-----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, Cdz1UkGSwd9fB0GTSDvXNhqqGV2NFYUYVj2+d21dPuJ0V0SXnT0McgFFCeeMW2Sz jpH5Y6lvizOoPDO9IiuT4A== 0000950133-97-003993.txt : 19971117 0000950133-97-003993.hdr.sgml : 19971117 ACCESSION NUMBER: 0000950133-97-003993 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19971114 SROS: NONE 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 SEC ACT: SEC FILE NUMBER: 000-22115 FILM NUMBER: 97721456 BUSINESS ADDRESS: STREET 1: 725 INDEPENDENCE AVE SE CITY: WASHINGTON STATE: DC ZIP: 20003 BUSINESS PHONE: 2025436800 MAIL ADDRESS: STREET 1: 725 INDEPENDENCE AVE SE CITY: WA STATE: DC ZIP: 20003 10QSB 1 FORM 10-QSB FOR COMPLETE WELLNESS CENTERS, INC. 1 ================================================================================ U.S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-QSB QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1997 COMMISSION FILE NUMBER 0-22115 COMPLETE WELLNESS CENTERS, INC. (Exact name of small business issuer as specified in its charter) DELAWARE 52-1910135 (State or other jurisdiction (IRS Employer of incorporation or organization) Identification No.)
725 INDEPENDENCE AVENUE, S.E., WASHINGTON, D.C. 20003 (Address of principal executive offices) (202) 543-6800 (Issuer's telephone number) --------------------------------------------------- (FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR, IF CHANGED SINCE LAST REPORT) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- State the number of shares outstanding of each of the issuer's classes of common equity, at September 30, 1997: 1,903,833. ================================================================================ 2 INDEX COMPLETE WELLNESS CENTERS, INC. FORM 10-QSB INDEX
PAGE ---- Part I. FINANCIAL INFORMATION......................................................... 1 Item 1. Financial Statements (Unaudited).............................................. 1 Condensed Consolidated Balance Sheets September 30, 1997 and December 31, 1996.................................... 1 Condensed Consolidated Statement of Operations Three months ended September 30, 1997 and September 30, 1996 Nine months ended September 30, 1997 and September 30, 1996................. 2 Condensed Consolidated Statement of Cash Flows Three months ended September 30, 1997 and September 30, 1996................ 3 Notes to Condensed Consolidated Financial Statements.......................... 4 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations......................................... 6 Part II. OTHER INFORMATION............................................................. 10 Signatures
3 PART I FINANCIAL INFORMATION ITEM 1: FINANCIAL STATEMENTS COMPLETE WELLNESS CENTERS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, DECEMBER 31, 1997 1996 ----------- ------------ (UNAUDITED) (NOTE) ASSETS Cash and equivalents.............................................. $ 993,224 $ 298,509 Patient receivables, net of allowance for doubtful accounts of $1,335,951 and $143,422...................................... 1,282,723 540,444 Management fees receivables....................................... 1,857,655 -- Other assets...................................................... 204,877 43,232 Deposits.......................................................... 159,524 -- Deferred tax assets............................................... 47,010 15,487 ---------- ---------- Total current assets.............................................. 4,545,013 897,672 Furniture and equipment, net...................................... 492,416 215,615 ---------- ---------- Total assets...................................................... $ 5,037,429 $ 1,113,287 ========== ========== LIABILITIES AND STOCKHOLDER'S EQUITY Current liabilities: Accounts payable and accrued expenses........................... $ 909,039 $ 412,725 Accrued wages................................................... 7,288 91,000 Accrued management fee.......................................... 2,180,552 442,646 Accrued interest................................................ 4,251 52,010 Deferred Tax Liability............................................ 59,455 23,728 Notes payable................................................... 159,697 1,098,000 ---------- ---------- Total current liabilities......................................... 3,320,282 2,120,109 Convertible note payable.......................................... 25,000 25,000 Minority interest................................................. 41,703 -- Stockholders' equity: Preferred Stock, $.01 par value per share, 2,000,000 authorized of which 1,500 are designated Series A, 12% Cumulative Convertible Preferred, 1,350 shares issued and outstanding at December 31, 1996............................................ -- 14 Common Stock, $.0001665 par value per share, 10,000,000 shares authorized, 1,903,833 shares and 714,967 shares issued and outstanding at September 30, 1997 and December 31, 1996...... 317 119 Additional capital.............................................. 4,824,652 156,027 Accumulated deficit............................................. (3,174,525) (1,187,982) ---------- ---------- Total stockholders' equity (deficit).............................. 1,650,444 (1,031,822) ---------- ---------- Total liabilities and stockholders' equity (deficit).............. $ 5,037,429 $ 1,113,287 ========== ==========
Note: The balance sheet at December 31, 1996 has been extracted from the audited financial statements at that date. See notes to condensed consolidated financial statements. 1 4 COMPLETE WELLNESS CENTERS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, -------------------------- -------------------------- 1997 1996 1997 1996 ----------- ----------- ----------- ----------- (UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED) Operating revenue: Patient revenue............................ $ 1,088,564 $ 553,100 $ 2,902,511 $ 869,122 Management services income................. 1,330,267 4,160 2,321,022 4,160 Other Income............................... 65,535 65,535 ---------- ---------- ---------- ---------- 2,484,366 557,260 5,289,068 873,282 Direct expenses: Salary and consulting costs................ 873,488 128,006 1,975,420 249,293 Management fees............................ 1,329,597 305,900 2,571,362 438,948 Rent....................................... 45,771 92,857 156,506 160,988 Advertising and marketing.................. 21,314 26,306 74,199 36,828 Bad debt expense........................... 305,782 26,608 778,926 61,608 ---------- ---------- ---------- ---------- Total direct expenses........................ 2,575,952 579,677 5,556,413 947,665 General and administrative................... 682,280 335,117 1,711,561 546,162 Depreciation and amortization................ 18,203 10,591 54,506 24,598 ---------- ---------- ---------- ---------- Operating deficit............................ (792,069) (368,125) (2,033,412) (645,143) Interest expense............................. 3,366 22,312 28,235 24,229 Interest income.............................. 35,229 4,059 82,599 4,663 Minority interest............................ 17,961 (8,457) 23,812 143,759 ---------- ---------- ---------- ---------- Net loss before income taxes................. (742,245) $(394,835) (1,955,236) (520,950) Income taxes................................. 27,103 31,307 ---------- ---------- ---------- ---------- Net loss after income taxes.................. $ (769,348) $(394,835) $(1,986,543) $ (520,950) ========== Net loss per share data (Note C) Net loss per share and common equivalent shares.................................. $ (0.50) $ (0.32) $ (1.13) $ (0.43) ========== Weighted average number of common and common equivalent shares outstanding.... 1,540,744 1,221,639 1,765,533 1,221,639 ========== Pro forma net loss per share data (Note C) Net loss per share and common equivalent shares.................................. $ (0.50) $ (0.32) $ (1.11) $ (0.43) ========== Weighted average number of common and common equivalent shares outstanding.... 1,540,744 1,221,639 1,791,168 1,221,639 ==========
See notes to condensed consolidated financial statements. 2 5 COMPLETE WELLNESS CENTERS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, --------------------------- 1997 1996 ----------- ----------- (UNAUDITED) (UNAUDITED) OPERATING ACTIVITIES Net loss........................................................... $(1,986,543) $ (520,950) Adjustments to reconcile net loss to net cash used in operating activities: Minority interest................................................ (41,703) (143,759) Depreciation and amortization.................................... 54,506 24,598 Amortization of debt discount.................................... 2,000 1,960 Recognition of granting of non-qualified stock options........... 18,964 4,988 Provision of bad debts........................................... 778,926 70,000 Provision for deferred taxes..................................... (31,523) -- Changes in operating assets and liabilities: Patient receivables........................................... (1,481,204) (640,390) Management Fee Receivable..................................... (1,857,655) -- Advances to officers and other current assets................. (281,210) (35,259) Inventory..................................................... (39,960) -- Current tax liability......................................... 35,727 -- Accounts payable and other current liabilities................ 2,262,790 534,160 --------- -------- Net cash used in operating activities:............................. (2,566,885) (704,652) INVESTING ACTIVITIES: Purchase of equipment.............................................. (332,223) (184,362) --------- -------- Net cash used in investing activities:............................. (332,233) (184,362) FINANCING ACTIVITIES: Payment of bridge notes............................................ (1,100,000) 1,100,000 Proceeds (payments) from notes payable............................. 25,198 -- Proceeds from the sale of common stock............................. 4,686,060 18 Proceeds from exercising of stock options.......................... (17,435) 1,455 Proceeds from the sale of equity in Complete Wellness Centers, LLC.............................................................. -- 446,000 Investment of minority shareholders in CWIPA....................... 50,000 -- Investment in Smokenders........................................... (50,000) -- --------- --------- Net cash provided by financing activities:......................... 3,593,823 1,547,473 --------- --------- Net increase in cash and cash equivalents.......................... 694,715 658,459 Cash and cash equivalents at beginning of year..................... 298,509 63,834 --------- --------- Cash and cash equivalents at end of year........................... $ 993,224 $ 722,293 ========= =========
See notes to condensed consolidated financial statements. 3 6 COMPLETE WELLNESS CENTERS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) September 30, 1997 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 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. Operating results for the nine month period ended September 30, 1997 are not necessarily indicative of the results that may be expected for the year ending December 31, 1997. The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the Company's audited financial statements included in the Company's 10-KSB dated December 31, 1996. The Company was incorporated under the laws of the State of Delaware in November 1994. The Company develops multi-disciplinary medical centers and furnishes certain support services to such facilities. Note B - Initial Public Offering On February 24, 1997, the Company successfully completed an initial public offering of 1,000,000 shares of common stock and 1,000,000 redeemable common stock purchase warrants from which it received net proceeds, after giving effect to the underwriting discount and non-accountable expenses, of approximately $5,281,000. The offering proceeds were received by the Company in February 1997. In addition, the Company incurred approximately $595,000 in transaction costs in connection with the offering. On March 20, 1997, the underwriter exercised 36,776 redeemable common stock purchase warrants from a possible 150,000 included in the over-allotment option. After giving effect to the underwriting discount, the Company received approximately $3,200 in March 1997. Note C - Net Loss Per Share The Company's net loss per share calculations are based upon the weighted average number of shares of Common Stock outstanding. During the second and third quarters 1996 the Company issued 110,000 and 37,667 shares of common stock. An additional 1,145,800 shares of common stock were issued on February 19, 1997 in connection with the Company's initial public offering and conversion of preferred stock to common stock. Pursuant to the 4 7 requirements of the Securities and Exchange Commission (SEC) staff accounting bulletin No. 83, options to purchase Common Stock issued at prices below the initial public offering price during the twelve months immediately preceding the initial filing of the registration statement related to the initial public offering have been included in the computation of net loss per share as if they were outstanding for all periods presented prior to the initial public offering (using the treasury method assuming repurchase of common stock at the estimated initial public offering price). Other shares issuable upon the exercise of stock options or conversion of redeemable convertible preferred stock have been excluded from the computation because the effect of their inclusion would be anti-dilutive. Subsequent to the Company's initial public offering, options under the treasury stock method are included to the extent they are dilutive. Weighted average shares used to calculate the pro forma net loss per share differs from the weighted average on a historical basis due primarily to the inclusion of the shares of Common Stock resulting from the assumed conversion at the beginning of the applicable period of the Series A Convertible Preferred Stock. Note D - New Subsidiaries During May 1997, the Company incorporated three new wholly owned subsidiaries, Complete Wellness Research Institute, Inc. (CWRI) and Complete Wellness Education, Inc. (CWEI), both Delaware corporations; and Complete Billing, Inc. (CBI), a Florida corporation. The results of operations of these companies are included in the Company's September 30, 1997 consolidated financial statements. During the three months and nine months ended September 30, 1997, CWRI had a net loss of $16,928 and $39,492, respectively, CWEI had no operating activity and CBI had a net loss of $1,045 and $11,174, respectively. The net losses are primarily related to start up expenses not capitalized. During May 1997, the Company entered into an agreement to become the majority shareholder of a new Delaware corporation, Complete Wellness Independent Physicians Association, Inc. (CWIPA). In accordance with the agreement, the Company acquired 86.67% of the common stock of CWIPA in return for $50,000 of initial capital and a commitment to provide up to $850,000 in additional working capital or guarantees. Approximately $276,000 of the additional working capital was provided through September 1997. The remaining 13.33% ownership is held by the management of CWIPA. Management of CWIPA is subject to employment agreements that provide them salary, annual bonuses equal to 10% of CWIPA annual pretax income and a stock option plan with 3,500 CWIPA shares. During the three months and nine months ended September 30, 1997, CWIPA had net losses of $130,571 and $ 174,555, respectively, of which the Company's share is $112,609 and $150,743, respectively. The financial statements of CWIPA are consolidated with those of the Company. During July 1997 a subsidiary of the Company acquired all of the operating assets and business of Oxford Health Plan's Smokenders program for $50,000. The subsidiary, Complete Wellness Smoking Cessation, Inc. (Smokenders) also agreed to pay Oxford Health Plan a royalty of 5% on gross revenues for a 10 year period. In forming Smokenders, the Company contributed $50,000 cash and a commitment to provide working capital as needed in an amount not to exceed $198,000 in return for 88.23% of the common stock. Robert J. Mrazek, the CEO of Smokenders and a director of the Company is to contribute $22,000 in promissory notes in return for 11.77% of the common stock. The promissory notes from Mr. Mrazek will accrue interest at 8%. Unpaid interest and principal on the promissory notes will be payable no later than September 30, 2000. Under the terms of Mr. Mrazeks' employment agreement, he will be granted options to purchase up to an additional 13.23% ownership of Smokenders, subject to certain time vesting. If the options are exercised, it will result in Mr. Mrazek holding 25% ownership of Smokenders. The exercise price of the options are $ .01 per share, vesting 50% on August 1, 1998 and 1999. The financial statements of Smokenders are consolidated with those of the Company. During the three months ended September 30, 1997 Smokenders had net losses of $41,063 all of which were recognized by the Company. On September 22, 1997, the Company signed a letter of intent with Nutri/System, L.P. to acquire a national network of 147 weight management centers and RxPress, Inc. a mail order pharmacy. The acquisition is subject to signing of a definitive agreement, the completion of due diligence, approval by both boards, and the Company obtaining necessary financing for the completion of the acquisition. In anticipation of a definitive agreement, the Company placed a deposit with Nutri/System, L.P. in the amount of $150,000 and received an exclusive right to acquire a minimum of seven 5 8 centers, of the Company's choice, currently owned by Nutri/System, L.P. for one dollar each in the event this acquisition is not consummated; otherwise, the deposit will be applied to the final acquisition. 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 Financial Statements and notes appearing elsewhere in this report. The Company was established in November 1994. From its inception until March 1995, the Company raised funds privately and developed the corporate infrastructure, protocols, policies and procedures required to commence its plan to develop multi-disciplinary medical clinics. In March 1995, the Company formed Complete Wellness Centers, LLC ("CWC, LLC") as a vehicle for raising capital needed to open medical clinics. The Company is the managing member of CWC, LLC, has a 1% equity interest and has obtained irrevocable and permanent voting proxies from the holders of a majority of ownership interests in CWC, LLC. The Company consolidates the financial statements of CWC, LLC in its financial statements due to its unilateral, perpetual and non-temporary control. In July 1995, CWC, LLC purchased selected assets of a chiropractic practice for the purpose of establishing the Company's first medical clinic. This clinic is a wholly owned subsidiary of CWC, LLC. Throughout 1996, CWC, LLC established affiliations with an additional six chiropractic practices using a strategy whereby CWC, LLC forms a medical entity and enters into a long term management agreement with the entity to provide certain administrative and management services. CWC, LLC employs the affiliated chiropractor and one or more medical doctors and subcontracts the daily operations of the medical clinic to the chiropractors' management company. At December 31, 1996, CWC, LLC had seven medical clinics in operation. During the first quarter of 1997, CWC, LLC closed one clinic. During the second quarter of 1997 CWC, LLC agreed to close an additional clinic as the result of the retirement of the affiliated chiropractor. In addition to the clinics owned by CWC, LLC, the Company has directly formed 22 medical corporations with similar affiliation contracts for an additional 23 clinics, of which 20 are in operation September 30, 1997. The operations of all owned medical corporations are included in the consolidated financial statements of the company. In locations were corporate ownership of medical clinics is prohibited by law, the Company provides similar administrative and management services for a fee to professional corporations owned by physician(s). These professional corporations provide similar services to patients and operate in a similar fashion to the medical corporations owned by the Company. As of September 30, 1997 the Company had 44 of such management service contracts in operation. During May 1997, the Company incorporated three new wholly owned subsidiaries. Complete Wellness Research Institute, Inc. (CWRI) and Complete Wellness Education, Inc. (CWEI), are Delaware corporations; and Complete Billing, Inc. (CBI), is a Florida corporation. Two of the three companies started operations in May 1997. CWEI has not yet begun operations. CWRI provides clinic research and studies to pharmaceutical, vitamin, natural product and medical device manufactures' within the Company's network of clinics. CWEI, through its consortium of nationally recognized doctors and authors, will 6 9 provide education and wellness articles and periodicals to national publications and publishers. CBI is a healthcare billing company, which provides services to medical and chiropractic clinics, both inside the Company's clinic network and to unaffiliated doctors. Included in the Company's September 30, 1997 consolidated financial statements are the results of operations of these companies. Also, during May 1997 the Company entered into an agreement to become the majority shareholder of a new company, Complete Wellness Independent Physicians Association, Inc. (CWIPA), a Delaware corporation. The Company holds an 86.67% stake in CWIPA, with 13.33% ownership held by the management of CWIPA. CWIPA plans to build a network of primary, specialty, hospital and ancillary healthcare providers, including the Company's network of clinics, to attract managed care contracts, Medicare, Medicaid and federal and state government contracts and self funded corporation contracts. CWIPA began developing its provider network in June 1997. It is anticipated that CWIPA will be ready to enter into contracts to provide access to it's network in 1998. Included in the Company's September 30, 1997 consolidated financial statements are the results of operations of this company, with effect given to the 13.33% minority interest. During July 1997 a subsidiary of the Company acquired all of the operating assets and business of Oxford Health Plan's Smokenders program for $50,000. The subsidiary, Complete Wellness Smoking Cessation, Inc. (Smokenders) also agreed to pay Oxford Health Plan a royalty of 5% on gross revenues for a 10 year period. In forming Smokenders the Company contributed $50,000 cash and a commitment to provide working capital as needed in an amount not to exceed $198,000 in return for 88.23% of the common stock. Robert J. Mrazek, the CEO of Smokenders and a director of the Company is to contribute $22,000 in promissory notes in return for 11.77% of the common stock. The promissory notes from Mr. Mrazek will accrue interest at 8%. Unpaid interest and principle on the promissory notes will be payable no later than September 30, 2000. Smokenders plans to market its smoking cessation behavioral modification program to corporations, federal and state government agencies and individuals as well as seek strategic alliances with pharmaceutical companies to develop an adjunct product for nicotine replacement therapies. Additionally, the Smokenders program will be offered in the Company's medical clinics. Smokenders started operations in August 1997. Included in the Company's September 30, 1997 consolidated financial statements are the results of operations of this company. On September 22, 1997, the Company signed a letter of intent with Nutri/System, L.P. to acquire a national network of 147 weight management centers and RxPress, Inc. a mail order pharmacy. The acquisition is subject to signing of a definitive agreement, the completion of due diligence, approval by both boards, and the Company obtaining necessary financing for the completion of the acquisition. In anticipation of a definitive agreement, the Company placed a deposit with Nutri/System, L.P. in the amount of $150,000 and received an exclusive right to acquire a minimum of seven centers, of the Company's choice, currently owned by Nutri/System, L.P. for one dollar each in the event this acquisition is not consummated; otherwise, the deposit will be applied to the final acquisition. Results from Operations Three and Nine Months Ended September 30, 1997 Compared to Three and Nine months ended September 30, 1996 Revenue. During the three and nine months ended September 30, 1997 the Company had total revenue of $2,484,366 and $5,289,068, respectively, as compared to $554,260 and $873,282 for the three and nine months ended September 30, 1996, respectively. The increase of $1,930,106 for the three month period was due primarily to the net addition of twenty owned medical clinics and forty four managed clinics after June 1996. The increase of $4,415,786 for the nine month period was due to the net addition of twenty owned medical clinics and forty three managed clinics after September 1996. Salary and Consulting Costs. During the three and nine months ended September 30, 1997, the Company incurred salary and consulting costs of $873,488 and $1,975,420, respectively as compared to $128,006 and $249,293 for the three and nine months ended September 30, 1996, respectively. The increase of $745,482 for the three month period was due to an increase in the costs resulting from the hiring of additional employees in the administrative capacity at 7 10 the corporate headquarters and the medical capacity at the clinics and salary costs at the various subsidiaries. The increase of $1,726,127 for the nine month period was due to commencement of normal salaries for certain executive officers who served without salary until February of 1997 and the hiring of additional employees in the administrative capacity at the corporate headquarters and the medical capacity at the clinics and salary costs at the various subsidiaries. Management Fees. During the three and nine months ended September 30, 1997, the Company incurred management fees of $1,329,597 and $2,571,362, respectively, as compared to $305,900 and $438,948 for the three and nine months ended September 30, 1996, respectively. These are fees that are paid to the affiliated chiropractors' management companies for managing the day-to-day operations of the Integrated Medical Centers. The increase of $1,023,697 for the three month period was due primarily to the net addition of twenty owned medical clinics and forty four managed clinics after June 1996. The increase of $2,132,414 for the nine month period was due primarily to the net addition of twenty owned medical clinics and forty three managed clinics after September 1996. Rent. During the three and nine months ended September 30, 1997, the Company incurred rent expense of $45,771 and $156,506, respectively, as compared to $92,857 and $160,988 for the three and nine months ended September 30, 1996, respectively. Rent consists of amounts incurred for office space and certain equipment by the Company at the medical clinics. Rent for space and equipment for the medical clinics is paid when the accounts receivable of the medical clinic are collected by the medical clinic. The decrease of $47,086 for the three month period was due primarily to a change in the contract terms and a change in the calculation of space and equipment rent. The decrease of $4,482 for the nine month period was primarily due to the effects of contract terms and rent calculations as mentioned above. Advertising and Marketing. During the three and nine months ended September 30, 1997, the Company incurred advertising and marketing expenses of $21,314 and $74,199, respectively, as compared to $26,306 and $36,828 for the three and nine months ended September 30, 1996, respectively. The decrease of $4,992 for the three month period was due primarily less aggressive advertising and promotion in the quarter. The increase of $37,371 for the nine month period was attributable to additional national advertising for marketing and clinic recruitment purposes during the first half of 1997. Bad Debt Expense. During the three and nine months ended September 30, 1997, the Company incurred bad debt expense of $305,782 and $778,926, respectively, as compared to $26,608 and $61,608 for the three and nine months ended September 30, 1996, respectively. The Company has adopted a policy of fully reserving all accounts receivable not collected within 90 days. The increase of $279,174 for the three month period was due to an increase related to reserves for doubtful accounts. The increase of $717,318 for the nine month period was due to an increase in reserves for doubtful accounts. General and Administrative. During the three and nine months ended September 30, 1997, the Company incurred general and administrative expenses of $682,280 and $1,711,561, respectively, as compared to $335,117 and $546,162 for the three and nine months ended September 30, 1996, respectively. The increase of $347,163 for the three month period was due primarily to the net addition of twenty owned medical clinics and forty four managed clinics after June 1996 and consists of an increase of (i) $7,709 in insurance costs, (ii) $165,786 in professional fees, (iii) $26,989 in travel and entertainment costs (iv) $100,078 in various costs such as automobile, telephone, postage and printing and reproduction, and (v) $122,790 in costs associated with subsidiary operations. The increase of $1,165,399 for the nine month period was due primarily to the net addition of twenty owned medical clinics and forty three managed clinics after September 1996 and consists of an increase of (i) $125,633 in insurance costs, (ii) $293,646 in professional fees, (iii) $103,264 in travel and entertainment costs (iv) $243,076 in various costs such as automobile, telephone, postage and printing and reproduction, and (v) $122,790 in costs associated with subsidiary operations. Depreciation and Amortization. During the three and nine months ended September 30, 1997, the Company recognized depreciation and amortization expense of $18,203 and $54,506, respectively, as compared to $10,591 and $24,598 for the three and nine months ended September 30, 1996, respectively. The increase of $7,612 for the three month period and $29,908 for the nine month period resulted from the addition of fixed assets, primarily computer equipment, with depreciable lives of five years or less. 8 11 Interest Income. During the three and nine months ended September 30, 1997, the Company had interest income of $35,229 and $82,599, respectively, as compared to $4,059 and $4,663 for the three and nine months ended September 30, 1996, respectively. The increase of $31,170 for the three month period and $77,936 for the nine month period resulted from the investment of funds as a result of the Company's Initial Public Offering in a series of short term securities. Interest Expense. During the three and nine months ended September 30, 1997, the Company had interest expense of $3,366 and $28,235, respectively, as compared to $22,312 and $24,229 for the three and nine months ended September 30, 1996, respectively. The decrease of $18,946 for the three month period resulted from the retirement of the bridge financing loan repaid in February 1997. The increase of $4,006 for the nine month period resulted from the bridge financing loan and amortization of loan discount on that loan. Liquidity and Capital Resources The Company has experienced net losses, negative cash flow from operations and an accumulated deficit each month since its inception. For the three and nine months ended September 30, 1997 the Company had incurred net losses of $769,348 and $1,986,543 respectively, as compared to $394,835 and $520,950 for the three and nine months ended September 30, 1996, respectively. At September 30, 1997, the Company had working capital of $1,224,731 and an accumulated deficit of $3,174,525. Net cash used in operations for the three and nine months ended September 30, 1997 was $1,011,216 and $2,566,885, respectively, as compared to $391,222 and $704,652 for the three and nine months ended September 30, 1996, respectively. Negative cash flow for each period was attributable to net losses in such periods and increases in accounts receivable net of accounts payable and other current liabilities. For the three and nine months ended September 30, 1997, the Company used $163,248 and $332,223, respectively, as compared to $42,041 and $184,362 for the three and nine months ended September 30, 1996, respectively, for purchases of equipment. On February 24, 1997, the Company successfully completed an initial public offering of its equity securities. Net proceeds to the Company after expenses of the Offering were $4,965,000. Of the net proceeds, the Company repaid approximately $1,100,000 of principal and $24,000 of interest to secured lenders who participated in a bridge financings in July and August 1996. Additionally, $121,000 of the proceeds was used to pay accrued salaries. The Company intends to develop no fewer than 20 additional medical clinics by December 31, 1997. The average cost to the Company to develop a medical clinic is approximately $10,000. The Company is financing its expansion strategy with a portion of the net proceeds of the offering. CWC, LLC experienced negative cash flow for the nine months ended September 30, 1997 of approximately $80,000. The cash flow shortfall was offset by advances from the Company for the nine months then ended. Two of the seven clinics developed under CWC, LLC have closed. At September 30, 1997, CWC, LLC has negative equity of approximately $327,000 and a deficit in working capital of approximately $563,331. To the extent that the five remaining medical clinics do not provide sufficient cash flow to meet the short term needs of CWC, LLC, the Company, at this time, intends to continue to provide cash advances. Under the shareholders agreement for CWIPA, the Company provided funding for start up costs of approximately $81,000 in the quarter ended September 30, 1997. A commitment remains for funding of an additional $739,000 through March 31, 1998. The acquisitions and the planned development of the Smokenders program through the next twelve months is expected to require additional cash needs of approximately $170,000. The acquisition of the Nutri/System, L.P. weight management centers and RxPress, Inc. mail order pharmacy is expected to require the Company to obtain additional financing arrangements. The Company is currently evaluating various options and sources of capital to fund these expansion efforts and does not currently anticipate funding these activities from operations or existing cash resources. 9 12 PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS None ITEM 2. CHANGES IN SECURITIES 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 Not applicable 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. Date: November 14, 1997 Complete Wellness Centers, Inc. By: /s/ E. Eugene Sharer E. Eugene Sharer - President and Chief Financial Officer EX-27 2 FINANCIAL DATA STATEMENT
5 9-MOS DEC-31-1997 SEP-30-1997 993,224 0 2,618,674 1,335,951 0 4,545,013 591,026 98,611 5,037,429 3,320,287 0 0 0 317 1,650,127 5,037,429 2,418,831 2,484,366 0 3,276,435 0 305,782 3,366 (742,245) 27,103 (769,348) 0 0 0 (769,348) 0 0
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