10QSB 1 e10qsb.txt COMPLETE WELLNESS CENTERS, INC. FORM 10-QSB 1 =============================================================================== U.S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 -------------------------------------------- FORM 10-QSB QUARTERLY REPORT UNDER SECTION 13 OF 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2000 -------------------------------------------- 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 201, WINTER PARK, FL 32792 -------------------------------- (Address and telephone number of principal executive offices) (407) 673-3073 ------------------------- (Issuer's telephone number) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15 (d) of the Exchange Act during the past 12 months(or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes _X_ No ___. State the number of shares outstanding of each of the issuer's classes of common equity, at June 30, 2000: 5,725,178 shares of Common Stock. Transitional Small Business Disclosure Format (check one) Yes ___ No _X_ 1 2 COMPLETE WELLNESS CENTERS, INC. FORM 10-QSB INDEX PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS (UNAUDITED) CONDENSED CONSOLIDATED BALANCE SHEETS JUNE 30, 2000 AND DECEMBER 31, 1999 CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS FOR THREE AND SIX MONTHS ENDED JUNE 30, 2000 AND JUNE 30, 1999 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2000 AND JUNE 30,1999 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS PART II. OTHER INFORMATION ITEM 1 LEGAL PROCEEDINGS ITEM 2 CHANGES IN SECURITIES AND USE OF PROCEEDS ITEM 3 DEFAULTS UPON SENIOR SECURITIES ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ITEM 5 OTHER INFORMATION ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K SIGNATURES 2 3 ITEM 1 -- FINANCIAL STATEMENTS COMPLETE WELLNESS CENTERS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, December 31, 2000 1999 ----- ---- (Unaudited) (Audited) ASSETS Current Assets: Cash and cash equivalents $210,225 $272,034 Certificate of deposit, restricted 111,002 111,002 Patient receivables, net of allowance for doubtful accounts of $6,980,000 and $5,270,000 at June 30, 2000 and December 31, 1999, respectively 4,325,696 5,485,901 Prepaid expenses 35,000 46,667 Other assets 1,555 ------------------------ ------------------- Total current assets 4,681,923 5,917,159 Furniture and equipment, net 181,977 225,978 Deposits 1,400 1,400 ------------------------ ------------------- Total assets $4,865,300 $6,144,537 ======================== =================== LIABILITIES AND STOCKHOLDERS' EQUITY/( DEFICIT) Current liabilities: Current portion of notes payable $1,064,142 $582,525 Accounts payable and accrued expenses 2,746,158 2,729,786 Accrued management fees and leases 2,035,268 2,573,463 ------------------------ ------------------- Total current liabilities 5,845,568 5,885,774 Note payable 298,740 314,475 Stockholders' equity/(deficit): Common Stock,$.0001665 par value per share 50,000,000 shares authorized, 5,725,178 and 4,881,149 shares issued and outstanding at June 30, 2000 and December 31, 1999, respectively 951 813 Senior Convertible Preferred Stock, $.01 par value per share, 8% Cumulative, and 113,880 and 121,107 shares issued and outstanding at June 30, 2000 and December 31, 1999, respectively 1,139 1,211 Junior Convertible Preferred Stock, $.01 par value per share, 8% cumulative, 2,175 and and 2,071 shares issued and outstanding at June 30, 2000 and December 31, 1999, respectively 22 21 Additional capital 19,697,053 18,838,475 Accumulated deficit (20,978,173) (18,896,232) ------------------------ ------------------- Total stockholders' deficit (1,279,008) (55,712) ------------------------ ------------------- Total liabilities and stockholders'equity/(deficit) $4,865,300 $6,144,537 ======================== ===================
Note: The Balance Sheet at December 31, 1999 has been extracted from the audited financial statements at that date. See notes to condensed consolidated financial statements. 3 4 COMPLETE WELLNESS CENTERS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, 2000 1999 2000 1999 (Unaudited) (Unaudited) (Unaudited) (Unaudited) Revenue: Integrated medical clinics $2,076,922 $2,530,352 $4,396,130 $7,025,214 Other income 30,428 115,600 ----------------- ----------------- ------------------ ------------------- Total operating revenue 2,076,922 2,560,780 $4,396,130 7,140,814 Direct expenses: Salary and consulting costs 352,124 605,557 960,227 1,407,952 Management fees 1,655,933 1,295,201 2,776,132 4,609,124 Cost of revenues 7,178 Rent 10,000 37,879 21,047 79,350 Advertising and marketing 150 4,852 3,798 7,999 Bad debt expense 888,608 605,990 1,559,344 761,939 ----------------- ----------------- ------------------ ------------------- Total direct expenses 2,906,815 2,549,479 5,320,548 6,873,542 General and administrative 421,918 661,276 678,090 927,976 Depreciation and amortization 22,000 31,646 44,000 63,300 ----------------- ----------------- ------------------ ------------------- Operating gain/loss (1,273,811) (681,621) (1,646,508) (724,004) Interest expense 110,870 28,825 136,104 38,325 Interest income 1,300 1,813 2,347 3,000 ----------------- ----------------- ------------------ ------------------- Net income/loss before income taxes (1,383,381) (708,633) (1,780,265) (759,329) Income taxes ----------------- ----------------- ------------------ ------------------- Net income/loss after income taxes ($1,383,381) ($708,633) $(1,780,265) ($759,329) ================= ================= ================== =================== Income/loss per share - basic ($0.26) ($0.22) ($0.34) ($0.24) ================= ================= ================== =================== - diluted ($0.26) ($0.22) ($0.34) ($0.24) ================= ================= ================== =================== Weighted avg. common shares - basic 5,406,735 3,243,255 5,195,728 3,108,407 ================= ================= ================== =================== - diluted 5,406,735 3,243,255 5,195,728 3,108,407 ================= ================= ================== ===================
See notes to condensed consolidated financial statements. 4 5 COMPLETE WELLNESS CENTERS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
------------------------------------------------------------------------------------- THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, JUNE 30, JUNE 30, 2000 1999 2000 1999 --------------------------------- (Unaudited) (Unaudited) (Unaudited) (Unaudited) OPERATING ACTIVITIES Net income/loss ($1,383,381) ($708,633) ($1,780,265) ($759,329) Adjustments to reconcile net income/loss to net Cash used in operating activities: Allocated proceeds of debt issued 57,994 57,994 0 Depreciation and amortization 22,000 31,646 44,000 63,300 Provision for bad debt 888,608 605,990 1,559,344 761,939 Recognition of compensatory granting non-qualified stock options 3,405 6,810 Recognition of the issuance of common stock warrants an options 400 95,826 0 Changes in operating assets and liabilities: Accounts receivables (194,538) (180,190) (399,140) (1,485,215) Other current assets 5,837 3,220 13,222 21,027 Accounts payable and other current (396,877) 199,200 liabilities 285,055 (273,384) ----------------------------------------------------------------- NET CASH USED IN OPERATING ACTIVITIES (318,025) (517,946) (805,896) (1,192,267) INVESTING ACTIVITIES Purchase of equipment (2,032) (3,116) NET CASH USED IN INVESTING ACTIVITIES (2,032) (3,116) FINANCING ACTIVITIES Payment of notes (12,953) (31,112) 0 Proceeds from sale of common stock 435,000 435,000 Proceeds from sale of stock options 225,199 684,148 Proceeds from notes payable 250,000 550,000 177,000 ----------------------------------------------------------------- NET CASH PROVIDED BY FINANCING ACTIVITIES 237,047 435,000 744,087 1,296,148 ----------------------------------------------------------------- NET INCREASE IN CASH AND CASH EQUIVALENTS (80,978) (84,978) (61,809) 100,765 Cash and cash equivalents at beginning of year 291,203 630,706 272,034 444,963 ----------------------------------------------------------------- Cash and cash equivalents at end of period $210,225 $545,728 $210,225 $545,728 ================================================================= SUMMARY OF SUPPLEMENTARY CASH FLOWS DISCLOSURES: Interest paid 0 0 Income taxes paid 0 0
Significant non-cash transactions completed by the Company during the three months ended March 31, 2000 include the following: Payment of preferred stock dividends with shares of preferred stock $301,677
See notes to condensed consolidated financial statements. 5 6 COMPLETE WELLNESS CENTERS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMETNS (UNAUDITED) JUNE 30, 2000 NOTE A - LIQUIDITY The consolidated financial statements of Complete Wellness Centers, Inc., (the "Company") have been presented on the basis that the Company is a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. For the year ended December 31, 1999, the Company had recurring loss from operations of $2,805,000, and total stockholders' deficiency of $56,000. The current ratio at December 31, 1999 was 1.01. For the six months ended June 30, 2000, the Company had recurring loss from operations of $1,780,000, and total stockholders' deficiency of $1,279,000. The current ratio at June 30, 2000 was 0.80. The Company has undergone significant restructuring of its operations to reduce overhead costs and is currently attempting to renegotiate its contractual relationships with its current customers. As has been the Company's practice, as certain contractual relationships cease to be honored, such lack of ability to control the operations of the customer have been reflected in the financial statements herein with adjusted for proper reflection in the consolidated financial statements. It is the Company's plan to seek relief from its creditors through debt forgiveness and/or long-term payment plans as the Company cannot meet its current obligations. Unless and until such relief is obtained, additional capital infusion from investors will be unlikely. NOTE B - BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-QSB and Article 10 of Regulation S-X. The financial statement information was derived from unaudited financial statements unless indicated otherwise. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included in the accompanying condensed consolidated financial statements. Operating results for the three and six month periods ended June 30, 2000 are not necessarily indicative of the results that may be expected for the year ending December 31, 2000. The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the Company's audited financial statements included in the Company's Form 10-KSB dated March 28, 2000, for the period ended December 31, 1999. Certain prior period amounts have been reclassified to conform to the current period presentation. 6 7 COMPLETE WELLNESS CENTERS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) JUNE 30, 2000 NOTE C - NET INCOME/(LOSS) PER SHARE The Company's net income/(loss) per share calculations are based upon the weighted average number of shares of Common Stock outstanding. Pursuant to the requirements of the Securities and Exchange Commission (SEC) staff accounting bulletin No. 98, the Company considers all potentially dilutive securities issued for nominal consideration prior to the Company's initial public offering as outstanding for all periods presented. Other shares issuable upon the exercise of stock options or conversion of the 8% Senior Convertible Preferred Stock (the "Senior Convertible Preferred Stock") or conversion of the 8% Junior Convertible Preferred Stock (the "Junior Convertible Preferred Stock") have been excluded from the computation because the effect of their inclusion would be anti-dilutive for June 30, 1999 and 2000. The following table sets forth the computation of basic loss per share:
Three Months Ended Six Months Ended June 30, June 30, June 30, June 30, 2000 1999 2000 1999 Net Income/(Loss) ($1,383,381) ($708,633) ($1,780,265) ($759,329) Weighted avg. shares outstanding - Basic 5,406,735 3,243,255 5,195,728 3,108,407 Incremental shares under stock 0 0 0 0 option plans Conversion of 8% Senior 0 0 0 0 Convertible Preferred Stock Conversion of 8% Junior 0 0 0 0 Convertible Preferred Stock Weighted average shares outstanding - diluted 5,406,735 3,243,255 5,195,728 3,108,407 Basic income/(loss) per share ($0.26) ($0.22) ($0.34) ($0.24)
NOTE D - FINANCINGS AND STOCKHOLDERS' EQUITY On July 14, 1999, we entered into a Separation and Release Agreement with Eric S. Kaplan, our former president and director, made effective as of July 21, 1999. In return and as consideration of Mr. Kaplan's resignation and release of the Company from all employment claims or actions, we agreed to: (i) indemnify him for actions taken by the Company or by him as an officer or director of the Company; (ii) continue liability coverage for as long as the applicable statute of limitations of claims shall run; (iii) transfer to him $200,000 in market value of the Company's common stock at a rate of 5,000 shares per month through stock issuances or stock option grants; (iv) reimburse a portion of his attorney fees in the amount of $6,000; and (v) pay him the sum of $10,000 in cash. We accelerated the vesting of the remaining options during the three months ended March 31, 2000. Subsequently, Dr. Kaplan exercised an aggregate of 60,000 options, the value of which was recorded as compensation expense. As final settlement of the remaining amounts owed Dr. Kaplan under this Agreement, on August 4, 2000, Dr. Kaplan was granted 62,000 options from two of the Company's stock option plans to purchase 62,000 shares of the Company's common stock at $0.01 per share and Dr. Kaplan also accepted a non-interest bearing promissory note from the Company for $19,000. In January 2000, the Board made a grant of 20,000 options, from the 1996 Stock Option Plan, to purchase common stock in the Company at $0.01 per share for the equal benefit of Nico Pronk and Wayne Horne, principals of Noble Financial Group, Inc. Following the grant of such options, both exercised their options and shares were issued. The Company received $200 for the exercise of these options. On January 4, 2000, the Company made a grant to Mrs. Joan Raymond of 100,000 options to purchase common stock in the Company, pursuant to the 1996 Stock Option Plan, at $1.25 per share. Following the grant of such options, Mrs. Raymond exercised those options and shares were issued. The Company received $125,000 for the exercise of such options. Mrs. Raymond is the sister-in-law of Mr. Joseph Raymond, Jr., Chairman (at that time) and CEO of the Company. 7 8 COMPLETE WELLNESS CENTERS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) JUNE 30, 2000 NOTE D - FINANCINGS AND STOCKHOLDERS' EQUITY (Continued) On February 23, 2000, the Company also made a grant of 57,143 options, from the 1999 Consultants Stock Option Plan, to purchase common stock in the Company at $1.75 per share to Structure Management, Inc. Following the grant of such options, Structure Management, Inc. exercised its options and shares were issued. The Company received $100,000 for the exercise of these options. Mr. Jeffrey Raymond is a principal in Structure Management, Inc. and Mr. Raymond is the brother of Mr. Joseph Raymond, Jr., Chairman (at that time) and CEO of the Company. On March 23, 2000, Completewellness.com, Inc. ("cwc.com"), a wholly owned subsidiary of the Company received $300,000 from DrAlt.com Corporation ("DrAlt"). The loan carries a 9% interest rate and is payable in full on September 23, 2000. In addition, DrAlt was awarded five-year warrants to purchase 150,000 shares of common stock of Complete Wellness Centers, Inc. at $2.00 per share. On April 3,2000, cwc.com received $250,000 from DrAlt. The loan carries a 9% interest rate is payable in full on October 3, 2000. In addition, DrAlt was awarded five-year warrants to purchase 125,000 shares of common stock of Complete Wellness Centers, Inc. at $2.00 per share. On May 1, 2000, the holders of Senior Convertible Preferred Stock submitted a request to convert 13,156 shares of Senior Convertible Preferred Stock to 524,101 shares of common stock; such shares were issued on May 4, 2000. On June 15, 2000, Raintree Systems, Inc. exercised 40,000 options to purchase 40,000 shares of the Company's common stock at $0.01 per share. On July 26, 2000, the Board of Directors voted to reprice certain stock options as shown below. Mr. Raymond agreed to forfeit his rights to 50,000 vested options for the purchase of 50,000 shares of the Company's common stock at $1.50 per share in return for the lower exercise price on his remaining 50,000 vested options. 1996 Stock Option Plan Joseph J. Raymond From $1.50 per share to $0.4375 per share on 50,000 shares 1998 Outside Directors Stock Option Plan Directors From $1.25 per share to $0.4375 per share on 52,500 shares The Company's common stock and warrants are listed on the NASDAQ SmallCap Market and the Company must meet certain requirements in order to maintain this listing. The requirements for continued listing include satisfying one of the following conditions: (a) net tangible assets of at least $2,000,000 (b) market capitalization of at least $35,000,000 or (c) net income of at least $500,000 in the most recent fiscal year or in two of the last three fiscal years. The Company does not meet any of the criteria as of December 31, 1999 or as of March 31, 2000. The Company received notification from the NASDAQ SmallCap Listing Qualifications Division for the purpose of deficiencies in the minimum listing requirements of the NASDAQ SmallCap Market. The Company formally responded to the inquiry, developed and submitted a plan and timeline through which such minimum requirement would be met. There can be no assurance that NASDAQ will allow the Company's shares to remain listed while it works to regain compliance. Consequently, the Company's shares could be delisted from the NASDAQ SmallCap Market at any time. In the event that the Company's shares are delisted from the NASDAQ SmallCap Market, they could continue to trade on the NASDAQ "Bulletin Board". 8 9 COMPLETE WELLNESS CENTERS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) JUNE 30, 2000 NOTE E - CERTAIN RELATIONSHIPS AND TRANSACTIONS On March 23, 2000, and April 3, 2000, cwc.com, borrowed $300,000 and $250,000, respectively from DrAlt on an unsecured basis at a 9% interest rate for six (6) months. On the same dates, as additional consideration for the loans, the Company granted DrAlt five-year warrants to purchase 150,000 and 125,000 warrants respectively, to purchase shares of common stock of the Company at $2.00 per share. These notes were pursuant to a five-year services agreement made on March 7, 2000, by and between the Company, its subsidiary cwc.com and DrAlt whereby the parties would together provide alternative medicine information and products to practitioners and consumers through the Companies web site, www.completewellness.com. The Company, cwc.com and DrAlt had certain duties and compensation in the relationship based on their respective abilities and expertise. On March 7, 2000, the Company also signed a non-binding letter of intent to complete a tax-free merger with DrAlt. The Company would be the surviving entity and would issue to the shareholders of DrAlt, such number of fully paid and non-assessable shares of the Company's common stock as would result in the shareholders of DrAlt collectively owning immediately after the closing of such merger, fifty (50) percent of the common equity of the Company on a fully diluted basis except for any outstanding warrants. DrAlt shareholders would surrender their DrAlt shares to the Company at closing. There were significant contingencies involved in the agreement, including but not limited to completion of proper due diligence, conversion of the preferred shareholders to common shareholders, additional funding of the Company through a private placement and approval of the transaction by the shareholders of each company. The non-binding letter of intent and related services agreement with DrAlt were terminated on May 4, 2000. NOTE F - CONTINGENCIES As of August 8, 2000, the Company is in default on the interest payments due related to the notes payable to DrAlt.com Corporation described above. As of August 8, 2000, the Company is in default on the payments due related to the note payable to Bowne Publishing Company. A plaintiff has penetrated the corporate boundary between the Integrated Medical Center and the Company, Complete Wellness Centers, Inc. The court awarded $147,292 for wages and damages with a subsequent award for related legal fees of $37,712 were rendered against us. We have appealed the decisions and have obtained a bond in the amount of $222,005 for satisfaction of the judgments, which is backed by an irrevocable letter of credit for $111,002, against which we have pledged a certificate of deposit of $111,002. The full amount of the judgment has been previously accrued for. In July 2000, the Company was informed it had lost the appeal and would be required to pay the judgment. On July 17, 2000, a petition was filed by the plaintiff seeking an award of an additional $62,200 in attorney's fees and $7,031 in costs for work surrounding the garnishments and appeal. No such award has been made at this time. The bonding company has been notified of the original verdict being upheld and will proceed accordingly with their duties and rights under the bond agreement, which will include seizure of the certificate of deposit pledged against the bond. Chances for success on subsequent appeal are very limited and the Company has chosen not to pursue the appeal process further. On November 12, 1999, C. Thomas McMillen, our former Chairman and Chief Executive Officer filed suit in Superior Court for the District of Columbia seeking damages resulting from the termination of his employment agreement with us. Mr. McMillen alleges that we breached our employment contract with him and that we breached a covenant of good faith and fair dealing, which the suit alleges was implied in the agreement. He seeks salary, vacation, bonus pool, stock options, office space, secretarial support, cellular phone and benefits including health insurance from the date of termination, February 18, 1999, through August 31, 2000. He seeks judgment in the amount of $500,000 plus pre-judgment interest, the costs of his suit, attorney's fees and any further relief that the court deems just and proper. We believe the action has no merit but have attempted to arrive at a settlement agreement with Mr. McMillen without success. In addition to defending this action, we have filed a counterclaim seeking judgment for damages and costs. No hearings or depositions are scheduled at this time. In July 1999, Complete Wellness Weight Management, Inc., a wholly owned subsidiary, filed for Chapter 7 bankruptcy protection. An initial hearing of the creditors was held and one creditor appeared to be heard on September 29, 1999. There are two suits pending related to landlord claims under the bankruptcy, both of which we are defending. 9 10 COMPLETE WELLNESS CENTERS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) JUNE 30, 2000 NOTE F - CONTINGENCIES - Continued The Company was named in a lawsuit filed in Washington, D.C. on December 15, 1999 by Crestar Bank, a landlord, for alleged failure to pay $108,981 of rents and fees due under a sub-lease plus attorney's fees. The Company has settled the claim. The full amount of the settlement has been previously accrued in the Company's financial statements, however, the Company is in default of the payment agreement as of June 30, 2000. The Company was named in a lawsuit filed in Orange County, Florida on July 24, 2000 by Michael T. Brigante, former Chief Financial Officer of the Company, for alleged failure to pay $37,503 pursuant to a separation agreement between Mr. Brigante and the Company dated November 30, 1999. The full amount of the claim has been previously accrued in the Company's financial statements. In November 1997, three of our facilities were searched by federal authorities pursuant to search warrants, and the federal authorities removed computer records and written documents in connection with an investigation of alleged healthcare fraud. In June 1998, Complete Wellness Centers and several of its employees, including its former Chief Executive Officer, were served with subpoenas requesting records and documents related to billing and claims coding, clinical relationships and corporate records. We believe that we could be a target in this investigation. One employee received a letter dated January 13, 1998 from the United States Attorney General's Office stating that the employee was a subject of the investigation. The investigation appears to be focused on two clinics in Virginia. No charges have been filed against us or any of our employees to date. However, any such charges could have a material adverse effect on our future financial position and results of operations. From time to time in the course of Complete Wellness Centers carrying out its business, we encounter threatened litigation, none of which is presently considered to be material. 10 11 Independent Accountants' Review Report The Board of Directors Complete Wellness Centers, Inc. We have reviewed the accompanying condensed consolidated balance sheet of Complete Wellness Centers, Inc. as of June 30, 2000, and the related condensed consolidated statement of operations, and condensed consolidated statement of cash flows for the three-month and six-month periods ended June 30, 2000. These financial statements are the responsibility of the company's management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to the accompanying financial statements for them to be in conformity with generally accepted accounting principles. We have previously audited, in accordance with generally accepted auditing standards, the consolidated balance sheet as of December 31, 1999, and the related consolidated statement of operations, stockholders' deficiency, and cash flows for the year then ended (not presented herein); and in our report dated March 28, 2000, we expressed an unqualified opinion on those financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 1999, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note A to the financial statements, the Company has suffered recurring losses from operations and has an accumulated deficit, which raise substantial doubt about its ability to continue as a going concern. Management's plans regarding those matters also are described in Note A. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. AMPER, POLITZINER & MATTIA P.A. August 8, 2000 Edison, New Jersey 11 12 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL Statements included in this "Management's Discussion and Analysis of Financial Condition and Results of Operations" Section, and in other sections of this Report and in prior and future filings by the Company with the Securities and Exchange Commission, in the Company's prior and future press releases and in oral statements made with the approval of an authorized executive which are not historical or current facts are "forward-looking statements" made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and are subject to certain risks and uncertainties that could cause actual results to differ materially from those presently anticipated or projected. The Company wishes to caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made. There are important risk factors that in some cases have affected and in the future could affect the Company's actual results and could cause the Company's actual financial and operating performance to differ materially from that expressed in any forward-looking statement. The following discussion and analysis should be read in conjunction with the Condensed Consolidated Financial Statements and notes appearing elsewhere in this report. As of June 30, 2000, the Company was managing 33 operational Integrated Medical Centers in 11 states. The Company also managed two Integrated Medical Centers in one state, which became inactive during the three months ended March 31, 2000. The operations of all the medical corporations are included in the consolidated financial statements of the Company. For the six months ended June 30, 2000, the Company, as a result of its medical operations, had revenues of $4,396,000. RESULTS FROM OPERATIONS THREE AND SIX MONTHS ENDED JUNE 30, 2000 COMPARED TO THREE AND SIX MONTHS ENDED JUNE 30, 1999 Revenue. During the three and six months ended June 30, 2000 the Company had revenues of $2,077,000 and $4,396,000 respectively, as compared to $2,530,000 and $7,025,000 for the three and six months ended June 30, 1999. The decrease of $453,000 and $2,629,000, respectively was due to the discontinuance of contractual relationships with certain customers. The Company had 63 active Integrated Medical Centers under contract at June 30, 1999 compared to 33 at June 30, 2000. We and certain Integrated Medical Centers have mutually agreed to discontinue contractual obligations related to certain operations. Salary and Consulting Costs. During the three and six months ended June 30, 2000, the Company incurred salary and consulting costs of $352,000 and $960,000 respectively, as compared to $606,000 and $1,408,000 for the three and six months ended June 30, 1999. The decreases of $254,000 and $448,000 respectively, were primarily due to the reduction of personnel due to the consolidation of corporate operations after June 30, 1999 and the reduction in staffing at the corporate offices in June 2000. Management Fees and Bad Debt Expense. Contractually, the Company's patient accounts receivable balances at the Integrated Medical Centers and the cash expended by those centers affect the Company's remaining liability for management of the centers and the allowance for doubtful accounts. The accrued management fee and the allowance for doubtful accounts should be evaluated on a combined basis as an offset to gross patient accounts receivable to arrive at net collectible patient accounts receivable for the Company. During the three and six months ended June 30, 2000, the Company incurred combined management fees and bad debt expense of $2,545,000 and $4,335,000 respectively, as compared to $1,901,000 and $5,371,000 for the three and six months ended June 30, 1999. The management fees are paid to the affiliated chiropractors' administrative entities for managing the day-to-day operations of the Integrated Medical Centers. The combined management fees and bad debt expense should vary directly with revenue and gross patient accounts receivable. The combined provision was 122% and 99% of revenue for the three and six months ended June 30, 2000, respectively, compared to 75% and 76% for the three and six months ended June 30, 1999. Due to the Company's changes to existing customer's contractual arrangements, its cash flow difficulties and willingness to discount receivables in favor of cash, significant additional bad debt expense and related accounts receivable reserves have been recorded in the three months ended June 30, 2000. The combined accrued management fee liability combined with the allowance for doubtful accounts as a percentage of gross patient accounts receivable was 80% at June 30, 2000 and 73% at December 31, 1999. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF 12 13 OPERATIONS - Continued Rent. During the three and six months ended June 30, 2000, the Company incurred rent expense of $10,000 and $21,000 respectively, as compared to $38,000 and $79,000 for the three and six months ended June 30, 1999. Rent consists of amounts incurred for administrative, medical office space and certain equipment leased by the Company at corporate headquarters and the medical clinics. The decreases of $28,000 and $58,000 respectively, were due primarily to the consolidation of corporate operations in mid-year 1999. General and Administrative. During the three and six months ended June 30, 2000, the Company incurred general and administrative expenses of $422,000 and $678,000 respectively, as compared to $661,000 and $928,000 for the three and six months ended June 30, 1999. The decreases of $239,000 and $250,000 were due primarily to reduction of costs from the consolidation of corporate operations, net of increased legal fees during the three and six months ended June 30, 2000 resulting from $127,000 in fees and legal costs associated with ongoing matters, financings and acquisitions. Depreciation and Amortization. During the three and six months ended June 30, 2000, the Company incurred depreciation and amortization expense of $22,000 and $44,000 respectively, as compared to $32,000 and $63,000 for the three and six months ended June 30, 1999. The decreases of $12,000 and $19,000 respectively, resulted from the previous write down of idle assets. Operating Loss. The consolidated operating losses of the Company were $1,274,000 and $1,647,000 for the three and six months ended June 30, 2000 respectively, compared to consolidated operating losses of $682,000 and $724,000 for the three and six months ended June 30, 1999. The losses resulted primarily from a 64% reduction in revenues derived from the closure or inactivity of 30 of 63 Integrated Medical Centers since June 30, 1999 coupled with fees and legal costs associated with ongoing matters, financings and acquisitions present during the three and six months ended June 30, 2000. Interest Expense. During the three and six months ended June 30, 2000, the Company had interest expense of $111,000 and $136,000 compared to $29,000 and $38,000 for the six months ended June 30, 1999. The increases of $82,000 and $98,000 resulted from the interest accrued on outstanding notes payable for each period, primarily the effective cost of the warrants issued along with the notes payable to DrAlt.com Corporation that originated in late March 2000. Interest Income. During the three and six months ended June 30, 2000, the Company had interest income of $1,000 and $2,000 respectively, as compared to $2,000 and $3,000 for the three and six months ended June 30, 1999. The decreases are from a lower amount of invested funds in 2000 compared to the same periods in 1999. Earnings Per Share. During the three and six months ended June 30, 2000, the Company had losses per share of $0.26 and $0.34 respectively, compared to $0.22 and $0.24 for the three and six months ended June 30, 1999. The number of shares outstanding increased 67% for both the three and six months ended June 30, 2000 compared to the same periods in 1999 due to conversions from preferred stock to common stock, stock option exercises, common stock issued as payment for debts and new shares issued in private placements after June 30, 1999. The weighted average shares outstanding on a basic and fully diluted basis for the three and six months ended June 30, 2000 were 5,407,000 and 5,196,000, respectively. LIQUIDITY AND CAPITAL RESOURCES The Company has experienced net losses, negative cash flow from operations and an accumulated deficit since its inception. For the three and six months ended June 30, 2000, the Company had net losses of $1,383,000 and $1,780,000 respectively, as compared to net losses of $709,000 and $759,000 for the three and six months ended June 30, 1999. At June 30, 2000, the Company had negative working capital of $1,164,000 and an accumulated deficit of $20,978,000. Net cash used in operations for the three and six months ended June 30, 2000 were $318,000 and $806,000 respectively, as compared to $518,000 and $1,192,000 for the three and six months ended June 30, 1999. Negative cash flows are attributable primarily to net losses and increases in accounts receivable of $399,000 and decreases in accounts payable and other current liabilities of $397,000 for the six months ended June 30, 2000 compared to the six months ended June 30, 1999 when accounts receivable increased $1,485,000 and operating liabilities increased $199,000. We are currently dependent on advances from investors to meet our day-to-day cash needs. Operating expenses have been reduced to a minimum level as of June 30, 2000. As a result, we must identify other sources of cash immediately in order to remain in business. Failure to immediately identify other sources of cash could result in insolvency. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF 13 14 OPERATIONS - Continued On March 23, 2000, and April 3, 2000, cwc.com, borrowed $300,000 and $250,000, respectively from DrAlt on an unsecured basis at a 9% interest rate for six (6) months. On the same dates, as additional consideration for the loans, the Company granted DrAlt five-year warrants to purchase 150,000 and 125,000 warrants respectively, to purchase shares of common stock of the Company at $2.00 per share. These notes were pursuant to a five-year services agreement made on March 7, 2000, by and between the Company, its subsidiary cwc.com and DrAlt whereby the parties would together provide alternative medicine information and products to practitioners and consumers through the Companies web site, www.completewellness.com. The Company, cwc.com and DrAlt had certain duties and compensation in the relationship based on the respective abilities and expertise. On March 7, 2000, the Company also signed a non-binding letter of intent to complete a tax-free merger with DrAlt. The Company would be the surviving entity and would issue to the shareholders of DrAlt, such number of fully paid and non-assessable shares of the Company's common stock as would result in the shareholders of DrAlt collectively owning immediately after the closing of such merger, fifty (50) percent of the common equity of the Company on a fully diluted basis except for any outstanding warrants. DrAlt shareholders would surrender their DrAlt shares to the Company at closing. There were significant contingencies involved in the agreement, including but not limited to completion of proper due diligence, conversion of the preferred shareholders to common shareholders, additional funding of the Company through a private placement and approval of the transaction by the shareholders of each company. The non-binding letter of intent and related services agreement with DrAlt.com Corporation were terminated on May 4, 2000. The Company is in default of the required payment terms of the notes payable with DrAlt described herein as of August 8, 2000. The Company has entered into employment agreements with certain key employees. Each of the employment agreements requires the full-time services of the employees, are for specified periods of time and specify the compensation and termination terms. The agreements also contain covenants restricting the employees from engaging in any activities competitive with our business during the term of the agreement and for a period of one year thereafter, and prohibiting the employee from disclosing confidential information regarding our business. The Company has not met its obligations for cash payments under these agreements. The Company and its affiliates are involved in the following material legal proceedings: As of August 8, 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 wages, goods or services rendered to the Integrated Medical Center or management company. We believe that two of these disputes are not material. We are defending all such actions and believe none is meritorious. One case has the plaintiff having penetrated the corporate boundary between the Integrated Medical Center and the Company, Complete Wellness Centers, Inc. The court awarded $147,292 for wages and damages with a subsequent award for related legal fees of $37,712 were rendered against us. We have appealed the decisions and have obtained a bond in the amount of $222,005 for satisfaction of the judgments, which is backed by an irrevocable letter of credit for $111,002, against which we have pledged a certificate of deposit of $111,002. The full amount of the judgment has been previously accrued for. In July 2000, the Company was informed it had lost the appeal and would be required to pay the judgment. On July 17, 2000, a petition was filed by the plaintiff seeking an award of an additional $62,200 in attorney's fees and $7,031 in costs for work surrounding the garnishments and appeal. No such award has been made at this time. The bonding company has been notified of the original verdict being upheld and will proceed accordingly with their duties and rights under the bond agreement, which will include seizure of the certificate of deposit pledged against the bond. Chances for success on subsequent appeal are very limited and the Company has chosen not to pursue the appeal process further. On November 12, 1999, C. Thomas McMillen, our former Chairman and Chief Executive Officer filed suit in Superior Court for the District of Columbia seeking damages resulting from the termination of his employment agreement with us. Mr. McMillen alleges that we breached our employment contract with him and that we breached a covenant of good faith and fair dealing, which the suit alleges was implied in the agreement. He seeks salary, vacation, bonus pool, stock options, office space, secretarial support, cellular phone and benefits including health insurance from the date of termination, February 18, 1999, through August 31, 2000. He seeks judgment in the amount of $500,000 plus pre-judgment interest, the costs of his suit, attorney's fees and any further relief that the court deems just and proper. We believe the action has no merit but have attempted to arrive at a settlement agreement with Mr. McMillen without success. In addition to defending this action, we have filed a counterclaim seeking judgment for damages and costs. No hearings or depositions are scheduled at this time. In July 1999, Complete Wellness Weight Management, Inc., a wholly owned subsidiary, filed for Chapter 7 bankruptcy protection. An initial hearing of the creditors was held and one creditor appeared to be heard on September 29, 1999. There are two suits pending related to landlord claims under the bankruptcy, both of which we are defending. 14 15 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued The Company was named in a lawsuit filed in Washington, D.C. on December 15, 1999 by Crestar Bank, a landlord, for alleged failure to pay $108,981 of rents and fees due under a sub-lease plus attorney's fees. The Company has settled the claim. The full amount of the settlement has been previously accrued in the Company's financial statements, however, the Company is in default of the payment agreement as of June 30, 2000 and subsequently. The Company was named in a lawsuit filed in Orange County, Florida on July 24, 2000 by Michael T. Brigante, former Chief Financial Officer of the Company, for alleged failure to pay $37,503 pursuant to a separation agreement between Mr. Brigante and the Company dated November 30, 1999. The full amount of the claim has been previously accrued in the Company's financial statements. In November 1997, three of our facilities were searched by federal authorities pursuant to search warrants, and the federal authorities removed computer records and written documents in connection with an investigation of alleged healthcare fraud. In June 1998, Complete Wellness Centers and several of its employees, including its former Chief Executive Officer, were served with subpoenas requesting records and documents related to billing and claims coding, clinical relationships and corporate records. We believe that we could be a target in this investigation. One employee received a letter dated January 13, 1998 from the United States Attorney General's Office stating that the employee was a subject of the investigation. The investigation appears to be focused on two clinics in Virginia. No charges have been filed against us or any of our employees to date. However, any such charges could have a material adverse effect on our future financial position and results of operations. From time to time in the course of Complete Wellness Centers carrying out its business, we encounter threatened litigation, none of which is presently considered to be material. The Company's common stock and warrants are listed on the NASDAQ SmallCap Market and the Company must meet certain requirements in order to maintain this listing. The requirements for continued listing include satisfying one of the following conditions: (a) net tangible assets of at least $2,000,000 (b) market capitalization of at least $35,000,000 or (c) net income of at least $500,000 in the most recent fiscal year or in two of the last three fiscal years. The Company does not meet any of the criteria as of December 31, 1999 or as of June 30, 2000. The Company received notification from the NASDAQ SmallCap Listing Qualifications Division for the purpose of deficiencies in the minimum listing requirements of the NASDAQ SmallCap Market. The Company formally responded to the inquiry, developed and submitted a plan and timeline through which such minimum requirement would be met. There can be no assurance that NASDAQ will allow the Company's shares to remain listed while it works to regain compliance. Consequently, the Company's shares could be delisted from the NASDAQ SmallCap Market at any time. In the event that the Company's shares are delisted from the NASDAQ SmallCap Market, they could continue to trade on the NASDAQ "Bulletin Board". Year 2000 Issue Many currently installed computer systems and software products are coded to accept only two digit entries in the date code field. These systems and products will need to accept four digit entries to distinguish 21st century dates from 20th century dates. As a result, computer systems and software used by many companies and government agencies may need to be updated to comply with the year 2000 requirements or risk system failure or miscalculations causing disruptions to business activities. All of the Company's internal operating systems were compliant as of December 31, 1999, however, Year 2000 problems may not surface until after January 1, 2000. Management estimates that the costs associated with any additional activities will not have a material effect on the Company's operations. Net Operating Loss Carryforward The Company files a consolidated federal tax return with its wholly owned subsidiaries. At December 31, 1999, the Company had net operating loss carryforwards for income tax purposes of approximately $8,713,000 which expire between 2010 and 2012. Utilization of net operating loss carryforwards may be significantly limited, based on changes in the Company's ownership. The use of substantially all of the combined net operating loss carryforwards of CWC, LLC will be limited to offset future taxable income of each separate subsidiary in proportion to their share of the tax losses generated to date. In addition, these carryforwards may be significantly limited under the Internal Revenue Code as a result of ownership changes resulting from the Company's Senior and Junior Convertible Preferred Stock financing and other equity offerings. 15 16 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued The Company has a cumulative pretax loss for financial reporting purposes. Recognition of deferred tax assets will require generation of future taxable income. There can be no assurance that the Company will generate earnings in future years. Therefore, the Company established a valuation allowance on deferred tax assets of approximately $5,415,000 as of December 31, 1999, respectively. Seasonality The Company believes that the patient volumes at its Integrated Medical Centers are not significantly affected by seasonality. PART II OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The Company and its affiliates are involved in the following material legal proceedings: As of August 8, 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 wages, goods or services rendered to the Integrated Medical Center or management company. We believe that two of these disputes are not material. We are defending all such actions and believe none is meritorious. In one case, the plaintiff penetrated the corporate boundary between the Integrated Medical Center and the Company, Complete Wellness Centers, Inc. The court awarded $147,292 for wages and damages with a subsequent award for related legal fees of $37,712 were rendered against us. We appealed the decisions and obtained a bond in the amount of $222,005 for satisfaction of the judgments, which is backed by an irrevocable letter of credit for $111,002, against which we have pledged a certificate of deposit of $111,002. The full amount of the judgment has been previously accrued for. In July 2000, the Company was informed it had lost the appeal and would be required to pay the judgment. On July 17, 2000, a petition was filed by the plaintiff seeking an award of an additional $62,200 in attorney's fees and $7,031 in costs for work surrounding the garnishments and appeal. No such award has been made at this time. The bonding company has been notified of the original verdict being upheld and will proceed accordingly with their duties and rights under the bond agreement, which will include seizure of the certificate of deposit pledged against the bond. Chances for success on subsequent appeal are very limited and the Company has chosen not to pursue the appeal process further. On November 12, 1999, C. Thomas McMillen, our former Chairman and Chief Executive Officer filed suit in Superior Court for the District of Columbia seeking damages resulting from the termination of his employment agreement with us. Mr. McMillen alleges that we breached our employment contract with him and that we breached a covenant of good faith and fair dealing, which the suit alleges was implied in the agreement. He seeks salary, vacation, bonus pool, stock options, office space, secretarial support, cellular phone and benefits including health insurance from the date of termination, February 18, 1999, through August 31, 2000. He seeks judgment in the amount of $500,000 plus pre-judgment interest, the costs of his suit, attorney's fees and any further relief that the court deems just and proper. We believe the action has no merit but have attempted to arrive at a settlement agreement with Mr. McMillen without success. In addition to defending this action, we have filed a counterclaim seeking judgment for damages and costs. No hearings or depositions are scheduled at this time. In July 1999, Complete Wellness Weight Management, Inc., a wholly owned subsidiary, filed for Chapter 7 bankruptcy protection. An initial hearing of the creditors was held and one creditor appeared to be heard on September 29, 1999. There are two suits pending related to landlord claims under the bankruptcy, both of which we are defending. The Company was named in a lawsuit filed in Washington, D.C. on December 15, 1999 by Crestar Bank, a landlord, for alleged failure to pay $108,981 of rents and fees due under a sub-lease plus attorney's fees. The Company has settled the claim. The full amount of the settlement has been previously accrued in the Company's financial statements, however, the Company is in default of the payment agreement as of June 30, 2000. 16 17 ITEM 1. LEGAL PROCEEDINGS - Continued The Company was named in a lawsuit filed in Orange County, Florida on July 24, 2000 by Michael T. Brigante, former Chief Financial Officer of the Company, for alleged failure to pay $37,503 pursuant to a separation agreement between Mr. Brigante and the Company dated November 30, 1999. The full amount of the claim has been previously accrued in the Company's financial statements. In November 1997, three of our facilities were searched by federal authorities pursuant to search warrants, and the federal authorities removed computer records and written documents in connection with an investigation of alleged healthcare fraud. In June 1998, Complete Wellness Centers and several of its employees, including its former Chief Executive Officer, were served with subpoenas requesting records and documents related to billing and claims coding, clinical relationships and corporate records. We believe that we could be a target in this investigation. One employee received a letter dated January 13, 1998 from the United States Attorney General's Office stating that the employee was a subject of the investigation. The investigation appears to be focused on two clinics in Virginia. No charges have been filed against us or any of our employees to date. However, any such charges could have a material adverse effect on our future financial position and results of operations. From time to time in the course of Complete Wellness Centers carrying out its business, we encounter threatened litigation, none of which is presently considered to be material ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS Not applicable ITEM 3. DEFAULTS UPON SENIOR SECURITIES Not applicable ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable ITEM 5. OTHER INFORMATION Not applicable ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits filed: None (b) Reports on Form 8-K Form 8-K as filed on July 7, 2000 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: August 14, 2000 By /s/ Joseph J. Raymond ------------------------------- Joseph J. Raymond Chief Financial Officer 17