COMPLETE WELLNESS CENTERS INC, 10KSB/A, 1999-01-20

COMPLETE WELLNESS CENTERS INC
10KSB/A, 1999-01-20
MISC HEALTH & ALLIED SERVICES, NEC

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-KSB/A
(AMENDMENT 2)

(MARK ONE)

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997

[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 FOR THE TRANSITION PERIOD FROM TO

COMMISSION FILE NUMBER 0-22115
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COMPLETE WELLNESS CENTERS, INC.
(EXACT NAME OF SMALL BUSINESS ISSUER AS SPECIFIED IN ITS CHARTER)

DELAWARE 52-1910135
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION
INCORPORATION OR ORGANIZATION) NUMBER)

725 INDEPENDENCE AVENUE, S.E., WASHINGTON, D.C. 20003
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES AND ZIP CODE)

(202) 543-6800
(ISSUER'S TELEPHONE NUMBER)

SECURITIES REGISTERED UNDER SECTION 12(b) OF THE ACT: none

SECURITIES REGISTERED UNDER SECTION 12(g) OF THE ACT:

Common Stock, $.0001665 par value per share
Redeemable Common Stock Purchase Warrants

Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes [X]
No [ ]

Check if there is no disclosure of delinquent filers in response to Item 405
of Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [X]

The issuer's revenues for the year ended December 31, 1997 were $9,006,874.

The aggregate market value of all of the voting stock held by non-affiliates
outstanding at March 31, 1998, was $5,373,215. The amount was computed by
reference to the average bid and asked prices of the Common Stock as of March
31, 1998.

As of March 31, 1998, 2,149,286 shares of Common Stock were outstanding, and
1,036,776 Redeemable Common Stock Purchase Warrants were outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Not applicable.

Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
================================================================================

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COMPLETE WELLNESS CENTERS, INC.
CONSOLIDATED FINANCIAL STATEMENTS
10 KSB DECEMBER 1997

TABLE OF CONTENTS

<TABLE>
<CAPTION>
<S> <C> <C>
PART I
Item 1 Business 1
Item 2 Properties 6
Item 3 Legal Proceedings 7
Item 4 Submission of Matters to a Vote of Security Holders 7

PART II
Item 5 Market for Common Equity and Related Stockholder Matters 8
Item 6 Management's Discussion and Analysis 8
Item 7 Financial Statements 16
Item 8 Changes in and Disagreements with Accountants on Accounting and 33
Financial Disclosure

PART III
Item 9 Directors, Executive Officers, Promoters and Control Persons; 34
Compliance with Section 16(a) of the Exchange Act
Item 10 Executive Compensation 35
Item 11 Security Ownership of Certain Beneficial Owners and Management 38
Item 12 Certain Relationships and Related Party Transactions 40
Item 13 Exhibits and Reports on Form 8-K 41
</TABLE>

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The Company operates through a series of wholly-owned and majority owned
subsidiaries as follows:
<TABLE>
<CAPTION>
<S> <C>
COMPLETE WELLNESS CENTERS, INC.

OPTIMUM HEALTH COMPLETE WELLNESS MEDICAL COMPLETE WELLNESS
SERVICES, INC. CENTERS (1) SMOKING CESSATION, INC.

COMPLETE WELLNESS WEIGHT COMPLETE BILLING,
MANAGEMENT, INC.(2) INC.

COMPLETE WELLNESS COMPLETE WELLNESS
RESEARCH INSTITUTE EDUCATION

</TABLE>

1. Represents 85 Integrated Medical Centers of which 27 are wholly owned by the
Company and 58 are owned by Medical Doctors who are nominee owners on behalf of
the Company.

2. Represents 56 weight management centers which were acquired by CWWM on
January 31, 1998.

<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
STATE INTEGRATED MEDICAL WEIGHT MANAGEMENT
CLINICS (1) CLINICS (2)
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
- --------------------------------------------------------------------------------------------------------------------
Georgia 2 --
- --------------------------------------------------------------------------------------------------------------------
Florida 26 --
- --------------------------------------------------------------------------------------------------------------------
North Carolina 16 --
- --------------------------------------------------------------------------------------------------------------------
Illinois 5 2
- --------------------------------------------------------------------------------------------------------------------
California 7 --
- --------------------------------------------------------------------------------------------------------------------
Texas 3 --
- --------------------------------------------------------------------------------------------------------------------
Oregon 2 --
- --------------------------------------------------------------------------------------------------------------------
Arizona 7 --
- --------------------------------------------------------------------------------------------------------------------
Tennessee 4 --
- --------------------------------------------------------------------------------------------------------------------
South Carolina 2 --
- --------------------------------------------------------------------------------------------------------------------
Iowa 2 --
- --------------------------------------------------------------------------------------------------------------------
Indiana 4 --
- --------------------------------------------------------------------------------------------------------------------
Ohio 3 --
- --------------------------------------------------------------------------------------------------------------------
Missouri 1 4
- --------------------------------------------------------------------------------------------------------------------
Michigan 1 --
- --------------------------------------------------------------------------------------------------------------------
Maryland -- 3
- --------------------------------------------------------------------------------------------------------------------
New Jersey -- 17
- --------------------------------------------------------------------------------------------------------------------
New York -- 12
- --------------------------------------------------------------------------------------------------------------------
Pennsylvania -- 6
- --------------------------------------------------------------------------------------------------------------------
Virginia -- 6
- --------------------------------------------------------------------------------------------------------------------
Washington -- 6
- --------------------------------------------------------------------------------------------------------------------
-- --
Total 85 56
== ==
</TABLE>

1. Represents fully Integrated Medical Centers as of December 21, 1997
which were in operation on that date. The Company also operated 7
Integrated Medical Centers in 2 states during 1997 which were closed
or otherwise ceased operations prior to December 31, 1997.

2. The Company aquired the weight loss centers in January 31, 1998 and
commenced operations thereof on that date.

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PART I

ITEM 1. BUSINESS

(a) General Development of Business

Complete Wellness Centers, Inc. (the "Company" or "CWC") was incorporated
under the laws of the State of Delaware in November 1994. The Company completed
an initial public offering of Common Stock and Redeemable Common Stock Warrants
in February 1997. The Company controls, either through 100% or majority
ownership, seven separate independent operating subsidiaries and is the managing
member of a limited liability corporation. The Company provides administrative
support services to all its subsidiaries including: (1) management services; (2)
legal services; (3) accounting services; (4) purchasing services; and (5)
support services. All of the subsidiaries are focused in the health care
industry and each delivers a unique product or service sold to consumers
directly or through their sister companies.

Complete Wellness Medical Centers, Inc. ("CWMC") was incorporated under the
laws of the State of Delaware in August 1997. The Company is a 100% owner of
CWMC. CWMC develops multi-disciplinary medical centers ("Integrated Medical
Centers") and furnishes certain support services to such facilities. The
Integrated Medical Centers combine, in one practice, at the same location,
traditional health care providers, such as physicians and physical therapists
and alternative health care providers, such as chiropractors, acupuncturists and
massage therapists. At December 31, 1997 CWMC was managing 85 Integrated Medical
Centers in 19 States and had 54 additional agreements with chiropractors to
develop and manage 51 Integrated Medical Centers in 2 additional states.

CWMC develops Integrated Medical Centers generally through affiliations with
chiropractors (the "Affiliated Chiropractors") and their existing chiropractic
practices. Management endeavors to enter into an agreement with a chiropractor
who has an existing chiropractic practice in a convenient location and who is an
individual who has demonstrated the entrepreneurial skills to build a practice.
The existing practice is used as a base for the development of an Integrated
Medical Center. Typically, CWMC establishes a new Integrated Medical Center by
forming a medical corporation, which is a general business corporation
wholly-owned by the company or a professional corporation that is
physician-owned, depending upon the applicable state law. The Affiliated
Chiropractor establishes a management company which contracts with CWMC to
provide day-to-day management of the Integrated Medical Center.

CWMC's development strategy is to develop additional Integrated Medical
Centers in local or regional groups or clusters. CWMC plans to continue to
develop Integrated Medical Centers through affiliations with chiropractors and
their existing practices and health clubs and intends to begin development of
Integrated Medical Centers in connection with corporations, government offices,
or other organizations, in which cases the Integrated Medical Centers would be
developed in places such as office buildings.

The Company plans to continue to develop Integrated Medical Centers
primarily by affiliating with chiropractors and their existing chiropractic
practices. Management endeavors to enter into agreements with chiropractors who
are located in convenient locations, and who have demonstrated the
entrepreneurial skills to build a practice. The Company believes that such
chiropractors will consider affiliation with an Integrated Medical Center to be
attractive because they may have greater access to managed care contracts in the
future through the Company and its network of Integrated Medical Centers, will
be relieved of certain administrative burdens, and may have the opportunity
increase their practice income by providing the expanded services that the
Integrated Medical Centers provide. An Integrated Medical Center is usually
established at the same location as the existing chiropractic practice, although
it could be established at a new or separate location. The Company has developed
seven Integrated Medical Centers in Arizona that are located inside health
clubs.

The Company's overall strategy is to integrate the services of each of the
subsidiaries into the Integrated Medical Centers. During 1998, the Company is
making available the products and services of the Smokenders program of Complete
Wellness Smoking Cessation as well as the weight loss programs of Nutri/System
to its Integrated Medical Centers.

The Company has developed and is in the process of implementing a corporate
computer network which ties together the major locations of the Company to
facilitate data transmission, email, Internet access, Integrated Medical Center
communication and access to management information and data. It is expected that
all subsidiaries of the Company and its affiliates will be integrated into the
system in 1998.

Historically, the cost to the Company to develop in Integrated Medical
Center has averaged $10,000. This cost has consisted of

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such things as computer software, legal fees, professional credentialing,
training, and administrative starter kit and travel. Recent additional training
and other services provided by the Company has increased the cost to $15,000,
which cost is presently to be borne by the affiliated Chiropractor and financed
by the Company via a five year term note.

The Company anticipates that its Integrated Medical Centers will expand
their services in two phases. The first phase involves the medical treatment of,
principally, neuromusculoskeletal conditions and, to a lesser extent, the
provision of primary care services and wellness and weight loss programs to
patients referred to the Integrated Medical Center by the Affiliated
Chiropractor for reasons of medical necessity and in the case of certain
Integrated Medical Centers, of any new patients to the facility. This is
accomplished by utilizing one of more part-time medical doctors and, depending
on the market , other providers such as a physical therapist or massage
therapist. The second phase of operations is generally expected to begin after
12 to 24 months of operation, depending on an Integrated Medical Center's
financial results. It would involve utilizing one or more medical doctors on a
full time basis. Several of the operating Integrated Medical Centers are now in
a second phase of expansion.

The Company intends to facilitate the growth of the Integrated Medical
Centers by arranging for the provision of ancillary services, such as medical
imaging, rehabilitation, diagnostics, and weight management either by contract
with third party providers or by acquisition of other businesses. The Company
believes that the ability to offer ancillary services will make the Integrated
Medical Centers more attractive to patients, health care practitioners and third
party payors. The acquisitions of other provision of certain other services
many, however, trigger additional licensing requirements. As of the date of this
Offering document, the Company has no understandings, commitment, or agreements
with respect to any acquisition.

The Company's expansion strategy is to use its existing network of
affiliated chiropractors to sell the integrated concept to the 50,000
chiropractors in the country not currently offering fully integrated medical
platforms. To date, the Company has augmented the efforts of its management and
staff through consulting arrangements with various persons and entities. These
consultants have directed their efforts primarily toward identifying potential
chiropractors and chiropractic practices with which to affiliate and toward
providing assistance with the integration process.

The agreements provide for the consultant(s) to assist the Company in
identifying candidates which meet the Company's criteria and executing binding
Integration Contracts. The Company seeks to execute consulting agreements with
chiropractic consultants whose clients include most of the chiropractic
industry. The highly successful chiropractors that have demonstrated success in
their integrated practice are used to reach out to others in the field,
assisting the Company in supporting the newly integrated practices and
identifying and targeting chiropractic practices for integration.

In November 1996, the Company entered into such a five year consulting
agreement (the "Kats Agreement") with Kats Management, LLC ("Kats Management"),
a company under common control with Integrated Physicians Management Co., LLC
("IPM") that has represented to the Company that it provides management and
consulting services to over 600 chiropractic clinics. Under the Kats Agreement,
Kats Management agreed to advise and assist the Company in (I) identifying and
negotiating with chiropractors and their existing chiropractic practices with
which the Company might affiliate for the purpose of developing additional
Integrated Medical Centers and (ii) developing Integrated Medical Centers.

Finally, the leading chiropractors may also be provided buyout opportunities
by the Company as an exit strategy. The company believes that this enterprise
development model creates additional opportunities for the chiropractic and
medical doctors as well as integration candidates for the Company.

Complete Billing, Inc. ("CBI") was incorporated under the laws of the State
of Delaware in May 1997. The Company is a 100% owner of CBI. CBI is a health
care billing company, which provides a full range of billing and collecting
services to medical and chiropractic clinics both inside the Company's network
and to unaffiliated doctors. CBI contracts with its clients on a fixed fee of
collection basis, unless state law dictates otherwise, which ranges from 5% - 8%
of collections. CBI has regional locations in Florida,

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Maryland and New Jersey. At December 31, 1997 CBI had 19 contracts representing
20 clinics in 8 states.

Optimum Health Services, Inc. ("OHS"), formerly known as Complete Wellness
Independent Physicians Association ("CWIPA") was incorporated under the laws of
the State of Delaware in May 1997. The Company holds an 86.67% interest in OHS,
with 13.33% ownership held by the management of OHS. OHS is a health care
Management Services Organization (MSO) currently providing services to Health
Maintenance Organizations. The management team joined Complete Wellness with
their goal of providing a comprehensive wellness model of care. In addition to
developing provider networks, OHS delivers support services which include
accepting delegated claims, credentialing, utilization management, quality
assurance, marketing, and provider relations functions.

OHS is a multi-disciplinary integrated delivery system. OHS's 1998 focus is
in the Florida market where they have contracted with approximately one thousand
physicians (>20% being Primary Care Physicians). In the state of Florida, OHS
has contracted more than two hundred complementary care practitioners in various
modalities including but not limited to; acupuncture, chiropractic, nutrition,
massage therapy, yoga and tai chi. OHS anticipates expanding into additional
states in 1999. OHS typically contracts for a percentage of premium or carve-out
pricing for alternative care and wellness products. We provide the following
wellness package of services under these same arrangements: smoking cessation,
weight management, and complimentary care education programs. OHS has the
ability to create innovative relationships for all these services or for a
subset thereof.

OHS network development focuses on contracting in geographically underserved
areas. These locations are new sites for payers to provide health care access to
their membership. These sites provide payers with expansion capabilities and
improve member satisfaction. In addition, these centers typically have patient
bases not previously enrolled in managed care programs. This provides payers
with an opportunity to expand their member base to new populations which had
previously not had access to their products.

OHS is one of the only companies in the country developing a health care
delivery system, which integrates alternative care practitioners under a managed
care setting. The management team's experience in managed care makes them
uniquely qualified to tailor programs to meet the scrutiny of qualification
under insurance settings. OHS has established credentialing protocols and
designs of benefit programs for inclusion under any type of insurance
arrangement. OHS develops systems for inclusion as a Preferred Provider
Organization, an insured benefit rider, and as a service under standard benefit
programs.

The inclusion of physician access and wellness products provides OHS with
market differentiation. These value-added services which exceed those services
typically provided by Management Services Organizations both in quality and
quantity provide OHS with future growth opportunity.

Complete Wellness Smoking Cessation, Inc. ("Smokenders") was incorporated
under the laws of the State of Delaware in July 1997. The Company holds an
88.23% interest in Smokenders, with 11.77% ownership held by management of
Smokenders. Smokenders was formerly owned by Oxford Health Plans and was
purchased from that company on July 31, 1997. Smokenders markets a patented
"Learn to Quit" kit to end users through a national network of trained
facilitators. Smokenders' customers include government agencies, corporations,
CWMC, CWIPA and individuals.

Smokenders is an adult education program which has as its goal, not only the
cessation of smoking for its clients, but the opportunity to be comfortable as a
non-smoker. The company was created in 1969. Since it was founded, more than a
million people have successfully quit smoking using the Smokenders' patented
techniques. The company is trademarked in more than 20 countries around the
world.

The dynamics of the program recognizes the complexity of smoking addiction
and approaches the challenge of dealing with it comprehensively. The program is
not based on pandering to the fears of smokers about health hazards or death.
Scare tactics are not used.

Smokenders currently delivers its services in the following three ways:

1. The Smokenders traditional seminar program consists of seven weekly
meetings, each one about an hour in length, in which clients are provided
step-by-step instruction from a trained moderator about ways to modify and
then eliminate their smoking habit. In weekly assignments, clients learn
about the nature of their addiction, the effects of nicotine on their body,
and utilize exercises to reinforce the new habit of non-smoking. They engage
in group participation, are put into a buddy system with another smoker and
are taught ways to cut back on their nicotine intake.

2. The Smokenders' "Train the Trainer" program is designed to be used in
very large corporations and government agencies.

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Under this format, Smokenders trains employees within the large organization
to deliver the program themselves. They learn in a day-long training seminar
how to motivate smokers to quit and effectively guide smokers through the
program.

3. Smokenders also markets a "Learn How To Quit" kit, which includes a
set of audio tapes as well as a complementary work-book. This program allows
clients to achieve success in the privacy of their own home or workplace.

A recent survey conducted by the Johns Hopkins University from the records
of people who attended the traditional seminar program found that 81% of those
who completed the program successfully quit smoking. 46% remained smoke-free
after one year, and 38% were still non-smokers after three years.

The Smokenders system is currently marketed to hospitals, health clinics,
weight-loss centers, private corporations, the military services, and other
federal and state governmental organizations.

Complete Wellness Weight Management, Inc. ("CWWM") was incorporated under
the laws of the State of Delaware in December 1997. The Company owns 100% of
CWWM. CWWM is made up of 56 weight loss centers formerly owned by Nutri/System,
L.P. CWWM agreed to purchase the assets of these 56 centers, subject to certain
objectives to be accomplished by January 31, 1998 which date constituted the
final closing of the purchased assets. CWWM markets, in a retail setting, food,
medically supervised weight loss programs and nutritional supplements. Included
in the asset purchase is the perpetual right to use the Nutri/System name and
logo. The Nutri/System program has both a traditional (non-medical) and medical
program.

The Nutri/System Program is designed to assist in the treatment of obesity.
Nutri/System clients receive a comprehensive approach to weight loss involving
nutritionally balanced menu plans, wellness and exercise information and
one-to-one counseling sessions with a trained Medical Staff.

The Nutri/System Menu Plan is designed to provide a nutritionally balanced,
low fat approach to calorie reduction. Health and wellness information is
offered through the Program Participant Manual that has been designed to provide
clients with information about lifestyle changes that can benefit their overall
health. The Participant Manual also contains information on exercise and
activity, to encourage clients to include this component as part of their
Nutri/System Program.

The Traditional Nutri/System Program offers a Maintenance Program that
monitors the clients continued progress after they have reached their Goal
Weight. Providing support with health and wellness information in this component
of the program completes the inclusive Nutri/System.

The Medical Program was designed to assist in the treatment of obesity using
a comprehensive approach to weight loss involving prescription medications,
nutritionally balanced menu plans, and wellness and exercise information. In
addition, the Medical Program offers professional supervision consisting of
scheduled visits with both a Nurse and a Medical Doctor Physician.

Weight loss authorities currently believe that prescription medications for
the treatment of obesity should be used in combination with caloric restriction,
behavior modification and exercise. Therefore the Medical Program was developed
using the traditional Nutri/System program as its foundation. In this approach,
the Staff Physician will prescribe drug combinations to eligible clients
following an initial screening process and a medical assessment. Since the Staff
Physician only monitors the client's health as it is affected by the Medical
Program, the client's personal physician or health care provider will continue
to manage the client's other medical needs.

As with the Traditional Nutri/System Program, clients participating in the
Medical Program can utilize the individualized Nutri/System Menu Plan designed
to provide a nutritionally balanced, low fat approach to calorie reduction. The
Medical Program also provides a Maintenance Program that incorporates the
Traditional Nutri/System Maintenance Program with the medical component, thus
rounding out the comprehensive Medical Program.

(b) Narrative Description of Business

The Company's operating strategy is to (i) provide consumers the opportunity
to obtain, and the convenience of obtaining, under the supervision of a medical
doctor, complementary traditional and alternative medical treatments in one
location, (ii) facilitate the efficient provision of high quality patient care
through the use of credentialing standards and standardized protocols, (iii)
establish Integrated Medical Centers in local and regional clusters for purposes
of obtaining managed care contracts, (iv) assist in marketing the Integrated
Medical Centers regionally and nationally on a coordinated basis and furnish
them management, marketing, financing and

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other advice and support, and (v) achieve operating efficiencies and economies
of scale through the implementation of an integrated management information
system, the rotation of health care providers among Integrated Medical Centers,
increased purchasing power with suppliers, and standardized protocols,
administrative systems, and procedures.

The Company itself is not authorized or qualified to engage in any activity
which may be construed or be deemed to constitute the practice of medicine but
is an independent supplier of non-medical services only. The physicians and
chiropractors are responsible for all aspects of the practice of medicine and
chiropractic and the delivery of medical and chiropractic services (subject to
certain business guidelines determined in conjunction with the Company),
including but not limited to diagnosis, treatment, referrals and therapy. In
connection with any managed care contracts it may arrange on behalf of the
Integrated Medical Centers, the Company will need to manage the Integrated
Medical Centers' utilization of medical services to patients. If under such
contracts, the Integrated Medical Centers accept responsibility for the
treatment of their patients by specialists or at hospitals, the Company will
also need to manage the practitioners' referral patterns with respect to
specialty physician and hospital services. The Company would only do so,
however, for payment purposes and would not, through such process, interfere
with the professional judgment of a medical practitioner or prohibit a
practitioner from providing any medical services.

The objective of the Company's operating strategy is to facilitate the
provision of a high level of traditional and alternative medical care to
patients in a convenient, cost-effective manner. Key elements of the Company's
operating strategy are:

One Location. The Company seeks to provide consumers the opportunity to
obtain, and the convenience of obtaining, under the supervision of a medical
doctor, complementary traditional and alternative medical treatments in one
location. The Company believes that alternative medicine is growing in
popularity, and that supervision of treatment by a medical doctor may
alleviate some patient and third party payor concerns.

Facilitate the Efficient Provision of High Quality Care. All health care
services at an Integrated Medical Center are provided by health care
practitioners under the supervision of a licensed medical doctor. The
Company seeks qualified and reputable medical doctors. The Company further
seeks to facilitate the efficient provision of high quality care through the
use of credentialing and standardized protocols. Additionally, in many
states, only medical doctors are permitted to order certain laboratory and
radiological tests. The Company believes that supervision by a medical
doctor and a medical doctor's access to more sophisticated diagnostic
testing services will enhance the quality of patient care.

Establish Networks of Integrated Medical Centers to Obtain Managed Care
Contracts. A key component of the Company's operating strategy is to attract
both health care practitioners and managed care payors. The Company seeks to
attract health care practitioners by, among other things, providing them
greater access to managed care contracts than they could attain
independently and relieving them of certain administrative responsibilities.
The Company intends for its local and regional clusters of Integrated
Medical Centers to attract managed care contractors by providing single,
integrated points of market entry, thereby enabling managed care payors to
more efficiently contract for the provision of health care services for
patient populations. The Company within its OHS subsidiary credentials its
licensed health care practitioners through a credentialing function
accredited by the National Committee for Quality Assurance, has drafted new
and improved standardized protocols and will develop and implement a
utilization management program, for the purpose of attracting and managing
its managed care contracts. The Company has signed five (5) such contracts
and will be implementing them in 1998.

Provide Advice and Assistance. The Company intends to develop and
implement advertising and marketing programs for the Integrated Medical
Centers primarily at the regional and national levels, utilizing television,
radio, and print advertising as well as internal marketing promotions. The
name of each Integrated Medical Center includes the words "Complete Wellness
Medical Center(SM)." Each Integrated Medical Center displays signage bearing
such words, or the words "Complete Wellness Center(SM)." The Company's goal
is to achieve "brand name" awareness of the Integrated Medical Centers.
There is no assurance, however, that the Company will be able to realize
this goal. An individual Integrated Medical Center may also advertise its
services locally, and the Company provides advice in that regard upon
request. The Company also agrees to furnish the Integrated Medical Centers
management services, financing and other advice and support. By doing so,
the Company seeks to relieve providers, to a limited extent, from certain
burdens of administering and managing a medical practice.

Achieve Operating Efficiencies and Economies of Scale. The Company
intends and has organized its Integrated Medical Centers into regional
groups or clusters to utilize employees and serve patients more effectively,
to leverage management and other resources, to increase purchasing power
with suppliers, and to facilitate the development of networks of affiliated
physicians, chiropractors, and other health care practitioners.

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The Company plans to continue to develop Integrated Medical Centers
primarily by affiliating with chiropractors and their existing chiropractic
practices. Management endeavors to enter into agreements with chiropractors who
are located in convenient locations, and who have demonstrated the
entrepreneurial skills to build a practice. The Company believes that such
chiropractors will consider affiliation with Integrated Medical Centers to be
attractive because they may have greater access to managed care contracts in the
future through the Company and its network of Integrated Medical Centers, will
be relieved of certain administrative burdens, and may have the opportunity to
increase their practice income. An Integrated Medical Center is usually
established at the same location as the existing chiropractic practice, although
it could be established at a new or separate location.

The Company has developed Integrated Medical Centers in connection with
health clubs. In such cases, the Integrated Medical Center would be established
at a location (such as a health club or office building) provided, leased or
licensed to the Company by the other party to the alliance. The Company would in
turn seek to affiliate with a chiropractor who has an existing chiropractic
practice located near the Integrated Medical Center. The chiropractor would
maintain his or her existing practice at its existing location, but would
arrange to see patients at the Integrated Medical Center as well. If the Company
were unable to affiliate with a chiropractor with an existing practice located
nearby, a chiropractor without an existing practice would take over and work on
site at the Integrated Medical Center.

Various state and federal laws regulate the relationship between providers
of health care services and physicians, and, as such, the Company is subject to
these laws and regulations. The Company is also subject to laws and regulations
relating to business corporations in general. During the past year and
continuing into 1998, the Company has, through its legal counsel, performed a
detailed regulatory review in each state in which the Company has established
Integrated Medical Centers. The Company believes its operations are in
compliance with applicable laws. Every state imposes licensing requirements on
individual physicians and on certain other types of health care providers and
facilities. Many states require regulatory approval, including licenses to
render care or certificates of need, before establishing certain types of heath
care facilities or offering services which entail the acquisition of expensive
medical equipment.

The laws of many states prohibit business corporations from engaging in the
practice of medicine, such as through employment arrangements with physicians.
These laws vary from state to state and are enforced by the state courts and
regulatory authorities with broad discretion. The Company does not employ
physicians to practice medicine, does not represent to the public that it offers
medical services, and does not control or interfere with the practice of
medicine by physicians at the Integrated Medical Centers. The Medcorps are
formed as general business corporations wholly-owned by the Company in states in
which the Company believes general business corporations are permitted to own
medical practices. In most states, the Medcorps are formed as professional
corporations owned by one or more medical doctors licensed to practice medicine
under applicable state law.

The laws of some states prohibit physicians from splitting professional
fees. These statutes are sometimes quite broad and as a result prohibit
otherwise legitimate business arrangements. Laws in all states regulate the
business of insurance and the operation of health maintenance organizations, or
HMOs. Many states also regulate the establishment and operation of networks of
health care providers. There are a number of federal laws prohibiting certain
activities and arrangements relating to services or items reimbursable by
federal or state funded health care programs. Certain provisions of the Social
Security Act, commonly referred to as the "Anti-kickback Amendments," prohibit
the offer, payment, solicitation or receipt of any form of remuneration either
in return for the referral of federal or state health care reimbursement program
patients or patient care opportunities, or in return for the recommendation,
arrangement, purchase, lease or order of items or services covered by such
federal or state health care funded programs.

Federal law and the laws of many states regulate the sale of franchises.
Franchise laws require, among other things, that a disclosure document be
prepared and given to prospective franchisees. The Company believes that
Medcorps formed as business corporations wholly-owned by the Company or by
Complete Wellness Centers, L.L.C., a Delaware limited liability company which is
managed by the Company, are not subject to such laws. Medcorps formed as
physician-owned professional corporations may be subject to them. If such laws
are deemed to apply, the Company would be required to prepare and deliver a
disclosure document to the physician that owns the professional corporation, who
may be an employee of the Company. Although the Company believes that its form
of relationship with Medcorps and Admincorps is not the type intended to be
covered by such laws, the Company has engaged counsel to advise it in this
regard. There can be no assurance that review of the Company's business by
regulatory authorities will not result in a determination that could adversely
affect the operations of the Company or require structural and organizational
modifications of the Company's form of relationship with Integrated Medical
Centers that could have an adverse effect on the Company.

The managed health care industry, including the provider practice management
industry, is highly competitive. The Company competes with other companies for
physicians and other practitioners of health care services as well as for
patients. The Company

9
<PAGE> 10

competes not only with national and regional provider practice management
companies, but also with local providers, many of which are trying to combine
their own services with those of other providers into integrated delivery
networks. Certain of the companies are significantly larger, provide a wider
variety of services, have greater financial and other resources, have greater
experience furnishing provider practice management services, and have longer
established relationships with buyers of these services, than the Company, and
provide at least some of the services provided by the Company.

The Company's overall strategy is to integrate the services of each of the
subsidiaries into the Medical Centers. During 1998, the Company will make
available the products and services of the smoking cessation program of Complete
Wellness Smoking Cessation as well as the weight loss programs of Nutri/System
to its Integrated Medical Centers. Also, it is planned to transition at least
half of the CWWM stores and turn them into Integrated Medical Centers.

The Company has developed and is in the process of implementing a corporate
computer network which ties together the major locations of the Company to
facilitate data transmission, e-mail, Internet access, Medical Center
communications and access to management information and data. It is expected
that all entities of the Company and its affiliates will be integrated into the
system during 1998.

As of February 28, 1998, the Company had 147 employees and the operating
Medcorps had a total of approximately 400 employees. The Company's 147 employees
consisted of 27 in finance and administration and 120 in sales and marketing,
mostly in its weight management subsidiary.

ITEM 2. PROPERTIES

The Company does not own any property. Effective April 1, 1998, the
Company's executive and administrative offices will be located in approximately
6,300 square feet of office space in Washington, D.C. The Company will pay
$10,000 per month rent on a 7 year sublease from Crestar Bank. It also leases
approximately 1,395 square feet of office space in West Palm Beach, Florida. The
lease term began in March 1998 and expires in February 2000. The current monthly
rental rate is $1,950 plus 6% sales tax. Both facilities are in satisfactory
condition and are adequate for the Company's use.

ITEM 3. LEGAL PROCEEDINGS

The Company or its affiliates currently have three legal proceedings in
various stages of litigation. A doctor has initiated action against an
Integrated Medical Center and the Company for contested back wages. Also, a
therapist has initiated a proceeding against another Medical Center for
contested back wages. The Company has initiated legal action against two Florida
doctors for breach of their agreement with the Company. In addition, judgments
have been rendered in actions against several of the Company's weight
management subsidiary. All of these actions are considered by the Company to be
routine litigations that is incidental to the business.

Another case currently in litigation is an action brought by an attorney
seeking damages against the Company for unpaid legal fees in an amount of
$13,500. The Company contests the validity and reasonableness of the fees
incurred and intends to defend the action. The final action currently in
litigation is a subrogation action related to a fire loss in California. In that
matter, an Affiliated Chiropractor's Admincorp entered a lease for certain
property that was later destroyed by fire. The Landlord's property insurer has
brought an action against the Company and a repairman hired by the Admincorp,
seeking subrogated recovery for losses related to the fire. The Company has
retained counsel and intends to vigorously defend the action.

In November 1997, various facilities of the Company's operations were
searched by federal authorities pursuant to search warrants, and the government
removed various computer equipment, records and documents. During 1998, various
employees of the Company and certain subsidiaries were served with subpoenas
requesting records and documents related to billing and claims coding, clinical
relationships and corporate records. The Company believes it may be a target in
this investigation. Only one employee has received a target letter stating that
the employee is a subject of the investigation. While it is too early to predict
the outcome of any of the ongoing investigations of the Company or the
initiation of any additional investigations, were CWC to be found in violation
of federal or state laws relating to Medicare, Medicaid, CHAMPUS or similar
programs, the Company could be subject to substantial monetary

10
<PAGE> 11

fines, civil and criminal penalties and exclusion from participation in the
Medicare, Medicaid or CHAMPUS programs and similar other reimbursement programs,
Any such sanctions could have a material adverse effect on the Company's
financial position and results of operations.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

At the Annual Meeting held on June 10, 1997, the following items were
submitted to the security holders.

1. to elect a Board of Directors who shall hold office until the next
Annual Meeting or until their successors are duly elected and shall have
qualified ("Proposal One");

2. to ratify the selection of Ernst & Young LLP as independent
accountants for the fiscal year ending December 31, 1997 ("Proposal Two");

3. to consider and vote upon a proposal to approve an amendment to the
Company's 1996 Stock Option Plan to increase the number of shares of the
Company's Common Stock that may be issued under the Option Plan by an
additional amount of 200,000 shares of the Company's Common Stock ("Proposal
Three"); and

4. to transact such other business as may properly come before the
Meeting or any adjournments thereof.

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<PAGE> 12

PART II

ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

(a) Market Information

The Company's Common Stock and Redeemable Common Stock Purchase Warrants are
traded on the Nasdaq SmallCap Market (Nasdaq SCM).

The following table states the high and low quotation information by quarter
for the Company's Common Stock and Warrants based on actual trading, as reported
on Nasdaq SCM. The quotations reflect inter-dealer prices, without retail
mark-up, markdown, or commission and may not represent actual transactions.

COMMON STOCK
<TABLE>
<CAPTION>

HIGH LOW
------ ------
<S> <C> <C>
1st Quarter, 1997.... $ 6.00 $ 3.25
2nd Quarter, 1997.... $ 5.00 $ 3.125
3rd Quarter, 1997.... $ 4.375 $ 2.25
4th Quarter, 1997.... $ 4.625 $ 1.375
</TABLE>

WARRANTS
<TABLE>
<CAPTION>

HIGH LOW
------ ------
<S> <C> <C>
1st Quarter, 1997.... $ 1.43 $ 0.68
2nd Quarter, 1997.... $ 1.625 $ 1.00
3rd Quarter, 1997.... $ 2.250 $ 1.125
4th Quarter, 1997.... $ 2.125 $ 0.75
</TABLE>

(b) Holders

As of December 31, 1997, there were 358 holders of record of the Company's
Common Stock and approximately 244 holders of record of its Redeemable Common
Stock Purchase Warrants.

Holders of the Company's Common Stock are entitled to receive such dividends
as may be declared by the Board of Directors out of funds legally available
therefor. There has been no declaration of dividends to date, and none is
expected in the foreseeable future. The Company anticipates that future earnings
will be retained to finance future operations and expansion. The payment of
dividends is within the discretion of the Board of Directors of the Company and
will depend on the Company's earnings, if any, capital requirements, financial
condition, and such other factors as are considered to be relevant by the Board
of Directors from time to time.

ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS

General

Statements included in this "Management's Discussion and Analysis of
Financial Condition and Results of Operations" Section, and in other sections of
this Report and in prior and future filings by the Company with the Securities
and Exchange Commission, in the Company's prior and future press releases and in
oral statements made with the approval of an authorized executive which are not
historical or current facts are "forward looking statements" made pursuant to
the safe harbor provisions of the Private Securities Litigation Reform Act of
1995 and are subject to certain risks and uncertainties that could cause actual
results to differ materially from those presently anticipated or projected. The
Company wishes to caution readers not to place undue reliance on any such
forward-looking statements, which speak only as of the date made. There are
important risk factors that in some cases have affected and in the future could
affect the Company's actual 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.

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<PAGE> 13

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 began
implementing the initial stages of its business plan. The Company formed
Complete Wellness Centers, L.L.C. ("CWC LLC"), a Delaware limited liability
company, as a vehicle for raising capital needed to open Integrated Medical
Centers. The Company is the managing member of CWC LLC and has a 1% equity
interest. The Company has obtained irrevocable and permanent voting proxies from
the holders of a majority of ownership interests in CWC LLC. The Company
consolidates the financial statements of CWC LLC in its financial statements.

Pursuant to an agreement entered into in July 1995, CWC LLC purchased
selected assets of a chiropractic practice for the purpose of establishing the
Company's first Integrated Medical Center in conjunction with a newly formed,
wholly-owned subsidiary of CWC LLC, Complete Wellness Medical Center of
Fredericksburg, Inc. ("CWC Fredericksburg"). Operations began at CWC
Fredericksburg on September 1, 1995.

The Company began pursuing its primary development strategy in early 1996.
This strategy involves entering into an agreement with one or more chiropractors
and their existing chiropractic practices and Admincorps. The chiropractor or
existing chiropractic practice leases the office space and equipment utilized by
the existing chiropractic practice to the Company. The chiropractor then
incorporates the Admincorp, with which task the Company now assists, and causes
the Admincorp to ratify the agreement. In general, the Admincorp assumes
responsibility for the daily management functions of the Integrated Medical
Centers. The Company agrees to furnish the Admincorp certain services, such as
assistance with advertising, other practice development activities, and medical
doctor recruitment, to help the Admincorp perform such daily management
functions. The Company then forms the Medcorp and enters into a long-term
management agreement with the Medcorp to provide certain administrative and
management services. In addition, the Company subleases the existing
chiropractic practice's office space and equipment to the Medcorp. The Medcorp
employs the Affiliated Chiropractor(s) and one or more medical doctors.
Depending on the needs of the patient base, the Medcorp may also employ one or
more other traditional or alternative health care providers.

The Company charges the Medcorp management fees for the goods and services
it provides the Medcorp. Such fees are generally based on a periodic
determination of the fair market value of such goods and services. The Company
also subleases the office space and equipment to the Medcorp for estimated fair
market value. With respect to Integrated Medical Centers that serve patients
covered by any federal or state funded health care program and certain other
Integrated Medical Centers, the management fees are pre-set for one year for
flat dollar amounts that represent the fair market value of the goods and
services the Company directly furnishes the Medcorp and of the services the
Company indirectly furnishes the Medcorp through its arrangement with the
Admincorp. The Admincorp charges the Company a monthly fee equal to the sum of
the management fees and rent that the Company charges the Medcorp, less a
specified fixed amount, however, with respect to certain Integrated Medical
Centers. In general, the Company charges the Admincorp a monthly integration fee
that is, depending on various factors, 9% to 20% (if the initial term of the
agreement is five years) or 10% to 15% (if the initial term of the agreement is
ten years) of the sum of (i) the management fee and rent that the Company
charges the Medcorp and (ii) the Medcorp's permissible expenses, until the sum
reaches $300,000 to $500,000 in any one year, and 10% of the sum for the
remainder of that year. (The "Integration Date" is the date on which a medical
doctor first sees a patient for an Integrated Medical Center.) With respect to
Integrated Medical Centers that serve patients covered by federal or state
funded health care programs and certain other Integrated Medical Centers, the
integration fees are fixed dollar amounts equal to estimated fair market value
of services provided by the Company to the Integrated Medical Centers, subject
to a 15% cap. The Company also may charge certain Admincorps an operations fee
of $250 per month, subject in certain cases to delayed or contingent
effectiveness. Except for the operations fee, however, the fees are simply
accrued, and actual payment of them is not required, unless and until, and then
only to the extent, that the Medcorps collect on their accounts receivable in
excess of certain permitted expenses, such as payroll expenses. If the agreement
with the Admincorp is terminated, the Admincorp is generally entitled to receive
from the Company 80% of the accounts receivable then due the Company from the
Medcorp, less the balance then due the Company from the Admincorp, subject to
the Medcorp collecting on its accounts receivable. In the case of certain
Integrated Medical Centers, however, the Admincorp is entitled to a pro rata
portion of the Medcorp's accounts receivable as of the date of termination, if
and when collected.

The Company's agreements with Affiliated Chiropractors and entities
controlled by them relating to the operation and management of the Integrated
Medical Centers are generally for initial terms of five or ten years. They may
be renewed in five year increments, up to four times, by mutual consent. An
Affiliated Chiropractor may terminate such an agreement if the Company
materially breaches it and, if the breach is correctable, the Company fails to
cure the breach within ten days after written notification. Agreements with
respect to four of the Integrated Medical Centers under management are also
terminable by the Affiliated Chiropractor if, for example, the combined revenues
of the Integrated Medical Center and existing chiropractic practice during the
first year after a start-up phase

13
<PAGE> 14

do not exceed 110% of the revenues of the Affiliated Chiropractor's existing
chiropractic practice for the one year preceding the date the Affiliated
Chiropractor agreed in writing to develop the Integrated Medical Center in
conjunction with the Company. The start-up phase is generally three months
following the Integration Date. The loss of a substantial number of such
agreements, or the loss of a substantial number of Affiliated Chiropractors,
would have a material adverse effect on the Company.

The Company currently plans to use this model for Integrated Medical Centers
to be developed pursuant to its expansion strategy, including those in
connection with strategic alliances with health clubs, corporations, government
offices, or other organizations. In the case of a strategic alliance, however,
office space for the Integrated Medical Center would be leased or licensed from
the other party to the strategic alliance rather than from the Affiliated
Chiropractor or his existing chiropractic practice, and the equipment would be
leased or purchased. In this regard, the Company entered into a master license
agreement with Bally Total Fitness Corporation in September 1996 to develop
Integrated Medical Centers within selected Bally Total Fitness Corporation
health clubs throughout the United States. The Company has not yet proceeded
with the implementation of the agreement due to delay in selecting the pilot
site and Bally's deferral awaiting the outcome of the current government
investigation.

As of December 31, 1997, the Company was managing 85 Integrated Medical
Centers. The Company ceased operating seven Integrated Medical Center and plans
to dissolve the related Medcorps after having terminated its agreement with the
Affiliated Chiropractors and Admincorps. The Company anticipates no material
adverse financial effect as a result of such terminations. Of the remaining 78
Integrated Medical Centers, all were developed through CWC, Inc. in 1997.

The Company integrated many of its existing Integrated Medical Centers
within a few weeks after the Affiliated Chiropractors entered into agreements
with the Company to develop such Integrated Medical Centers. The Company is now
taking up to six months to integrate clinics due to the substantial number of
agreements it has pending with chiropractors to develop Integrated Medical
Centers.

The cost to the Company to develop an Integrated Medical Center not
connected with a strategic alliance has averaged $10,000. This cost has
consisted of such things as computer software, legal fees, professional
credentialing, training, an administrative starter kit and travel. The Company
believes that the average cost to the Company to develop an Integrated Medical
Center in connection with a strategic alliance to be up to $150,000. These funds
are expected to be used for leasehold improvements, equipment, professional
salaries, information systems and working capital.

The Company may from time to time advance additional funds to the Medcorps
to fund working capital requirements. If the Company does make such an advance,
the advance will bear interest (the current rate being 10% per annum), will be
secured by such collateral as the Company deems appropriate, and will be
repayable before the expiration of the initial term of the Company's agreement
with the Affiliated Chiropractor and the Admincorp.

The Company intends to develop no fewer than 50 additional Integrated
Medical Centers by December 31, 1998. However, there can be no assurance that
the Company will develop the Integrated Medical Centers with respect to which it
had agreements with chiropractors as of December 31, 1997, will be able to
identify and recruit a sufficient number of additional chiropractors, or that
the average cost to the Company to develop Integrated Medical Centers will not
be greater than those discussed above.

The Integrated Medical Centers developed prior to the date of the completion
of the IPO were financed by the issuance of the Company's notes, shares of
Common Stock, and shares of preferred stock, and by the sale of membership
interests in CWC LLC. The Integrated Medical Centers intended to be developed by
December 31, 1998 are expected to be financed by internal cash flow of the
Company and additional financing if necessary.

During May 1997, the Company incorporated three new wholly owned
subsidiaries: Complete Wellness Research Institute, Inc., ("CWRI"), Complete
Wellness Education, Inc., ("CWEI"), both corporations of the state of Delaware,
and Complete Billing, Inc., ("CBI"), a state of 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 and has had limited operational results in 1997. CWEI,
through its consortium of nationally recognized doctors and authors, will
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 December 31, 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

14
<PAGE> 15

Wellness Independent Physicians Association, Inc. ("CWIPA"), a Delaware
corporation now named Optimum Health Services, Inc. ("OHS"). 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. CWIPA has entered into contracts to provide
access to its network in early 1998.

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 Integrated Medical Centers in 1998.

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 was 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 would be applied to the
final acquisition. In January, 1998, the Company acquired 56 weight loss centers
from Nutri/System, L.P. for the $150,000 and the assumption and assignment of
the outstanding lease obligations of the centers of approximately $320,000.

Results of Operations

Twelve months ended December 31, 1997 compared to twelve months ended
December 31, 1996:

Revenue. During the twelve months ended December 31, 1997 and December 31,
1996, the Company had total revenue of $9,006,874 and $1,338,085, respectively.
The increase of $7,668,789 was due primarily to the addition of 78 Integrated
Medical Centers after December 1996.

Salary and Consulting Costs. During the twelve months ended December 31,
1997 and December 31, 1996, the Company incurred salary and consulting costs of
$3,116,061 and $733,367, respectively. The increase of $2,382,694 was due to an
increase of $1,443,337 in costs resulting from the hiring of additional
employees at the corporate headquarters, at the new subsidiaries and the
Integrated Medical Centers, an increase of $191,511 in compensation expense
resulting from the grant of stock options and warrants to purchase Common Stock,
the fair market value of which exceeded their exercise price, and an increase of
$288,590 resulting from consulting fees in connection with the development of
corporate infrastructure and the operation of Integrated Medical Centers.

Management Fees. During the twelve months ended December 31, 1997 and
December 31, 1996, the Company incurred management fees of $3,850,112 and
$468,991, 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 fees are paid when the accounts receivable
of the Medcorps are collected by the Medcorps. The increase of $3,338,121 was
due primarily to the addition of 78 Integrated Medical Centers after December
1996.

Rent. During the twelve months ended December 31, 1997 and December 31,
1996, the Company incurred rent expenses of $139,081 and $102,149, respectively.
Rent consists of amounts paid for office space and certain equipment by the
Company and the Medcorps. Rent for space and equipment for the Integrated
Medical Centers is paid when the accounts receivable of the Medcorps are
collected by the Medcorps. The increase of $36,932 was due primarily to the
addition of 78 Integrated Medical Centers after December 1996.

Advertising and Marketing. During the twelve months ended December 31, 1997
and December 31, 1996, the Company incurred advertising and marketing expenses
of $80,616 and $75,907, respectively. The increase of $4,709 was attributable
primarily to

15
<PAGE> 16

additional advertising for marketing and recruitment purposes.

Bad Debt Expense. During the twelve months ended December 31, 1997 and
December 31, 1996 the Company incurred bad debt expense of $3,232,111 and
$301,618, respectively. The increase of $2,930,493 was due to an increase in
reserves for doubtful accounts of $3,682,286 as a result of the addition of 78
Integrated Medical Centers.

General and Administrative. During the twelve months ended December 31, 1997
and December 31, 1996, the Company incurred general and administrative expenses
of $2,775,886 and $1,025,327, respectively. The increase of $1,628,634 was due
primarily to the addition of 78 Integrated Medical Centers after December 1996
and consists of an increase of (i) $318,684 in accounting costs and in legal
costs, (ii) $22,711 in royalty costs associated with its Smokender subsidiary,
(iii) $732,721 in various costs, such as automobile, travel and entertainment,
telephone, bank services, and insurance, (iv) $75,000 in costs attributable to a
bridge financing completed in December 1997, and (v) $74,851 in costs attributed
to acquisition, commissions, and bonuses.

Depreciation and Amortization. During the twelve months ended December 31,
1997 and December 31, 1996, the Company incurred depreciation and amortization
expense of $89,245 and $36,698, respectively. The increase of $52,547 resulted
from the addition of fixed assets, primarily computer software and equipment,
which tend to have depreciable lives of five years or less.

Interest Income. During the twelve months ended December 31, 1997 and
December 31, 1996, the Company had interest income of $88,499 and $12,076,
respectively. The increase of $76,423 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 twelve months ended December 31, 1997, and
December 31, 1996, the Company had interest expenses of $31,041 and $59,094,
respectively. The decrease of $28,052 resulted from the retirement of the bridge
financing loan repaid in February 1997.

During 1996, the losses incurred by the consolidated CWC, LLC allocable to
the minority interest owners of the CWC, LLC, eliminated all net equity of the
minority interest owners. Accordingly, the Company has reflected 100% of the
operations of the CWC, LLC in its results of operations, without allocation to
the minority interest owners. In addition, the Company's investments in Complete
Wellness Smoking Cessation, Inc. represents 100% of the equity funding of that
entity. The Company has reflected 100% of the operations, assets, and
liabilities of the subsidiary due to the lack of minority interest investment
into the Company. The Company's investment in Optimum Health Services, Inc. was
made in conjunction with an investment by the minority interest owners. The
Company has included the effects of an allocation of approximately $42,000 of
the net losses incurred by Optimum Health Services, Inc. for the year ended
December 31, 1997 based on the minority interest owners investment in and
percentage ownership of Optimum Health Services, Inc.

The Company has evaluated its tax position as of December 31, 1997 and its
expected tax position for the next three to five years and determined that,
based on assumptions and estimates utilized in its evaluation, it is more likely
than not that the Company will not be able to realize the economic benefits of
net operating losses incurred and certain other deferred items. Accordingly, the
Company has recorded a valuation allowance representing 100% of the net deferred
tax assets and has recognized a net tax provision of zero.

Seasonality

The Company believes that the patient volumes at its Integrated Medical
Centers are not significantly affected by seasonality.

Liquidity and Capital Resources

The Company has experienced net losses, negative cash flow, a deficit in
working capital, and an accumulated deficit each month since its inception. For
the years ended December 31, 1997 and December 31, 1996 the Company had incurred
a net loss of $(4,176,433) and of $(990,693), respectively. At December 31,
1997, the Company had a working capital deficit of ($291,723), and an
accumulated deficit of $(5,364,415). Net cash used in operations for the years
ended December 31, 1997 and December 31, 1996 was $(3,320,204) and $(1,117,079),
respectively. Negative cash flow for each period was attributable primarily to
net losses in each of the periods and increases in accounts receivable net of
accounts payable and other current liabilities. For the years ended December 31,
1997 and December 31, 1996, the Company used $370,680 and $194,989,
respectively, for purchases of equipment.

From November 1994 to August 1996 development costs, capital expenditures
and working capital needs of the Company were primarily financed through the
issuance of notes, shares of Common Stock, and shares of preferred stock of the
Company.

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<PAGE> 17

The Company has financed certain start-up operations through the sale of
minority interest in those operations. In 1996, approximately $470,000 was
raised through a private placement of CWC LLC Class A units. In 1997,
approximately $50,000 was raised through the sale of common stock to management
of CWIPA.

In August 1996, the Company completed the Bridge Financing pursuant to which
it issued (i) an aggregate of $1.1 million principal amount of secured
promissory notes (the "Bridge Notes") that bore interest at the rate of 12% per
annum, were payable upon the earlier of the closing of the IPO or June 30, 1997,
and were secured by substantially all of the Company's assets and (ii) warrants
entitling the holders to purchase that number of shares of Common Stock
determined by dividing the principal amount of the Bridge Notes by the price per
share of Common Stock offered in the IPO (the "Bridge Warrants"). The Company
agreed that the Bridge Warrants and the shares of Common Stock issuable upon
exercise of the Bridge Warrants would be included in the registration statement
for the IPO. A total of 183,333 shares of Common Stock were issuable upon
exercise of the Bridge Warrants at an exercise price of $.003 per share.
Proceeds of the Bridge Financing were used for the development of additional
Integrated Medical Centers, working capital, and general corporate purposes. The
Company also issued a warrant to purchase 3,333 shares of Common Stock to a
broker-dealer who acted as a placement agent for a portion of the Bridge
Financing. The fair value of the Bridge Warrants and broker/dealer warrants,
$5,920, was recognized as a discount on the Bridge Notes of which $3,920 was
amortized through December 31, 1996.

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.

On December 23, 1997, the Company completed a Bridge Financing of $500,000.
This temporary financing was used in the lease payment for the acquisition of
assets for Complete Wellness Weight Management, Inc. On January 23, 1998, the
$500,000 Bridge Loan was converted to Preferred Stock. (See Note 14, subsequent
events). Interest expense on this loan was $1,315 in 1997.

The Company intends to develop no fewer than 50 Integrated Medical Centers
(including the 50 for which it had agreements with chiropractors as of December
31, 1997) during 1998. The average cost to the Company to develop an Integrated
Medical Center not connected with a strategic alliance is approximately $10,000.
There can be no assurance, however, that the Company will develop the Integrated
Medical Centers with respect to which it had agreements with chiropractors as of
December 31, 1997, will be able to identify and recruit a sufficient number of
additional chiropractors, or that the average costs to the Company to develop
Integrated Medical Centers will not be greater than those mentioned above.

The Company has committed to fund future working capital requirements of
Smokenders totaling approximately $98,000, of which no amounts have been funded
through December 31, 1997. In addition, the Company is obligated to pay a
royalty fee of 5% of total revenues to Oxford Health Plan and the $26,000 per
annum to the founders of Smokenders as a result of its acquisition of
Smokenders. This obligation is payable in annual installments over a 10 year
period.

The Company has entered into employment agreements with certain key
employees which, generally, provide for continued employment through various
dates in 1999 at an aggregate annual compensation level of approximately
$550,000. In the event the employees subject to such agreements were terminated
by the Company for reasons other than "with cause", the employees would receive
6 to 12 months compensation and benefits upon separation. The Company has not
obtained key man life insurance for employees subject to employment agreements.

In addition, the Company has entered into various consulting agreements
which, generally, provide for payment of "finders fees" of $1,500 to $4,000 for
each chiropractic clinic identified by the consultant and integrated by the
Company subject to ceratin maximum amounts per consultant. Certain consulting
agreements also provide for the Company to pay royalties ranging from 1% to 10%
of gross collections at Integrated Medical Centers identified by the consultant
for periods ranging from 5 to 25 years after integration.

17
<PAGE> 18

The Company or its affiliates currently have three legal proceedings in
various stages of litigation. A doctor has initiated action against an
Integrated Medical Center and the Company for contested back wages. Also, a
therapist has initiated a proceeding against another Medical Center for
contested back wages. The Company has initiated legal action against two
Florida doctors for breach of their agreement with the Company. In addition,
judgments have been rendered in actions against several of the Company's
weight management subsidiary.

The Company has initiated legal action against two Florida doctors for
breach of their agreement with the Company. Though its Compliance Program, the
Company has initiated legal action to acquire the patient records from four (4)
Administrators of Integrated Medical Centers which were operated under contracts
that have been terminated for cause.

The Company does not currently have an external source of liquidity. The
Company believes its existing working capital and operations will provide
sufficient funds to meet its short term liquidity requirements.

The Company is currently under a federal investigation whose ultimate
outcome can not be reasonably predicated at this time. If the Company is found
to be in violation of federal or state laws, the Company could be subject to
substantial monetary fines, civil and criminal penalties, and exclusion from
federal and state reimbursement programs. The ultimate cost to the Company to
defend itself and any settlement, fine, or penalty imposed could have a material
adverse effect on the Company's financial position, results of operations and
liquidity.

The Year 2000 issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any of the Company's
operational equipment or internal computer software that have time- sensitive
programs may recognize a date using "00" as the year 1900 rather than the year
2000. This could result in a system failure or miscalculations causing
disruption of operations, including, among other things, a temporary inability
to process transactions, send invoices, or engage in similar normal business
activities. Similar failures in the Company's medical clinic, independent
physician's network, or medical billing company operations could result in an
impairment of revenue recognition due to significant future obligations,
impairment of future services provided by the Company's subsidiaries, or
potential other liability.

The Company began assessing the implications of the Year 2000 during late
1997. At December 31, 1997, the process of evaluation the Company's services,
products and internal systems was underway and is expected to be completed in
1998. At this time, the actual impact of Year 2000 compliance on the Company's
future results of operations, capital spending, and business operations is not
known, but is not expected to be material.

Net Operating Losses

At December 31, 1997, the Company and CWC LLC's wholly owned subsidiaries
had combined net operating loss carryforwards for income tax purposes of
approximately $2,571,922, which expire $192,000 in 2010, $921,000 in 2011, and
$1,458,922 in 2012. The Company files a consolidated federal tax return with its
wholly owned subsidiaries. CWC LLC is not included in this tax return. CWC LLC
is treated as a partnership for tax purposes and its gains and losses are
reflected at each member's level. Further, CWC LLC does not file a consolidated
tax return with its subsidiaries. Accordingly, the use of substantially all of
the combined net operating loss carryforwards will be limited to use to offset
future taxable income of each separate subsidiary in proportion to its share of
the tax losses generated to date. In addition, these carryforwards may be
significantly limited under the Internal Revenue Code of 1986, as amended, as a
result of ownership changes resulting from the Company's Preferred Stock
financing and other equity offerings. A valuation allowance of approximately
$457,592 has been established at December 31, 1997 to offset any benefit from
the net operating loss carryforwards, as it cannot be determined when or if the
Company will be able to utilize the net operating losses.

Seasonality

The Company believes that the patient volumes at its Integrated Medical
Centers are not signifiacantly affected by Seasonality. However, the wieght loss
subsidiary, aquired January 31, 1998, is expected to experience significant
decreases in patient volumes of up to 50% during the summer months of June
through September.

18
<PAGE> 19

New Accounting Pronouncements

In 1997, the Financial Accounting Standards Board issued Statement No. 128,
Earnings Per Share. Statement 128 replaced the calculation of primary and fully
diluted earnings per share with basic and diluted earnings per share. Unlike
primary earnings per share, basic earnings per share excluded the dilutive
effects of options, warrants and convertible securities. Diluted earnings per
share is very similar to the previously reported fully diluted earnings per
share. In addition, the SEC staff issued Staff Accounting Bulletin No. 98 ("SAB
98"), in February 1998. SAB 98 requires that registrants consider all
potentially dilutive securities issued for nominal consideration outstanding for
all periods. Under the previous SEC regulations in SAB 83, the Company
considered all potentially dilutive securities issued within a twelve month
period prior to the initial public offering date at a price below the initial
public offering price as outstanding for all periods. All earnings per share
amounts for all periods have been presented, and where appropriate, restated to
conform to the Statement 128 and SAB 98 requirements. The effect on weighted
average shares outstanding of securities that could potentially dilute basic
earnings per share in the future were not included in the computation of diluted
earnings per share because to do so would have been antidilutive for the periods
presented.

In 1997, the Financial Accounting Standards Board issued three statements
related to financial statement disclosures, SFAS No. 129, Disclosure of
Information about Capital Structure (Statement 129), SFAS No. 130, Reporting
Comprehensive Income (Statement 130) and SFA No. 131, Disclosures about Segments
of an Enterprise and Related Information (Statement 131). Each standard is
effective for years beginning after December 15, 1997. and therefore the Company
will adopt the new requirements retroactively in 1998. Management has not
completed its review of the statements, but does not anticipate that their
adoption will have a significant effect on the Company's historical financial
statement disclosures.

19
<PAGE> 20

ITEM 7. FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
INDEX PAGE NO.
- ----- ---------
<S> <C>
Report of Independent Auditors............................................... 17
Consolidated Balance Sheets as of December 31, 1997 and 1996................. 18
Consolidated Statements of Operations for the Years Ended December 31, 1997
and 1996................................................................... 19
Consolidated Statements of Stockholders' Equity (Deficit) for the Years Ended
December 31, 1997 and 1996................................................. 20
Consolidated Statements of Cash Flows for the Years Ended December 31, 1997
and 1996................................................................... 21
Notes to Consolidated Financial Statements................................... 22
</TABLE>

20
<PAGE> 21

REPORT OF INDEPENDENT AUDITORS

The Board of Directors
Complete Wellness Centers, Inc.

We have audited the accompanying consolidated balance sheets of Complete
Wellness Centers, Inc. (the "Company"), as of December 31, 1996 and 1997, and
the related consolidated statements of operations, stockholders' equity, and
cash flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Complete Wellness Centers, Inc. at December 31, 1996 and 1997 and the
consolidated results of their operations and their cash flows for the years then
ended in conformity with generally accepted accounting principles.

/s/ ERNST & YOUNG LLP

Washington, D.C.
March 30, 1998

21
<PAGE> 22

COMPLETE WELLNESS CENTERS, INC.

CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31
1996 1997
------------- ------------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents....................................... $ 298,509 $ 804,924
Patient receivables, net of allowance for doubtful accounts of
$143,422 and $3,825,708....................................... 540,444 2,758,841
Inventory....................................................... 0 39,483
Advances to officers and other assets........................... 43,232 437,736
Deposit......................................................... 0 150,000
----------- ----------
Total current assets............................................... 882,185 4,190,984
Furniture and equipment, net....................................... 215,615 504,215
----------- ----------
Total assets....................................................... $ 1,097,800 $4,695,199
=========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY/(DEFICIT)
Current liabilities:
Accounts payable and accrued expenses........................... $ 412,725 $1,003,865
Accrued wages................................................... 91,000 153,000
Accrued management fees and leases.............................. 442,646 3,117,135
Accrued interest................................................ 52,010 8,298
Deferred tax liability.......................................... 8,241 0
Advances from affiliates........................................ 0 154,976
Notes payable -- current........................................ 1,098,000 45,433
----------- ----------
Total current liabilities.......................................... 2,104,622 4,482,707
Convertible note payable........................................... 25,000 25,000
Notes payable...................................................... 0 500,000
Minority interest.................................................. 0 7,179
Stockholders' equity/(deficit):
Preferred Stock, $.01 par value per share, 2,000,000 shares
authorized of which 1,500 are designated Series A, 12% Cumulative
Convertible Preferred Stock, no shares currently issued and
outstanding................................................... 14 0
Common Stock, $.0001665 par value per share, 10,000,000 shares
authorized, 714,967 shares and 2,183,598 shares issued and
outstanding at December 31, 1996 and 1997, respectively...... 119 363
Additional capital.............................................. 156,027 5,044,365
Accumulated deficit............................................. (1,187,982) (5,364,415)
----------- ----------
Total stockholders' equity/(deficit)............................... (1,031,822) (319,687)
----------- ----------
Total liabilities and stockholders' deficit........................ $ 1,097,800 $4,695,199
=========== ==========
</TABLE>

See accompanying notes.

22
<PAGE> 23

COMPLETE WELLNESS CENTERS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1996 1997
------------- -------------
<S> <C> <C>
Operating revenue:
Patient revenue................. $ 1,307,859 $ 8,846,772
Management services income...... 30,226 17,974
Other income.................... 0 142,128
----------- -----------
Total operating revenue.............. 1,338,085 9,006,874
Direct expenses:
Salary and consulting costs..... 733,367 3,116,061
Management fees................. 468,991 3,850,112
Rent............................ 102,149 139,081
Advertising and marketing....... 75,907 80,616
Bad debt expense................ 301,618 3,232,111
----------- -----------
Total direct expenses................ 1,682,032 10,417,981
General and administrative........... 1,025,327 2,775,886
Depreciation and amortization........ 36,698 89,245
----------- -----------
Operating loss....................... (1,405,972) (4,276,238)
Interest expense..................... (59,094) (31,041)
Interest income...................... 12,071 88,499
Minority interest.................... 470,543 42,347
----------- -----------
Net loss before income taxes......... (982,452) (4,176,433)
Income taxes......................... 8,241 0
----------- -----------
Net loss after income taxes.......... $ (990,693) $(4,176,433)
=========== ===========
Loss per share -- basic.............. $ (1.03) $ (1.98)
Weighted average common shares --
basic................................ 965,006 2,113,096
</TABLE>

See accompanying notes.

23
<PAGE> 24

COMPLETE WELLNESS CENTERS, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY/(DEFICIT)

PREFERRED STOCK COMMON STOCK
------------------------- ---------------------
ADDITIONAL ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT TOTAL
----------- ------------ --------- ---------- ------------ ------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1995......................... 1,350 $ 14 567,300 $ 95 $ 137,013 $ (197,289) $ (60,167)
Issuance of common stock... 0 0 110,000 18 0 0 18
Exercise of stock options
for shares of Complete
Wellness Centers, Inc.
common stock.............. 0 0 37,667 6 1,449 0 1,455
Recognition of the granting
of below market common
stock..................... 0 0 0 0 11,645 0 11,645
Recognition of the granting
of below market common
stock warrants............ 0 0 0 0 5,920 0 5,920
Net loss................... 0 0 0 0 0 (990,693) (990,693)
----- ----- -------- ----- ----------- ----------- -----------
Balance at December 31,
1996......................... 1,350 14 714,967 119 156,027 (1,187,982) (1,031,822)
Issuance of common stock... 1,000,000 167 4,687,205 0 4,687,372
Conversion of preferred
stock to common........... (1,350) (14) 145,800 24 (10) 0 0
Exercise of stock options
for shares of Complete
Wellness Centers, Inc.
common stock.............. 0 0 146,498 24 4,371 0 4,395
Exercise of common stock
warrants of Complete
Wellness Centers, Inc.
common stock.............. 0 0 176,333 29 5,261 0 5,290
Recognition of the granting
of below market common
stock..................... 0 0 0 0 4,511 0 4,511
Recognition of the granting
of below market common
stock warrants............ 0 0 0 0 187,000 0 187,000
Net loss................... 0 0 0 0 0 (4,176,433) (4,176,433)
----- ----- -------- ----- ----------- ----------- -----------
Balance at December 31,
1997....................... 0 $ 0 2,183,598 $ 363 $ 5,044,365 $(5,364,415) $ (319,687)
===== ===== ========= ===== =========== =========== ===========
</TABLE>

See accompanying notes.

24
<PAGE> 25

COMPLETE WELLNESS CENTERS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1996 1997
------------- -------------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss.................................................. $ (990,693) $(4,176,433)
Adjustments to reconcile net loss to net cash used in
operating activities:
Minority interest.................................... (470,543) (42,347)
Depreciation and amortization........................ 36,698 89,245
Provision for bad debts.............................. 301,618 3,232,111
Amortization of debt discount........................ 3,920 2,000
Recognition of the compensatory granting of
nonqualified stock options.......................... 11,645 4,511
Recognition of the granting of common stock warrants. 0 187,000
Changes in operating assets and liabilities:
Patient receivables............................. (838,942) (5,450,508)
Advances to officers and other current assets... (41,479) (399,964)
Deferred taxes.................................. 8,241 (8,241)
Accounts payable and other current liabilities.. 862,456 3,292,422
----------- -----------
Net cash used in operating activities..................... (1,117,079) (3,270,204)
INVESTING ACTIVITIES
Deposit for Nutri/Systems acquisition..................... 0 (150,000)
Purchase of equipment..................................... (194,989) (370,680)
Investment in Smokenders.................................. 0 (50,000)
----------- -----------
Net cash used in investing activities..................... (194,989) (570,680)
FINANCING ACTIVITIES
Proceeds from bridge notes and warrants................... 1,100,000 500,000
Payment of bridge loan.................................... 0 (1,100,000)
Proceeds from sale of common stock........................ 18 4,687,205
Proceeds from notes payable............................... 0 200,409
Proceeds from sale of equity in Complete Wellness
Centers, LLC............................................. 446,000 0
Investment of minority stockholders in CWIPA.............. 0 50,000
Payments of notes payable................................. (730) 0
Exercise of warrants...................................... 0 5,290
Exercise of stock options................................. 1,455 4,395
----------- -----------
Net cash provided by financing activities................. 1,546,743 4,347,299
----------- -----------
Net increase in cash and cas equivalents.................. 234,675 506,415
Cash and cash equivalents at beginning of year............ 63,834 298,509
----------- -----------
Cash and cash equivalents at end of year.................. $ 298,509 $ 804,924
=========== ===========
</TABLE>

See accompanying notes.

25
<PAGE> 26

COMPLETE WELLNESS CENTERS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996 AND 1997

1. ORGANIZATION AND PRESENTATION

Complete Wellness Centers, Inc. (the "Company") was incorporated in Delaware
in November 1994. The Company develops and operates integrated medical delivery
systems with a goal of providing consumers with a comprehensive integrated
wellness model of care. The current primary operations are integrated medical
centers. The Company also operates a medical billing company, a smoking
cessation program and is developing an integrated delivery network in Florida.

Integrated Medical Center Model

The Company's integrated medical centers are generally developed and operate
under agreements whereby the Company will open new Integrated Medical Centers in
the same location as chiropractors' existing chiropractic practices (the
"Affiliated Practices"). The Integrated Medical Centers will employ a physician
(the "MD") on a salaried basis to supervise the provision of health care
services. Where permitted by state law, the Integrated Medical Centers will be
wholly owned by the Company. In other jurisdictions, the Integrated Medical
Centers will be wholly owned by another MD and managed by the Company. The
chiropractor will continue to operate his or her existing Affiliated Practice
separately from the Integrated Medical Center. The Company will not acquire the
Affiliated Practice, its patient base, or its tangible assets. In addition, no
consideration will be paid to the chiropractor at inception of the arrangements.
As of December 31, 1997 the Company had integrated 85 centers.

2. SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

The consolidated financial statements reflect the accounts of Complete
Wellness Centers, Inc., which includes 23 wholly owned subsidiaries, and 55
managed Integrated Medical Centers, CWC, LLC, which includes 7 wholly owned
subsidiaries, Complete Billing Inc., and its majority owned subsidiaries,
Complete Wellness Smoking Cessation, Inc. (88.23%), and Complete Wellness
Independent Physicians Association, Inc. (86.67%). Significant inter-company
transactions have been eliminated. The financial statements of CWC, LLC are
consolidated with the Company's financial statements because the Company has
unilateral, perpetual and non-temporary control (via signed irrevocable proxies
from the holders of a majority in interest of the membership interests of CWC,
LLC) over the assets and business operations of CWC, LLC and, notwithstanding
the lack of technical majority ownership, consolidation of CWC, LLC is necessary
to present fairly the financial position and results of operation of the
Company. The Company has recorded the net equity of any individuals holding a
minority percentage as minority interest.

Use of Estimates

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.

Cash and Equivalents

The Company considers cash and cash equivalents to include currency on hand,
demand deposits, and all highly liquid investments with a maturity of three
months or less at the date of purchase.

Inventory

Inventory is recorded at the lower of cost using the average cost method or
net realized value. The Company establishes reserves as appropriate to account
for obsolescence of perishable inventory.

Furniture and Equipment

26
<PAGE> 27

Furniture and equipment are recorded at cost. Maintenance and repairs are
charged to expense as incurred. Depreciation is computed using the straight-line
method at rates intended to amortize the cost of the related assets over their
estimated useful lives.

Furniture and equipment of the Company are reviewed for impairment whenever
events or circumstances indicate that the asset's undiscounted expected cash
flows are not sufficient to recover its carrying amount. The Company measures an
impairment loss by comparing the fair value of the asset to its carrying amount.
Fair value of an asset is calculated as the present value of expected future
cash flows.

Revenue

Patient revenue from services is reported at the estimated realizable
amounts from patients and third party payors for services rendered.
Substantially all of the patient service revenue of the Integrated Medical
Centers is paid by the patients and traditional commercial insurers. The
Integrated Medical Centers do not currently have any HMO contracts.

The Company's Integrated Medical Centers provide certain patient services at
discounted rates based on the patients' demonstration of financial hardship and
need for the services rendered. The amount of discount is based on the level of
demonstrable hardship on a case by case basis. The Company and its Integrated
Medical Centers are under no obligation to provide such services but do so as a
community service. Patient revenues related to such services are recognized net
of discounts allowed in the accompanying financial statements. The Company does
not measure the level of such services provided.

Income Taxes

Income taxes are provided using the liability method. Deferred tax assets
and liabilities are recognized for the future tax consequences attributable to
differences between the financial statements carrying amounts of existing assets
and liabilities and their respective tax bases (i.e., temporary differences).

Stock-Based Compensation

The Company grants stock options for a fixed number of shares to employees
and certain consultants. The Company has elected to continue to account for
stock-based compensation arrangements under APB Opinion No. 25 "Accounting for
Stock Issued to Employees," and accordingly recognizes compensation expense for
the stock option grants as the difference between the fair value and the
exercise price at the grant date. The pro forma information required by FASB
Statement No. 123, "Accounting for Stock-Based Compensation," which provides a
fair-value-based method of accounting alternative to account for stock-based
compensation issued to employees and consultants has been disclosed in Note 9.

In addition, the SEC staff issued Staff Accounting Bulletin No. 98 ("SAB
98"), issued by the SEC staff in February 1998. SAB 98 requires that registrants
in initial public offerings consider all potentially dilutive securities issued
for nominal consideration outstanding for all periods. Under the previous SEC
regulations in SAB 83, the Company considered all potentially dilutive
securities issued within a twelve month period prior to the initial public
offering date at a price below the initial public offering price as outstanding
for all periods.

Fair Value of Financial Instruments

Management has determined the estimated fair value of financial instruments
using available market information and valuation methodologies. Cash
equivalents, accounts receivable, accounts payable, notes payable and accrued
liabilities and other current assets and liabilities are carried at amounts
which reasonably approximate their fair values. Considerable judgment is
necessary to interpret market data and develop estimated fair value.
Accordingly, the estimates presented herein are not necessarily indicative of
the amounts the Company could realize on disposition of the financial
instruments. The use of different market assumptions or estimation methodologies
may have an effect on the estimated fair value amounts.

Reclassifications

Certain prior year amounts have been reclassified to conform with the
current year presentation.

New Accounting Pronouncements

27
<PAGE> 28

In December 1997, the FASB's Emerging Issues Task Force issued consensus
97-2 "Application of APB Opinion No. 16 and FASB Statement No. 94 to Medical
Entities". The standard is effective for fiscal years ending after December 15,
1998. Early adoption is encouraged. The Company elected to adopt the provisions
of this standard in the fourth quarter of 1997. Under the provisions of this
standard, integrated medical centers that are controlled but not directly owned
by the Company should be consolidated in the Company's financial statements. The
Company has revised its financial statements for 1997 to reflect such centers on
a consolidated basis. Previously, the Company had recognized only the fees
derived from these centers through its management agreements. The effect of the
change on the 1997 financial statements was not significant. The 1996 financial
statements were not restated because the change was inconsequential to those
financial statements.

In 1997, the Financial Accounting Standards Board issued Statement No. 128,
Earnings Per Share. Statement 128 replaced the calculation of primary and fully
diluted earnings per share with basic and diluted earnings per share. Unlike
primary earnings per share, basic earnings per share excludes the dilutive
effects of options, warrants and convertible securities. Diluted earnings per
share is very similar to the previously reported fully diluted earnings per
share. In addition, the SEC staff issued Staff Accounting Bulletin No. 98 ("SAB
98"), in February 1998. SAB 98 requires that registrants consider all
potentially dilutive securities issued for nominal consideration outstanding for
all periods. Under the previous SEC regulations in SAB 83, the Company
considered all potentially dilutive securities issued within a twelve month
period prior to the initial public offering date at a price below the initial
public offering price as outstanding for all periods. All earnings per share
amounts for all periods have been presented, and where appropriate, restated to
conform to the Statement 128 and SAB 98 requirements. The effect on weighted
average shares outstanding of securities that could potentially dilute basic
earnings per share in the future were not included in the computation of diluted
earnings per share because to do so would have been antidilutive for the periods
presented.

In 1997, the Financial Accounting Standards Board issued three statements
related to financial statement disclosures, SFAS No. 129, Disclosure of
Information about Capital Structure (Statement 129), SFAS No. 130, Reporting
Comprehensive Income (Statement 130) and SFAS No. 131, Disclosures about
Segments of an Enterprise and Related Information (Statement 131). Each standard
is effective for years beginning after December 15, 1997 and therefore the
Company will adopt the new requirements retroactively in 1998. Management has
not completed its review of the standards statements, but does not anticipate
that their adoption will have a significant effect on the Company's historical
financial statement disclosures.

3. ACQUISITIONS

Acquired Medical Centers

In June 1997, CWC, LLC acquired the assets of Complete Wellness Medical
Center of Paula Drive, Inc., one of its affiliated Integrated Medical Centers,
in exchange for forgiveness of $35,000 of debt and all the assets of the clinic
Complete Wellness Medical Center of Dunedin.

Smokenders

On July 31, 1997, a subsidiary of the Company acquired substantially all of
the assets of a smoking cessation program owned by the Oxford Health Plan
(Smokenders) for $50,000. The operating results of Smokenders have been
reflected in the accompanying financial statements since acquisition. The
acquisition is subject to two royalty arrangements, a 5% royalty on gross
revenues for a 10 year period to Oxford Health Plan and 12.4% of revenues with a
minimum of $26,000 to the founders of Smokenders. At the same time, the CEO of
Smokenders, who is also a Director of the Company, acquired an 11.77% minority
interest in Smokenders from the Company in return for a $22,000 promissory note
bearing interest at 8%, due September 30, 2000. The transaction was accounted
for as a purchase. The net purchase price has been allocated for accounting
purposes to the assets acquired, primarily the inventory of printed materials.

Nutri/Systems

On January 31, 1998, a subsidiary of the Company completed the acquisition
of 56 weight loss treatment centers from Nutri/system, L.P. The results of
operations of these centers will not be reflected in the Company's financial
statements until February 1, 1998. The centers market, in a retail setting,
food, medically supervised weight loss programs and nutritional supplements. The
purchase price of the centers included $150,000 in cash that had been deposited
with the seller in September 1997 and the assumption of certain lease
liabilities and other acquisition costs of approximately $400,000. The
transaction was accounted for as a purchase. The purchase price, including
acquisition costs has been allocated for accounting purposes to the assets
acquired, primarily food inventory.

28
<PAGE> 29

4. ALLOWANCE FOR DOUBTFUL ACCOUNTS

Details of the allowance for doubtful accounts receivable are as follows:

<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1996 1997
---------- -----------
<S> <C> <C>
Beginning Balance............................ $ 5,650 $ 143,422
Bad Debt Expense............................. 301,618 3,232,111
Provision for third party allowances and
adjustments.................................. -- 450,175
Accounts Written Off......................... (163,846) --
--------- ----------
Ending Balance............................... $ 143,422 $3,825,708
========= ==========
</TABLE>

5. FURNITURE AND EQUIPMENT

Furniture and equipment consists of the following:

<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1996 1997
---------- ----------
<S> <C> <C>
Furniture and Equipment (5 year life)...... $ 258,804 $ 638,084
Less Accumulated Depreciation and
Amortization............................... $ (43,189) $(133,869)
--------- ---------
$ 215,615 $ 504,215
========= =========
</TABLE>

6. DEBT

1997 Bridge Note

The Company, as part of a new financing (See Note 14), received $500,000 as
a Bridge Loan on December 19 1997. This note bears interest at 12% was converted
into Preferred Stock on January 23, 1998. The note, along with an additional
investment of $4,500,000 was converted into 100,000 shares of 12% convertible
Preferred Stock. (See Note 14).

Convertible Note Payable

CWC, LLC as the result of the acquisition of the Fredericksburg Center, has
a $25,000 convertible note payable which bears interest at 8% and is due July
17, 2000. Interest is payable quarterly while the principal is payable in one
installment on the due date. The note is secured by a lien on the assets of
Complete Wellness Centers of Fredericksburg. In the event of an initial public
offering for CWC, LLC, at the lender's option, the note will be convertible into
common stock of CWC, LLC at the initial public offering price equal to the face
value of the note. This note was retired in February 1998 for $5,000.

1996 Bridge Note

On August 15, 1996, the Company completed a private placement of $1.1
million of 12% notes. In connection with the agreement, the lenders have been
issued detachable warrants with an exercise price of $0.003 to purchase 183,333
shares of Common Stock. An additional 3,333 warrants with an exercise price of
$.003 were given to a broker/dealer as consideration for assisting with the
financing. The fair value of the lender and broker/dealer warrants, $5,920, was
recognized as a discount on the loan, of which $3,920 was amortized through
December 31, 1996. The outstanding notes accrued interest at 12% ($52,010 at
December 31, 1996), payable quarterly beginning January 1, 1997. The loan was
secured by substantially all of the Company's assets. On February 24, 1997, the
principal plus accrued interest was repaid with the proceeds from the initial
public offering.

7. INCOME TAXES

Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and the amount used for income tax purposes. The tax effects of
temporary differences that give rise to significant portions of the deferred tax
assets and deferred tax liabilities recognized as of December 31, 1996 and 1997
are presented below:

<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1996 1997
----------- -------------
<S> <C> <C>
Deferred tax assets:
Start-up costs................ $ -- $ 10,138
Nonqualified stock options.... 4,658 11,448
</TABLE>

29
<PAGE> 30

<TABLE>
<S> <C> <C>
Bad debt expense............... 24,450 388,168
Operating loss carryforward.... 445,080 1,174,844
--------- -----------
Total deferred tax assets... 474,188 1,584,598
Less valuation allowance............ (457,592) (1,579,770)
--------- -----------
Net deferred tax assets............. 16,596 4,828
Deferred tax liabilities:
Depreciation................... (1,109) (4,828)
--------- -----------
Total deferred tax liabilities...... (1,109) (4,828)
--------- -----------
Net deferred tax amount...... $ 15,487 $ -0-
========= ===========
</TABLE>

The Company files a consolidated federal tax return with its wholly owned
subsidiaries. CWC, LLC is not included in this tax return. CWC, LLC is treated
as a partnership for tax purposes and its gains and losses are reflected at each
member's level. CWC, LLC does not file a consolidated tax return with its
subsidiaries. At December 31, 1997, the Company had net operating loss
carryforwards for income tax purposes of approximately $2,571,922 and CWC, LLC's
wholly owned subsidiaries had combined net operating loss carryforwards for
income tax purposes of approximately $603,331, all of which expire between 2010
and 2011. The use of substantially all of the combined net operating loss
carryforwards of CWC, LLC will be limited to use 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 redeemable convertible Preferred Stock financing and other equity
offerings.

The Company has a cumulative pretax loss for financial reporting purposes.
Recognition of deferred tax assets will require generation of future taxable
income. There can be no assurance that the Company will generate earnings in
future years. Therefore, the Company established a valuation allowance on
deferred tax assets of $457,592 and $1,579,770 as of December 31, 1996 and 1997,
respectively.

Significant components of the provision for income taxes are as follows for
the years ended:

<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1996 1997
--------- -----------
<S> <C> <C>
Current:
Federal.............................. $ 16,778 $ 0
State................................ 6,950 0
---------- ----------
Total current........................... 23,728 0
Deferred:
Federal.............................. (279,856) (928,516)
State................................ (144,308) (193,662)
Increase in valuation allowance...... 378,677 1,122,178
---------- ----------
Total deferred.......................... (15,487) 0
---------- ----------
Total provision for income taxes........ $ 8,241 $ 0
========== ==========
</TABLE>

The effective tax rate on income before income taxes varies from the
statutory federal income tax rate for the years ended December 31, 1996 and 1997
as follows:

<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1996 1997
------- ------
<S> <C> <C>
Statutory rate.................. (34)% (34)%
State taxes, net................ (4)% (3)%
Other differences, net.......... 1% 1%
Valuation allowance............. 38% 36%
---- ----
1% 0%
==== ====
</TABLE>

8. STOCKHOLDERS EQUITY

Stock Split

The Company effected a 1 for 3 stock split on November 13, 1996. All share
amounts reflected herein have been adjusted to reflect the stock spit.

Initial Public Offering

On February 24, 1997, the Company closed on its Initial Public Offering. At
this time, 1 million shares of Common Stock, par value $0.0001665, and 1 million
redeemable common stock purchase warrants were sold on a public market for $6
per share and $0.10 per warrant, respectively. Net proceeds to the Company after
expenses of the Offering were $4,965,000. In conjunction with the

30
<PAGE> 31

offering, all of the Series A (at that time) Preferred Stock then outstanding
was converted into 145,800 shares of Common Stock and the Company repaid the
principal plus accrued interest relating to the 1996 Bridge Financing Notes.

Warrants

The Company issued one warrant for each common share sold in connection with
its initial public offering. The warrants are exercisable at any time commencing
August 19, 1997 until February 18, 2002 at $7.20 per share. The warrants are
subject to adjustment in accordance with the certain anti-dilution commitments
and other provisions.

9. STOCK OPTION PLAN

The Company has stock option plans providing for the grant of incentive and
non-qualified stock options to employees, directors, consultants and advisors.
Pursuant to the Plan, 800,000 shares of Common Stock have been reserved for
issuance. At December 31, 1997 the following options have been granted:

<TABLE>
<CAPTION>
NUMBER OF
OPTIONS/
WARRANTS EXERCISABLE EXERCISE
DATE OF GRANT GRANTED AT 12/31/97 PRICE FAIR VALUE
---------------------- ---------- ------------- ------- ----------
<S> <C> <C> <C> <C>
Employee Options:
December 1, 1995...... 36,667 0 $0.0300 $0.0100
January 1, 1996....... 56,667 0 $0.0300 $0.0300
March 1, 1996......... 40,000 0 $0.0300 $0.0400
March 18, 1996........ 1,500 0 $0.0300 $0.0400
April 1, 1996......... 116,667 0 $0.0300 $0.0400
May 30, 1996.......... 1,000 0 $0.0300 $0.0500
June 14, 1996......... 1,000 0 $0.0300 $0.0600
June 15, 1996......... 1,000 0 $0.0300 $0.0600
August 26, 1996....... 46,667 15,556 $0.6000 $0.0600
September 23, 1996.... 5,000 1,667 $4.5000 $0.0600
April 6, 1997......... 157,000 52,333 $3.3750 $0.8433
July 25, 1997......... 89,733 11,250 $4.3750 $1.0932
July 28, 1997......... 32,510 0 $4.8125 $1.2025
August 6, 1997........ 7,500 3,750 $3.7500 $0.9370
Non-Employee Options:
December 1, 1995...... 4,333 0 $0.0300 $0.0040
January 19, 1996...... 23,333 0 $0.0300 $0.0100
January 31, 1996...... 50,000 30,000 $0.0300 $0.0100
May 1, 1996........... 13,332 3,333 $0.0300 $0.0300
July 1, 1996.......... 5,000 5,000 $0.6000 $0.0200
September 12, 1996.... 16,667 5,556 $4.5000 $0.4800
September 26, 1996.... 6,667 2,223 $4.5000 $0.4800
November 1, 1996...... 11,000 3,667 $4.5000 $0.4800
February 24, 1997..... 8,000 0 $6.0000 $1.4992
March 28, 1997........ 10,000 10,000 $3.7500 $0.9370
April 29, 1997........ 15,000 4,000 $3.3800 $0.8445
May 15, 1997.......... 2,000 0 $3.3750 $0.8433
May 16, 1997.......... 15,000 0 $3.3750 $0.8433
July 25, 1997......... 18,600 0 $4.3750 $1.0932
July 28, 1997......... 17,490 0 $4.8125 $1.2025
</TABLE>

Options generally vest 33 1/3% each year beginning on the anniversary of the
grant date. During 1997, 3,333 of the 1996 incentive options were forfeited and
20,000 of the non-qualified options were forfeited. The weighted average
remaining contractual life of the options outstanding at December 31, 1997 is
4.78. The weighted average price of exercisable options at December 31, 1997 was
$2.25.

The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" (APB 25), and related
Interpretations in accounting for its employee stock option because, as
discussed below, the alternative fair value accounting provided for under FASB
Statement No. 123, "Accounting for Stock Based Compensation," requires use of
option valuation models that were not developed for use in valuing employee
stock options. Under APB 25's intrinsic value method, compensation expense is
determined on the measurement date, that is the first date on which both the
number of shares the employee is entitled to receive and the exercise price, if
any, are known. Compensation expense is measured based on the award's intrinsic
value of the excess of the market price of the stock over the exercise price on
the measurement date. The Company has recorded $1,050 and $462 of compensation
expense and $10,595 and $4,049 of consulting expense related to stock options
granted below market value as of December 31, 1996 and 1997, respectively.
Additionally, the Company has recorded consulting expense of $5,920 and $187,000
as

31
<PAGE> 32

of December 31, 1996 and 1997, respectively as a result of the granting of
Common Stock warrants during the years then ended.

Had compensation costs for the Company's stock option plan been determined
based on the fair value at the date of grant for the awards in 1997 consistent
with the provisions of SFAS 123, the Company's net loss and loss per
share-diluted would have been as indicated below:

<TABLE>
<CAPTION>
1996 1997
----------- ------------
<S> <C> <C>
Net loss -- as reported... $ (990,693) $(4,176,433)
Net loss -- pro forma..... $ (993,221) $(4,314,674)
Loss per share -- as
reported.................. $ (1.03) $ (1.98)
Loss per share -- pro
forma..................... $ (1.03) $ (2.04)
</TABLE>

For the purposes of the pro forma disclosures, the estimated fair value of
the options is amortized to expense over the options' vesting period.

The fair value of each option grant is estimated on the date of grant using
the "minimum value" option-pricing model with the following weighted-average
assumptions for 1996: risk-free interest of 6.25%; expected life of the option
of 5 years; and a zero dividend yield; and the following weighted-average
assumptions for 1997: risk free interest of 5.75%; expected life of the option
of 5 years; and a zero dividend yield. The weighted average fair value of
options granted during 1997 and 1996 was $0.96 and $0.05, respectively.

Option valuation models require the input of highly subjective assumptions,
including the expected stock price volatility. Because the Company's employee
stock options have characteristics significantly different from those of traded
options and because changes in the subjective input assumptions can materially
affect the fair value estimate, in management's opinion, the existing models do
not necessarily provide a reliable single measure of the fair value of its
employee stock options.

10. LEASE ARRANGEMENTS

CWC, LLC leases space of its wholly owned Integrated Medical Centers
(Complete Wellness Centers of Fredericksburg and Complete Wellness Medical
Center of Dunedin). The Company leases its corporate office space on a
month-by-month basis.

11. NET LOSS PER COMMON SHARE

The following table sets forth the computation of basis loss per share:

<TABLE>
<CAPTION>
1996 1997
----------- ------------
<S> <C> <C>
Weighted average common shares
Outstanding........................... 664,051 1,703,808
Shares issued for nominal consideration
Prior to the Initial Public Offering.. 300,955 409,287
---------- -----------
965,006 2,113,095
Loss allocable to common shareholders...... $ (990,693) $(4,176,433)
Basic loss per share....................... $ (1.03) $ (1.98)
</TABLE>

During 1996 and 1997 options and warrants to purchase 25,244 and 306,107 of
the Company's common stock respectively, whose exercise price exceeded that of
the average market price during the year were excluded from the above
calculation because of the anti-dilutive effect their inclusion would have on
loss per share.

12. RELATED PARTY

In August 1996, the Company entered into a consulting agreement with J.E.M,
Inc. (JEM), the sole stockholders of which are Dr. Kaplan, the Company's Chief
Operating Officer, and his wife. Under the terms of the consulting agreement,
JEM agreed to provide advice and assistance to the Company in connection with
identifying and affiliating with chiropractors and their existing chiropractic
practices and identifying, acquiring, and/or managing businesses engaged in
providing services ancillary to those provided by Integrated Medical Centers.
The Company agreed to pay JEM $6,000 per month for its services. The consulting
agreement expires in August 1999 and may be terminated sooner by mutual
agreement of the parties, by the Company for "cause," defined as a violation by
JEM of any material provision of the consulting agreement not remedied within 30
days after notification or JEM's conviction of a felony, upon termination of the
employment agreement between Dr. Kaplan and the Company, or by JEM's failure to
meet certain performance goals.

32
<PAGE> 33

13. CONTINGENCIES

Federal Investigation

Revenues from all Federal programs accounted for approximately 3%, of the
Company's net patient service revenues for the year ended December 31, 1997.
Laws and regulations governing the Medicare and Medicaid programs are complex
and subject to interpretation. In November 1997 federal agents served search
warrants and subpoenas on the Company and four of its subsidiaries and
affiliates. Company records and files were seized. If the government review
finds wrongdoing, the Company would be subject to significant regulatory action
including fines, penalties, and possible exclusion from the Medicare and
Medicaid programs. Any such action would be material to the financial position
of the Company and could have a materially adverse effect on the results of
operations and cash flows of the Company. The Company is not currently aware of
any pending or threatened allegations of potential wrongdoing as a result of the
investigation. Further, the Company believes that it is substantially in
compliance with all applicable laws and regulations.

Professional Liability

The Company has obtained an insurance policy that, subject to certain
conditions, provides both it and its subsidiaries medical malpractice insurance
and managed care errors and omissions insurance retroactive to the Integration
Dates of the Company's current Integrated Medical Centers and, one former
Integrated Medical Center. The policy provides coverage for $1,000,000 per claim
per Integrated Medical Center, subject to an aggregated limit of $3,000,000 per
Integrated Medical and Weight Loss Centers per year. The policy will also cover
the Company with respect to Integrated Medical Centers as they are opened. There
is no deductible under the policy.

The foregoing policy is a "claims made" policy. Thus, it provides coverage
for covered claims made during the policy's term but not for losses occurring
during the policy's term for which a claim is made subsequent to the expiration
of the term. Based on experience to date of the medical professionals employed,
it is believed that potential losses on any claims incurred but not reported
would not be material to the Company's financial position.

Consulting Agreement

The Company has a consulting agreement (the Kats Agreement) with Kats
Management, LLC (Kats Management), a company that has represented to the Company
that it provides management and consulting services to over 600 chiropractic
clinics. Under the Kats Agreement, Kats Management agreed to advise and assist
the Company in (i) identifying and negotiating with chiropractors and their
existing chiropractic practices with which the Company might affiliate for the
purpose of developing additional Integrated Medical Centers and (ii) developing
Integrated Medical Centers. The Company agreed to pay Kats Management for each
agreement entered into by the Company with a chiropractor identified by Kats
Management (i) a commission equal to 5% of the Company's integration fee under
such agreement during the initial term of the agreement and (ii) a fixed fee not
to exceed $350. In addition, the Company granted Kats Management, subject to a
vesting schedule, non-qualified options to purchase 11,000 shares of Common
Stock under the Company's 1994 Stock Option Plan and paid Kats Management a
$100,000 bonus in 1997.

Integrated Medical Centers

As of March 30, 1998, the Company was managing 91 Integrated Medical Centers
and had signed contracts with Affiliated Chiropractors to develop 50 additional
Integrated Medical Centers. The Company estimates the cost of fully integrating
these new clinics to be approximately $500,000.

14. SUBSEQUENT EVENTS

Sale of Redeemable Preferred Stock

On January 23, 1998 the Company finalized a $5,000,000 private placement of
Senior Redeemable Preferred Stock (the "Preferred Stock") with Wexford
Management LLC ("Wexford"). The terms of the offering consisted of a $500,000
13% Bridge Loan (the "Bridge Loan") received by the Company on December 16,
1997, a $1,000,000 Preferred Stock purchase by Wexford on January 17, 1998, of
which $500,000 was used to retire the Bridge Loan and a $4,000,000 Preferred
Stock purchase by Wexford on January 23, 1998.

33
<PAGE> 34

The cost of the offering to the Company of approximately $550,000 was paid
out of the proceeds of the Preferred Stock offering.

The Preferred Stock was sold at $50 per share and carries a $0.01 par value.
The Preferred Stock accrues cash dividends at 8% payable quarterly in arrears or
at 10% payable quarterly in arrears if the Company chooses to pay the dividend
in additional preferred stock. After December 31, 2000 the dividend rate will
increase to 12%. The Preferred Stock has a liquidation preference of $50 per
share plus accrued and unpaid dividends. Wexford has mandatory redemption rights
with respect to $3,000,000 of the Preferred Shares on the earlier of December
31, 2000 or the completion of any financing by the Company in excess of
$5,000,000. The remaining $2,000,000 of Preferred Shares are subject to
mandatory redemption no later than five years after closing of the transaction
(January 23, 2003). The Preferred Stock is redeemable at $50 per share plus
accrued and unpaid dividends.

Additionally, Wexford received warrants (the "Purchase Warrants"), with a
term of seven years, to purchase an aggregate of 2,850,000 of the Company's
publicly traded redeemable common stock purchase warrants (the "Warrants"). The
Purchase Warrants have an exercise price of $.01. The Warrants have an exercise
price of $1.75. Up to 1,350,000 of the Purchase Warrants are redeemable by the
Company at $0.01 per warrant under certain conditions as follows:

(I) 337,500 Purchase Warrants are redeemable prior to March 31, 2000 if
the fiscal 1999 pre-tax earnings of the Company equals or exceeds $1.25 per
share on a fully diluted basis;

(II) 337,500 Purchase Warrants are redeemable prior to March 31, 2000 if
the combined fiscal 1998 and 1999 pre-tax earnings of the Company equals or
exceeds $1.90 per share on a fully diluted basis;

(III) 337,500 Purchase Warrants are redeemable prior to March 31, 2001
if the fiscal 2000 pre-tax earnings of the Company equals or exceeds $2.00
per share on a fully diluted basis;

(IV) 337,500 Purchase Warrants are redeemable prior to March 31, 2001 if
the combined fiscal 1998, 1999 and 2000 combined pre-tax earnings of the
Company equals or exceeds $4.10 per share on a fully diluted basis.

Wexford has the right to prohibit any significant transactions, financing,
dividends and related party transactions as part of the general conditions of
the transaction. Further, Wexford has demand and piggyback registration rights
for any common stock issued or issuable pursuant to the Warrants.

Leases

During March 1998 the Company entered into an agreement to sublease office
space in Washington, DC for use as its corporate offices. The space consists of
approximately 9,000 square feet at a cost of $10,000 per month. It is the
Company's intention to use approximately 6,000 square feet of the space and
sublet the remainder. The agreement is for seven years. The following table
reflects the Company's minimum obligation under the lease agreement:

<TABLE>
<CAPTION>
<S> <C>
1998........................ $ 90,000
1999........................ 120,000
2000........................ 120,000
2001........................ 120,000
2002........................ 120,000
Thereafter.................. 270,000
---------
Total Minimum Obligations... $ 840,000
=========
</TABLE>

ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

Not applicable.

34
<PAGE> 35

PART III

ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(a) OF THE EXCHANGE ACT

(a) Identification of Directors

<TABLE>
<CAPTION>
YEAR YEAR
NAME AGE FIRST ELECTED OF EXPIRATION
---- ----- ---------------- -------------
<S> <C> <C> <C>
C. Thomas McMillen... 45 1994 1998
E. Eugene Sharer..... 64 1996 1998
Robert J. Mrazek..... 52 1995 1998
James T. McMillen.... 52 1994 1998
Eric S. Kaplan, D.C.. 45 1997 1998
</TABLE>

(b) Identification of Executive Officers

<TABLE>
<CAPTION>
YEAR FIRST SERVED
NAME AGE AS OFFICER
---- --- -----------------
<S> <C> <C>
C. Thomas McMillen................................... 45 1994
Chairman of the Board and Chief Executive Officer
E. Eugene Sharer..................................... 64 1996
President and Treasurer
Danielle F. Milano, M.D.............................. 42 1996
Vice President -- Medical Affairs
Eric S. Kaplan, D.C.................................. 45 1997
Senior Vice President and Chief Operating Officer
Michael T. Brigante.................................. 43 1997
Vice President and Chief Financial Officer
F. Ryan Knoll........................................ 28 1997
Secretary
</TABLE>

C. Thomas McMillen, the Company's founder, has been the Chairman of the
Board of Directors and Chief Executive Officer since its formation in November
1994. He was also the President of the Company until April 1996. In 1993, Mr.
McMillen formed McMillen and Company, Inc., a health care consulting firm, and
subsequently from November 1993 through March 1994, assumed the role of Chief
Administrative Officer of Clinicorp, Inc., a publicly-traded physician practice
management company. Mr. McMillen was also a director of Clinicorp, Inc., from
January 1993 through December 1994. Clinicorp, Inc., filed for Chapter 11
bankruptcy protection in June 1996. From 1987 to 1993, Mr. McMillen served three
consecutive terms in the U.S. House of Representatives from the 4th
Congressional District of Maryland. He was named by President Clinton to
Co-Chair the President's Council on Physical Fitness and Sports in 1993 and
served until December 1997. Mr. McMillen is currently a member of the Board of
Directors of CHG Inc., a subsidiary of Chemring Group, PLC, and North Atlantic
Acquisition Corporation (of which he is also the secretary and treasurer).

Mr. McMillen is the brother of James J. McMillen, a director of the Company.

E. Eugene Sharer has been President, Chief Operating Officer, and a director
of the Company since April 1996, and Chief Financial Officer and Treasurer since
February 1997. He relinquished the CFO title in February, 1998 and the COO title
in November 1997. From 1990 to 1995 he was President and Chief Operating Officer
of R.O.W. Sciences, Inc., a health research company. In August 1995, Mr. Sharer
formed Sharer Associates, a management consulting company. From 1989 to 1990 he
was Executive Vice President, Chief Operating Officer and Director of Iverson
Technology Corporation and from 1985 through 1988, he was President and Director
of Calculon Corporation and a Vice President of Atlantic Research Corporation,
the parent company of Calculon. Between 1980 and 1985, Mr. Sharer was Vice
President of the Systems Group at Computer Sciences Corporation.

Danielle F. Milano, M.D., has been Vice President -- Medical Affairs since
January 1996 and Secretary since February 1997. She relinquished the Secretary's
position in July, 1997. From October 1994 to December 1995, she was Medical
Director of Rivington House Health Care Facility in New York, New York. From
October 1990 to October 1994, Dr. Milano was attending physician at New York
University School of Medicine and Director of the AIDS Clinic at Bellevue
Hospital in New York, New York. She is a graduate of New York University School
of Medicine, completed her residency at Lenox Hill Hospital and is board
certified in internal medicine. Dr. Milano resigned from the Company in January,
1998.

Eric S. Kaplan, D.C., has been Senior Vice President and a director since
April 1997. He served as Senior Director of Operations

35
<PAGE> 36

and Development from August 1996 to April 1997. He was named Chief Operating
Officer in November, 1997. From June 1993 to August 1996, Dr. Kaplan was
president of two subsidiaries of Clinicorp, Inc., Medical Diagnostic Imaging of
America and Clinicare Wellness Centers. From 1978 to June 1993, he was the
founder and owner of six chiropractic, weight loss, and medical clinics in south
Florida.

James J. McMillen, M.D., has been a director of the Company since November
1994. From 1977 to the present, Dr. McMillen has been in private medical
practice in St. Joseph, Missouri. He is board certified in internal medicine.
Dr. McMillen is the brother of C. Thomas McMillen.

Robert J. Mrazek has been a director of the Company since January 1995.
Since 1993, Mr. Mrazek has been a legislative affairs consultant. From 1983 to
January 1993, he served five consecutive terms in the U.S. House of
Representatives from the 3rd Congressional District of New York.

Michael T. Brigante has been Chief Financial Officer since February, 1998.
Mr. Brigante is an executive manager with over nineteen years of diversified
financial experience with public and private companies. He worked with the
Thomas & Betts Corporation from 1978 through 1986 culminating his tenure as
controller. From 1987 to 1988, Mr. Brigante served as senior manager of
international financial systems with SeaLand Corporation. In 1988 Mr. Brigante
joined the MAC Group and served as chief financial officer and controller until
starting his own consulting firm in 1994.

ITEM 10. EXECUTIVE COMPENSATION

EXECUTIVE COMPENSATION

The following table sets forth information concerning the annual
compensation of the Company's Chief Executive Officer for services in all
capacities to the Company during the Company's last fiscal year.

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
ANNUAL
FISCAL COMPENSATION
NAME AND PRINCIPAL POSITION YEAR SALARY
--------------------------- ------ --------------
<S> <C> <C>
C. Thomas McMillen................................... 1997 $ 135,500
Chief Executive Officer
E. Eugene Sharer..................................... 1997 $ 132,500
President
Eric S. Kaplan....................................... 1997 $ 120,000
Chief Operating Officer
Danielle F. Milano................................... 1997 $ 120,000
Vice President -- Medical Affairs
Michael T. Brigante.................................. $ 90,000
Vice President Finance and Chief Financial Officer

</TABLE>

- ------------
* Mr. McMillen did not receive any cash compensation for fiscal years 1995 or
1996, nor were any options granted to him. For fiscal year 1996,
compensation in the amount of $45,000 was accrued. In addition, the Company
advanced to him without interest approximately $23,000 in 1996, which he
repaid in February 1997. See "Certain Relationships and Related
Transactions." No other executive officer received compensation in excess of
$100,000 during the Company's last fiscal year.

DIRECTOR COMPENSATION

The Company does not currently compensate, and does not anticipate
compensating its directors for their services as directors, except that each of
the Company's non-employee directors may receive a director's fee of $500 per
meeting for attendance at Board of Directors or committee meetings held after
December 1997. Additionally, they are granted 7,500 common stock options for
each year served which vest 50% in each of two years. In addition, each of the
Company's directors receives reimbursement of all ordinary and necessary
expenses incurred in attending any meeting or any committee meeting of the Board
of Directors. Currently, all directors hold office until the next annual meeting
of stockholders and until their successors have been duly elected and qualified.
The Company's executive officers are appointed annually and serve at the
direction of the Board of Directors, subject to the terms of existing employment
agreements.

36
<PAGE> 37

EMPLOYMENT AGREEMENTS

In July 1996, the Company entered into an employment agreement with Mr.
McMillen providing for his employment, as Chairman of the Board and Chief
Executive Officer, for a term expiring in March 1999. The employment agreement
provides for an annual base salary for Mr. McMillen of $90,000 that increase to
$150,000 upon the closing of the IPO. All salary payments were accrued until the
closing of the IPO and paid with a portion of the net proceeds of the IPO. Mr.
McMillen may participate in all executive benefit plans and has the use of a
Company car. The agreement also provides, among other things, that if his
employment is terminated without cause (as defined in the agreement), the
Company will pay an amount equal to one year's base salary, payable over a one
year period. In 1996, the Company advanced approximately $23,000 to Mr. McMillen
without interest. Mr. McMillen repaid the amount in February 1997.

In March 1996 the Company entered into an employment agreement with Mr.
Sharer providing for his employment as President and Chief Operating Officer for
a term expiring in March 1999. The employment agreement provides for an annual
base salary for Mr. Sharer of $150,000 effective upon closing of the IPO, and
for participation in all executive benefit plans, as well as an automobile
allowance of $1,000 per month. Mr. Sharer was granted options to purchase
116,667 shares of the Company's Common Stock at an exercise price of $0.03 per
share. On the date of such grant, 16,667 of those options were exercisable, of
which 10,000 were exercised in 1996. The remaining options were to vest in equal
installments on April 1, 1997, April 1, 1998, and March 31, 1999. Mr. Sharer
exercised his vested options of 40,001 in December, 1997. The agreement also
provides, among other things, that, if his employment is terminated without
cause (as defined in the agreement) the Company will pay to him an amount equal
to one year's base salary, payable over a one year period.

In January 1996, the Company entered into an employment agreement with Dr.
Milano, providing for her employment as Vice President -- Medical Affairs, for a
term expiring on December 31, 1998. The employment agreement provides for an
annual base salary of $120,000 beginning August 1, 1996, of which $6,000 per
month was accrued until the closing of the IPO and paid with a portion of the
net proceeds of the IPO, a bonus of $1,000 for each Medcorp formed as a
professional corporation of which Dr. Milano is a shareholder, to be paid by
such Medcorp, and for participation in all executive benefit plans plus an
automobile allowance of $500 per month. Dr. Milano was granted options to
purchase 46,667 shares of the Company's Common Stock at an exercise price of
$0.03 per share. The options have vested as to 16,667 shares and will vest as to
15,000 shares on October 1, 1997, and as to 15,000 shares on September 30, 1998.
Dr. Milano exercised her vested options of 31,667 in December, 1997. Any
additional compensation Dr. Milano receives for services as a shareholder of a
Medcorp formed as a professional corporation will be offset against her base
salary. The agreement also provides, among other things, that, if her employment
is terminated without cause (as defined in the agreement), the Company will pay
her an amount equal to six month's salary, payable over a six month period. She
resigned from the Company in January, 1998.

In March, 1996, the Company entered into an employment agreement with Mr.
Brigante for his services as corporate controller for a term expiring on
September 30, 1999. The Employment Agreement provided for an annual base salary
for Mr. Brigante of $90,000 beginning January 1, 1997 and for participation in
all executive benefit plans plus an automobile allowance of $500 per month. Mr.
Brigante was granted options to purchase 40,000 shares of the Company's common
stock at an exercise price of $.03 per share. The options have vested as to
26,667 shares and will vest as to 13,333 shares on September 30, 1998. Mr.
Brigante exercised his vested options of 26,667 shares in December 1997. On
February 23, 1998, Mr. Brigante was elected to the position of Vice President of
Finance and Chief Financial Officer. His annual compensation increased to
$100,000 at that time.

In August 1996, the Company entered into an employment agreement with Dr.
Kaplan providing for his employment as Senior Director for Operations and
Development for a term expiring in August 1999. The employment agreement
provides for a base salary of $4,000 per month, which was accrued until the
closing of the IPO. After such closing, Dr. Kaplan became entitled to an
automobile allowance of $500 per month. Dr. Kaplan was granted options to
purchase 46,667 shares of the Company's Common Stock at an exercise price of
$0.60 per share. The options have vested with respect to 30,000 shares and will
vest as to 16,667 shares on August 26, 1998. The agreement also provides, among
other things, that if his employment is terminated by mutual agreement or upon
his death or disability, the Company will pay an amount equal to $60,000,
payable over a six month period. On April 6, 1997, Dr. Kaplan became a Senior
Vice President and a director of the Company.

Each of the employment agreements with Messrs. McMillen, Sharer, Brigante
and with Dr. Kaplan requires the full-time services of such employees. Mr.
McMillen's employment agreement requires that he devote a minimum of 40 hours
per week to his responsibilities as Chairman and Chief Executive Officer. The
agreements also contain covenants restricting the employee from engaging in any
activities competitive with the business of the Company during the term of such
agreement and for a period of one year thereafter, and prohibiting the employee
from disclosing confidential information regarding the Company.

37
<PAGE> 38

STOCK OPTION PLANS

1994 Stock Option Plan. The Company's 1994 Stock Option Plan (the "1994
Plan") was adopted by the Company's Board of Directors and approved by the
shareholders of the Company in December 1994. The 1994 Plan was amended by the
Board of Directors, with shareholder approval, in 1995, so as to increase the
number of shares available under the 1994 Plan to 400,000 from 60,000. The
purpose of the 1994 Plan is to attract and retain qualified personnel, to
provide additional incentives to employees, officers, directors, consultants and
advisors of the Company, and to promote the Company's business. As of March 23,
1998, options to purchase 366,832 shares of Common Stock at a weighted average
per share exercise price of $0.34 were outstanding. A total of 33,168 shares of
Common Stock were available for grant under the 1994 Plan at that date. The 1994
Plan will terminate in April 2004, unless sooner terminated by the Board of
Directors.

The 1994 Plan provides for the grant of both incentive stock options,
intended to qualify as such under Section 422 of the Internal Revenue Code of
1986, as amended (the "Code"), and nonqualified stock options. The Board may
delegate administration of the 1994 Plan to the Compensation Committee. Subject
to the limitations set forth in the 1994 Plan, the Board of Directors (or the
Compensation Committee) has the authority to select the persons to whom grants
are to be made, to designate the number of shares to be covered by each option,
to determine whether an option is to be an incentive stock option or a
nonqualified stock option, to establish vesting schedules, and, subject to
certain restrictions, to specify the type of consideration to be paid to the
Company upon exercise and to specify other terms of the options. The maximum
term of options granted under the 1994 Plan is ten years. Options granted under
the 1994 Plan are nontransferable and generally expire 90 days after the
termination of an optionee's service to the Company.

Although no specific vesting schedule is required under the 1994 Plan,
options previously granted under the 1994 Plan have generally provided for
vesting in three equal annual installments. The exercise price of incentive
stock options must equal at least the fair market value of the Common Stock on
the date of grant, except that the exercise price of incentive stock options
granted to any person who at the time of grant owns stock possessing more than
10% of the total combined voting power of all classes of stock must be at least
110% of the fair market value of such stock on the date of grant.

1996 Stock Option Plan. In October 1996, the Board of Directors of the
Company, with shareholder approval, adopted its 1996 Stock Option Plan (the
"1996 Plan") covering up to 200,000 shares of the Common Stock, pursuant to
which officers, directors, employees, advisors and consultants to the Company
are eligible to receive incentive and/or nonqualified stock options. The 1996
Plan was modified as approved by the shareholders to 400,000 shares in June,
1997. The 1996 Plan, which expires in September 2006, is administered by the
Compensation Committee of the Board of Directors. The selection of participants,
allotment of shares, determination of price, and other conditions relating to
the grant of options will be determined by the Compensation Committee in its
sole discretion. Incentive stock options granted under the 1996 Plan are
exercisable for a period of up to 10 years from the date of grant at an exercise
price which is not less than the fair market value of the Common Stock on the
date of the grant, except that the term of an incentive stock option granted
under the 1996 Plan to a shareholder owning more than 10% of the outstanding
Common Stock may not exceed five years and its exercise price may not be less
than 110% of the fair market value of the Common Stock on the date of the grant.
As of March 23, 1998, options to purchase an aggregate of 372,833 shares of
Common Stock at a weighted average per share exercise price of $3.98 were out
standing. A total of 27,167 shares of Common Stock were available for grant
under the 1996 Plan at that date.

1996 Restricted Stock Option Plan for Health Care Professionals. In October
1996, the Board of Directors adopted, and the stockholders of the Company
approved, the 1996 Restricted Stock Option Plan for Health Care Professionals
(the "1996 Professionals Plan"), which expires in October 2006. The 1996
Professionals Plan permits the Company to grant nonqualified stock options to
licensed health care professionals affiliated with the Company and in most cases
employed by a Medcorp. The aggregate amount of Common Stock with respect to
which options may be granted may not exceed 100,000 shares. The Board of
Directors has delegated to the Compensation Committee the authority to grant
options under such a plan, to construct and interpret such plan, and to make all
other determinations and take all actions necessary or advisable for the
administration of such plan. The exercise price for options granted under the
1996 Professionals Plan may be no less than 85% of the fair market value of the
Common Stock on the date of grant. Options granted under the 1996 Professionals
Plan will expire no later than the tenth anniversary of the date of grant. There
have been 9,500 options granted under the 1996 Professionals Plan as of March
23, 1998, at $2.25 per share.

38
<PAGE> 39

EXECUTIVE BONUS PLAN

Effective January 1, 1996, the Company established an Executive Bonus Plan
for Key Executives (the "Bonus Plan") to reward executive officers and other key
employees based upon the performance of the Company and such individuals. Under
the Bonus Plan, the Company has discretion to award bonuses in an aggregate
amount equal to 10% of the Company's pre-tax income for a particular fiscal year
(the "Bonus Fund"). The maximum amount of the Bonus Fund for any year is $5
million. Under the terms of existing employment agreements, which expire on
various dates from December 1998 through August 1999, the Bonus Fund has been
allocated as follows: 30% to Mr. McMillen, 30% to Mr. Sharer, and 20% to Dr.
Kaplan, with 20% available for other employees. Awards under the Bonus Fund are
not exclusive of other bonuses that may be awarded by the Board of Directors or
the Compensation Committee from time to time.

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth certain information regarding the beneficial
ownership of the Company's voting securities as of March 23,1998 by (i) each
shareholder known by the Company to be the beneficial owner of more than 5% of
any class of the Company's voting securities, (ii) each director of the Company
and (iii) all officers and directors of the Company as a group. Except as
otherwise indicated, the Company believes that the beneficial owners of the
securities listed below have sole investment and voting power with respect to
such securities, subject to community property laws where applicable.

<TABLE>
<CAPTION>
NUMBER OF SHARES PERCENTAGE OF
OF CLASS CLASS
NAME AND ADDRESS OF BENEFICIAL OWNER BENEFICIALLY OWNED BENEFICIALLY OWNED
------------------------------------------ ------------------ ------------------
<S> <C> <C>
COMMON STOCK
C. Thomas McMillen(1)...................... 411,167 19.1%
725 Independence Avenue, S.E.
Washington, D.C. 20003

Robert J. Mrazek(3)........................ 20,250 *
301 Constitution Ave., N.E.
Washington, D.C. 20002

Eric S. Kaplan (2)......................... 46,673 2.2%
27 Marlwood Lane
Palm Beach Gardens, FL 33418

Michael T. Brigante (6).................... 26,667 1.2%
17 Daniel Drive
Bell Meade, N.J. 08502

E. Eugene Sharer(4)........................ 50,001 2.3%
725 Independence Avenue, S.E.
Washington, D.C. 20003

James J. McMillen, M.D.(3)................. 9,250 *
4004 Miller Road
St. Joseph, MO 64505

Reach Laboratories, Inc.(5)................ 110,000 5.1%
1000 NBC Center
Lincoln, NE 68508

R. Michael Floyd........................... 72,866 3.3%
5817 Ogden Court
Bethesda, MD 20816

All officers and directors as a group (six
persons)................................... 564,508 26.3%
</TABLE>

- ------------
* Percentage ownership is less than 1%

(1) Includes 34,500 shares as to which Mr. McMillen has sole voting power until
December 31, 2000, pursuant to irrevocable proxies from four other holders
of Common Stock. Does not include 16,667 shares subject to stock options
which vest in July, 1998 nor 16,666 options which become exercisable in
April, 1998.

(2) Does not include 16,666 shares subject to stock options which become
exercisable in April, 1998, 9,869 shares in July, 1998 and 16,880 shares in
August, 1998.

(3) Mr. Mrazek and Dr. McMillen have each given Mr. McMillen an irrevocable
proxy to vote their respective shares until December 31, 2000.

39
<PAGE> 40

(4) Does not include 33,333 shares subject to stock options that become
exercisable on April 1, 1997, and 5,000 options that became exercisable on
April 6, 1997.

(5) The beneficial owners of Reach Laboratories, Inc., are Richard R. Endacott
and Janice G. Peterson.

(6) Does not include 2,000 shares subject to stock options that became
exercisable on April 4, 1998 and 10,000 shares exercisable on September 1,
1998.

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Six of the Company's seven Integrated Medical Centers under management at
January 31, 1997 were owned by Complete Wellness Centers, L.L.C. ("CWC LLC"), a
Delaware limited liability company. The Company is the managing member of CWC
LLC and owns 1% of its membership interests. The Company, as managing member,
has the authority and responsibility to make substantially all management
decisions for CWC LLC. In addition, the holders of more than 50% of the CWC LLC
membership interests have granted the Company an irrevocable proxy to vote their
membership interests as the Company sees fit. The proxy is valid for the life of
CWC LLC. As a result of these irrevocable proxies, the financial statements of
the Company and CWC LLC are consolidated for financial reporting purposes. In
the future, the Company does not plan to open any additional Integrated Medical
Centers owned directly or indirectly by CWC LLC, nor does it plan for CWC LLC to
raise any additional capital.

The Company has an option to purchase all of the membership interests of CWC
LLC at an exercise price in an amount such that the other members would receive
a 12% preferred, cumulative, non-compounded, annual return plus a multiple of
their capital contributions ranging from 2 in the first year (1997) to 4 in the
seventh year (2003), after taking into account any previously returned capital
contribution and preferred cumulative return. The exercise price is payable to
the members within 120 days of the Company's exercise of the option. The price
may be paid, at the Company's election, either in cash, or, if any class of the
Company's securities is publicly traded, 75% in cash and 25% in securities of
that class valued at their initial public offering price. If securities
constitute part of the exercise price, the securities will not be registered
under the Securities Act of 1933, as amended, or applicable state securities
laws.

CWC LLC has outstanding 13.3 Class A Units (membership interests other than
that of the managing member). The following officers and directors of the
Company or members of their immediate family hold the following interests in CWC
LLC: a trust for the benefit of Wilma Sharer, the spouse of the Company's
President and Chief Operating Officer, holds two Class A Units; Danielle Milano,
the Company's Vice President-Medical Affairs and Secretary, holds 1/5 of one
Class A Unit; a trust for the benefit of Virginia Brigante holds 1/5 of one
Class A Unit; a trust for the benefit of Jacqueline Brigante holds 11/50 of one
Class A Unit. Virginia Brigante and Jacqueline Brigante are the minor children
of Michael T. Brigante, the Company's Vice President of Finance and Chief
Financial Officer. Each such person or trust granted to the Company an
irrevocable proxy to vote such person's respective ownership interest in CWC
LLC.

In August 1996, the Company entered into a consulting agreement with J.E.M.,
Inc. ("JEM"), the sole stockholders of which are Dr. Kaplan, the Company's
Senior Vice President and a director, and his wife. Under the terms of the
consulting agreement, JEM agreed to provide advice and assistance to the Company
in connection with identifying and affiliating with chiropractors and their
existing chiropractic practices and identifying, acquiring, and/ or managing
businesses engaged in providing services ancillary to those provided by
Integrated Medical Centers. The Company agreed to pay JEM $6,000 per month for
its services. The term of the consulting agreement expires in August 1999 and
may be terminated sooner by mutual agreement of the parties, by the Company for
"cause," defined as a violation by JEM of any material provision of the
consulting agreement not remedied within 30 days after notification or JEM's
conviction of a felony, upon termination of the employment agreement between Dr.
Kaplan and the Company, or JEM's failure to meet certain performance goals.

The Company, Mr. McMillen, Dr. McMillen, Mr. Mrazek, two other holders of
Common Stock, and all holders of Series A Preferred Stock that were outstanding
prior to the effectiveness of the IPO and automatically converted into shares of
Common Stock at that time, are parties to a certain Stockholders' Agreement
dated March 20, 1995 (the "Stockholders' Agreement"), pursuant to which such
stockholders agreed to various restrictions on their ability to transfer the
shares of Common Stock or Series A Preferred Stock owned by them, among other
things. The holders of the Series A Preferred Stock, voting together as a class,
were given the right to elect one director to the Company's Board of Directors,
but never exercised the right. The Stockholders' Agreement is to expire on March
20, 2015, or upon the earlier voluntary written agreement of the Company and
such stockholders. The Company believes that the parties to the Stockholders'
Agreement will agree to terminate it effective as of the consummation of the
IPO.

At December 31, 1997, Dr. Milano served as an officer, director, and the
sole stockholder of selected Complete Wellness Medical Centers. In all cases,
Dr. Milano, the Integrated Medical Center, and the Company entered into a Stock
Transfer Agreement (the

40
<PAGE> 41

"Stock Transfer Agreement") pursuant to which (i) Dr. Milano agreed not to sell,
encumber, or otherwise transfer the shares of stock in the Integrated Medical
Centers owned by her without the written consent of the Integrated Medical
Centers and the Company and (ii) the Company has the right, following the
provision of notice, to direct the transfer of all or part of such shares to
such transferee as it may designate for the sum of ten dollars, provided that
the transferee is licensed to practice medicine in the appropriate State. In
order to facilitate the transfer, the Stock Transfer Agreement required the
contemporaneous execution by Dr. Milano of a stock transfer assignment, a
resignation as an officer and director of the Integrated Medical Center, and an
Agreement for Sale of Business by Transfer of Capital Stock under which Dr.
Milano agreed to transfer her shares in Integrated Medical Centers for the sum
of ten dollars to a transferee to be designated by the Company for this purpose.
In accordance with the Stock Transfer Agreement, the Company holds the stock
transfer assignment, the resignation, and the Agreement for Sale of Business by
Transfer of Capital Stock in escrow. Additionally, the Stock Transfer Agreement
prohibits Dr. Milano, without prior written consent of the Integrated Medical
Center and the Company, from amending the charter or bylaws of the Integrated
Medical Center, agreeing to the merger or consolidation of the Integrated
Medical Centers with or into another corporation, dissolving or liquidating the
Integrated Medical Centers, authorizing the issuance of any additional shares of
stock of the Integrated Medical Centers, or approving any contract with Dr.
Milano herself, members of her family, or related parties. The Company and Dr.
Milano also entered into an indemnification agreement pursuant to which the
Company agreed to indemnify her from and against claims made against her in her
capacity as an officer or director of the Integrated Medical Centers.

In 1996, the Company advanced approximately $23,000 to Mr. McMillen without
interest. Mr. McMillen repaid the amount in February 1997.

Dr. McMillen, Mr. Mrazek, and two other individuals have each given Mr.
McMillen a proxy to vote on their behalf all of the shares of Common Stock owned
by them. Each proxy is irrevocable and valid until December 31, 2000.

The Company believes that all prior transactions between the Company, its
officers, directors or other affiliates of the Company have been on terms no
less favorable than could have been obtained from unaffiliated third parties.
Any future transactions with officers, directors, 5% stockholders or affiliates
must be for valid business reasons, be on terms no less favorable to the Company
than could be obtained from unaffiliated third parties, and be approved by a
majority of the independent outside members of the Company's Board of Directors
who do not have an interest in the transaction.

ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K

(a) No Exhibits

(b) Reports on Form 8-K.

The Company filed a Form 8-K on November 24, 1997 regarding service of
government search warrants and seizure of records.

41
<PAGE> 42
SIGNATURES

IN ACCORDANCE WITH THE REQUIREMENTS OF SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON
ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.

COMPLETE WELLNESS CENTERS, INC.
(Registrant)

By: /s/ MICHAEL T. BRIGANTE
-----------------------
MICHAEL T. BRIGANTE
CHIEF FINANCIAL OFFICER

March 31, 1998

IN ACCORDANCE WITH THE SECURITIES EXCHANGE ACT OF 1934, THIS REPORT HAS BEEN
SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT AND IN THE
CAPACITIES AND ON THE DATES INDICATED.

<TABLE>
<CAPTION>
<S> <C> <C>
/s/ C. THOMAS MCMILLEN Chairman of the Board, March 31, 1998
---------------------- Chief Executive Officer,
C. THOMAS MCMILLEN and Director

/s/ E. EUGENE SHARER President, Treasurer March 31, 1998
-------------------- and Director
E. EUGENE SHARER

/s/ JAMES T. MCMILLEN Director March 31, 1998
---------------------
JAMES T. MCMILLEN

/s/ ROBERT J. MRAZEK Director March 31, 1998
--------------------
ROBERT J. MRAZEK

/s/ ERIC S. KAPLAN Chief Operating March 31, 1998
------------------ Officer and Director
ERIC S. KAPLAN

/s/ MICHAEL T. BRIGANTE V.P. Finance and March 31, 1998
----------------------- Chief Financial Officer
MICHAEL T. BRIGANTE
</TABLE>
42