and marketing expenses of $20,000 as compared to $964,000 for the year ended December 31, 1998, a decrease of $944,000 or 98%, attributable to the closing of CWWM in December 1998. Bad Debt Expense. During the year ended December 31, 1999, we had bad debt expense of $1,599,000 as compared to $2,657,000 for the year ended December 31, 1998, a decrease of $1,058,000 or 40%, primarily due to the decrease in revenue of the Integrated Medical Centers for these periods and a reduction in the percentage used to calculate the bad debt reserve based on additional historical experience. Network Development Costs. All network development costs relate to the activities of Optimum Health Services. During the year ended December 31, 1998 our former subsidiary experienced network development costs of $701,000. As a result of the spin-off of this subsidiary in November 1998 we have not incurred any such related costs in 1999. General and Administrative. During the year ended December 31, 1999, we incurred general and administrative expenses of $2,401,000 as compared to $6,066,000 for the year ended December 31, 1998, a decrease of $3,665,000 or 60%, due primarily to the closure of CWWM in December 1998 and the reduction of corporate overhead in such categories as insurance costs, legal and accounting costs, travel and entertainment costs and various other corporate costs such as automobile, telephone, postage and printing and reproduction, equipment rental, supplies, professional development, recruiting and repairs. 12 13 Depreciation and Amortization. During the year ended December 31, 1999, we incurred depreciation and amortization expense of $137,000 as compared to $210,000 for the year ended December 31, 1998, a decrease of $73,000 or 35% attributable to the return of certain assets to divested businesses and the write off of improvements in facilities no longer occupied by the Company. Operating Loss. Our operating loss was $2,699,000 for the year ended December 31, 1999 as compared to an operating loss of $9,735,000 for the year ended December 31, 1998. The reduction in the losses is due primarily to improved operations at our remaining Integrated Medical Centers and the discontinuance of the operations of CWWM, Complete Wellness Smoking Cessation, Inc. (Smokenders), Optimum Health Services, Inc. and Complete Billing, Inc. Additionally, we have significantly reduced corporate overhead but have experienced certain non-recurring legal matters regarding the termination of former employees and vendors that represent approximately $994,000 or 37% of the operating loss for the year ended December 31, 1999. Interest Expense. During the year ended December 31, 1999 we had interest expense of $111,000 as compared to negligible amounts for the year ended December 31, 1998. We increased our interest-bearing borrowings during 1999 to $897,000 at December 31, 1999 from $392,000 at December 31, 1998. Interest Income. During the year ended December 31, 1999, we had interest income of $5,000 as compared to $63,000 for the year ended December 31, 1998, a decrease of $58,000 or 92%, resulting from a lower amount of invested funds in 1999 as compared to the same periods in 1998. The losses incurred by the consolidated CWC, LLC allocable to the minority interest owners of the CWC, LLC, eliminated all net equity of the minority interest owners. Accordingly, the Company has reflected 100% of the operations of the CWC, LLC in its results of operations in 1998, without allocation to the minority interest owners. In addition, the Company's investments in Complete Wellness Smoking Cessation, Inc. represents 100% of the equity funding of that entity. The Company has reflected 100% of the operations, assets, and liabilities of the Smokenders subsidiary due to the lack of minority interest investment into the Company. During 1998 the Company allocated approximately $8,000 of the net losses incurred by Optimum Health Services, Inc. to the minority interest owners investment in and percentage ownership of Optimum Health Services, Inc. Accordingly, the Company has reflected the balance of the results operations of Optimum Health Services, Inc. in its results of operations in 1998, without further allocation to the minority interest owners. The Company has evaluated its tax position as of December 31, 1998 and its expected tax position for the next three to five years and determined that, based on assumptions and estimates utilized in its evaluation, it is more likely than not that the Company will not be able to realize the economic benefits of net operating losses incurred and certain other deferred items. Accordingly, the Company has recorded a valuation allowance representing 100% of the net deferred tax assets and has recognized a net tax provision of zero. At December 31, 1999, we and our wholly owned subsidiaries had combined net operating loss carryforwards for income tax purposes of approximately $8,713,000, which expire between 2010 and 2012. We file a consolidated federal tax return with our wholly owned subsidiaries. Complete Wellness Centers, LLC ("CWC, LLC"), a limited partnership of which we serve as the general partner and hold a 1% interest thereof, is not included in this tax return. CWC, LLC is treated as a partnership for tax purposes and its gains and losses are reflected at each member's level. Further, CWC, LLC does not file a consolidated tax return with its subsidiaries. Accordingly, the use of substantially all of the combined net operating loss carryforwards will be limited to use to offset future taxable income of each separate subsidiary in proportion to its share of the tax losses generated to date. In addition, these carryforwards may be significantly limited under the Internal Revenue Code of 1986, as amended, as a result of ownership changes resulting from equity offerings or changes in ownership. A valuation allowance of approximately $5,415,000 has been established at December 31, 1999 to offset any benefit from the net operating loss carryforwards, as it cannot be determined when or if we will be able to utilize the net operating losses. Utilization of the net operating loss carryforwards may be significantly limited, based on changes in our ownership. LIQUIDITY AND CAPITAL RESOURCES Since inception, we have experienced net losses, negative cash flow from operations and an accumulated deficit. For the year ended December 31, 1999, we had net losses of $2,805,000 as compared to net losses of $9,668,000 for the year ended December 31, 1998. At December 31, 1999, we had working capital of $32,000, compared to a working capital deficit of $4,389,000 at December 31, 1998. We have an stockholders' deficiency of $56,000 at December 31, 1999. Our current ratio at December 31, 1999 was 1.01 compared to 0.59 at December 31, 1998. Net cash used in operations for the year ended December 31, 1999 was $2,204,000, as compared to $4,617,000 for the year ended December 31, 1998. Negative cash flows are attributable primarily to net losses and increases in accounts receivable in 1998. Negative cash flows for the year ended December 31, 1999 are attributable primarily to increases in accounts receivable and some decreases in accounts payable and other current liabilities. We purchased a six month $111,002 certificate of deposit that is pledged toward an irrevocable letter of credit of $222,005 required by an appeal bond secured against a legal judgment pending against us. We completed several significant non-cash transactions during the year ended December 31, 1999, including the $3,852,000 reduction of liabilities related to the cessation of operations in December 1998 of Complete Wellness Weight Management, Inc. ("CWWM") and the related bankruptcy filing, the reduction of liabilities due to conversions of debts totaling $950,000 to equity, the exercise of stock options as compensatory payments for $116,806, and the payment of all preferred stock dividends with shares of preferred stock valued 13 14 at $575,000. The bankruptcy filing was in July 1999 with a hearing of the creditors in November 1999. One creditor appeared at the hearing and there are two lawsuits pending by former landlords. On April 21, 1999 our Board of Directors approved a plan to raise up to $1,000,000 through a private placement of our common stock. The plan consisted of the issuance of up to 1,000,000 shares of our common stock priced at $1.00 per share. Through June 30, 1999 we received $587,000 through the private placement of which $152,000 was used to cover costs of the offering which was terminated on July 15, 1999. We subsequently registered the 587,000 shares of our common stock issued in that private placement offering. In October 1999, we received $481,000 through a private placement of which $50,000 was used to cover costs of the offering which was terminated on December 15, 1999. We are currently dependent on advances from investors to meet our day to day cash needs. Our major investors, Wexford Spectrum Investors LLC and Imprimis Investors LLC, have told us that it is their intention not to loan us any additional cash. As a result, we have identified other sources of investment in the Company to remain in business. Failure to received additional sources of cash could result in our insolvency. Based on our current operating plan, we anticipate that the net proceeds from borrowings and expected equity investments will allow us to meet our cash requirements for at least the next 12 months. We cannot be certain that additional financing will be available on commercially reasonable terms, if at all. If we raise additional capital through the sale of equity, including preferred stock or convertible debt securities, the percentage ownership of our then existing stockholders will be diluted. RESTATEMENT OF QUARTERLY INFORMATION As a result of the discontinuation of certain contractual relationships with Integrated Medical Centers, accruals of liabilities and certain estimation processes utilized by the Company, a restatement of the quarterly results for the year ended December 31, 1999 is necessary. The restatement for the nine months ended September 30, 1999 had the effect of increasing the net loss by $1,747,000 and the loss per share by approximately $0.47 in the fourth quarter. The Company will file amended quarterly reports on Form 10-QSB by May 15, 2000. The restated quarterly results for 1999 are as follows (first table) and may be compared to the previously reported quarterly results for 1999 (second table):
RESTATED Quarter Quarter Quarter Ended Ended Quarter Ended Ended March 31 June 30 September 30 December 31 ---------- ---------- ------------- ----------- Net Revenues $4,580,034 $2,560,780 $2,867,828 $2,931,689 Net Loss $ 50,696 $ 708,633 $ 747,477 $1,298,185 Net Loss Per Share $ 0.02 $ 0.20 $ 0.18 $ 0.28 Weighted Avg Shares Outstanding - Basic 2,949,755 3,536,755 4,055,862 4,623,447
PREVIOUSLY REPORTED Quarter Quarter Ended Ended Quarter Ended March 31 June 30 September 30 ---------- ---------- ------------- Net Revenues $4,588,085 $3,683,278 $3,479,720 Net Income $ 78,304 $ 91,425 $ 70,339 Net Income Per Share - Basic $ 0.03 $ 0.03 $ 0.02 Weighted Avg Shares Outstanding - Basic 2,949,755 3,536,755 4,055,862
SEASONALITY We believe that the patient volumes at our integrated medical centers are not significantly affected by seasonality. 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. 14 15 ITEM 7. FINANCIAL STATEMENTS Report of Independent Auditors Consolidated Balance Sheets as of December 31, 1998 and 1999 Consolidated Statements of Operations for the Years Ended December 31, 1998 and 1999 Consolidated Statements of Stockholders' Equity (Deficiency) for the Years Ended December 31, 1998 and 1999 Consolidated Statements of Cash Flows for the Years Ended December 31, 1998 and 1999 Notes to Consolidated Financial Statements 15 16 REPORT OF INDEPENDENT AUDITORS The Board of Directors Complete Wellness Centers, Inc. We have audited the accompanying consolidated balance sheets of Complete Wellness Centers, Inc., as of December 31, 1998 and 1999, and the related consolidated statements of operations, stockholders' deficiency, and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Complete Wellness Centers, Inc. at December 31, 1998 and 1999 and the consolidated results of their operations and their cash flows for the year then ended in conformity with generally accepted accounting principles. /s/ Amper, Politziner & Mattia P.A. Edison, NJ March 28, 2000 16 17 COMPLETE WELLNESS CENTERS, INC. CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 DECEMBER 31, 1999 ----------------- ----------------- ASSETS Current Assets: Cash and cash equivalents $ 444,963 $ 272,034 Certificate of Deposit, restricted 0 111,002 Patient accounts receivables, net of allowance for doubtful accounts 5,766,369 5,485,901 of $6,255,238 and $5,270,361 Inventory 53,405 0 Prepaid expenses 9,661 46,667 Other assets 49,774 1,555 ----------------- ----------------- Total current assets 6,324,172 5,917,159 Furniture and equipment, net 369,583 225,978 Deposits 31,983 1,400 ----------------- ----------------- Total assets $ 6,725,738 $ 6,144,537 ================= ================= LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY) Current liabilities: Accounts payable and accrued expenses $ 6,693,321 $ 2,729,786 Accrued management fees 4,020,288 2,573,463 Notes payable - current 0 582,525 ----------------- ----------------- Total current liabilities 10,713,609 5,885,774 Notes payable 392,000 314,475 Stockholders' equity (deficiency): Common Stock, $.0001665 par value per share, 10,000,000 and 50,000,000 shares authorized, 2,457,968 shares and 4,881,149 issued 409 813 and outstanding at December 31, 1998 and 1999, respectively Senior Convertible Preferred Stock, $.01 par value per share, 2,000,000 shares authorized, 8% cumulative, 109,686 shares and 121,107 shares issued and outstanding at December 31, 1998 and 1999, respectively 1,097 1,211 Junior Convertible Preferred Stock, $.01 par value per share, 2,071 Shares authorized, 8% cumulative, 0 shares and 2,071 shares issued 0 21 And outstanding at December 31, 1998 and 1999, respectively Additional paid in capital 11,135,356 18,838,475 Accumulated deficit (15,516,733) (18,896,232) ----------------- ----------------- Total stockholders' equity (deficiency) (4,379,871) (55,712) ----------------- ----------------- Total liabilities and stockholders' deficiency $ 6,725,738 $ 6,144,537 ================= =================
See accompanying notes. 17 18 COMPLETE WELLNESS CENTERS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED YEAR ENDED DECEMBER 31, 1998 DECEMBER 31, 1999 ----------------- ----------------- Operating revenue: Patient revenue $ 17,132,388 $ 12,940,331 Weight management centers 6,573,931 0 Other income 455,500 0 ----------------- ----------------- Total operating revenue 24,161,819 12,940,331 Direct expenses: Salary and consulting costs 7,066,208 3,357,697 Management fees 8,641,067 7,907,969 Cost of revenues 2,450,577 7,178 Rent 5,140,929 208,936 Advertising and marketing 963,918 20,453 Bad debt expense 2,656,597 1,598,635 ----------------- ----------------- Total direct expenses 26,919,296 13,100,868 Network development cost 701,443 0 General and administrative 6,066,240 2,401,452 Depreciation and amortization 209,882 137,446 ----------------- ----------------- Operating loss (9,735,042) (2,699,435) Interest expense (2,771) (110,818) Interest income 62,616 5,262 Minority interest 7,179 0 ----------------- ----------------- Net loss before income taxes (9,668,018) (2,804,991) Income taxes 0 0 ----------------- ----------------- Net loss after income taxes $ (9,668,018) $ (2,804,991) ================= ================= Loss per share - basic $ (4.41) $ (0.77) ================= ================= Weighted average common shares - basic 2,301,332 3,630,453 ================= =================
See accompanying notes. 18 19 COMPLETE WELLNESS CENTERS, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY (DEFICIENCY)
JUNIOR SENIOR ------ ------ CONVERTIBLE CONVERTIBLE ----------- ----------- PREFERRED STOCK PREFERRED STOCK COMMON STOCK ADDITIONAL ACCUMULATED --------------- --------------- ------------ ---------------------- SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIENCY TOTAL ------ ------ ------ ------ ------ ------ ------- ---------- ----- Balance at January 1, 1998 2,183,598 $363 $ 5,044,365 $ (5,364,415) $ (319,687) Issuance of common stock 70,912 13 199,987 200,000 Issuance of redeemable preferred 100,000 $1,000 4,531,320 4,532,320 stock Exercise of stock options for shares of Complete Wellness Centers, 68,792 11 2,379 2,390 Inc. Common stock Exercise of common stock warrants of Complete Wellness Centers, Inc. Common stock 16,666 2 48 50 Exercise of representative warrants to Purchase Complete Wellness 1,563 1,563 Centers, Inc. warrants Granted 100,000 shares of common stock, grant price $3.75 100,000 17 374,983 375,000 Granted 8,000 shares of common Stock, grant price $2.50 8,000 1 19,999 20,000 Granted 10,000 shares of common Stock, grant price $3.875 10,000 2 38,748 38,750 Recognition of the granting of below 80,633 80,633 Market common stock options Recognition of the granting of below 357,128 357,128 Market common stock warrants Dividends recorded on preferred stock 9,686 97 484,203 (484,300) Net loss (9,668,018) (9,668,018) ------- ------ --------- --- ---------- ----------- ---------- Balance at December 31, 1998 109,686 1,097 2,457,968 409 11,135,356 (15,516,733) (4,379,871) Exercise of stock options for compensation 74,330 13 259,516 259,529 Exercise of stock options 643,601 108 899,039 899,147 Dividend paid in kind on preferred stock 71 $ 1 11,421 114 574,390 (574,508) Private placement of common stock 587,000 98 586,905 587,000 Issuance of common stock for compensation 67,306 10 99,986 99,996 Conversion of debt to preferred stock 2000 20 99,980 200,000 Conversion of debt to preferred stock 2000 $20 99,980 Private placement of common stock 481,000 80 480,920 481,000 Bankruptcy related adjustments for Complete Wellness Weight 3,852,478 3,852,478 Management Conversion of preferred to common stock (2,000) (20) 69,944 12 8 Conversion of debt to common stock 500,000 83 749,917 750,000 Net loss (2,804,991) (2,804,991) ---- --- ------- ------ --------- ---- ----------- ------------ ---------- Balance at December 31, 1999 2071 $21 121,107 $1,211 4,881,149 $813 $18,838,475 $(18,896,232) $ (55,712) ==== === ======= ====== ========= ==== =========== ============ ==========
See accompanying notes. 19 20 COMPLETE WELLNESS CENTERS, INC CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED YEAR ENDED DECEMBER 31, 1998 DECEMBER 31, 1999 ----------------- ----------------- OPERATING ACTIVITIES Net loss $ (9,668,018) $ (2,804,991) Adjustments to reconcile net loss to net cash used in operating activities: Minority interest (7,179) 0 Depreciation and amortization 216,197 137,446 Provision for bad debt 2,656,597 1,598,635 Provision for loss on long lived assets 18,066 0 Recognition of the granting of common stock warrants and options 873,074 358,772 Issuance of stock for LLC units 200,000 0 Changes in operating assets and liabilities: Accounts receivable (5,664,125) (1,318,167) Advances to officers and other current assets 327,420 20,488 Inventory 0 53,405 Deposits 0 30,583 Accounts payable and other current liabilities 6,431,211 1,166,943 Accrued management fees 0 (1,446,825) ----------------- ----------------- Net cash used in operating activities (4,616,757) (2,203,711) INVESTING ACTIVITIES Investment in Certificate of Deposit 0 (111,002) (Purchase)/disposal of equipment (99,631) (3,116) ----------------- ----------------- Net cash used in investing activities (99,631) (114,118) FINANCING ACTIVITIES Repayment of notes (178,333) 0 Stock issuance costs incurred (467,680) 0 Proceeds from sale of preferred stock 5,000,000 0 Proceeds from sale of common stock 0 1,068,131 Proceeds from notes payable 0 177,000 Exercise of warrants 50 0 Exercise of stock options 2,390 899,769 ----------------- ----------------- Net cash provided by financing activities 4,356,427 2,144,900 ----------------- ----------------- Net increase in cash and cash equivalents (359,961) (172,929) Cash and cash equivalents at beginning of year 804,924 444,963 ----------------- ----------------- Cash and cash equivalents at end of year $ 444,963 $ 272,034 ================= =================
SUMMARY OF SUPPLEMENTARY CASH FLOWS DISCLOSURES: Interest paid 0 $44,710 Income taxes paid 0 0
Significant non-cash transactions completed by the Company during the year ended December 31, 1999 include the following: Reduction of liabilities related to bankruptcy filing $3,852,478 Reduction of liabilities due to conversions to equity 950,000 Payment of preferred stock dividends with shares of preferred stock 574,507 Exercise of stock option through conversion of liability 269,123 Conversion of preferred stock to common stock 100,000
See accompanying notes. 20 21 COMPLETE WELLNESS CENTERS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1998 AND 1999 1. 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 $2,804,991, and total stockholders' deficiency of $55,712. The current ratio at December 31, 1999 was 1.01. During March 2000, the Company obtained financing of $750,000, see note 16. It is the Company's intention to seek additional equity funding through a private placement, which is expected to start in June 2000, and to seek a firm underwriting commitment for a secondary offering in the second half of 2000. The Company believes that through continued cost cutting efforts currently underway, profitability could improve. 2. ORGANIZATION AND PRESENTATION The Company was incorporated in Delaware in November 1994. The Company develops and operates integrated medical delivery systems with a goal of providing consumers with a comprehensive integrated wellness model of care. The current primary operations are integrated medical centers. Integrated Medical Center Model The Company's integrated medical centers are generally developed and operate under agreements whereby the Company will open new Integrated Medical Centers in the same location as chiropractors' existing chiropractic practices (the "Affiliated Practices"). The Integrated Medical Centers will employ a physician (the "MD") on a salaried basis to supervise the provision of health care services. Where permitted by state law, the Integrated Medical Centers will be wholly owned by the Company. In other jurisdictions, the Integrated Medical Centers will be wholly owned by a nominee MD and managed by the Company. The chiropractor may continue to operate his or her existing Affiliated Practice separately from the Integrated Medical Center. The Company will not acquire the Affiliated Practice, its patient base, or its tangible assets. In addition, no consideration will be paid to the chiropractor at inception of the arrangements. As of December 31, 1999, the Company had 42 operational Integrated Medical Centers. 3. SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation The consolidated financial statements reflect the accounts of Complete Wellness Centers, Inc., which includes 6 wholly owned subsidiaries, and 42 managed Integrated Medical Centers, CWC, LLC, Complete Wellness Weight Management, Inc. ("CWWM"), Complete Wellness Research Institute, Inc., Complete Wellness Education, Inc., Complete Billing, Inc., and its majority owned subsidiaries, Complete Wellness Smoking Cessation, Inc. d/b/a Smokenders (88.23%), and Optimum Health Services, Inc. (86.67%). CWWM ceased operations in December 1998, Optimum Health Services ("OHS") was sold to the management of OHS in November 1998, Complete Billing ceased operations in August 1998 and Smokenders was returned to its previous owners in July 1999. Operational activities through these dates are consolidated in the Company's applicable financial statements. Significant intercompany transactions have been eliminated. The financial statements of the Integrated Medical Centers that are controlled but not directly owned by the Company are consolidated in the Company's financial statements in accordance with the FASB's Emerging Issues Task Force consensus 97-2 "Application of APB Opinion No, 16 and FASB Statement No. 94 to Medical Entities." Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. The more significant areas, requiring the use of management estimates, relate to allowance for doubtful patient accounts receivable and accrued management fees. Actual results could differ from those estimates. Cash and Equivalents The Company considers cash and cash equivalents to include currency on hand, demand deposits, and all highly liquid investments with a maturity of three months or less at the date of purchase. Inventory Inventory was recorded at the lower of cost, using the average cost method or net realized value. Furniture and Equipment 21 22 Furniture and equipment are recorded at cost. Maintenance and repairs are charged to expense as incurred. Depreciation is computed using the straight-line method at rates intended to amortize the cost of the related assets over their estimated useful lives. Furniture and equipment of the Company are reviewed for impairment whenever events or circumstances indicate that the asset's undiscounted expected cash flows are not sufficient to recover its carrying amount. The Company measures an impairment loss by comparing the fair value of the asset to its carrying amount. Fair value of an asset is calculated as the present value of expected future cash flows. Revenue Patient revenue from services is reported at the estimated realizable amounts from patients and third party payors for services rendered. Substantially all of the patient service revenue of the Integrated Medical Centers is paid by the patients and traditional commercial insurers. Certain managed care arrangements have been made by individual Integrated Medical Centers. The Company's Integrated Medical Centers provide certain patient services at discounted rates based on the patients' demonstration of financial hardship and need for the services rendered. The amount of discount is based on the level of demonstrable hardship on a case by case basis. The Company and its Integrated Medical Centers are under no obligation to provide such services but do so as a community service. Patient revenues related to such services are recognized net of discounts allowed in the accompanying financial statements. The Company does not measure the level of such services provided. Income Taxes Income taxes are provided using the liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statements carrying amounts of existing assets and liabilities and their respective tax bases (i.e., temporary differences). Stock-Based Compensation The Company grants stock options for a fixed number of shares to employees and certain consultants. The Company has elected to continue to account for stock-based compensation arrangements under APB Opinion No. 25 "Accounting for Stock Issued to Employees," and accordingly recognizes compensation expense for the stock option grants as the difference between the fair value and the exercise price at the grant date. The pro forma information required by FASB Statement No. 123, "Accounting for Stock-Based Compensation," which provides a fair-value-based method of accounting alternative to account for stock-based compensation issued to employees and consultants has been disclosed in Note 9. Fair Value of Financial Instruments Management has determined the estimated fair value of financial instruments using available market information and valuation methodologies. Cash equivalents, accounts receivable, accounts payable, notes payable and accrued liabilities and other current assets and liabilities are carried at amounts which reasonably approximate their fair values. Considerable judgment is necessary to interpret market data and develop estimated fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts the Company could realize on disposition of the financial instruments. The use of different market assumptions or estimation methodologies may have an effect on the estimated fair value amounts. Concentration of Cash Balances Periodically, the Company maintains cash balances in excess of the $100,000 insured by the Federal Deposit Insurance Corporation (FDIC). Net Income Per Share Statement of Financial Accounting Standards (SFAS) No. 128, Earnings Per Share, replaced the calculation of primary and fully diluted earnings per share with basic and diluted earnings per share. Unlike primary earnings per share, basic earnings per share excludes the dilutive effects of options, warrants and convertible securities. Diluted earnings per share is very similar to the previously reported fully diluted earnings per share. In addition, the SEC staff issued Staff Accounting Bulletin No. 98 ("SAB 98"), in February 1998. SAB 98 requires that registrants consider all potentially dilutive securities issued for nominal consideration outstanding for all periods. Under the previous SEC regulations in SAB 83, the Company considered all potentially dilutive securities issued within a twelve month period prior to the initial public offering date at a price below the initial public offering price as outstanding for all periods. The effect on weighted average shares outstanding of securities that could potentially dilute basic earnings per share in the future were not included in the computation of diluted earnings per share because to do so would have been antidilutive for the periods presented. 22 23 New Accounting Pronouncements In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities". SFAS No. 133 establishes accounting and reporting standards for derivative instruments and for hedging activities. It requires that an entity recognize all derivative as either assets or liabilities and measure them at fair value. Under certain circumstances, the gains or losses from derivatives may be offset against those from the items the derivatives hedge against. This statement is required to be adopted for fiscal quarters of fiscal years beginning after June 15, 2000. The Company expects to adopt SFAS No. 133 effective January 1, 2001. Reclassifications Certain reclassifications have been made to conform prior year amounts to the current year presentation. 4. ACQUISITIONS/DISPOSALS Smokenders On July 31, 1997, a subsidiary of the Company acquired substantially all of the assets of a smoking cessation program owned by the Oxford Health Plan (Smokenders) for $50,000. This acquisition was subject to two royalty arrangements, a 5% royalty on gross revenues for a 10 year period to Oxford Health Plan and 12.4% of revenues with a minimum of $26,000 to the founders of Smokenders. At the same time, the CEO of Smokenders, who was also a Director of the Company, acquired an 11.77% minority interest in Smokenders from the Company in return for a $22,000 promissory note bearing interest at 8%, due September 30, 2000. The transaction was accounted for as a purchase. The net purchase price was allocated for accounting purposes to the assets acquired, primarily the inventory of printed materials. On June 1, 1998, the Company amended certain agreements with its Complete Wellness Smoking Cessation, Inc. ("Smokenders") subsidiary. During September 1998, the Company contributed to Smokenders $23,000 as additional capital and $75,000 in return for a secured note bearing interest at 12%, payable on or before September 30, 1999. Additionally, the Company eliminated $22,000 of promissory notes due from the CEO of Smokenders, as part of the original shareholder agreement. On September 15, 1998, the CEO resigned his position however, he remained a Board Member of the Company. The Company also agreed to grant the managers of Smokenders up to an additional 3,000 options to purchase Smokenders stock, 1,500 of which vested at the grant date and 1,500 of which are subject to time vesting schedules through August 1, 1999. All options are exercisable for 5 year periods, contain anti-dilution provisions, and are not exercisable until January 1, 2000, except under certain circumstances. The exercise of these options will result in the managers owning 35% of the outstanding shares of Common Stock and the Company owning 65% of the outstanding shares of Common Stock of Smokenders. All shares are non-public restricted securities exempt from regulation requirements of the Securities Act of 1933 as amended. The shareholders of Smokenders have certain put and call options as well as non-mandatory repurchase options and liquidation requirements in the event selling shareholders are not able to obtain buyers for their stock. On May 1, 1999, as a result of the failure to pay the minimum royalty fee of approximately $26,000 to the founding shareholders of Smokenders, the Company reached an agreement with those shareholders to transfer all licenses, patents, copyrights, trademarks, inventory and other assets back to them as of July 1, 1999 for no further consideration and a release of debt on the royalty fee due as well as the assumption of certain liabilities. The Company has included the results of operations of Smokenders through June 30, 1999 in its consolidated results from operations. Nutri/Systems On January 31, 1998, CWWM completed the acquisition of 56 weight loss treatment centers from Nutri/System, L.P. The retail centers marketed food, medically supervised weight loss programs and nutritional supplements. The purchase price of the centers included $150,000 in cash and the assumption of certain lease liabilities and other acquisition costs of approximately $700,000. The transaction was accounted for as a purchase. The purchase price, including acquisition costs, was allocated for accounting purposes to the assets acquired, primarily food inventory. On November 13, 1998, the Company's Board of Directors voted to sell, close and/or otherwise divest the operations of CWWM. CWWM commenced operations on February 1, 1998 and realized losses from operations of approximately $5,974,000 on revenues of approximately $6,573,000 for the period ended December 31, 1998. The costs to exit this activity were estimated to be approximately $3,355,000. On April 21, 1999 the Company's Board of Directors approved a formal plan for CWWM to file for Chapter 7 bankruptcy proceedings. The Company filed the formal Chapter 7 documents on July 6, 1999 in Trenton, New Jersey. As of July 6, 1999, this subsidiary is no longer included in the Company's consolidated financial results. The Company's investment in this subsidiary was adjusted to reflect those liabilities that are guaranteed by the Company. The remaining liabilities of the subsidiary, approximately $3,852,000, were adjusted through changes to additional paid in capital of the Company in July 1999. Complete Wellness Centers, LLC On May 29, 1998 the Company, by unanimous consent of the Board of Directors, agreed to purchase all of the outstanding units of Complete Wellness Centers, LLC ("CWC,LLC"), a Delaware limited liability company, of which the Company has a 1% equity interest and irrevocable proxies from a majority of interest holders in the LLC. The acquisition was accomplished by the issuance of 23 24 77,821 shares of Common Stock valued at $200,000, based upon the average closing bid price of the Company's Common Stock for the thirty (30) trading days prior to June 1, 1998. Such shares are subject to SEC Rule 144, but shall have piggyback registration rights. Former and current employees, directors, and immediate relatives of management, owning 37.6% of the LLC's equity received a discount to 26.32% of the $200,000 valuation of the LLC; the remaining investors received the balance of the valuation on a pro rata basis in accordance with their respective investments. This amount was expensed during 1998. Accident and Industrial Injury Associates In July 1998, the Company purchased Accident and Industrial Injury Associates ("AIIA"), a chiropractic preferred provider network of approximately 2,700 providers located throughout the United States in exchange for warrants to purchase 20,000 shares of its common stock for $3.31 per share which expire in 5 years and contain certain piggyback registration rights. The Company accounted for this transaction under the purchase method. The primary assets acquired were members of the network and databases related to the operations thereof. The Company contemporaneously sold 30% of its interest in AIIA to its 86.67% owned subsidiary, Optimum Health Services, Inc. ("OHS") in exchange for a $12,000 note bearing interest at 6.1% per annum, due January 31, 2000. OHS will manage the network on behalf of the Company and receive an additional 20% interest in AIIA over three years as compensation for such services. The Company has committed to fund the initial working capital requirements of AIIA, up to approximately $10,000, after which, the Company and OHS will fund all future working capital requirements equally. As a result of a revised spin off plan with OHS, as amended on November 3,1998, the Company agreed to sell OHS an additional 25% of AIIA for an additional $6,000 note bearing interest at 6.1% pre annum. The amended agreement established the new company, Optimum Preferred Provider Organization ("OPPO"), with is owned initially as to 55% OHS and 45% to the Company. OHS was to manage the network and will receive an additional 20% interest in OPPO over three years as compensation for such services at which time OHS will own 75% of OPPO. On January 3, 1999, the Board passed a resolution to nullify the Company's acquisition of AIIA Managed Care, Inc. (AIIA). Complete Billing, Inc. On July 7, 1998, the Company committed to a formal plan to exit the operations of Complete Billing, Inc. ("CBI") one of its wholly owned subsidiaries. The Company ceased CBI's operations on August 15, 1998 and converted all billing performed by CBI back to the respective medical clinics that were CBI's clients. The Company does not expect to incur any further expenses as a result of closing CBI. For the period ended December 31, 1998, CBI had losses from operations of approximately $75,000 on revenues of approximately $91,000. Optimum Health Services, Inc. The Company's formal plan to divest its 86.67% interest in OHS, as amended on November 3, 1998 was to spin-off the Company's interest in OHS to the management of OHS. For the eleven months ended November 30, 1998, OHS had losses from operations of approximately $701,000 with approximately $19,000 in revenues. Under the plan, the Company converted its investment in OHS into 266,736 OHS ten-year warrants at an exercise price of $0.01 per share. The warrants can not be exercised prior to one year and not in an amount at any time such that the Company's ownership of OHS's common stock would be greater than 49% of the total OHS common stock outstanding. The current value recorded by the Company in relation to the 266,736 OHS warrants is zero. On March 31, 2000, the Company exercised its warrants with a cash payment of $2,667 and now owns 266,736 shares of OHS, approximately 6.7% of their outstanding shares at that time. 5. ALLOWANCE FOR DOUBTFUL ACCOUNTS Details of the allowance for doubtful accounts receivable are as follows:
December 31, 1998 1999 --------------- ---------------- Beginning Balance $ 3,825,708 $ 6,255,238 Bad debt expense 2,656,597 1,598,635 Recoveries/Write-offs (227,067) (2,583,512) --------------- ---------------- Ending Balance $ 6,255,238 $ 5,270,361 =============== ================
24 25 6. FURNITURE AND EQUIPMENT Furniture and equipment consists of the following:
December 31, 1998 1999 ---------------- ---------------- Furniture and Equipment (5 year life) $ 706,208 $ 440,003 Less Accumulated Depreciation and Amortization (336,625) (214,025) ---------------- ---------------- $ 369,583 $ 225,978 ================ ================
7. DEBT Notes Payable On December 19, 1997, we entered into an Investment Agreement with Wexford Spectrum Investors LLC and Imprimis Investors LLC pursuant to which, as supplemented by a First Supplement dated January 12, 1998, a Second Supplement dated July 2, 1998 and a Third Supplement dated October 19, 1998, we issued $475,000 in aggregate principal amount of Senior Secured Floating Rate Bridge Notes due February 1, 1999, secured by various assets of Complete Wellness Centers, $375,000 of which evidenced term loans and $125,000 of which evidenced revolving loans made by Wexford and Imprimis to us. On August 31, 1999, we executed a Fourth Supplement to the Investment Agreement with Wexford and Imprimis, whereby we (i) converted $100,000 of the outstanding principal of the bridge notes to 2,000 newly issued shares of Senior Convertible Preferred Stock, and (ii) agreed to repay the remaining principal and accrued and unpaid interest by equal quarterly payments to Wexford and Imprimis during the period from January 1, 2000 to December 31, 2001 based on a four year amortization schedule. The note accrues interest at 12% per annum. 1997 Bridge Note The Company received $500,000 as a Bridge Loan on December 19, 1997. This note bears interest at 12% and was converted into Senior Convertible Preferred Stock on January 23, 1998. The note, along with an additional investment of $4,500,000 was converted into 100,000 shares of 12% convertible Preferred Stock. Other Notes Payable On February 19, 1999 we signed a loan agreement with RVR Consulting Group, Inc. ("RVR"), a related party, for $100,000 and on August 31, 1999 we signed a First Supplement to the Loan Agreement with RVR, pursuant to which we and RVR agreed to convert the $100,000 loan in full into 2,000 shares of 8% Junior Convertible Preferred Stock. The Company entered into loan agreements with two vendors totalling $428,000. Interest is 9% and 12% respectively and the loans are due December 2000 and April 2002. We are in default of one these loans and have classified this note as current.. On December 27, 1999 we received a $100,000 loan from Joseph J. Raymond, Jr., Chairman and Chief Executive Officer of the Company for a term of six months. The note accrues interest at 12% per annum. The aggregate amount of all maturities for the year ended December 31, 1999 are as follows: 2000 $582,525 2001 314,475 -------- $897,000 ========
8. INCOME TAXES Deferred income taxes reflect the net tax effects of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amount used for income tax purposes. The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities recognized as of December 31, 1998 and 1999 are presented below: 25 26
December 31, 1998 1999 ----------- ----------- Deferred tax assets: Start-up costs $ 21,000 $ -- Nonqualified stock options 314,000 392,000 Bad debt expense 2,252,000 1,897,000 Operating loss carryforward 1,090,000 3,137,000 Accrued exit of activity 880,000 -- costs ----------- ----------- Total deferred tax assets 4,557,000 5,426,000 Less valuation allowance (4,546,000) (5,415,000) ----------- ----------- Net Deferred tax assets 11,000 11,000 ----------- ----------- Deferred tax liabilities: Depreciation (11,000) (11,000) ----------- ----------- Total deferred tax liabilities (11,000) (11,000) ----------- ----------- Net deferred tax amount $ 0 $ 0
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 $4,546,000 and $5,415,000 as of December 31, 1998 and 1999, respectively. Significant components of the provision for income taxes are as follows for the years ended:
December 31, 1998 1999 ----------- ----------- Current: Federal $ 0 $ 0 State 0 0 ----------- ----------- Total Current 0 0 Deferred: Federal (2,453,000) (765,000) State (513,000) (104,000) Increase in valuation allowance 2,966,000 869,000 ----------- ----------- Total deferred 0 0 ----------- ----------- Total provision for income taxes $ 0 $ 0 =========== ===========
The effective tax rate on income before income taxes varies from the statutory federal income tax rate for the years ended December 31, 1998 and 1999 as follows:
December 31, 1998 1999 ---- ---- Statutory rate (34%) (34%) State taxes, net (3%) (3%) Other differences, net 1% 1% Valuation allowance 36% 36% ---- ---- 0% 0% ==== ====
26 27 9. STOCKHOLDERS' EQUITY Warrants The Company issued one warrant for each common share sold in connection with its initial public offering. The warrants are exercisable at any time commencing August 19, 1997 until February 18, 2002 at $7.20 per share. The warrants are subject to adjustment in accordance with the certain anti-dilution commitments and other provisions. Sale of Senior Redeemable Preferred Stock / Conversion to Senior Convertible Preferred Stock The Senior Redeemable Preferred Stock was issued to two investment groups (the "investors") pursuant to the terms of the investment agreement dated January 23, 1998 and amended July 2, 1998. The offering consisted of a $500,000 12% Bridge Loan (the "Bridge Loan") received by the Company on December 16, 1997, a $1,000,000 Senior Redeemable Preferred Stock purchase by the Investors on January 17, 1998, of which $500,000 was used to retire the Bridge Loan and a $4,000,000 Senior Redeemable Preferred Stock purchase by the Investors on January 23, 1998. On July 2, 1998, the Senior Redeemable Preferred Stock was exchanged for Senior Convertible Preferred Stock. The cost of the offering to the Company, approximately $468,000, was paid out of the proceeds of the Senior Redeemable Preferred Stock offering. The significant provisions of the for Senior Convertible Preferred Stock are as follows: (I) The Senior Convertible Preferred Stock accrues dividends at 8% per annum if paid in cash and 10% per annum if paid in the form of additional shares of Senior Convertible Preferred Stock. Dividends are payable quarterly. Dividends in the form of additional shares of Senior Convertible Preferred Stock were paid at the end of each calendar quarter in 1998 and 1999. (II) The Senior Convertible Preferred Stock's liquidation preference is calculated as $50 per share plus an amount equal to all dividends (whether or not earned or declared) accumulated and unpaid to the date of final distribution. (III)Conversion of the Senior Convertible Preferred Stock is based on the liquidation preference divided by the lower of $1.75 or 75% of the current market price per share of the Company's Common Stock on the trading day immediately prior to the conversion date, subject to certain anti-dilution provisions. Conversion of the Senior Convertible Preferred Stock, at the option of the Investors, can occur at any time on or after January 3, 1999. (IV) The Senior Convertible Preferred Stock is redeemable, at the Company's option, in whole but not in part, from July 2, 1998 through January 3, 1999 at the liquidation preference, except that the dividend rate shall be 12% per annum. (V) Warrants issued to the Investors in connection with the Senior Redeemable Preferred Stock were returned to the Company and canceled. (VI) The Company issued 100,000 fully paid for and non-assessable shares of the Company's Common Stock to the Investors. All common stock issued or issuable to the Investors upon conversion of the Senior Convertible Preferred Stock contain certain demand registration rights, the Company will bear the costs associated with the registrations if any. On November 17, 1999, a request to convert 2,000 shares of Senior Convertible Preferred Stock to 69,944 shares of Common Stock was completed. Our board of directors has the authority to issue up to 10,000,000 shares of preferred stock in one or more series and to determine the number of shares in each series, as well as the designations, preferences, rights and qualifications or restrictions of those shares without any further vote or action by the common stockholders. The rights of the holders of common stock and the preferred stock offered in this offering will be subject to, and may be adversely affected by, the rights of the holders of any preferred stock that is currently issued or which may be issued in the future. On August 19, 1998, we entered into a consulting agreement with RVR Consulting Group, Inc. for a term of August 1, 1998 through July 31, 1999. We agreed to pay RVR $7,000 per month plus expenses to help us identify problem areas in our operations and provide subsequent solutions. Joseph J. Raymond Jr., our chairman of our board of directors and chief executive officer, is the president of RVR, and Sergio R. Vallejo, our president and chief operating officer, is the vice president of RVR. We subsequently amended the consulting agreement to agree to issue RVR warrants to purchase 150,000 shares of our common stock. On March 4, 1999, we terminated the consulting agreement and converted the warrants granted to RVR to options granted under our 1999 Consultants Stock Option Plan to purchase 150,000 shares of our common stock at an exercise price of $1.25 per share, 75,000 to Joseph J. Raymond, Jr. and Sergio R. Vallejo individually. On December 1, 1999, the Board of Directors agreed to convert each of their 75,000 options to 16,666 shares of common stock at the closing price on December 1, 1999. On September 17, 1998, we entered into a consulting agreement with Structure Management, Inc., pursuant to which Structure Management agreed to provide consulting services related to our operations and financing, and pursuant to which we agreed to issue warrants to purchase 120,000 shares of our common stock at $2.00 per share to Structure Management. On March 4, 1999, we converted the warrants to options, granted under our 1999 Consultant's Stock Option Plan, to purchase 120,000 shares of our common stock at $2.00 per share. Structure Management subsequently exercised the options. Structure Management is controlled by Jeffrey J. Raymond, the brother of Joseph J. Raymond, Jr., Chairman and Chief Executive Officer of CWC. 27 28 On February 19, 1999 we signed a loan agreement with RVR Consulting Group, Inc. for $100,000 and on August 31, 1999 we signed a First Supplement to the Loan Agreement with RVR, pursuant to which we and RVR agreed to convert the $100,000 loan in full into 2,000 shares of Junior Convertible Preferred Stock. This class of Preferred Stock has the same rights and terms as the Senior Convertible Preferred Stock, except it is junior in its liquidation preference to the Senior Convertible Preferred Stock. On February 26, 1999, Imprimis Investors LLC, Wexford Spectrum Investors LLC and RVR entered into a Stock Purchase Agreement whereby Imprimis and Wexford agreed to sell RVR an aggregate of 10,969 shares of our Senior Convertible Preferred Stock for $500,000. Joseph J. Raymond, Jr., Sergio Vallego and Joseph Raymond, Sr., father of Joseph J. Raymond, Jr., guaranteed RVR's payment of the purchase price to Imprimis and Wexford. Imprimis and Wexford each beneficially own greater than 5% of our outstanding Common Stock, and Frederick Simon, a Senior Vice President of Wexford, is a former director of ours who resigned from our board of directors on July 27, 1999. On March 8, 1999, we entered into another consulting agreement with Structure Management, Inc. for the period ending on March 4, 2000. The agreement calls for Structure Management to support our corporate planning process by: (i) identifying and bringing to us opportunities which help meet our corporate objectives and our business plans; (ii) assessing our competitive position, whether financial, technology or operational; (iii) identifying suitable merger or acquisition candidates, perform appropriate due diligence and assist us in negotiations with those identified candidates; (iv) supporting our financial public relations efforts by reviewing and commenting on our financial reports and plans and identifying examples of outstanding financial reporting presentation in other industries; and (v) supporting our shareholder relations activity by reviewing and responding to shareholder communications and advise us as to selection of public relations counsel. As compensation, we have issued Jeffrey J. Raymond, as a principal of Structure Management, Inc. options under our 1999 Consultants Stock Option Plan to purchase 117,500 shares of common stock at $1.25 per share. Mr. Jeffrey J. Raymond subsequently exercised the options. On April 1, 1999, the Company reached a settlement with Haim Zitman. Mr. Zitman had sued the Company for breach of his employment agreement with CWWM, a subsidiary of the Company. Mr. Zitman was granted options to purchase 40,000 shares of the Company's Common Stock for $0.01 per share, valued at $80,000 in compensation expense, vested upon issuance, in full satisfaction of his claim. Mr. Zitman exercised options to purchase 27,625 shares and 12,375 shares in September 1999 and October 1999, respectively. On April 21, 1999 the Company's Board of Directors approved a plan to raise up to $1,000,000 through a private placement of the Company's Common Stock. The plan consisted of the issuance of up to 1,000,000 shares of the Company's Common Stock priced at $1.00 per share. Through June 30, 1999 the Company received $587,000 through the private placement of which $152,000 was used to cover costs of the offering. The offering was terminated on July 15, 1999. On June 30, 1999, the Company filed a registration statement on Form S-3 with the SEC to register 587,000 shares of its Common Stock issued in the private placement offering discussed above. On August 24, 1999, as consideration for services provided by Structure Management in connection with a private placement of our common stock, we issued Structure Management options under our 1999 Consultants Stock Option Plan for an additional 125,000 shares of our common stock at $1.50 per share and paid Structure Management $50,000. Structure Management subsequently exercised the 125,000 options. On August 24, 1999 the Company's Board of Directors approved a plan to raise up to $750,000 through a private placement of the Company's Common Stock. The plan consisted of the issuance of up to 750,000 shares of the Company's Common Stock priced at $1.00 per share. All such shares were sold and issued. These shares were subsequently registered with the Securities and Exchange Commission. Through December 15, 1999, the Company received $481,000 through another private placement of which $50,000 was used to cover costs of the offering. CWC sold 481,000 shares of its Common Stock at $1 per share. These shares are considered restricted securities subject to Rule 144 of the Securities Act of 1933, as amended. On August 24, 1999 the Company's Board of Directors approved the conversion of $950,000 of debt into the Company's securities. On September 23, 1999,Stratus Services Group converted their entire debt to the Company, which consisted of $750,000, into 500,000 shares of the Company's Common Stock. Joseph J. Raymond, Sr., a principal of Stratus Services Group, is the father of Mr. Joseph J. Raymond, Jr., the Chairman and Chief Executive Officer of the Company. Imprimis Investors, LLC and Wexford Spectrum Investors, LLC converted $80,000 and $20,000 respectively, of their Senior Secured Debt into 1,600 and 400 shares respectively, of Senior Convertible Preferred Stock. RVR Consulting Group, Inc. converted $100,000 of unsecured term notes into 2,000 shares of the Company's Junior Convertible Preferred Stock. Mr. Joseph J. Raymond, Jr., the Chairman and Chief Executive Officer of the Company and Mr. Sergio R. Vallejo, the President and Chief Operating Officer of the Company are both principles of RVR Consulting Group. All the aforementioned conversions were completed by August 31, 1999. The shares of Junior Convertible Preferred Stock have the same rights as shares of the Senior Secured Cumulative Convertible Preferred Stock, except that they are junior, or subordinate, to the Senior Convertible Preferred Stock. As of December 31, 1999, total options outstanding for shares to be issued under all plans were 652,083 of which 531,337 were exercisable. The underlying shares of Common Stock have been reserved for issuance under the respective plans. 28 29 On January 5, 2000, we issued options for 100,000 shares of our common stock under our 1996 Stock Option Plan to Joan Raymond, a principal of Structure Management, Inc., at $1.25 per share. Mrs. Raymond, a sister-in-law to Mr. Joseph J. Raymond, Jr., the Chairman and Chief Executive Officer of the Company, subsequently exercised the options in full. On March 13, 2000, we reached an agreement with our preferred shareholders to restructure the capitalization of our company. The restructuring will only take place upon completion of the merger with Dr.Alt.com Corporation (See Note 16 - Potential Transactions and Relationships). In an attempt to simplify the capital structure and to remove the liquidation preferences of the Senior Convertible Preferred Stock ("Senior") and of the Junior Convertible Preferred Stock ("Junior") the following transactions will take place upon the effective date of the merger: - - Conversion of all outstanding shares of Senior to shares of Common Stock of the Company based on their current conversion factor; - - Conversion of all outstanding shares of Junior to shares of Common Stock of the Company based on their current conversion factor; - - The shares of Common Stock will be restricted subject to Rule 144 of Securities Act 1933, yet will be granted piggyback registration rights in the next Common Stock offering. CWC has agreed to register such shares no later than December 31, 2000. - - The principle of the secured note payable to Wexford Spectrum Investors LLC will continue and the related accrued interest will be brought current. During 1999, the Company changed its presentation of convertible preferred stock to reflect par value. Prior year amounts have been reclassified to reflect this reclassification. 10. STOCK OPTION PLANS The Company has stock option plans providing for the grant of incentive and non-qualified stock options to employees, directors, consultants and advisors. Pursuant to the Plans, 1,071,704 shares of Common Stock have been reserved for issuance. At December 31, 1999 the following options have been granted and are outstanding: 1994 Stock Option Plan
Number of Exercisable Date of Grant Options Granted at 12/31/99 Exercise Price Fair Value - ----------------- ----------------- --------------- ---------------- ------------- 12/31/96 30,333 30,333 $.03 - 4.50 47,396 12/31/97 11,000 11,000 4.50 17,188 12/31/98 17,334 8,000 3.03 12,504 8/31/99 20,000 20,000 .01 31,250 12/1/99 75,000 25,000 1.25 39,063 ------- ------ Total 153,667 94,335
1996 Stock Option Plan
Number of Exercisable Date of Grant Options Granted at 12/31/99 Exercise Price Fair Value - ----------------- ----------------- --------------- ---------------- ------------- 12/31/97 104,166 102,499 $3.615 $160,154 12/31/98 26,000 19,864 2.56 - 4.38 45,313 7/1/99 30,000 0 .01 46,875 8/31/99 40,000 40,000 .01 62,500 9/1/99 10,000 5,000 1.75 15,625 12/1/99 200,000 200,000 1.50 312,500 ------- ------- Total 410,166 367,333
1996 Restricted Stock Option Plan
Number of Exercisable Date of Grant Options Granted at 12/31/99 Exercise Price Fair Value - ----------------- ----------------- --------------- ---------------- ------------- 1998 29,500 16,169 $2.25 - 3.03 $25,264 ------ ------ Total 29,500 16,169
29 30 1998 Outside Directors Stock Option Plan
Number of Exercisable Date of Grant Options Granted at 12/31/99 Exercise Price Fair Value - ----------------- ----------------- --------------- ---------------- ------------- 1998 18,750 18,750 $2.8125 - 3.0625 $29,297 3/29/99 7,500 3,750 2.25 5,860 4/1/99 7,500 3,750 2.50 5,860 9/16/99 7,500 3,750 2.6875 5,860 ------ ------ Total 41,250 30,000
Number of Options Granted Exercisable and Outstanding at 12/31/99 --------------- ----------- GRAND TOTAL 634,583 507,837 ======= =======
Year of Grant ----------------------------------------------------------- 1996 1997 1998 1999 ----------- ------------- ----------- ------------- 1998 Forfeited Incentive Options 74,980 20,000 25,000 0 Forfeited Non-Qualified Options 0 17,000 0 0 1999 Forfeited Incentive Options 0 161,975 94,916 5,000 Forfeited Non-Qualified 0 39,544 17,166 0 Options
Options generally vest 33 1/3% each year beginning on the anniversary of the grant date. The weighted average remaining contractual life of the options outstanding at December 31, 1999 is 3.15 years. The weighted average price of exercisable options at December 31, 1999 was $1.98. On August 16, 1999, the Company filed a Form S-8 with the SEC to register the following numbers of shares under its respective stock option plans: 1994 Stock Option Plan................................................................. 400,000 shares 1996 Stock Option Plan................................................................. 600,000 shares 1996 Restricted Stock Option Plan for Health Care Professionals........................ 100,000 shares 1998 Outside Directors Stock Option Plan............................................... 100,000 shares
The Company has elected to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25), and related Interpretations in accounting for its employee stock option because, as discussed below, the alternative fair value accounting provided for under FASB Statement No. 123, "Accounting for Stock Based Compensation," requires use of option valuation models that were not developed for use in valuing employee stock options. Under APB 25's intrinsic value method, compensation expense is determined on the measurement date, that is the first date on which both the number of shares the employee is entitled to receive and the exercise price, if any, are known. Compensation expense is measured based on the award's intrinsic value of the excess of the market price of the stock over the exercise price on the measurement date. The Company recorded $80,633 and $147,719 of compensation expense and $0 and $211,806 of consulting expense related to stock options granted below market value as of December 31, 1998 and 1999, respectively. Additionally, the Company has recorded consulting expense of $357,128 and $0 as of December 31, 1998 and 1999, respectively as a result of the granting of Common Stock warrants during the years then ended. Had compensation costs for the Company's stock option plan been determined based on the fair value at the date of grant for the awards in 1998 and 1999 and consistent with the provisions of SFAS 123, the Company's net loss and loss per share-diluted would have been as indicated below:
Year Ended December 31, 1998 1999 ------------------ ---------------- Net loss - as reported $(9,668,018) $(2,804,991) Net loss - pro forma $(9,698,389) $(2,815,991) Loss per share - as reported $ (4.41) $ (0.77) Loss per share - pro forma $ (4.43) $ (0.78)
For the purposes of the pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. The fair value of each option grant is estimated on the date of grant using the "Black Scholes" option-pricing model with the following weighted-average assumptions for 1998 and 1999: risk free interest of 5.75%; expected life of the option of 5 years; and a 30 31 zero dividend yield; volatility .55. The weighted average fair value of options granted during 1998 and 1999 was $1.60 and $2.00, respectively. Option valuation models require the input of highly subjective assumptions, including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. 11. WARRANTS The Company has contractual agreements granting warrants to purchase shares of its $.0001665 par value Common Stock and warrants to purchase warrants. Such warrants and the underlying shares of Common Stock are restricted in accordance with Rule 144 of the Securities Act of 1933. Pursuant to these agreements, 418,000 shares of Common Stock have been reserved for issuance. At December 31, 1999, the following warrants have been granted:
Number of Date of Grant Warrants Granted Exercise Price Fair Value - ----------------- -------------------- ---------------- ------------ 1997 65,000 for shares $ 2.00 - 750 $101,563 1997 20,000 for warrants 0.125 15,000 1998 233,000 for shares 1.6875 - 7.50 364,063 1998 80,000 for warrants 0.125 60,000
100,000 warrants to purchase warrants were in the money on December 31, 1999 due to the closing price of CMWLW of $.75 exceeding the exercise price of $0.125. All warrants are exercisable at December 31, 1999. 12. LEASE ARRANGEMENTS During 1998 and through June 1999, the Company leased its corporate office space in Washington, D.C. for use as its corporate offices for a seven year term. The space consisted of approximately 9,000 square feet at a cost of $10,000 per month. In January 1999, the Company sublet, for the balance of the seven year lease term, approximately 2,500 square feet for $2,750 per month. The Company was named in a lawsuit in Washington, D.C. on December 15, 1999 by the 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 and as of December 31, 1999, has accrued $109,000 for payment of the settlement. In July 1999, we relocated our principal executive offices to Winter Park, Florida, where we lease an aggregate of approximately 1,760 square feet of office space pursuant to two leases at an aggregate current monthly rent of $2,281. The leases expire May 2000 for 795 square feet and in September 2001 for 965 square feet. The Company leases substantially all its equipment including furniture, fixtures and computers under various operating leases at a cost of approximately $8,000 per month. The following table sets forth the Company's lease obligations for each of the next five years and a lump sum balance for the remainder of all the leases as of December 31, 1998: 2000............................. $ 119,600 2001............................. $ 111,780 2002............................. $ 18,561 2003............................. $ 3,702 ----------- Total Minimum Obligations........ $ 253,643 ===========
CWWM, which filed for Chapter 7 bankruptcy protection in July 1999, had lease arrangements with landlords at each of its clinic locations. At December 31, 1998 and 1999 the majority of the leases were either in default or the subsidiary had judgments rendered against it for delinquent lease payments. All weight loss center leases have been surrendered to the respective landlords. There are two suits pending related to landlord claims under the bankruptcy, both of which we are defending. 13. NET LOSS PER COMMON SHARE The Company's net 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 shares of Senior and Junior Convertible Preferred Stock have been excluded from the computation for the period ended September 30, 1998 as they would have an anti-dilutive effect. 31 32 The following table sets forth the computation of basic loss per share:
Year Ended December 31, 1998 1999 ------------- ------------- Weighted average common shares outstanding 1,892,045 3,221,166 Shares issued for nominal consideration Prior to the Initial Public Offering 409,287 409,287 ------------ ----------- 2,301,332 3,630,453 Loss allocable to common shareholders $ (9,668,018) $(2,804,991) Basic loss per share $ (4.41) $ (0.77)
14. RELATED PARTY TRANSACTIONS In August 1996, the Company entered into a consulting agreement with J.E.M, Inc. (JEM), the sole stockholders of which are Dr. Kaplan, the Company's President and Chief Operating Officer, and his wife. Under the terms of the consulting agreement, JEM agreed to provide advice and assistance to the Company in connection with identifying and affiliating with chiropractors and their existing chiropractic practices and identifying, acquiring, and/or managing businesses engaged in providing services ancillary to those provided by Integrated Medical Centers. The Company agreed to pay JEM $6,000 per month for its services. The consulting agreement expired in August 1999 and was not renewed. On December 19, 1997, we entered into an Investment Agreement with Wexford Spectrum Investors LLC and Imprimis Investors LLC pursuant to which, as supplemented by a First Supplement dated January 12, 1998, a Second Supplement dated July 2, 1998 and a Third Supplement dated October 19, 1998, we issued $475,000 in aggregate principal amount of Senior Secured Floating Rate Bridge Notes due February 1, 1999, secured by various assets of Complete Wellness Centers, $375,000 of which evidenced term loans and $125,000 of which evidenced revolving loans made by Wexford and Imprimis to us. On August 31, 1999, we executed a Fourth Supplement to the Investment Agreement with Wexford and Imprimis, whereby we (i) converted $100,000 of the outstanding principal of the bridge notes to 2,000 newly issued shares of 8% Series B Senior Secured Cumulative Convertible Preferred Stock, and (ii) agreed to repay the remaining principal and accrued and unpaid interest by equal quarterly payments to Wexford and Imprimis during the period from January 1, 2000 to December 31, 2001 based on a four year amortization schedule. The note payable accrues interest at 12% per annum. In January 1998, the Company entered in an agreement with Stratus Services Group, Inc ("Stratus"), an employee leasing and payroll company for the term of one year, which is annually renewable. Under the terms of the agreement, Stratus will provide the Company with leased employees and payroll services at all the Company's locations, both at the parent and subsidiary levels. Mr. Joseph J. Raymond, Sr. is a principal in Stratus and is the father of Joseph J. Raymond, Jr., Chief Executive Officer of the Company. The Company believes that the services provided by Stratus are at least as favorably priced as any other company providing such services which the Company may contract with. In August 1998 the Company entered into a consulting agreement with RVR Consulting, Inc. ("RVR") for the term of August 1, 1998 through July 31, 1999. The Company agreed to pay RVR $7,000 per month plus expenses to help the Company identify problem areas in its operations and provide subsequent solutions. The principles of RVR are Joseph J. Raymond, Jr. and Sergio R. Vallejo, who are officers of the Company and members of the Company's Board of Directors. RVR was not paid in 1999 under this arrangement, except for out of pocket expenses. On December 1, 1999, the board of directors approved the employment contracts for Joseph J. Raymond, Jr. and Sergio Vallejo and the issuance of 16,666 shares of common stock to each Joseph J. Raymond, Jr. and Sergio R. Vallejo in lieu of options held by each for 75,000 shares of common stock in satisfaction of all amounts due through that date. These securities are restricted subject to Rule 144 of the Securities Act of 1933, as amended. In May 1999 we executed a one year consulting agreement with Kats Management, LLC whereby Kats has agreed to provide day to day integrated medical center operation services, provide training services to the integrated medical centers, integrate new integrated medical centers and assist in the development of products and new health related services. In consideration for such services, we have agreed, in part, to pay Kats (i) $19,000 per month, (ii) $300 per month for each new integrated medical center established by Kats, (iii) commissions averaging 5% of revenues generated by 16 existing integrated medical centers and (iv) an annual travel allowance of up to $5,000. In October 1999, the monthly cash payment was reduced by mutual agreement to $12,000. On July 1, 1999, we entered into a one year consulting agreement with The WorkSource, Inc., to provide daily accounting, consulting and administrative services to us, in consideration for which we agreed to pay The WorkSource $7,500 bi-weekly. On November 30, 1999, we amended the consulting agreement whereby we agreed to pay The WorkSource an additional $50,000 in consideration for additional services provided by The WorkSource related to raising additional capital for CWC. Ms. Rebecca Irish, Chief Financial Officer, Vice President and Treasurer of CWC, is the principal of The WorkSource, Inc. The WorkSource, Inc. is a financial services and consulting firm and serves as an independent contractor to perform accounting, cash management and certain administrative functions for CWC and was paid $85,813 in 1999. On July 14, 1999 we entered into a Separation and Release Agreement with Eric S. Kaplan, D.C., 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 Complete 32 33 Wellness Centers from all employment claims or actions, we agreed to: (i) indemnify him for actions taken by Complete Wellness Centers or by him as an officer or director of Complete Wellness Centers; (ii) continue liability coverage for as long as the applicable statute of limitations of claims shall run; (iii) transfer $200,000 in market value of our common stock at a 5,000 shares per month rate to him through stock issuances or stock option grants; (iv) pay him attorney fees in the amount of $6,000; and (v) pay him the sum of $10,000 in cash. We accelerated the vesting of various options in 1999 and 2000. Dr. Kaplan has exercised 30,000 of these options during 1999, the value of which was recorded as compensation expense. Dr. Kaplan also exercised other unrelated previously vested options to purchase 16,660 shares at $0.60 per share of the Company's Common Stock in September 1999. The remaining $145,000 owed to Dr. Kaplan is accrued at December 31, 1999. On July 27, 1999, Mr. Frederick Simon resigned from the Company's Board of Directors. Mr. Simon is a Senior Vice President of Wexford Spectrum Investors, LLC, an owner of 20% of the Company's Senior Convertible Preferred Stock and to which the Company has a secured note payable in the amount of $375,000 as of December 31, 1999. On November 30, 1999, we entered into a termination of employment agreement with Michael T. Brigante, our former Sr. Vice President and Chief Financial Officer, to pay $73,704 for monies owed for back wages, vacation, allowances and severance compensation pursuant to the provisions in Mr. Brigante's employment agreement. The monies are to be paid over a twelve month period ending December 2000. Mr. Eugene Sharer, former President of CWC and current director of CWC, is the principal of Sharer and Associates. Sharer Associates serves as an independent contractor to assist CWC in various projects and management services and was paid approximately $7,500 in 1999 for services rendered. CWC owed Sharer Associates $40,785 as of December 31, 1999. Mr. L. Mark Michel became a director of CWC in January 2000. Mr. Michel serves as an independent contractor to assist CWC with managed care contracting and advisory services and was paid $4,495 in 1999. 15. CONTINGENCIES Federal Investigation Revenues from all Federal programs accounted for approximately 5% and 4%, respectively, of the Company's net patient service revenues for the year ended December 31, 1998 and 1999. Laws and regulations governing the Medicare and Medicaid programs are complex and subject to interpretation. In November 1997, federal agents served search warrants and subpoenas on the Company and four of its subsidiaries and affiliates. Company records and files were seized. If the government review finds wrongdoing, the Company would be subject to significant regulatory action including fines, penalties, and possible exclusion from the Medicare and Medicaid programs. 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. Any such action would be material to the financial position of the Company and could have a materially adverse effect on the results of operations and cash flows of the Company. The Company is not currently aware of any pending or threatened allegations of potential wrongdoing as a result of the investigation. Further, the Company believes that it is substantially in compliance with all applicable laws and regulations. Legal Proceedings The Company was named in a lawsuit filed in Sarasota, Florida in July 1997 by Jeffrey Friedlander, a medical doctor, for alleged back wages owed him by the Company for work he performed at an Integrated Medical Center in Florida. The case was tried by a jury in March 1999, and two judgments were entered against the Company for $147,292 in March, which includes $100,000 in punitive damages, followed by a subsequent judgment for related legal fees of $37,712. The Company has a bond for $222,005 in place for the satisfaction of the judgments, which is backed by an irrevocable letter of credit for $111,002, against which the Company has pledged a certificate of deposit of $111,002. Even though the Company contests the jury finding and is in the process of appealing the decision, the full amount of the judgments has been accrued at December 31, 1999. The Certificate of Deposit of $111,002 is pledged as collateral for a letter of credit obtained by the Company. Government Regulation Federal and state laws extensively regulate the relationships among providers of health care services. These laws include federal fraud and abuse provisions which if violated by any of our health care providers could put us at risk of severe criminal and monetary penalties. Federal fraud and abuse laws also impose restrictions on physicians' referrals for designated health services covered under Medicare or Medicaid to entities with which they have financial relationships. There can be no assurance that the federal and state governments will not consider additional prohibitions on physician ownership, directly or indirectly, of facilities to which they refer patients, which could adversely affect us. 33 34 Professional Liability Although we do not provide medical services or control the provision of health care services by the integrated medical centers' practitioners, we could nevertheless also be accused of medical negligence. We have obtained an insurance policy that provides medical malpractice insurance and managed care errors and omissions insurance retroactive to the integration dates of the integrated medical centers for both our integrated medical centers and Complete Wellness Centers. The policy provides coverage for $1,000,000 per claim per integrated medical center, subject to an aggregate limit of $3,000,000 per integrated medical center per year. A successful claim against us in excess of our insurance coverage could have a material adverse effect upon our business. The foregoing policy is a "claims made" policy. Thus, it provides coverage for covered claims made during the policy's term but not for losses occurring during the policy's term for which a claim is made subsequent to the expiration of the term. Based on experience to date of the medical professionals employed, it is believed that potential losses on any claims incurred but not reported would not be material to the Company's financial position. There is no deductible under the policy. New Integrated Medical Centers During the first quarter of 2000, the Company did not add any new affiliates but did contract with one new clinic on a consulting only basis. Continued Listing on the Nasdaq SmallCap Market The Company's Shares 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. The Company did not meet any of the criteria at December 31, 1998 and provided the Nasdaq with details of its plan to increase its net tangible assets to the threshold level and accomplished that goal by September 30, 1999. Additional losses in the Company have mitigated the improvements. The Company has had no communications with Nasdaq since this deficiency became apparent. 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". Employment Agreements The Company has entered into employment agreements with three executives for two-year terms. The agreements stipulate annual salaries, aggregating $425,000 plus bonus and stock options aggregating 275,000 shares granted and vesting immediately (for 225,000 shares) and over two years (for 50,000 shares). Year 2000 Issue 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. 16. POTENTIAL TRANSACTIONS AND RELATIONSHIPS On March 7, 2000, CWC and our wholly owned subsidiary, Completewellness.com ("cwc.com") signed a Services Agreement with Dr. Alt.com Corporation ("DrAlt") to provide alternative medicine information and products to practitioners and consumers through our web site, www.completewellness.com. CWC, cwc.com and DrAlt have certain duties and compensations in the relationship based on their abilities and expertise. The agreement is for 5 years. DrAlt has agreed to lend CWC $750,000 by May 1, 2000 and to consider lending an additional $250,000 at their discretion. As of April 10, 2000 CWC has executed 6 month promissory notes with DrAlt totaling $550,000 at the prime rate. CWC has granted to DrAlt a total of 275,000 five year warrants to purchase 275,000 shares of CWC Common Stock at $2 per share. These warrants constitute restricted securities under federal and state securities laws. Upon execution of the additional note for $200,000, anticipated on May 1, 2000, CWC will issue additional warrants for the purchase of 100,000 shares of our Common Stock. On March 7,2000, CWC also signed a non-binding letter of intent to complete a tax-free merger with DrAlt. The agreement provides for CWC to be the surviving entity. CWC would issue to the shareholders of DrAlt, such number of fully paid and non-assessable shares of CWC Common Stock as would result in the shareholders of DrAlt collectively owning immediately after the closing of the merger, fifty (50) percent of the common equity of CWC on a fully diluted basis except for any outstanding warrants. DrAlt shareholders would surrender their DrAlt shares to CWC at closing. There are significant contingencies involved in the agreement, including but not limited to proper due diligence, conversion of the preferred shareholders to common shareholders, additional funding of CWC through a private placement and approval of the transaction by the shareholders of each company. CWC is 34 35 using its best efforts to effect the required actions to bring the merger to completion, but there is no guarantee the transaction will be completed as described. 17. RESTATEMENT OF QUARTERLY INFORMATION (UNAUDITED) As a result of the discontinuation of certain contractual relationships with Integrated Medical Centers, accruals of liabilities and certain estimation processes utilized by the Company, a restatement of the quarterly results for the year ended December 31, 1999 is necessary. The restatement for the nine months ended September 30, 1999 had the effect of increasing the net loss by $1,747,000 and the net loss per share by approximately $0.47 in the fourth quarter. The Company will file amended quarterly reports on Form 10-QSB by May 15, 2000. The restated quarterly results for 1999 are as follows (first table) and may be compared to the previously reported quarterly results for 1999 (second table):
RESTATED Quarter Quarter Quarter Quarter Ended Ended Ended Ended March 31 June 30 September 30 December 31 ------------ ------------ ------------ ------------ Net Revenues $ 4,580,034 $ 2,560,780 $ 2,867,828 $ 2,931,690 Net Loss $ (50,696) $ (708,633) $ (747,477) $ (1,298,185) Net Loss Per Share $ (0.02) $ (0.20) $ (0.18) $ (0.28) Weighted Avg Shares Outstanding - Basic 2,949,755 3,536,755 4,055,862 4,623,447
PREVIOUSLY REPORTED Quarter Quarter Ended Quarter Ended Ended March 31 June 30 September 30 ------------- -------------- ---------------- Net Revenues $ 4,588,085 $ 3,683,278 $ 3,479,720 Net Income $ 78,304 $ 91,425 $ 70,339 Net Income Per Share - Basic $ 0.03 $ 0.03 $ 0.02 Weighted Avg Shares Outstanding - Basic 2,949,755 3,536,755 4,055,862
18. SUBSEQUENT EVENTS In January 2000, the Board made a grant of 40,000 options, from the 1996 Stock Option Plan, to purchase Common Stock in the Company at $0.01 per share to Nico Pronk and Wayne Horne, principal owners of Noble Financial Group, Inc. Following the grant of such options, both exercised their options and shares were issued. The Company received $400 for the exercise of these options. See Note 9 - Stockholders' Equity for the discussion of other transactions in 2000 to date. See Note 14 - Related Party Transactions for the discussion of other transactions in 2000 to date. See Note 16 - Potential Transactions and Relationships for the discussion about DrAlt. ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. 35 36 PART III ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT (a) Identification of Directors
YEAR FIRST YEAR OF NAME AGE ELECTED EXPIRATION - -------------------------------------- ----------- ------------------- ----------------- E. Eugene Sharer 67 1996 2000 Donald S. Radcliffe 54 1999 2000 John K. Pawlowski 63 1999 2000 L. Mark Michel 62 2000 2000 Sergio R. Vallejo, DMD 37 1998 2000 Joseph J. Raymond, Jr. 38 1998 2000
(b) Identification of Executive Officers
YEAR FIRST SERVED NAME AGE AS OFFICER - ------------------------------------------------------ ----------------------- ------------------------- Joseph J. Raymond, Jr. 38 1999 Chairman of the Board/Chief Executive Officer Sergio Vallejo 37 1999 President/Chief Operating Officer and Secretary Rebecca R. Irish 38 1999 Vice President/Chief Financial Officer and Treasurer
Joseph J. Raymond, Jr. has been chairman of our board of directors and chief executive officer of the Company since February 1999 and a director since September 1998. From 1997 to current, he has been the President of RVR Consulting Group, Inc., a financial consultant company. From 1988 to 1997, he served as chairman of the board of directors and chief executive officer of Transworld Services Group, an employee staffing company. In 1997, Transworld merged with Corestaff Services, a staffing company, where Mr. Raymond served as the Vice President of Operations through December 1997. Sergio R. Vallejo has been a director of the Company since May 1998, the Chief Operating Officer since February 1999 and President of the Company since July 1999. From 1997 to current, he has been the Vice President of RVR Consulting Group, Inc. Mr. Vallejo is also a Doctor of Dental Medicine. Mr. Vallejo has been a director of pharmacy operations in Florida for Subscript Pharmacy Corporation, an international company, since 1996. In 1989, Mr. Vallejo formed Jones Wilson Vallejo Associates, P.A., a dental management company. In 1985, Mr. Vallejo founded PVM Prescription Center, an institutional pharmacy that provided medications and supplies to the residents of long-term care facilities throughout central Florida. Rebecca R. Irish became Vice President of Finance, Chief Financial Officer, Treasurer and Assistant Secretary of the Company on December 1, 1999. Ms. Irish is also the president of The WorkSource, Inc., a financial consulting and services firm. From 1991 through 1997, Ms. Irish served as chief financial officer of RoTech Medical Corporation, a publicly-traded home healthcare company, until it merged with Integrated Health Services, Inc. in 1997. Ms. Irish is a certified public accountant and was a senior manager with Ernst & Young prior to joining RoTech Medical Corporation. 36 37 ITEM 10. EXECUTIVE COMPENSATION EXECUTIVE COMPENSATION The following table sets forth information concerning the annual compensation of the Company's Chief Executive Officer for services in all capacities to the Company during the Company's last fiscal year. SUMMARY COMPENSATION TABLE
Restricted Securities Name and Principal Annual Other Annual Stock Underlying All Other Position Year Compensation Bonus Compensation Awards Options Compensation - --------------------------- ------- ------------- ------ ------------- ---------- ----------- ------------- Joseph J. Raymond, Jr. 1999 $ 22,115 $25,000 100,000 Chairman of the 7,500 Board/Chief Executive Officer C. Thomas McMillen (a) 1999 $ 8,981 Former Chairman of the 1998 $155,719 $ 2,008 Board/Chief Executive 1997 $135,000 $ 1,338 Officer Sergio Vallejo 1999 $ 22,115 $25,000 100,000 President/Chief Operating Officer and Secretary Rebecca R. Irish 1999 $ 0 75,000 Vice President/Chief Financial Officer and Treasurer Michael T. Brigante (b) 1999 $ 89,214 10,000 Former Senior Vice 1998 $102,931 $21,194 President and Chief 1997 $ 90,000 $18,796 Financial Officer Eric S. Kaplan, D.C. (c) 1999 $ 13,212 $55,000 60,000 Former President/Chief 1998 $ 76,517 $71,901 Operating Officer 1997 $120,000
- --------------------------- (a) Terminated February 1999 (b) Resigned November 1999 (c) Resigned June 1999 and January 1999, respectively No other executive officer received compensation in excess of $100,000 during the Company's 1998 fiscal year.
Number of Securities % of Total Name Underlying Options Options Granted Exercise Price Expiration Granted (#) To All Employees ($/Share) Date - ------------------------- --------------------- ------------------- ------------------ --------------- Joseph J. Raymond, Jr. 100,000 27.5% $1.50 11/30/04 7,500 2% $2.875 09/01/03 Sergio R. Vallejo 100,000 27.5% $1.50 11/30/04 Rebecca R. Irish 75,000 20.5% $1.50 11/30/04 Michael T. Brigante 10,000 3% $1.75 8/31/04 Eric S. Kaplan, D.C. 25,000 17% 1.75 5/31/04 5,000 1.50 5,000 1.81 10,000 1.25
37 38 The following table presents the value of unexercised options held at December 31, 1999 by the individuals named in the Summary Compensation Table:
Number of Unexercised Value of Unexercised In the Options at Year End (#) Money Options at Year End (#) --------------------------- ------------------------------ Exercisable (E) Exercisable (E) Name Unexercisable (U) Unexercisable (U) - -------------------------- --------------------------- ------------------------------ Joseph J. Raymond, Jr. 103,750 (E) $6,250 (E) Sergio R. Vallejo 107,500 (E) $6,250 (E) Rebecca R. Irish 25,000 (E) $1,563 (E) 50,000 (U) $3,125 (U) Michael T. Brigante 20,334 (E) $ 313 (E)
*Values are calculated by subtracting the exercise price from the fair market value of the Common Stock at year-end ($1.5625 per share). The following table presents the value of exercised options held at December 31, 1999 by the individuals named in the Summary Compensation Table:
Value of Unexercised Number of Unexercised In the Money Options/SARs Shares Options/SARs at Year End (#) at Year End (#) Acquired Value Exercisable (E) Exercisable (E) Name on Exercise Realized Unexercisable (U) Unexercisable (U) - ------------------------- ------------ ------------ ----------------------------- --------------------------- Joseph J. Raymond, Jr. 103,750 (E) $6,250 (E) Sergio R. Vallejo 107,500 (E) $6,250 (E) Rebecca R. Irish 25,000 (E) $1,563 (E) 50,000 (U) $3,125 (U) Michael T. Brigante 13,333 $27,937 20,334 (E) $ 313 (E) Eric Kaplan 16,660 $19,159 30,000 0
DIRECTOR COMPENSATION The Company does not currently compensate, and does not anticipate compensating its directors for their services as directors, except that each of the Company's non-employee directors may receive a director's fee of $500 per meeting for attendance at Board of Directors or committee meetings held after December 1997. Additionally, they are granted 7,500 common stock options for each year served which vest 50% in each of two years. In addition, each of the Company's directors receives reimbursement of all ordinary and necessary expenses incurred in attending any meeting or any committee meeting of the Board of Directors. Currently, all directors hold office until the next annual meeting of stockholders and until their successors have been duly elected and qualified. The Company's executive officers are appointed annually and serve at the direction of the Board of Directors, subject to the terms of existing employment agreements. EMPLOYMENT AGREEMENTS We have employment agreements with Mr. Raymond, Mr. Vallejo and Ms. Irish. 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. In February 1999, Joseph J. Raymond, Jr. was appointed our Chairman of the Board of Directors and Chief Executive Officer. On December 1, 1999, we entered into an employment agreement with Mr. Raymond providing for his employment as Chief Executive Officer for a two year term. The agreement provides for an annual base salary of $150,000, 100,000 options under our stock option plans, all of which vested immediately and are exercisable at $1.50 per share and participation in all executive or employee profit sharing bonus or stock option plans established by us. In addition, Mr. Raymond is to be paid a performance bonus of 3% of the pretax profit earned in each fiscal year not to exceed 50% of the base salary and paid within 90 days of the end of each respective business year (2000 and 2001). Mr. Raymond was awarded 16,666 shares of the Company's Common Stock valued at $25,000 in lieu of cash as 38 39 payment for services rendered to the Company prior to the December 1, 1999 employment agreement. As of December 31, 1999, Mr. Raymond held 16,666 shares of the Company's restricted stock subject to Rule 144 of the Securities Act of 1933. In February 1999, Sergio R. Vallejo was appointed our Chief Operating Officer. In July of 1999, he was appointed our President and Chief Operating Officer. On December 1, 1999, we entered into an employment agreement with Mr. Vallejo providing for his employment as President and Chief Operating Officer for a two year term. The agreement provides for an annual base salary of $150,000, 100,000 options under our stock option plans all of which vested immediately and are exercisable at $1.50 per share and participation in all executive or employee profit sharing bonus or stock option plans established by us. In addition, Mr. Vallejo is to be paid a performance bonus of 3% of the pretax profit earned in the fiscal year, not to exceed 50% of the base salary and paid within 90 days of the end of each respective business year (2000 and 2001). Mr. Vallejo was awarded 16,666 shares of the Company's Common Stock valued at $25,000 in lieu of cash as payment for services rendered to the Company prior to the December 1, 1999 employment agreement. As of December 31, 1999, Mr. Vallejo held 16,666 shares of the Company's restricted stock subject to Rule 144 of the Securities Act of 1933. On December 1, 1999, Rebecca R. Irish was appointed Vice President of Finance, Chief Financial Officer, Treasurer and Assistant Secretary. At that time, we entered into an employment agreement with Ms. Irish providing for her employment as described for a two year term. The agreement provides for an annual base salary of $125,000, 75,000 options under our stock option plans exercisable at $1.50 per share, of which 25,000 vested immediately, 25,000 of which vest on November 30, 2000 and 25,000 of which vest on November 30, 2001, and participation in all executive or employee profit sharing plans established by us. In addition, Ms. Irish is to be paid a performance bonus of 3% of the pretax profit earned in each fiscal year, not to exceed 50% of the base salary and paid within 90 days of the end of each respective business year (2000 and 2001). STOCK OPTION PLANS 1994 Stock Option Plan. The Company's 1994 Stock Option Plan (the "1994 Plan") was adopted by the Company's Board of Directors and approved by the shareholders of the Company in December 1994. The purpose of the 1994 Plan is to attract and retain qualified personnel, to provide additional incentives to employees, officers, directors, consultants and advisors of the Company, and to promote the Company's business. As of April 10, 2000, options to purchase 153,667 shares of Common Stock at a weighted average per share exercise price of 1.63 were outstanding. A total of 10,479 option to purchase shares of Common Stock were available for grant under the 1994 Plan at that date. The 1994 Plan will terminate in April 2004, unless sooner terminated by the Board of Directors. The 1994 Plan provides for the grant of both incentive stock options, intended to qualify as such under Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"), and nonqualified stock options. The Board may delegate administration of the 1994 Plan to the Compensation Committee. Subject to the limitations set forth in the 1994 Plan, the Board of Directors (or the Compensation Committee) has the authority to select the persons to whom grants are to be made, to designate the number of shares to be covered by each option, to determine whether an option is to be an incentive stock option or a nonqualified stock option, to establish vesting schedules, and, subject to certain restrictions, to specify the type of consideration to be paid to the Company upon exercise and to specify other terms of the options. The maximum term of options granted under the 1994 Plan is ten years. Options granted under the 1994 Plan are nontransferable and generally expire 90 days after the termination of an optionee's service to the Company. Although no specific vesting schedule is required under the 1994 Plan, options previously granted under the 1994 Plan have generally provided for vesting in three equal annual installments. The exercise price of incentive stock options must equal at least the fair market value of the Common Stock on the date of grant, except that the exercise price of incentive stock options granted to any person who at the time of grant owns stock possessing more than 10% of the total combined voting power of all classes of stock must be at least 110% of the fair market value of such stock on the date of grant. 1996 Stock Option Plan. In October 1996, the Board of Directors of the Company, with shareholder approval, adopted its 1996 Stock Option Plan (the "1996 Plan") covering up to 200,000 shares of the Common Stock, pursuant to which officers, directors, employees, advisors and consultants to the Company are eligible to receive incentive and/or nonqualified stock options. The 1996 Plan was modified as approved by the shareholders to 400,000 shares in June, 1997, and increased to 600,000 in November 1999. The 1996 Plan, which expires in September 2006, is administered by the Compensation Committee of the Board of Directors. The selection of participants, allotment of shares, determination of price, and other conditions relating to the grant of options will be determined by the Compensation Committee in its sole discretion. Incentive stock options granted under the 1996 Plan are exercisable for a period of up to 10 years from the date of grant at an exercise price which is not less than the fair market value of the Common Stock on the date of the grant, except that the term of an incentive stock option granted under the 1996 Plan to a shareholder owning more than 10% of the outstanding Common Stock may not exceed five years and its exercise price may not be less than 110% of the fair market value of the Common Stock on the date of the grant. As of April 10, 2000, options to purchase an aggregate of 395,166 shares of Common Stock at a weighted average per share exercise price of $1.93 were outstanding. A total of 2,334 options to purchase shares of Common Stock were available for grant under the 1996 Plan at that date. 1996 Restricted Stock Option Plan for Health Care Professionals. In October 1996, the Board of Directors adopted, and the stockholders of the Company approved, the 1996 Restricted Stock Option Plan for Health Care Professionals (the "1996 Professionals Plan"), which expires in October 2006. The 1996 Professionals Plan permits the Company to grant nonqualified stock options to licensed health care professionals affiliated with the Company and in most cases employed by a Integrated Medical Center. The 39 40 aggregate amount of Common Stock with respect to which options may be granted may not exceed 100,000 shares. The Board of Directors has delegated to the Compensation Committee the authority to grant options under such a plan, to construct and interpret such plan, and to make all other determinations and take all actions necessary or advisable for the administration of such plan. The exercise price for options granted under the 1996 Professionals Plan may be no less than 85% of the fair market value of the Common Stock on the date of grant. Options granted under the 1996 Professionals Plan will expire no later than the tenth anniversary of the date of grant. As of April 10, 2000, 29,500 shares of Common Stock at an approximate weighted average per share exercise price of 2.70 were outstanding. A total of 60,558 options to purchase shares of Common Stock were available for grant under the 1996 Restricted Plan at that date. Outside Directors Stock Option Plan. On March 30, 1998, our board of directors approved and in November 1999 our shareholders subsequently approved the establishment of a stock option plan for non-employee outside directors on our board of directors or on the boards of directors of any of our subsidiaries. The Outside Directors Stock Option Plan provides for the grant of stock options, provided that the maximum number of shares of common stock of the company that may be issued upon the exercise of options granted pursuant to the Outside Directors Stock Option Plan is 50,000. Under the Outside Directors Stock Option Plan, each outside director may receive options for shares of common stock for each year of service on the company's board of directors, as granted by a committee of the board of directors. Our shareholders approved the addition of the 50,000 shares on November 29, 1999 shares bringing the total authorized under the outside directors option plan to 100,000 shares. We currently have three outside directors eligible to participate in the Outside Directors Stock Option Plan. The Outside Directors Stock Option Plan is administered by our board of directors or a duly appointed committee of our board of directors; the exercise price of options granted pursuant to the Outside Directors Stock Option Plan is determined by the plan administrators of our board of directors. As of April 10, 2000, options to purchase 48,750 shares of common stock at an approximate weighted average per share exercise price of $2.46 were outstanding. A total of 51,250 shares of common stock are available for grant under the Outside Directors Stock Option Plan. Consultant's Stock Option Plan. On March 8, 1999, our board of directors approved the establishment of the 1999 Consultant's Stock Option Plan. The consultant's option plan as approved by the board provides for the grant of stock options, provided that the maximum number of shares of common stock of the company that may be issued upon the exercise of options granted pursuant to the consultant's option plan is 475,000. Under the consultant's option plan, companies providing services to us and individuals similarly employed may be granted options to purchase common stock at an exercise price established by our board of directors and which vests at a time and interval established by our board of directors. Subsequently, on September 29, 1999 our board adopted a resolution to increase the number of shares authorized in the consultant's option plan by 200,000 shares bringing the total authorized under the consultant's option plan to 675,000 shares. As of April 10, 2000, options to purchase 400,000 shares of common stock at a weighted average per share exercise price of $1.32 were granted and exercised. A total of 195,000 shares of common stock are available for grant under the consultant's option plan. On November 29, 1999, our shareholders approved the establishment of this plan and approved the increase in the number of shares in the consultant's option plan. ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth certain information regarding the beneficial ownership of the Company's voting securities as of April 10, 2000, by (i) each shareholder known by the Company to be the beneficial owner of more than 5% of any class of the Company's voting securities, (ii) each director of the Company and (iii) all officers and directors of the Company as a group. Except as otherwise indicated, the Company believes that the beneficial owners of the securities listed below have sole investment and voting power with respect to such securities, subject to community property laws where applicable. The number of shares of common stock outstanding used in calculating the percentage ownership for each person listed below includes common stock underlying options held by the person that are exercisable within 60 days April 10, 2000. All calculations are based on 5,088,292 shares outstanding as of April 10, 2000. 40 41
NAME AND ADDRESS NUMBER OF SHARES OF CLASS PERCENTAGE OF CLASS OF BENEFICIAL OWNER BENEFICIALLY OWNED BENEFICIALLY OWNED ------------------- ------------------ ------------------ Rebecca R. Irish........................... 25,000(1) * 1835 Edgewater Drive Orlando, Fl 32804 L. Mark Michel............................. 3,750(2) * 7808 Creekridge Circle, Suite 220 Minneapolis, MN 55439 John K. Pawlowski.......................... 3,750(2) * 2 Daniel Drive Ocean, NJ 07712 Donald Radcliffe........................... 60,978(3) 1.2% 575 Madison Avenue, Suite 1006 New York, NY 10022 Joseph J. Raymond, Jr...................... 244,086(4) 4.8% 4074 Scarlet Iris Place Winter Park, FL 32792 E. Eugene Sharer........................... 155,417(5) 3.1% 12404 Beall Spring Road Potomac, MD 20854 Sergio R. Vallejo.......................... 143,616(6) 2.8% 875 Hanover Way Lakeland, FL 33813 Wexford Spectrum Investors LLC............. 634,200(7) 12.5% 411 West Putnam Avenue Greenwich, CT 06830 Imprimis Investors LLC..................... 2,536,772(7) 49.9% 411 West Putnam Avenue Greenwich, CT 06830 Stratus Services Group, Inc................ 500,000 9.8% 500 Craig Road, Suite 201 Manalapan, NJ 07726 RVR Consulting Group, Inc.................. 400,629(7) 7.9% P.O. Box 2148 Goldenrod, FL 32733 Structure Management, Inc.................. 127,000 2.5% 500 Craig Road, Suite 201 Manalapan, NJ 07726 All directors and executive officers as a 1,037,226 20.4% group (6 persons)..........................
(1) Includes 25,000 shares of common stock issuable upon exercise of stock options. (2) Includes 3,750 shares of common stock issuable upon exercise of stock options. (3) Includes 3,750 shares of common stock issuable upon exercise of stock options. (4) Includes 103,750 shares of common stock issuable upon exercise of stock options. Mr. Joseph J. Raymond, Jr. disclaims any beneficial ownership or interest in any other shares of common stock except that of RVR Consulting Group, Inc. of which he is the President. (5) Includes 28,750 shares of common stock issuable upon exercise of stock options. Does not include 8,193 shares held in trust by Wilma I. Sharer, the wife of Mr. Sharer, of which he disavows any beneficial ownership. (6) Includes 103,750 shares of common stock issuable upon exercise of stock options. Mr. Vallejo disclaims any beneficial ownership or interest in any other shares of common stock except that of RVR Consulting Group, Inc. of which he is the Vice President. (7) Includes shares of common stock issuable upon conversion of 8% Series B Senior Secured Cumulative Convertible Preferred Stock and 8% Series D Junior Secured Cumulative Convertible Preferred Stock. 41 42 ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Six of the Company's seven original Integrated Medical Centers under management at January 31, 1997 were owned by Complete Wellness Centers, L.L.C. ("CWC, LLC"), a Delaware limited liability company. The Company was the managing member of CWC LLC and owns 1% of its membership interests. The Company, as managing member, had the authority and responsibility to make substantially all management decisions for CWC, LLC. In addition, the holders at the time, of more than 50% of the CWC, LLC membership interests granted the Company an irrevocable proxy to vote their membership interests as the Company saw fit. The proxy was valid for the life of CWC, LLC. As a result of these irrevocable proxies, the financial statements of the Company and CWC, LLC are consolidated for financial reporting purposes. CWC, LLC had outstanding 13.3 Class A Units (membership interests other than that of the managing member). The following officers and directors of the Company or members of their immediate family held the following interests in CWC LLC: a trust for the benefit of Wilma Sharer, the spouse of the Company's President and Chief Operating Officer, held two Class A Units; a trust for the benefit of Virginia Brigante held 1/5 of one Class A Unit; a trust for the benefit of Jacqueline Brigante held 11/50 of one Class A Unit. Virginia Brigante and Jacqueline Brigante are the minor children of Michael T. Brigante, the Company's Vice President of Finance and Chief Financial Officer. Each such person or trust granted to the Company an irrevocable proxy to vote such person's respective ownership interest in CWC LLC. On May 29, 1998 the Company, by unanimous consent of the Board of Directors, agreed to purchase all of the outstanding units of Complete Wellness Centers, LLC ("CWC,LLC"), a Delaware limited liability company, of which the Company has a 1% equity interest and irrevocable proxies from a majority of interest holders in the LLC. The acquisition was be accomplished by the issuance of 77,821 shares of Common Stock valued at $200,000, based upon the average closing bid price of the Company's Common Stock for the thirty (30) trading days prior to June 1, 1998. Such shares are subject to SEC Rule 144, but have piggyback registration rights. Former and current employees, directors, and immediate relatives of management, owning 37.6% of the LLC's equity received a discount to 26.32% of the $200,000 valuation of the LLC; the remaining investors received the balance of the valuation on a pro rata basis in accordance with their respective investments. In August 1996, the Company entered into a consulting agreement with J.E.M., Inc. ("JEM"), the sole stockholders of which are Dr. Kaplan, the Company's Senior Vice President and a director, and his wife. Under the terms of the consulting agreement, JEM agreed to provide advice and assistance to the Company in connection with identifying and affiliating with chiropractors and their existing chiropractic practices and identifying, acquiring, and/ or managing businesses engaged in providing services ancillary to those provided by Integrated Medical Centers. The Company agreed to pay JEM $6,000 per month for its services. The term of the consulting agreement expires in August 1999 and may be terminated sooner by mutual agreement of the parties, by the Company for "cause," defined as a violation by JEM of any material provision of the consulting agreement not remedied within 30 days after notification or JEM's conviction of a felony, upon termination of the employment agreement between Dr. Kaplan and the Company, or JEM's failure to meet certain performance goals. On December 19, 1997, we entered into an Investment Agreement with Wexford and Imprimis pursuant to which, as supplemented by a First Supplement dated January 12, 1998, a Second Supplement dated July 2, 1998 and a Third Supplement dated October 19, 1998, we issued $475,000 in aggregate principal amount of Senior Secured Floating Rate Bridge Notes due February 1, 1999, secured by various assets of Complete Wellness Centers, $375,000 of which evidenced term loans and $125,000 of which evidenced revolving loans made by Wexford and Imprimis to us. On August 31, 1999, we executed a Fourth Supplement to the Investment Agreement with Wexford and Imprimis, whereby we (i) converted $100,000 of the outstanding principal of the bridge notes to 2,000 newly issued shares of 8% Senior Convertible Preferred Stock, and (ii) agreed to repay the remaining principal and accrued and unpaid interest by equal quarterly payments to Wexford and Imprimis during the period from January 1, 2000 to December 31, 2001 based on a four year amortization schedule. The note payable accrues interest at 12% per annum At December 31, 1997, Dr. Milano, the former Vice President for Medical Affairs, who resigned in January 1998, served as an officer, director, and the sole stockholder of selected Complete Wellness Medical Centers. In all cases, Dr. Milano, the Integrated Medical Center, and the Company entered into a Stock Transfer Agreement (the "Stock Transfer Agreement") pursuant to which (i) Dr. Milano agreed not to sell, encumber, or otherwise transfer the shares of stock in the Integrated Medical Centers owned by her without the written consent of the Integrated Medical Centers and the Company and (ii) the Company has the right, following the provision of notice, to direct the transfer of all or part of such shares to such transferee as it may designate for the sum of ten dollars, provided that the transferee is licensed to practice medicine in the appropriate State. In order to facilitate the transfer, the Stock Transfer Agreement required the contemporaneous execution by Dr. Milano of a stock transfer assignment, a resignation as an officer and director of the Integrated Medical Center, and an Agreement for Sale of Business by Transfer of Capital Stock under which Dr. Milano agreed to transfer her shares in Integrated Medical Centers for the sum of ten dollars to a transferee to be designated by the Company for this purpose. In accordance with the Stock Transfer Agreement, the Company holds the stock transfer assignment, the resignation, and the Agreement for Sale of Business by Transfer of Capital Stock in escrow. Additionally, the Stock Transfer Agreement prohibits Dr. Milano, without prior written consent of the Integrated Medical Center and the Company, from amending the charter or bylaws of the Integrated Medical Center, agreeing to the merger or consolidation of the Integrated Medical Centers with or into another corporation, dissolving or liquidating the Integrated Medical Centers, authorizing the issuance of any additional shares of stock of the Integrated 42 43 Medical Centers, or approving any contract with Dr. Milano herself, members of her family, or related parties. The Company and Dr. Milano also entered into an indemnification agreement pursuant to which the Company agreed to indemnify her from and against claims made against her in her capacity as an officer or director of the Integrated Medical Centers. In January 1998, the Company entered in an agreement with Stratus Services, Inc ("Stratus"), an employee leasing and payroll company for the term of one year, which is annually renewable. Under the terms of the agreement, Stratus will provide the Company with leased employees and payroll services at all the Company's locations, both at the parent and subsidiary levels. Joseph J. Raymond, Sr. is the principal of Stratus and the father of Joseph Raymond, Jr. The Company believes that the services provided by Stratus are at least as favorably priced as any other company providing such services which the Company may contract with. On August 19, 1998, we entered into a consulting agreement with RVR Consulting Group, Inc. for a term of August 1, 1998 through July 31, 1999. We agreed to pay RVR $7,000 per month plus expenses to help us identify problem areas in our operations and provide subsequent solutions. Joseph J. Raymond Jr., our chairman of our board of directors and chief executive officer, is the president of RVR, and Sergio R. Vallejo, our president and chief operating officer, is the vice president of RVR. We subsequently amended the consulting agreement to agree to issue RVR warrants to purchase 150,000 shares of our common stock. On March 4, 1999, we terminated the consulting agreement and converted the warrants granted to RVR to options granted under our 1999 Consultants Stock Option Plan to purchase 150,000 shares of our common stock at an exercise price of $1.25 per share, 75,000 to Joseph J. Raymond, Jr. and Sergio R. Vallejo individually. On December 1, 1999, the Board of Directors agreed to convert each of their 75,000 options to 16,666 shares of common stock at the closing price on December 1, 1999. These shares are restricted subject to Rule 144 of the Securities Act of 1933. On February 19, 1999 we signed a loan agreement with RVR Consulting Group, Inc. for $100,000 and on August 31, 1999 we signed a First Supplement to the Loan Agreement with RVR, pursuant to which we and RVR agreed to convert the $100,000 loan in full into 2,000 shares of 8% Junior Convertible Preferred Stock. On February 26, 1999, Imprimis Investors LLC, Wexford Spectrum Investors LLC and RVR entered into a Stock Purchase Agreement whereby Imprimis and Wexford agreed to sell RVR an aggregate of 10,969 shares of our 8% Senior Convertible Preferred Stock for $500,000. Joseph J. Raymond, Jr., Sergio Vallego and Joseph Raymond, Sr., father of Joseph J. Raymond, Jr., guaranteed RVR's payment of the purchase price to Imprimis and Wexford. Imprimis and Wexford each beneficially own greater than 5% of our outstanding common stock, and Frederick Simon, a Senior Vice President of Wexford, is a former director of ours who resigned from our board of directors on July 27, 1999. On September 17, 1998, we entered into a consulting agreement with Structure Management, Inc., pursuant to which Structure Management agreed to provide consulting services related to our operations and financing, and pursuant to which we agreed to issue warrants to purchase 120,000 shares of our common stock at $2.00 per share to Structure Management. On March 4, 1999, we converted the warrants to options, granted under our 1999 Consultant's Stock Option Plan, to purchase 120,000 shares of our common stock at $2.00 per share. Structure Management subsequently exercised the options. Structure Management is controlled by Jeffrey J. Raymond, the brother of Joseph J. Raymond, Jr., Chairman and Chief Executive Officer of CWC. On March 8, 1999, we entered into another consulting agreement with Structure Management, Inc. for the period ending on March 4, 2000. The agreement calls for Structure Management to support our corporate planning process by: (i) identifying and bringing to us opportunities which help meet our corporate objectives and our business plans; (ii) assessing our competitive position, whether financial, technology or operational; (iii) identifying suitable merger or acquisition candidates, perform appropriate due diligence and assist us in negotiations with those identified candidates; (iv) supporting our financial public relations efforts by reviewing and commenting on our financial reports and plans and identifying examples of outstanding financial reporting presentation in other industries; and (v) supporting our shareholder relations activity by reviewing and responding to shareholder communications and advise us as to selection of public relations counsel. As compensation, we have issued Jeffrey J. Raymond, as the controlling principal of Structure Management, options under our 1999 Consultants Stock Option Plan to purchase 117,500 shares of common stock at $1.25 per share. Mr. Jeffrey J. Raymond subsequently exercised the options. On April 1, 1999, we entered into a settlement agreement with Haim Zitman, the former chief executive officer of Complete Wellness Weight Management, Inc., a subsidiary company which is now in Chapter 7 liquidation proceedings. We executed a Stipulation and Order Dismissing Action with Mr. Zitman with the execution of the settlement agreement. We issued options to Mr. Zitman to purchase an aggregate of 40,000 shares of our common stock at $0.01 per share, valued at $80,000 in compensation expense, vested upon issuance, in satisfaction of the settlement agreement terms. Mr. Zitman subsequently exercised the options. On July 1, 1999, we entered into a one year consulting agreement with The WorkSource, Inc., to provide daily accounting, consulting and administrative services to us, in consideration for which we agreed to pay The WorkSource $7,500 bi-weekly. On November 30, 1999, we and The WorkSource amended the consulting agreement whereby we agreed to pay The WorkSource an additional $50,000 from the proceeds of any offering that raises $750,000 in consideration for additional services provided by The WorkSource in connection with such effort. Rebecca R. Irish, our Vice President of Finance and Chief Financial Officer, is the President of The WorkSource. 43 44 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 Complete Wellness Centers from all employment claims or actions, we agreed to: (i) indemnify him for actions taken by Complete Wellness Centers or by him as an officer or director of Complete Wellness Centers; (ii) continue liability coverage for as long as the applicable statute of limitations of claims shall run; (iii) transfer $200,000 in market value of our common stock at a 5,000 shares per month rate to him through stock issuances or stock option grants; (iv) pay him attorney fees in the amount of $6,000; and (v) pay him the sum of $10,000 in cash. We accelerated the vesting of 10,000 options in September 1999. Subsequently, Dr. Kaplan exercised an aggregate of 30,000 these options, the value of which was recorded as compensation expense. On August 24, 1999, as consideration for services provided by Structure Management in connection with a private placement of our common stock, we issued Structure Management options under our 1999 Consultants Stock Option Plan for an additional 125,000 shares of our common stock at $1.50 per share and paid Structure Management $50,000. Structure Management subsequently exercised the 125,000 options. On September 23, 1999, we entered into an agreement with Stratus Services Group, Inc. to convert $750,000 in loans from Stratus into 500,000 shares of our common stock. Stratus is controlled by Joseph J. Raymond, Sr. On November 30, 1999, we entered into a termination of employment agreement with Michael T. Brigante, our former Sr. Vice President and Chief Financial Officer, to pay $73,704 for monies owed for back wages, vacation, allowances and severance compensation pursuant to the provisions in Mr. Brigante's employment agreement. The monies are to be paid over a twelve month period ending December 2000. On December 1, 1999, the board of directors approved the issuance of 16,666 shares of common stock to each Joseph J. Raymond, Jr. and to Sergio R. Vallejo in lieu of options held by each for 75,000 shares of common stock. On January 5, 2000, we issued options for 100,000 shares of our common stock under our 1996 Stock Option Plan to Joan Raymond, a principal of Structure Management, Inc., at $1.25 per share. Mrs. Raymond, a sister-in-law to Mr. Joseph J. Raymond, Jr., the Chairman and Chief Executive Officer of the Company, subsequently exercised the options in full. On March 13, 2000, we reached an agreement with our preferred shareholders to restructure the capitalization of our company. The restructuring will only take place upon completion of the merger with Dr.Alt.com Corporation (See Note 16 - Potential Transactions and Relationships). In an attempt to simplify the capital structure and to remove the liquidation preferences of the Senior Convertible Preferred Stock ("Senior") and of the Junior Convertible Preferred Stock ("Junior") the following transactions will take place upon the effective date of the merger: - - Conversion of all outstanding shares of Senior to shares of Common Stock of the Company based on their current conversion factor; - - Conversion of all outstanding shares of Junior to shares of Common Stock of the Company based on their current conversion factor; - - The shares of Common Stock will be restricted subject to Rule 144 of Securities Act 1933, yet will be granted piggyback registration rights in the next Common Stock offering. CWC has agreed to register such shares no later than December 31, 2000. - - The principle of the secured note payable to Wexford Spectrum Investors LLC will continue and the related accrued interest will be brought current. The Company believes that all prior transactions between the Company, its officers, directors or other affiliates of the Company have been on terms no less favorable than could have been obtained from unaffiliated third parties. Any future transactions with officers, directors, 5% stockholders or affiliates must be for valid business reasons, be on terms no less favorable to the Company than could be obtained from unaffiliated third parties, and be approved by a majority of the independent outside members of the Company's Board of Directors who do not have an interest in the transaction. Mr. Eugene Sharer, former President of CWC and current director of CWC, is the principal of Sharer and Associates. Sharer Associates serves as an independent contractor to assist CWC in various projects and management services and was paid approximately $7,500 in 1999 for services rendered. Mr. L. Mark Michel became a director of CWC in January 2000. Mr. Michel serves as an independent contractor to assist CWC with managed care contracting and advisory services and was paid $4,495 in 1999. For 2000, Mr. Michel has been paid $1,154 through April 10, 2000. 44 45 ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K (a) All reports and exhibits contained therein as previous filing with the Commission are incorporated by reference. (b) Reports on Form 8-K. March 15, 1999 Item 4 Changes in Registrants Certifying Accounts Item 7 Exhibits March 9, 1999 Item 1 Changes in Control of Registrant Item 7 Exhibits
SIGNATURES IN ACCORDANCE WITH THE REQUIREMENTS OF SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED. COMPLETE WELLNESS CENTERS, INC. (Registrant) By: /s/ Rebecca R. Irish --------------------------------- Rebecca R. Irish CHIEF FINANCIAL OFFICER April 14, 2000 IN ACCORDANCE WITH THE SECURITIES EXCHANGE ACT OF 1934, THIS REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED. /s/ JOSEPH J. RAYMOND, JR Chairman of the Board, April 14, 2000 - -------------------------------------- Chief Executive Officer, JOSEPH J. RAYMOND, JR and Director /s/ SERGIO R. VALLEJO Chief Operating Officer/President April 14, 2000 - ------------------------------------- and Director SERGIO R. VALLEJO /s/ REBECCA R. IRISH VP Finance/Treasurer April 14, 2000 - ------------------------------------- Chief Financial Officer REBECCA R. IRISH /s/ E. EUGENE SHARER Director April 14, 2000 - ------------------------------------- E. EUGENE SHARER /s/ DONALD S. RADCLIFFE Director April 14, 2000 - ------------------------------------- DONALD S. RADCLIFFE /s/ L. MARK MICHEL Director April 14, 2000 - ------------------------------------- L. MARK MICHEL /s/ JOHN K. PAWLOWSKI Director April 14, 2000 - ------------------------------------- JOHN K. PAWLOWSKI
45 46 EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION - ------- ----------- 1 Non-Binding Letter of Intent to Merge.............. 2 Services Agreement with DrAlt.com..................
EX-1 2 NON-BINDING LETTER OF INTENT 1 EXHIBIT 1 [CWC letterhead] March 7, 2000 DrAlt.com Corporation 11 State Street Woburn, MA 01801 RE: Non-Binding Letter of Intent Gentlemen: 1. INTRODUCTION. 1.1. This non-binding letter of intent outlines the terms on which Completewellness.com, Inc. ("CWC.COM") which is a wholly-owned subsidiary of Complete Wellness Centers, Inc., a Delaware corporation, ("CWC") proposes to merge with DrAlt.com Corporation, a Delaware corporation, ("DrAlt"). DrAlt would become a wholly-owned subsidiary of CWC.COM. 1.2. DrAlt would merge with CWC.COM in a tax-free transaction pursuant to a definitive Merger Agreement and ancillary agreements (collectively, the "Merger Agreement") to be entered into by and among CWC, CWC.COM, DrAlt and the stockholders of DrAlt. The parties to the Merger Agreement would use their best efforts to enter into such agreement on or about March 17, 2000, and to consummate the private placement transaction contemplated in Section 3.1 on or about May 22, 2000. 2. STRUCTURE OF THE TRANSACTION. 2.1. Prior to the closing of the merger ("Closing") and prior to the Record Date for the meeting at which CWC stockholders will be asked to approve the merger transaction, condition 3.3 shall be completed and all of CWC's Series B and Series D Preferred Stock shall be converted into CWC Common Stock. At Closing all issued and outstanding shares of DrAlt Common Stock would be converted into the right to receive such number of fully paid and nonassessable shares of common stock, $.001665 par value per share, of CWC ("CWC Common Stock"), as would result in the shareholders of DrAlt collectively owning immediately after the Closing of the merger, fifty (50) percent of the common equity of CWC on a fully diluted basis except for any outstanding warrants, determined by reference to all outstanding shares of the common stock of CWC as of the record date for the meeting at which CWC stockholders will be asked to approve the merger transaction. After the merger is consummated at the Closing, CWC.COM will be the surviving entity in the merger with DrAlt. 2.2. The CWC Common Stock, which constitutes the merger consideration, would be delivered to the stockholders of DrAlt at the Closing, providing DrAlt stock certificates are surrendered at the Closing. Complete Wellness Centers, Inc./DrAlt.com Corporation Letter of Intent Page 1 of 5 2 2.3. CWC would prepare and file with the SEC as soon as practicable after the execution of the Merger Agreement a Joint Prospectus/Proxy Statement and Registration Statement with respect to the CWC Common Stock which constitutes the merger consideration, but in no event more than sixty days from the date of this letter. CWC would use its best efforts to cause such Registration Statement to become effective as promptly as practicable. The Closing of the merger shall not take place until the registration statement becomes effective. However, all holders of shares of CWC Common Stock will be required to execute at Closing a lock up agreement committing not to sell any of the shares of CWC Common Stock for a period of nine months from issuance. 3. ADDITIONAL CONDITIONS TO CLOSING. 3.1. PRIVATE PLACEMENT. Prior to June 30, 2000, CWC or CWC.COM shall have obtained funding for a private placement in the amount of approximately $7 to $8 million dollars, on terms reasonably satisfactory to CWC and DrAlt. 3.2. SERVICE AGREEMENT. Simultaneous with this non-binding letter of intent, DrAlt and CWC.COM will enter into a service agreement (the "DrAlt Service Agreement"). 3.3. PREFERRED REDEMPTION. No later than March 10, 2000, CWC shall have negotiated a binding irrevocable agreement to redeem all Series B & D preferred shareholder positions to common stock, subject to DrAlt's approval of the terms of such conversion. 3.4. NO FURTHER ENCUMBRANCE. There shall be no further encumbrance of CWC.COM through issuance of additional shares of CWC.COM (with the exception of Item 3.1) or by incurring debt, without the mutual written consent of CWC and DrAlt. 3.5. BOARD OF DIRECTORS; MANAGEMENT. Upon the consummation of the merger, the initial Board of Directors of CWC and CWC.COM shall vote on reconstitution such that CWC, and DrAlt each shall have two members of a seven member Board of Directors. Three outside Directors will be mutually agreed upon by both DrAlt and CWC. Management shall consist of Joseph Raymond, CEO; Sergio Vallejo, COO and President; Rebecca Irish, CFO and Vice President; and Gary Whear, CIO and Vice President. 3.6. DUE DILIGENCE. Due diligence will commence after the execution of this non-binding letter of intent by all parties and the approval of same by the Board of Directors of both DrAlt and CWC. CWC and DrAlt will provide each other and their respective counsel, accountants and other representatives with access to their respective assets, properties, liabilities, business, operations, prospectus and conditions (financial or otherwise), and books and records, including the working papers of their respective outside independent accountants. 3.7. EMPLOYMENT ARRANGEMENTS. At the Closing, CWC and CWC.COM shall have entered into satisfactory employment arrangements with key employees of CWC, CWC.COM and DrAlt. 3.8. STANDSTILL AGREEMENT. CWC, CWC.COM and DrAlt each hereby agree that for a period of thirty (30) days from the date hereof, each of them shall:(i) refrain from any activities (whether conducted by it or on its behalf) with any third party directly or indirectly involving any solicitations, negotiations or discussions of any kind whatsoever in respect of any merger, sale of all or any material portion of its assets, issuance of equity securities, or any other similar type of transaction; (ii) discontinue and terminate any such solicitations, negotiations or discussions currently in progress, except for those with Kats Complete Wellness Centers, Inc./DrAlt.com Corporation Letter of Intent Page 2 of 5 3 Management; and (iii) not provide any information to any third party in furtherance of any such solicitations, negotiations or discussions. 3.9. CONFIDENTIALITY AND INSIDE INFORMATION. Each party will hold in complete confidence all information obtained from the other, and if the transaction contemplated hereby is not consummated, will return all documents so obtained, and all such information shall continue to remain confidential. This obligation of confidentiality shall not extend to any information which CWC, CWC.COM or DrAlt is required by law to disclose or which is shown to have previously been (i) known to the party receiving it; (ii) generally known to others engaged in the trade or business of the party receiving it; (iii) part of public knowledge or literature; or (iv) lawfully received from a third party. This agreement shall survive any termination of this non-binding letter of intent. 3.10. NON-COMPETITION AGREEMENT. Each of the directors, officers and employees of DrAlt shall enter into an agreement with CWC and CWC.COM pursuant to which each of them shall agree not to compete with the business of DrAlt as conducted as of the Closing, and not to solicit the employees of DrAlt retained by CWC and CWC.COM for a period of one year after the Closing. 3.11. CONDUCT OF THE BUSINESS. From the date of this letter until the Closing, each of CWC, CWC.COM and DrAlt will continue to operate their businesses as they have in the past and will not engage in any transactions outside the ordinary course of business. 3.12. ABSENCE OF ADVERSE CHANGE. There shall have been no material adverse change in the business, properties, operations, condition (financial or otherwise), prospects, assets or liabilities of CWC, CWC.COM or DrAlt since March 2, 2000. Except that DrAlt may issue up to approximately Three Million Dollars ($3,000,000) of shares of its Common or Preferred Stock. 3.13. SECURITIES MATTERS It is understood and agreed that certain information disclosed to CWC, CWC.COM or DrAlt or its representatives to the other party constitute "material inside information" that has not previously been disclosed to the public generally. CWC, CWC.COM and DrAlt acknowledge and understand the restrictions on the use of such information imposed by federal and state securities laws, where applicable, and agreed to comply and cause their representatives to comply with such restrictions, and with respect to such securities matters agree jointly and severally indemnify and hold each other and each of the others party's directors, officers, and employees harmless and free from any and all liability, cost or expense that any of them may incur or suffer by reason of any breach by CWC, CWC.COM or DrAlt or any of its authorized representatives of any such restrictions. 3.14. PUBLIC ANNOUNCEMENT Neither CWC, CWC.COM nor DrAlt nor any of their respective partners, directors, employees, accountants, attorneys, and other representatives shall make any public announcements or otherwise reveal to third parties information relating to this non-binding letter of intent, the definitive agreements or the transactions contemplated hereby, except as required by law or with the prior written approval of the other parties hereto. 3.15. BOARD OF DIRECTORS ACTION A non-binding letter of intent will be signed by a duly authorized officer of CWC, but the parties acknowledge that, except with respect to the provisions covering exclusivity, confidentiality and inside information and public announcements (and indemnification with respect to such provisions only), such signature is subject to approval of the transaction by the Board of Directors of CWC, CWC.COM and DrAlt at meetings duly called for such purposes on or prior to March 6, Complete Wellness Centers, Inc./DrAlt.com Corporation Letter of Intent Page 3 of 5 4 2000. Unless each party is advised in writing by the close of business (5:00 p.m., EST) on March 6, 2000, that the other party's Board of Directors has approved this transaction, this non-binding letter of intent will be deemed null and void. 3.16. GOVERNMENT AND THIRD PARTY APPROVALS. The Merger shall have been approved by all government agencies and third parties by which such approval is required. 3.17. SURRENDER OF STOCK. All DrAlt Common Stock shall be surrendered to CWC.COM at the Closing in accordance with the Merger Agreement. 3.18. COMPLETION OF THE MERGER AGREEMENT. The Merger Agreement shall be completed and shall contain customary representations and warranties, closing conditions and covenants. 3.19. CORPORATE APPROVALS. The Merger shall have been approved by the Boards of Directors and stockholders of CWC, CWC.COM and DrAlt. 3.20. CLOSING DATE. The Closing of the Merger shall take place no later than August 31, 2000. 3.21. GOVERNING LAW This non-binding letter of intent shall be governed by and construed under the laws of the State of Delaware, without reference to choice or conflict of law principles. 3.22. DISSENTING STOCKHOLDER RIGHTS. In the event DrAlt fails to obtain the consent of all of its stockholders to the merger, as evidenced by the signature of each such stockholder on the Merger Agreement, DrAlt shall cause its legal advisor to report to CWC and CWC.COM the legal consequences of any non-consent, including whether any non-consenting or dissenting stockholder has rights under applicable law to be paid the fair value of such stockholder's shares. DrAlt shall be solely responsible for satisfying any dissenters rights and the merger consideration will be adjusted accordingly. 4. BINDING EFFECT. This letter is intended solely to record the non-binding understandings of the parties, and neither party shall be under any legal obligation to the other except pursuant to the Merger Agreement, when and if executed and delivered. Each party shall bear its own costs and expenses whether or not the merger transaction is consummated. If the foregoing accurately summarizes our understanding with respect to this proposed transaction, please acknowledge your intent to proceed on the basis outlined in this letter by signing where indicated below and returning one signed original to me. REMAINDER OF PAGE INTENTIONALLY LEFT BLANK Complete Wellness Centers, Inc./DrAlt.com Corporation Letter of Intent Page 4 of 5 5 LETTER OF INTENT BETWEEN COMPLETEWELLNESS.COM, INC. AND DRALT.COM CORPORATION Agreed to and accepted as of March 7, 2000. DrAlt.com Corporation By: _______________________________ Gary R. Whear President Complete Wellness Centers, Inc. By: _______________________________ Joseph J. Raymond, Jr. Chief Executive Officer Completewellness.com, Inc. By: _______________________________ Joseph J. Raymond, Jr. Chief Executive Officer Complete Wellness Centers, Inc./DrAlt.com Corporation Letter of Intent Page 5 of 5 EX-2 3 PROMISSORY NOTE 1 EXHIBIT 2 SERVICES AGREEMENT BETWEEN COMPLETEWELLNESS.COM, INC. AND DRALT.COM CORPORATION This SERVICES AGREEMENT (the "Agreement") is entered into as of March 7, 2000 (the "Effective Date") by and between Completewellness.com, Inc. ("CWC.COM"), a corporation organized under the laws of the State of Delaware, having a principal place of business at 1964 Howell Branch Road, Suite 202, Winter Park, Florida 32792, DrAlt.com Corporation ("DrAlt"), a corporation organized under the laws of the State of Delaware having a principal place of business at 11 State Street, Woburn, Massachusetts 01801 and Complete Wellness Centers, Inc. ("CWC"), a corporation organized under the laws of the State of Delaware, having a principal place of business at 1964 Howell Branch Road, Suite 202, Winter Park, Florida 32792. WHEREAS, DrAlt was formed and organized for the primary purpose of providing alternative medicine information and products to practitioners and consumers; WHEREAS, DrAlt desires that CWC.COM provide DrAlt with certain services to create its web site known as www.DrAlt.com; WHEREAS, CWC.COM desires to change and update the web site known as www.completewellness.com; NOW, THEREFORE, in consideration of the mutual covenants herein, and for other good and valuable consideration, the receipt and adequacy of which is hereby acknowledged, the parties hereby agree as follows: 1. CWC.COM agrees to provide DrAlt with the following services at DrAlt's reasonable request: (a) CWC.COM will provide access to the web site known as www.completewellness.com to DrAlt to manage and develop as more fully described in Items 2 & 3 below. (b) CWC.COM will provide access to DrAlt to contract through its parent company, CWC with the existing and future wholly-owned subsidiaries of CWC that are medical centers and the related practitioners for the DrAlt eBusiness web site. (c) CWC.COM will provide access to the medical centers and the related practitioners that are under existing and future consulting contracts for the DrAlt eBusiness web site. (d) CWC.COM will provide access to the seminars and the related audiences conducted after the Effective Date by CWC and third party audience. (e) CWC.COM, upon request by DrAlt, will assist in the overall strategic direction for the DrAlt eBusiness web site and the related product and service offerings to be made on such web site. (f) CWC.COM, upon request by DrAlt, will assist in the determination of appropriate specific content management modules for the DrAlt eBusiness web site. Complete Wellness Centers, Inc./DrAlt.com Corporation Services Agreement Page 1 of 6 2 2. DrAlt will review the existing format and functionality of www.completewellness.com and incorporate any design features determined to be valuable in the site redesign. Part of this site analysis will be search engine effectiveness and competitive analysis. DrAlt will discuss with CWC.COM designated personnel the definition of the specific business objectives of this project. This planning activity converts the business goals and objectives developed in the planning phase into specific functional components and includes: (a) Internet business goals to support overall organizational goals (b) Identification of audience sets (c) Identification of goals per audience set (d) Prioritization of audience sets (e) Preliminary site map (f) Front and backend system requirements (g) Assess business and technical risks with eBusiness strategy/tactics 3. DrAlt will use its best efforts to review the existing web site, www.completewellness.com, and either use this as a baseline for modification or create a completely new site format, using the effective and desired visual and navigation components contained in the existing site. Because everything resides in a customer's first impression of a web site, it is critical that the front-end interface be consumer friendly. By that the parties agree that it should be as reasonably easy to use as practicable and rapid to download, personalized, and invites a customer to return to the site. The content on the home page should be updated regularly and anyone should be able to navigate to his or her desired web page within three clicks. This task in the development phase includes: (a) Graphical design of site pages (b) Definition of static pages (c) Global navigation development (d) Local navigation development (e) Stress testing for link integrity and scalability 4. The term of this Agreement shall be five (5) years and may be extended by mutual agreement by the parties for a period of five (5) years. 5. DrAlt shall loan to CWC.COM up to Seven Hundred and Fifty Thousand Dollars ($750,000) according to a disbursement schedule (attached as an addendum hereto). DrAlt, its succesors in interest or assigns, shall be awarded 5 year warrants in CWC (constituting restricted securities under federal and state securities laws) for the purchase of Three Hundred Seventy-Five Thousand (375,000) shares of common stock of CWC at $2.00 per share. The amounts earned under those arrangements described as consideration in Item 6 below can be used as an offset against amounts owed by DrAlt to CWC.COM. If CWC should require additional monies, DrAlt will negotiate in good faith to loan up to an additional Two Hundred Fifty Thousand Dollars ($250,000) for an additional One Hundred Twenty-five Thousand (125,000) warrants at $2.00 per share if it, in DrAlt's sole judgement, is financially able to do so. 6. Dr. Alt shall provide the following additional consideration as follows: (a) DrAlt will pay to CWC.COM a one-time fee of $150 per each practitioner directly referred by CWC to DrAlt and signed during the first twelve months, $100 per each practitioner directly referred by CWC to DrAlt and signed during the months thirteen through eighteen, $50 per each practitioner directly referred by CWC to DrAlt and signed during months nineteen through twenty-four, and $25 per each practitioner directly referred by CWC to DrAlt and signed from month twenty-five through the end of the Complete Wellness Centers, Inc./DrAlt.com Corporation Services Agreement Page 2 of 6 3 contract period. The number of practitioners signed with DrAlt at the end of each month will determine the fee that is due by the 15th of the following month. (b) Other ancillary net revenue derived by DrAlt related to the www.completewellness.com web site or the www.DrAlt.com web site, including but not limited to advertising commissions, traffic-based revenue or affiliate revenue, shall be shared between CWC.COM and DrAlt on an equal basis. (c) Revenues generated by sales of products and/or services originated through clinics or practitioners on service with DrAlt as a result of this Agreement, shall be paid commissions as follows: (1) 10% of collected net sales to contracted clinic or practitioner (2) 10% of collected net sales to CWC.COM. 7. With the exception of the initial payment described in Item 5 above, payments for the consideration in Item 6 shall be made monthly to CWC.COM. 8. DrAlt shall exercise reasonable effort in performing the services to be provided hereunder but DrAlt shall not be liable for any delays resulting from circumstances or causes beyond its control, except as such circumstances or causes pertain to DrAlt's inability to perform services competently or devote the resources required to accomplish the obligations of DrAlt. 9. Either party may terminate this Agreement if the other party breaches this Agreement in any material respect, including but not limited to nonpayment of fees or nonperformance of services. In the event of such breach by one party, the other party shall give the non-performing party written notice specifying in detail the nature of the alleged breach. If at the end of thirty (30) days the breach has not been cured, the other party shall give the non-performing party final written notice of its intention to terminate, and this Agreement shall be terminated five (5) days after such second notice has been deemed to be received if there is no response and attempt to cure the breach. Either party may terminate this Agreement, effective immediately and without notice, if; (a) The other party becomes insolvent, files a petition seeking any reorganization, composition or similar relief under any law regarding insolvency or relief for debtors, makes an assignment for the benefit of creditors or similar undertaking, or is placed under liquidation, whether provisionally, finally, compulsorily, or voluntarily, or if a receiver, trustee, liquidator, or similar officer is appointed for the business or property of the other party, or (b) A third party files a petition in bankruptcy against a party, files a petition against a party seeking any reorganization, arrangement, composition or similar relief under any federal or state law regarding insolvency or relief for debtors or creditors, or seeks the appointment of a receiver, trustee or similar officer for the business or property of a party, and none of the foregoing actions is dismissed within thirty (30) days. (c) If CWC files a petition for bankruptcy as more fully described above, the contracts with the clinics and practitioners will be assignable to DrAlt without encumbrance and the web site known as www.completewellness.com or its successor, if any, will be retained by DrAlt. 10. In the event the merger contemplated in the non-binding letter of intent between CWC, CWC.COM and DrAlt dated March 7, 2000 is not consummated, the following treatment shall be given to the following items: (a) If the merger is not consummated prior to July 1, 2000 due to the failure of CWC to raise an approximate $7 to $8 million private placement or due to a material adverse change in the business of CWC: (1) This Service Agreement shall survive only by mutual written agreement between CWC.COM, CWC, and DrAlt. Complete Wellness Centers, Inc./DrAlt.com Corporation Services Agreement Page 3 of 6 4 (2) DrAlt shall retain the warrants described as consideration in Item 5 above. (3) CWC.COM will repay the $750,000 described as consideration in Item 5 and this shall be a general obligation of CWC. By mutual written agreement, the amounts earned under those arrangements described as consideration in Item 6 above can be used as an offset against amounts owed by DrAlt to CWC.COM. (b) If the merger is not consummated as a result of DrAlt not providing the payments described in Item 5 above; due to a material adverse change in the business of DrAlt; or due to failure of DrAlt to substantially and in good faith perform the duties described in Items 2 or 3 above: (1) This Service Agreement shall survive only by mutual written agreement between CWC.COM, CWC and DrAlt. (2) DrAlt shall retain the warrants on a prorata basis with the funds received and retained by CWC.COM all described as consideration in Item 5 above. For example, if DrAlt only provides and CWC.COM retains $500,000 or 66.7% of the $750,000, DrAlt would retain 250,000 warrants. (3) Once DrAlt is fully repaid, the web site known as www.completewellness.com or its successor, if any, would revert to CWC.COM in its state of development as of a date determined in Item 9 above. Such reversion would include any programming source code and other related information required to continue the development of the web site without the assistance of DrAlt. 11. All notices shall be in writing and shall be sent by fax or first-class certified or registered mail, addressed to the other party. Any notice sent by fax shall be deemed to have been received on the day it is sent, or on the first business day thereafter, if it was sent on a non-business day or if it was sent after 4 p.m. on a business day. Any notice sent by mail shall be deemed to have been received on the fifth (5th) business day after the date of posting. 12. DrAlt may use its relationship with CWC.COM and the projects for marketing purposes such as case studies, press releases, and other marketing activities, subject to CWC.COM's approval, which shall not be unreasonably withheld or delayed. CWC.COM agrees that DrAlt can place a notice and link at the bottom of each web site page, which displays, "Website developed by Envision Development Corporation". 13. If at any time, the web site known as www.completewellness.com should become known as any other domain name, the terms herein shall still apply. 14. CWC hereby warrants that it owns all rights, titles and interest in the website known as www.completewellness.com. It is understood that CWC.COM retains title and ownership of all customer supplied website content. All source codes, trademarks, and patentable inventions created by DrAlt for CWC.COM shall be owned solely by CWC.COM. DrAlt will use components, which in its sole judgment are useful, from its Envision Development Library (EDL) in the construction of the web site. Title and ownership of DrAlt supplied EDL components at all times remain with DrAlt. DrAlt's proprietary notice shall appear on all copies of the software, regardless of form, including partial copies and modifications of the Software. DrAlt grants to CWC.COM and to CWC and its subsidiaries and affiliates ("the CWC Group") a non-exclusive, non-transferable, royalty-free license to use the software furnished to CWC.COM first made by DrAlt under this Agreement on all of the CWC Group's Central Processor Units (CPU's) as required for the web site operation. DrAlt shall also have a non-exclusive, non-transferable, royalty-free license to use the web site as required for its general business purposes. Complete Wellness Centers, Inc./DrAlt.com Corporation Services Agreement Page 4 of 6 5 Except as otherwise expressly provided, no license or other right is hereby transferred to CWC.COM, including any license by implication, estoppel or otherwise, under any patent, patent application, trade secret, trademark or copyright. 15. DrAlt, CWC.COM and CWC shall not disclose any confidential or proprietary information to any third party, nor use such information for its own account or for the account of any other person or entity, nor make any copies of such information, except as required to perform the services under this agreement. Proprietary information shall mean all confidential or proprietary information designated as such in writing, whether by letter or by the use of an appropriate proprietary stamp or legend, prior to or at the time any such confidential or proprietary information is disclosed. The obligations of DrAlt, CWC.COM and CWC shall not apply, and shall have no further obligations, with respect to any proprietary information to the extent that such proprietary information: a) Is generally known to the public at the time of disclosure or becomes generally known through no wrongful act; b) Is in possession at the time of disclosure otherwise than as a result of any breach of any legal obligation; c) Becomes known through disclosure by sources having the legal right to disclose such proprietary information. 16. It is understood and agreed that DrAlt is a company and that no employee of DrAlt is an employee of CWC or CWC.COM. This Agreement shall not be construed to form a partnership between the parties or to create any form of employment relationship or any legal association which would impose liability on the other party for act or failure to act of the other party. DrAlt, CWC.COM and CWC agree not to hire nor solicit the employment of the other's employees or independent contractors without written authorization by the respective party, during the term of this Agreement and continuing for a period of twelve (12) months thereafter. 17. Other general terms governing this relationship per this Agreement are as follows: (a) No waiver of any right or remedy with respect to any occurrence or event on one occasion shall be deemed a waiver of such right or remedy with respect to such occurrence or event on any other occasion. All rights and remedies evidenced herein are in addition and cumulative to rights and remedies available to the parties at law or under any other agreement between the parties. (b) The laws of Orange County of the State of Florida will govern this Agreement. (c) This Agreement is not assignable without the prior written approval of the parties. 18. This Agreement constitutes the entire Agreement between the parties with respect to the subject matter hereof and supersedes all prior proposals, negotiations and communications, oral or written, between the parties with respect to the subject matter hereof, and no deviation from these terms and conditions shall be binding unless in writing and signed by the party against whom the same is sought to be enforced. REMAINDER OF PAGE INTENTIONALLY LEFT BLANK Complete Wellness Centers, Inc./DrAlt.com Corporation Services Agreement Page 5 of 6 6 SERVICES AGREEMENT BETWEEN COMPLETEWELLNESS.COM, INC. AND DRALT.COM CORPORATION Agreed to and accepted as of March ______, 2000. Completewellness.com, Inc. By: _________________________ Joseph J. Raymond, Jr. Chief Executive Officer Complete Wellness Centers, Inc. By: _________________________ Joseph J. Raymond, Jr. Chief Executive Officer DrAlt.com Corporation By: __________________________ Gary R. Whear President Complete Wellness Centers, Inc./DrAlt.com Corporation Services Agreement Page 6 of 6 EX-27 4 FINANCIAL DATA SCHEDULE
5 1,000 12-MOS DEC-31-1999 DEC-31-1999 272 111 5,486 0 0 5,917 226 0 6,145 5,886 0 0 1 1 158,089 6,145 12,940 12,940 0 15,640 0 0 111 (2,805) 0 (2,805) 0 0 0 (2,805) .77 .77
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