-----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, BTG1UwLPkpy8mR2vNzfBMFuEXhCfQmrT5/JCgzHtLaUFoo+lJ3T4BHw25iRBYE+T wnkFGEgEpH8BBAgrxTlbfw== 0000950133-00-002108.txt : 20000517 0000950133-00-002108.hdr.sgml : 20000517 ACCESSION NUMBER: 0000950133-00-002108 CONFORMED SUBMISSION TYPE: 10QSB/A PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 20000515 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: 10QSB/A SEC ACT: SEC FILE NUMBER: 000-22115 FILM NUMBER: 636543 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 10QSB/A 1 FORM 10QSB/A FOR PERIOD ENDED JUNE 30, 1999 1 U.S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 -------------------------------------------- FORM 10-QSBA QUARTERLY REPORT UNDER SECTION 13 OF 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1999 -------------------------------------------- Commission file number 0-22115 -------------------------------------------- COMPLETE WELLNESS CENTERS, INC. (Exact name of small business issuer as specified in its charter) DELAWARE 52-1910135 (State or jurisdiction of Incorporation or Organization) (IRS Employer Identification Number)
--------------------------------------------- 1964 HOWELL BRANCH ROAD, SUITE 202, WINTER PARK, FL 32792 -------------------------------- (Address and telephone number of principal executive offices) (407) 673-3073 ------------------------- (Issuer's telephone number) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15 (d) of the Exchange Act during the past 12 months(or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes _X_ No ___. State the number of shares outstanding of each of the issuer's classes of common equity, at June 30, 1999: 3,536,755 shares of Common Stock. Transitional Small Business Disclosure Format (check one) Yes ___ No _X_ 1 2 COMPLETE WELLNESS CENTERS, INC. FORM 10-QSBA INDEX PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS (UNAUDITED) CONDENSED CONSOLIDATED BALANCE SHEETS JUNE 30, 1999 AND December 31, 1998 CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS FOR THREE AND SIX MONTHS ENDED JUNE 30, 1999 AND JUNE 30, 1998 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR SIX MONTHS ENDED JUNE 30, 1999 AND JUNE 30,1998 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS PART II. OTHER INFORMATION ITEM 1 LEGAL PROCEEDINGS ITEM 2 CHANGES IN SECURITIES AND USE OF PROCEEDS ITEM 3 DEFAULTS UPON SENIOR SECURITIES ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ITEM 5 OTHER INFORMATION ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K SIGNATURES 2 3 ITEM 1 -- FINANCIAL STATEMENTS COMPLETE WELLNESS CENTERS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, December 31, 1999 1998 ---- ---- (Unaudited) (Audited) ASSETS Current Assets: Cash and cash equivalents $ 545,728 $ 444,963 Patient receivables, net of allowance for doubtful accounts of $7,079,796 and $6,255,238 6,489,645 5,766,369 Inventory 46,228 53,405 Prepaid expenses 5,171 9,661 Other assets 42,715 49,774 ----------------- -------------- Total current assets 7,129,487 6,324,172 Furniture and equipment, net 309,399 369,583 Deposits 29,683 31,983 ----------------- -------------- Total assets $ 7,468,569 $ 6,725,738 ================= ============== LIABILITIES AND STOCKHOLDERS' EQUITY/( DEFICIT) Current liabilities: Current portion of notes payable $ 366,050 $0 Accounts payable and accrued expenses 6,122,161 6,693,321 Accrued management fees and leases 4,440,648 4,020,288 ----------------- -------------- Total current liabilities 10,928,859 10,713,609 Note payable 552,950 392,000 Stockholders' equity/(deficit): Common Stock,$.0001665 par value per share 50,000,000 shares authorized, 3,536,755 shares issued and outstanding 588 409 Convertible Preferred Stock, $.01 par value per share, 8% Cumulative, 115,239 shares currently issued and outstanding 5,294,278 5,016,620 Additional capital 7,245,614 6,119,833 Accumulated deficit (16,553,720) (15,516,733) ----------------- -------------- Total stockholders' deficit (4,013,240) (4,379,871) ----------------- -------------- Total liabilities and stockholders' equity/(deficit) $ 7,468,569 $ 6,725,738 ================= ==============
Note: The Balance Sheet at December 31, 1998 has been extracted from the audited financial statements at that date. See notes to condensed consolidated financial statements. 3 4 COMPLETE WELLNESS CENTERS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, 1999 1998 1999 1998 (Unaudited) (Unaudited) (Unaudited) (Unaudited) Revenue: Integrated medical clinics $2,530,352 $5,144,177 $7,025,214 $10,018,316 Weight management centers 0 2,935,295 0 5,303,951 Other income 30,428 66,085 115,600 151,767 ----------- ------------ ------------ ------------- Total operating revenue 2,560,780 8,145,557 7,140,814 15,474,034 Direct expenses: Salary and consulting costs 605,557 2,218,061 1,407,952 3,739,895 Management fees 1,295,201 2,371,113 4,609,124 4,998,003 Cost of revenues 0 612,203 7,178 1,081,679 Rent 37,879 745,140 79,350 1,253,714 Advertising and marketing 4,852 396,090 7,999 605,853 Bad debt expense 605,990 1,122,304 761,939 2,169,540 ----------- ------------ ------------ ------------- Total direct expenses 2,549,479 7,464,911 6,873,542 13,848,684 Network development cost 0 224,018 0 427,676 General and administrative 661,276 1,007,155 927,976 2,125,743 Depreciation and amortization 31,646 24,125 63,300 109,908 ----------- ------------ ------------ ------------- Operating gain/loss (681,621) (574,652) (724,004) (1,037,977) Interest expense 28,825 0 38,325 1,523 Interest income 1,813 4,947 3,000 26,810 ----------- ------------ ------------ ------------- Net income/loss before income taxes (708,633) (569,705) (759,329) (1,005,511) Income taxes 0 1,045 0 1,045 ----------- ------------ ------------ ------------- Net income/loss after income taxes ($708,633) ($570,750) ($759,329) ($1,006,556) =========== ============ ============ ============= Income/loss per share - basic ($0.22) ($0.22) ($0.24) ($0.40) =========== ============ ============ ============= - diluted ($0.22) ($0.22) ($0.24) ($0.40) =========== ============ ============ ============= Weighted avg. common shares - - basic 3,243,255 2,543,610 3,108,407 2,539,020 =========== ============ ============ ============= - diluted 3,243,255 2,543,610 3,108,407 2,539,020 =========== ============ ============ =============
See notes to condensed consolidated financial statements. A 4 5 COMPLETE WELLNESS CENTERS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, JUNE 30, 1999 1998 -------------------------- (Unaudited) (Unaudited) Operating activities Net income/loss ($759,329) ($1,006,556) Adjustments to reconcile net income/loss to net Cash used in operating activities: Minority interest 0 (7,179) Depreciation and amortization 63,300 109,908 Provision for bad debt 761,939 2,169,540 Recognition of compensatory granting non-qualified stock options 6,810 67,083 Recognition of the issuance of common stock warrants an options 0 38,059 Changes in operating assets and liabilities: Accounts receivables (1,485,215) (4,414,841) Other current assets 21,027 (683,460) Accounts payable and other current 199,200 956,493 liabilities -------------------------- Net cash used in operating activities (1,192,267) (2,770,953) Investing activities Purchase of equipment (3,116) (61,506) Acquisition costs 0 (120,805) -------------------------- Net cash used in investing activities (3,116) (182,311) Financing activities Payment of notes 0 (505,006) Proceeds from sale of common stock 435,000 2,909 Proceeds from sale of stock options 684,148 0 Proceeds from sale of preferred stock 0 4,532,320 Proceeds from notes payable 177,000 0 -------------------------- Net cash provided by financing activities 1,296,148 4,010,229 -------------------------- Net increase in cash and cash equivalents 100,765 1,056,965 Cash and cash equivalents at beginning of year 444,963 804,924 -------------------------- Cash and cash equivalents at end of period $545,728 $1,861,889 ==========================
See notes to condensed consolidated financial statements. 5 6 COMPLETE WELLNESS CENTERS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMETNS (UNAUDITED) JUNE 30, 1999 NOTE A - BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-QSB and Article 10 of Regulation S-X. The financial statement information was derived from unaudited financial statements unless indicated otherwise. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included in the accompanying condensed consolidated financial statements. Operating results for the three and six month periods ended June 30, 1999 are not necessarily indicative of the results that may be expected for the year ending December 31, 1999. The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the Company's audited financial statements included in the Company's Form 10-KSB dated March 31, 1999, for the period ended December 31, 1998. Certain prior period amounts have been reclassified to conform with the current period presentation. NOTE B - NET INCOME/(LOSS) PER SHARE The Company's net income/(loss) per share calculations are based upon the weighted average number of shares of Common Stock outstanding. Pursuant to the requirements of the Securities and Exchange Commission (SEC)staff accounting bulletin No. 98, the Company considers all potentially dilutive securities issued for nominal consideration prior to the Company's initial public offering as outstanding for all periods presented. Other shares issuable upon the exercise of stock options or conversion of the 8% Senior Convertible Preferred Stock (the "Senior Convertible Preferred Stock") have been excluded from the computation because the effect of their inclusion would be anti-dilutive for June 30, 1998 and June 30, 1999. 6 7 In accordance with SFAS No. 128, the table below presents both basic and dilutive income/(loss) per share:
Three Months Ended Six Months Ended June 30, June 30, June 30, June 30, 1999 1998 1999 1998 Net Income/(Loss) $(708,633) $(570,750) $(759,329) $(1,006,556) Weighted avg. shares 3,243,255 2,543,610 3,108,407 2,539,020 outstanding - Basic Incremental shares 0 0 0 0 under stock option plans Conversion of 8% Senior 0 0 0 0 Convertible Preferred Stock Weighted average shares 3,243,255 2,543,610 3,108,407 2,539,020 outstanding - diluted Basic income/(loss) per $(0.22) $(0.22) $(0.24) $(0.40) share Diluted income/(loss) $(0.22) $(0.22) $(0.24) $(0.40) per share
NOTE C - FINANCING On January 26, 1999 the Company received $77,000 from Wexford Partners, LLP ("Wexford") which constituted the last installment to be loaned under the $472,000 loan agreement between the Company and Wexford. On February 22, 1999 the Company received a loan of $100,000 from RVR Consulting ("RVR"). Two of the principles of RVR are Joseph J. Raymond, Jr., the Chairman and CEO of the Company and Sergio Vallejo, the Chief Operating Officer of the Company. The loan has no stated interest rate, nor does it include a term. On March 4, 1999 the Board of Directors modified a consulting agreement, previously approved by the Board, between the Company and Structure Management, Inc. ("Structure"). Structure has a consulting agreement with the Company to provide consulting services related to operations and financing of the Company. Under the existing consulting agreement, Structure was granted warrants to purchase 120,000 shares of common stock at a price of $2.00 each. The Board approved the conversion of such warrants to options for the purchase of common stock of the Company priced at $2.00 per share. Following the conversion, the options were exercised and the shares have been issued. The Company received $240,000 for the exercise of these options. Additionally, the Board of Directors approved the establishment of a consultants stock option plan (the "1999 Consultants Stock Option Plan"). The Company made a grant to Jeffrey Raymond of 117,500 options to purchase common stock in the Company, pursuant to the 1999 Consultants Stock Option Plan, at the intraday trading low of the Company's common stock on March 9, 1999 or $1.25. Following the grant of such options, Mr. Jeffrey Raymond exercised those options and shares were issued. The Company received $146,875 for the exercise of such options. Mr. Jeff Raymond is the brother of Mr. Joseph Raymond, Jr., Chairman and CEO of the Company. The Board also made a grant of 237,500 options, from the 1999 Consultants Stock Option Plan, to purchase common stock in the Company at the intraday low trading price on March 9, 1999 or $1.25 to John Trevisan, a principal owner of Texas International Investment, Inc. Following the grant of such options, Mr. Trevisan exercised his options and shares were issued. The Company received $296,875 for the exercise of these options. On April 21, 1999 the Company's Board of Directors approved a plan to raise up to $1,000,000 through a private placement of the Company's securities. The plan consisted of the issuance of up to 1,000,000 shares of the Company's common stock priced at $1.00 per share. Through June 30, 1999 the Company received $587,000 through the private placement of which $152,000 was used to cover costs of the offering. Unless otherwise extended by the Company's Board, the private placement is scheduled to close August 31, 1999. NOTE D - DISCONTINUANCE OF CERTAIN LINES OF BUSINESS On November 13, 1998, the Company's Board of Directors voted to sell, close and/or otherwise divest the operations of Complete Wellness Weight Management, Inc., ("CWWM"), one of its wholly owned subsidiaries. On April 21, 1999 the Company's Board of Directors approved a formal plan for CWWM to file for Chapter 7 bankruptcy proceedings. The Company filed the formal Chapter 7 documents on July 6, 1999 in Trenton, New Jersey. As of the date of the bankruptcy filing, this subsidiary will no longer be included in the Company's consolidated financial results. The Company's investment in this subsidiary will be adjusted to reflect those liabilities that are guaranteed by 7 8 the Company. The remaining liabilities of the subsidiary, approximately $4,509,000, will be adjusted through changes to additional paid in capital of the Company. NOTE E - OTHER TRANSACTIONS On October 1, 1998 the Company filed a registration statement with the SEC to comply with the exercise of certain demand registration rights by the holders of shares of its Common Stock. Such shares of Common Stock were acquired upon conversion of shares of the Senior Convertible Preferred Stock. Subsequent to the filing, the Company arranged for a private sale of the Common Stock to twelve purchasers. On January 20, 1999 the Company amended the registration statement to respond to SEC comments on the first filing in addition to adding shares of Common Stock to the registration statement. On February 10, 1999 the Company asked the SEC to formally withdraw the amended registration statement as the Company's Board of Directors could not reach unanimous agreement as to its filing. On April 1, 1999 the Company reached a settlement with Hiam Zitman. Mr. Zitman had sued the Company for breach of his employment agreement with Complete Wellness Weight Management, Inc., a subsidiary of the Company. The settlement terms are that Mr. Zitman will receive $80,000 in value of the Company's common stock, valued at the date the common stock is registered with the SEC. If the Company fails to register the common shares underlying the common stock awarded Mr. Zitman in the settlement, the Company has 180 days from the date of the settlement to pay Mr. Zitman $80,000 in cash. On May 1, 1999, as a result of the failure to pay the minimum royalty fee of approximately $26,000 to the founding shareholders of Smokenders, the Company reached an agreement with those shareholders to transfer all licenses, patients, copyrights, trademarks, inventory and other assets back to them as of July 1, 1999 for no consideration and a release of debt on the royalty fee due as well as the assumption of certain liabilities. The Company will include the results of operations of Smokenders through June 30, 1999 in its consolidated results from operations. On June 30, 1999 the Company filed a registration statement on Form S-3 with the SEC. On July 14, 1999 the SEC contacted the Company by letter and informed the Company that it did not intend to review the filing and invited the Company to request acceleration of the effectiveness of the filing. The Company amended the registration statement and filed the final amendment on August 4, 1999. On August 4, 1999 the Company made a formal request to the SEC for an acceleration of the effective date for the filing and such request was granted. On July 6, 1999 the Company filed a Chapter 7 bankruptcy petition for Complete Wellness Weight Management, Inc. a subsidiary of the Company. The filing took place in Trenton, NJ. On July 25, 1999 the Company's Board of Directors appointed Mr. Sergio Vallejo as President of the Company as a result of the resignation of Dr. Eric Kaplan from that position. Mr. Vallejo also serves as Chief Operating Officer and is a Board member. Dr. Kaplan remains a Board member. On July 27, 1999 Mr. Frederick Simon resigned from the Company's Board of Directors. Mr. Simon is a Senior Vice President of Wexford Management, LLC. Wexford is the owner of 103,861 of the Company's preferred shares and has extended to the Company a senior secured loan in the amount of $472,000. NOTE F - RESTATEMENT OF QUARTERLY INFORMATION As a result of the discontinuation of certain contractual relationships with Integrated Medical Centers, accruals of liabilities and certain estimation processes utilized by the company, we have restated the quarterly results for the period ended June 30, 1999. The restatement for the three and six months ended June 30, 1999 required an increase in operating expenses and a decrease in net revenue, creating a net loss of ($708,633) and ($759,329), respectively or ($0.22) and ($0.24) per share respectively. The restated results for the periods ended June 30, 1999 are as follows and may be compared to the previously reported quarterly results. For the three months ended June 30, 1999
Restated Results Previously Reported Results Net Revenue $2,560,780 $3,683,278 Net Income (Loss) $ (708,633) $ 91,425 Net Income (Loss) Per Share - Basic $ (0.22) $ 0.03 Weighted Avg. Shares Outstanding - Basic 3,243,255 3,536,755
8 9 For the six months ended June 30, 1999
Restated Results Previously Reported Results Net Revenue $7,140,814 $ 8,271,363 Net Income (Loss) $ (759,329) $ 169,729 Net Income (Loss) Per Share - Basic $ (0.24) $ 0.05 Weighted Avg. Shares Outstanding - Basic 3,108,407 3,536,755
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL Statements included in this "Management's Discussion and Analysis of Financial Condition and Results of Operations" Section, and in other sections of this Report and in prior and future filings by the Company with the Securities and Exchange Commission, in the Company's prior and future press releases and in oral statements made with the approval of an authorized executive which are not historical or current facts are "forward-looking statements" made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and are subject to certain risks and uncertainties that could cause actual results to differ materially from those presently anticipated or projected. The Company wishes to caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made. There are important risk factors that in some cases have affected and in the future could affect the Company's actual results and could cause the Company's actual financial and operating performance to differ materially from that expressed in any forward-looking statement. The following discussion and analysis should be read in conjunction with the Condensed Consolidated Financial Statements and notes appearing elsewhere in this report. Through June 30, 1999 the Company has directly formed 90 medical corporations representing 112 clinics, of which 63 are in operation as of that date. The operations of all the medical corporations are included in the consolidated financial statements of the Company. At June 30, 1999 and June 30, 1998 the Company, as a result of its medical operations, had revenues of $7,025,214 and $10,018,316 respectively. Included in the Company's June 30, 1999 consolidated financial statements are the results of operations of Smokenders. At June 30, 1999 and June 30, 1998 Smokenders, as a result of its operations, had revenues of $61,216 and $103,645 respectively. The Company divested itself of Smokenders at June 30, 1999. The closings, divestitures and spin-offs of non-profitable or unrelated business units, such as Complete Wellness Weight Management, Inc., Smokenders and Complete Billing Inc., are expected to allow management to focus on the Company's core business, integrating traditional and complementary/alternative medical centers, and significantly improve the Company's operating results in future periods. The Company anticipates that the weight loss programs offered by CWWM and the smoking cessation programs offered by Smokenders will continue to be offered by its Integrated Medical Centers. RESULTS FROM OPERATIONS THREE AND SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO THREE AND SIX MONTHS ENDED JUNE 30, 1998 Revenue. During the three and six months ended June 30, 1999 the Company had revenues of $2,560,780 and $7,140,814 respectively, as compared to $8,145,557 and $15,474,034 for the three and six months ended June 30, 1998. The decrease of $5,584,777 and $8,333,220 for the three and six months was due primarily to Complete Wellness Weight Management being idle in 1999. CWWM revenues for the three and six months ended June 30, 1998 were $2,935,295 and $5,303,951. Integrated Medical Center revenues for the three and six months ended June 30, 1999 were $2,530,352 and $7,025,214; respectively, as compared to $5,144,177 and $10,018,316 for the three and six months ended June 30, 1998. The decrease of $2,613,825 and $2,993,102 for the three and six months was attributable to the lack of growth of the existing 63 Integrated Medical Centers and a net reduction of 21 Integrated Medical Centers after June 30, 1998. During the three and six months ended June 30, 1999 Smokenders had revenues of $22,194 and $61,216 respectively, as compared to $58,093 and $103,645 for the three months ended June 30, 1998. The decrease of $35,899 and $42,429 was due to a slow down in the seminar programs and a winding down of the business. Salary and Consulting Costs. During the three and six months ended June 30, 1999 the Company incurred salary and consulting costs of $605,557 and $1,407,952 respectively, as compared to $2,218,061 and $3,739,895 for the three and six months ended June 30, 1998. The decrease of $1,612,504 and $2,331,943 was primarily due to Complete Wellness Weight Management being idle in 1999 and the reduction of personnel at the corporate headquarters. Management Fees. During the three and six months ended June 30, 1999 the Company incurred management fees of 9 10 $1,295,201 and $4,609,124 respectively, as compared to $2,371,113 and $4,998,003 for the three and six months ended June 30, 1998. These are fees that are paid to the affiliated chiropractors' admincorps for managing the day to day operations of the Integrated Medical Centers. The decrease of $1,075,912 and $388,879 was due primarily to reduced revenues in the medical clinics, contractual changes in 18 of the 63 medical clinics and a reduction of 21 clinics after June 30, 1998. Rent. During the three and six months ended June 30, 1999 the Company incurred rent expenses of $37,879 and $79,350 respectively, as compared to $745,140 and $1,253,714 for the three and six months ended June 30, 1998. Rent consists of amounts incurred for administrative, medical office space and certain equipment leased by the Company at corporate headquarters and the medical clinics. The decrease of $707,261 and $1,174,364 was due primarily to Complete Wellness Weight Management being idle in 1999. Advertising and Marketing. During the three and six months ended June 30, 1999 the Company incurred advertising and marketing expenses of $4,852 and $7,999 respectively, as compared to $396,090 and $605,853 for the three and six months ended June 30, 1998. The decrease of $391,238 and $597,854 is attributable to Complete Wellness Weight Management being idle in 1999. Bad Debt Expense. During the three and six months ended June 30,1999 the Company had bad debt expenses of $605,990 and $761,939 respectively, as compared to $1,122,304 and $2,169,540 for the three and six months ended June 30, 1998. The decrease of $516,314 and $1,407,601 was primarily due to the decrease in revenue of the medical clinics for the periods, the increase in collections of outstanding accounts receivable and a reduction in the percentage used to calculate the reserve based on historical experience. Network Development Costs. All network development costs relate to the activities of Optimum Health Services, Inc. During the three and six months ended June 30, 1998 the Company's OHS subsidiary experienced network development costs of $224,018 and $427,676 respectively. As a result of the spin-off of OHS in November 1998 the Company will not incur any of these costs in 1999. General and Administrative. During the three and six months ended June 30, 1999, the Company incurred general and administrative expenses of $661,276 and $927,976 respectively, as compared to $1,007,155 and $2,125,743 for the three and six months ended June 30, 1998. The decrease of $345,879 and $1,197,767 was due primarily to Complete Wellness Weight Management being idle in 1999 and the reduction of corporate overhead in such categories as insurance costs, legal and accounting costs, travel and entertainment costs and various other corporate costs such as automobile, telephone, postage and printing and reproduction, equipment rental, supplies, professional development, recruiting and repairs. Depreciation and Amortization. During the three and six months ended June 30, 1999, the Company incurred depreciation and amortization expense of $31,646 and $63,300 respectively, as compared to $24,125 and $109,908 for the three and six months ended June 30, 1998. The increase of $7,521 for the three month period is attributable to the accelerated write down of idle assets. The decrease of $46,608 for the six month period is attributable to the previous write down of idle assets in 1998. Operating Income. The consolidated operating loss of the Company was $681,621 and $724,004 for the three and six months ended June 30, 1999 as compared to a consolidated operating loss of $574,652 and $1,037,977 for the three and six months ended June 30, 1998. The increase resulted from improved operations at the Company's medical centers and benefited from the discontinuance of the operations of OHS, CWWM and CBI. Additionally, the Company has significantly reduced corporate overhead and has adjusted the calculations for certain reserves based on historical experience. Interest Expense. During the three and six months ended June 30, 1999 the Company had interest expense of $28,825 and $38,325 respectively, as compared to $0 and $1,523 for the three and six months ended June 30, 1998. The increase of $28,825 and $36,802 resulted from the interest due on notes entered into after June 30, 1998. Interest Income. During the three and six months ended June 30, 1999, the Company had interest income of $1,813 and $3,000 respectively, as compared to $4,947 and $26,810 for the three and six months ended June 30, 1998. The decrease of $3,134 and $23,810 resulted from a lower amount of invested funds in 1999 as compared to the same periods in 1998. LIQUIDITY AND CAPITAL RESOURCES The Company has experienced net losses, negative cash flow from operations and an accumulated deficit since its inception. For the three and six months ended June 30, 1999, the Company had net loss of $708,633 and $759,329 as compared to a net loss of $570,750 and $1,006,556 for the three and six months ended June 30, 1998. At June 30, 1999, the Company had working capital of $(3,799,372) and an accumulated deficit of $16,553,720. Net cash used in operations for the six months ended June 30, 1999 was $1,192,267, as compared to $2,770,953 for six months ended June 30, 1998. Negative cash flows are attributable primarily to net losses in 1998 and increases in cash flows for the three and six months ended June 30, 1999 are 10 11 attributable primarily to increases in accounts receivable net of accounts payable and other current liabilities. For the six months ended June 30, 1999 the Company used in investing activities $3,116, as compared to $61,506 for the six months ended June 30, 1998, for the purchase of equipment. The Company intends to develop approximately 15 additional medical clinics by December 31, 1999. The average cost to the Company to develop a medical clinic is approximately $15,000. The Company has entered into employment agreements with certain key employees which generally provide for continued employment through August 31, 2000 at an aggregate annual compensation level of $400,000. In the event the employees subject to such agreements were terminated by the Company for reasons other than "with cause", the employees would receive 6 to 12 months compensation and benefits upon separation. The Company has not obtained key man life insurance for employees subject to such employment agreements. In addition, the Company has entered into various consulting agreements which generally provide for payment of "finders fees" of $1,500 to $4,000 for each chiropractic clinic identified by the consultant and integrated by the Company subject to certain maximum amounts ranging from up to $1,000,000 per consultant. Certain consulting agreements also provide for the Company to pay royalties ranging from 1% to 10% of gross collections at Integrated Medical Centers identified by the consultant for periods ranging from 5 to 25 years after integration. One consulting contract also provides for the payment of 1% of any increases in gross cash collections over the preceding 12 month period, at any Integrated Medical Center which the consultant provides specific services to. The Company and its affiliates are involved in the following material legal proceedings: Complete Wellness Centers, Inc. is currently involved in three material legal proceedings. The first matter is an action brought in Sarasota Florida in July 1997 by Jeffrey Friedlander, a medical doctor, against the Company for alleged back wages owed him by the Company for work he performed at an Integrated Medical Center in Florida. The case was tried by a jury in March, 1999, and a verdict was entered against the Company in the amount of $141,000, which includes $100,000 in punitive damages. The Company contests the jury finding and has appealed the decision. The second matter is a breach of contract action brought by Comprehensive Billing Services, Inc., a medical billing company, against the Company and one of the Integrated Medical Centers in Tampa, Florida, in May 1998 alleging a breach of contract and seeking damages of approximately $14,500. The Company has submitted its answer and discovery is currently underway. The Company intends to defend the suit vigorously. The third matter involves an action initiated by James Renegar, a massage therapist, in Pinellas County, Florida in May 1998 against the Company for an unspecified amount of back wages which the therapist alleges is owed him. He has sued the Company and the Integrated Medical Center for the wages, alleging an oral contract with the Company. The Company denies that he was an employee of the Company and is vigorously defending the action. In addition to the matters described above, the Company's subsidiaries are involved in the following legal matters: Complete Wellness Weight Management, Inc.("CWWM"), a wholly-owned subsidiary of the Company, ceased operations in December, 1998. At the time, it vacated the various store locations which it had rented to conduct business. In vacating the premises, CWWM had outstanding lease obligations, which were not guaranteed by the Company. Many of the landlords of those various locations have brought suit against CWWM seeking to recover damages under the leases, for past and future rent and associated charges. The Company has not opposed those collection actions, and several such suits have proceeded to judgment against CWWM. Although no plaintiffs in such suits have obtained judgments against the Company, any attempt by any such creditor of CWWM to impose any liability on the Company will be promptly and vigorously defended by the Company. Likewise, certain other creditors, including vendors to various CWWM facilities, have brought collection actions against CWWM. Once again, although no such suits have obtained judgments against the Company, any attempt by any such creditor of CWWM to impose any liability on the Company will be promptly and vigorously defended by the Company. The Company has a number of ongoing disputes with former employees, vendors and Integrated Medical Center Doctors. The Company believes these disputes are in the normal course of business and are not material. The Company endeavors to settle such disputes in a timely manner. In November 1997, various facilities of the Company's operations were searched by federal authorities pursuant to search warrants, and the government removed various computer equipment, records and documents. During 1998, various employees of the Company and certain subsidiaries were served with subpoenas requesting records and documents related to billing and claims coding, clinical relationships and corporate records. The Company believes it may be a target in this investigation. Only one employee has received a target letter stating that the employee is a subject of the investigation. While it is too early to predict the outcome of any of the ongoing investigations of the Company or the initiation of any additional 11 12 investigations, were the Company to be found in violation of federal or state laws relating to Medicare, Medicaid, CHAMPUS or similar programs, the Company could be subject to substantial monetary fines, civil and criminal penalties and exclusion from participation in the Medicare, Medicaid or CHAMPUS programs and similar other reimbursement programs. Any such sanctions could have a material adverse effect on the Company's financial position and results of operations. The Company is currently seeking additional financing in the form of a private placement of up to 1,000,000 shares of its common stock, the net proceeds of which are expected to repay current debt, fund the development of additional Integrated Medical Centers, and to fund general corporate working capital requirements. Through June 30, 1999 the Company has sold 587,000 shares of its common stock pursuant to the private placement and has received $435,000 net of related expenses. The Company anticipates continuing to utilize the services of one or more investment advisors/bankers to assist the Company in consummating this financing. Year 2000 Issue The Year 2000 issue is the result of computer programs being written using two digits rather than four to define the applicable year. Any of the Company's operational equipment or internal computer software that have time-sensitive programs may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in a system failure or miscalculations causing disruption of operations, including, among other things, a temporary inability to process transactions, send invoices, or engage in similar normal business activities. Similar failures in the Company's medical clinics could result in an impairment of revenue recognition due to significant future obligations, impairment of future services provided by the Company's subsidiaries, or potential other liability. The Company has been and is continuing to assess the implications on its operations of the Year 2000 issue. At June 30, 1999, the process of evaluation the Company's services, products and internal systems was, in the Company's determination, complete. At this time, the Company is satisfied that all of its major vendors have or are in the process of verifying to the Company their Year 2000 compliance. The Company's internal systems have been updated, where appropriate, to accomplish Year 2000 compliance. Any actual impact of Year 2000 compliance on the Company's future results of operations, capital spending, and business operations is not expected to be material. Net Operating Loss Carryforward At December 31, 1998, the Company and its wholly owned subsidiaries had combined net operating loss carryforwards for income tax purposes of approximately $3,030,000, which expire between 2010 and 2011. The Company files a consolidated federal tax return with its wholly owned subsidiaries. CWC, LLC was not included in this tax return through May 1998. CWC, LLC is treated as a partnership for tax purposes and its gains and losses are reflected at each member's level as of that date. In addition, these carryforwards may be significantly limited under the Internal Revenue Code of 1986, as amended, as a result of ownership changes resulting from the Company's Preferred Stock financing and other equity offerings. A valuation allowance of approximately $4,546,000 has been established at December 31, 1998 to offset any benefit from the net operating loss carryforwards, as it cannot be determined when or if the Company will be able to utilize the net operating losses. Utilization of the net operating loss carryforwards may be significantly limited, based on changes in the Company's ownership. Seasonality The Company believes that the patient volumes at its Integrated Medical Centers are not significantly affected by seasonality. 12 13 PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The Company and its affiliates are involved in the following material legal proceedings: Complete Wellness Centers, Inc. is currently involved in three material legal proceedings. The first matter is an action brought in Sarasota Florida in July 1997 by Jeffrey Friedlander, a medical doctor, against the Company for alleged back wages owed him by the Company for work he performed at an Integrated Medical Center in Florida. The case was tried by a jury in March, 1999, and a verdict was entered against the Company in the amount of $141,000, which includes $100,000 in punitive damages. The Company contests the jury finding and has appealed the decision. The Company expects to settle this matter on terms favorable to the Company. The second matter is a breach of contract action brought by Comprehensive Billing Services, Inc., a medical billing company, against the Company and one of the Integrated Medical Centers in Tampa, Florida, in May 1998 alleging a breach of contract and seeking damages of approximately $14,500. The Company has submitted its answer and discovery is currently underway. The Company intends to defend the suit vigorously. The third matter involves an action initiated by James Renegar, a massage therapist, in Pinellas County, Florida in May 1998 against the Company for an unspecified amount of back wages which the therapist alleges is owed him. He has sued the Company and the Integrated Medical Center for the wages, alleging an oral contract with the Company. The Company denies that he was an employee of the Company and is vigorously defending the action. In addition to the matters described above, the Company's subsidiaries are involved in the following legal matters: Complete Wellness Weight Management, Inc.("CWWM"), a wholly-owned subsidiary of the Company, ceased operations in December, 1998. At the time, it vacated the various store locations which it had rented to conduct business. In vacating the premises, CWWM had outstanding lease obligations, which were not guaranteed by the Company. Many of the landlords of those various locations have brought suit against CWWM seeking to recover damages under the leases, for past and future rent and associated charges. The Company has not opposed those collection actions, and several such suits have proceeded to judgment against CWWM. Although no such suits have obtained judgments against the Company, any attempt by any such creditor of CWWM to impose any liability on the Company will be promptly and vigorously defended by the Company. Likewise, certain other creditors, including vendors to various CWWM facilities, have brought collection actions against CWWM. Although no plaintiffs in such suits have obtained judgments against the Company, any attempt by any such creditor of CWWM to impose any liability on the Company will be promptly and vigorously defended by the Company. The Company has a number of ongoing disputes with former employees, vendors and Integrated Medical Center Doctors. The Company believes these disputes are in the normal course of business and are not material. The Company endeavors to settle such disputes in a timely manner. In November 1997, various facilities of the Company's operations were searched by federal authorities pursuant to search warrants, and the government removed various computer equipment, records and documents. During 1998, various employees of the Company and certain subsidiaries were served with subpoenas requesting records and documents related to billing and claims coding, clinical relationships and corporate records. The Company believes it may be a target in this investigation. Only one employee has received a target letter stating that the employee is a subject of the investigation. While it is too early to predict the outcome of any of the ongoing investigations of the Company or the initiation of any additional investigations, were the Company to be found in violation of federal or state laws relating to Medicare, Medicaid, CHAMPUS or similar programs, the Company could be subject to substantial monetary fines, civil and criminal penalties and exclusion from participation in the Medicare, Medicaid or CHAMPUS programs and similar other reimbursement programs. Any such sanctions could have a material adverse effect on the Company's financial position and results of operations. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS Not applicable ITEM 3. DEFAULTS UPON SENIOR SECURITIES Not applicable ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable ITEM 5. OTHER INFORMATION Not applicable 13 14 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits filed: None (b) Reports on Form 8-K 3/15/99 Item 5 Change in Registrant's Certifying Accountant Item 7 Exhibits 3/12/99 Item 5 Change in Registrant's Certifying Accountant Item 7 Exhibits 3/09/99 Item 1 Change in Control of Registrant Item 7 Exhibits SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Complete Wellness Centers, Inc. Date: May 10, 2000 By /s/ Rebecca R. Irish --------------------------- Rebecca R. Irish Chief Financial Officer 14 EX-27 2 FINANCIAL DATA SCHEDULE
5 6-MOS DEC-31-1999 JAN-01-1999 JUN-30-1999 545,728 0 13,569,441 7,079,796 46,228 7,129,487 709,324 399,925 7,468,569 10,928,859 552,950 0 5,294,278 588 (4,013,240) 7,468,569 7,140,814 7,140,814 6,111,603 6,111,603 991,276 761,939 35,325 (759,329) 0 (759,329) 0 0 0 (759,329) ($0.24) ($0.24)
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