<PAGE>   1
 
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                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                            ------------------------
 
                                  FORM 10-KSB
(MARK ONE)
 
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<C>        <S>
    [X]    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
           THE SECURITIES EXCHANGE ACT OF 1934
           FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
    [ ]    TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF
           THE SECURITIES EXCHANGE ACT OF 1934
           FOR THE TRANSITION PERIOD FROM ____________ TO ____________
</TABLE>
 
                         COMMISSION FILE NUMBER 0-22115
                            ------------------------
 
                        COMPLETE WELLNESS CENTERS, INC.
       (EXACT NAME OF SMALL BUSINESS ISSUER AS SPECIFIED IN ITS CHARTER)
 
<TABLE>
<S>                                           <C>
                   DELAWARE                                     52-1910135
(State or other jurisdiction of incorporation    (I.R.S. Employer Identification Number)
               or organization)
</TABLE>
 
             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 [ ]  No [X]
 
     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, 1996 were $1,338,085.
 
     The aggregate market value of all of the voting stock held by
non-affiliates outstanding at March 31, 1997, was $4,591,332. The amount was
computed by reference to the average bid and asked prices of the Common Stock as
of March 31, 1997.
 
     As of March 31, 1997, 2,044,100 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]
================================================================================
<PAGE>   2
 
                               TABLE OF CONTENTS
 
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<S>           <C>                                                                          <C>
PART I
Item 1        Business..................................................................     1
Item 2        Properties................................................................     4
Item 3        Legal Proceedings.........................................................     4
Item 4        Submission of Matters to a Vote of Security Holders.......................     5
 
PART II
Item 5        Market for Common Equity and Related Stockholder Matters..................     5
Item 6        Management's Discussion and Analysis......................................     6
Item 7        Financial Statements......................................................    11
Item 8        Changes in and Disagreements with Accountants
                on Accounting and Financial Disclosure..................................    28
 
PART III
Item 9        Directors, Executive Officers, Promoters and Control Persons;
                Compliance with Section 16(a) of the Exchange Act.......................    28
Item 10       Executive Compensation....................................................    29
Item 11       Security Ownership of Certain Beneficial Owners and Management............    32
Item 12       Certain Relationships and Related Transactions............................    33
Item 13       Exhibits and Reports on Form 8-K..........................................    35
</TABLE>
<PAGE>   3
 
                                     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 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.
The Company's objective is to become a nationally recognized developer and
manager of Integrated Medical Centers. At January 31, 1997, the Company was
managing 7 Integrated Medical Centers in the states of Florida, Virginia and
Illinois and had 48 agreements with chiropractors to develop and manage 59
Integrated Medical Centers in 11 states.
 
     The Company 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, the Company establishes
a new Integrated Medical Center by forming a medical corporation ("Medcorp"),
which is a general business corporation wholly-owned by the Company or a
professional corporation that is physician-owned, depending upon its
interpretation of applicable state law. In some cases, one Medcorp encompasses
two or more Integrated Medical Centers. The Affiliated Chiropractor establishes
an administration corporation ("Admincorp") which contracts with the Company to
provide day-to-day management of the Integrated Medical Center.
 
     The Company's development strategy is to develop additional Integrated
Medical Centers in local or regional groups or clusters. The Company plans to
continue to develop Integrated Medical Centers through affiliations with
chiropractors and their existing chiropractic practices and intends to begin
development of Integrated Medical Centers in connection with strategic alliances
with health clubs, corporations, government offices, or other organizations, in
which cases the Integrated Medical Centers would be developed in locations such
as a health club or office building. The Company regularly explores new
opportunities related to integrated medical services and intends to negotiate
arrangements with or acquire businesses that provide services ancillary to the
provision of integrated medical services, such as services relating to medical
diagnostics or billing systems.
 
     The Company completed an initial public offering ("IPO") of Common Stock
and Redeemable Common Stock Purchase Warrants in February 1997. Unless otherwise
indicated herein, all share and per share information gives effect to (i) a
180-for-1 split of the Common Stock effected in November 1995, (ii) a 1-for-3
reverse split of the Common Stock effected in November 1996, and (iii) the
conversion of 1,350 shares of Series A, 12% Cumulative Convertible Preferred
Stock ("Series A Preferred Stock") into 145,800 shares of Common Stock upon
consummation of the IPO.
 
  (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 other
advice and support, and (v) achieve operating efficiencies and economies of
scale through the implementation of an upgraded management information system,
the rotation of health care
 
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<PAGE>   4
 
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 has
recently begun to credential its licensed health care practitioners through a
credentialing concern accredited by the National Committee for Quality
Assurance, is drafting new and reviewing for improvement its standardized
protocols and plans to develop and implement a utilization management program,
all for the purpose of attracting managed care contracts.
 
     Provide Advice and Assistance.  Although it has not yet done so, 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." 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. Each Medcorp is required to pay a flat monthly fee to finance
the Company's advertising and marketing programs beginning, generally, six
months after its Integration Date. This requirement is under review, however,
and may be eliminated. 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
 
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<PAGE>   5
 
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
to organize 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. The Company has rotated some physicians and
intends to rotate physicians and other health care practitioners among
Integrated Medical Centers. The Company believes that this will reduce the
number of practitioners otherwise needed, and thereby help contain salary costs.
In addition, the Company has adopted and is looking to improve and develop
certain standardized protocols, administrative systems, and procedures. The
Company intends to upgrade its management information system.
 
     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
in some instances it might be established at a new location.
 
     The Company also plans to develop Integrated Medical Centers in connection
with strategic alliances with health clubs, corporations, government offices, or
other organizations. 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 strategic 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 be hired to 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 a business in the health care
industry, the Company is subject to these laws and regulations. The Company is
also subject to laws and regulations relating to business corporations in
general. Although many aspects of the Company's business operations have not
been the subject of state or federal regulatory interpretation, the Company
believes its operations are in material 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
(such as Florida and Virginia) in which the Company believes general business
corporations are permitted to own medical practices. In other states (such as
Illinois), 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 (including Illinois) 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
 
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<PAGE>   6
 
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 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.
 
     As of January 31, 1997, the Company had 11 employees and the six operating
Medcorps had a total of 30 employees. The Company's 11 employees consisted of
eight in finance and administration and three in sales and marketing.
 
ITEM 2.  PROPERTIES
 
     The Company does not own any property. The Company's executive and
administrative offices are located in approximately 1,800 square feet of office
space in Washington, D.C. The Company currently pays $2,200 per month rent, on a
month-to-month basis. It also leases approximately 924 square feet of office
space in West Palm Beach, Florida. The lease term began in March 1997 and
expires in February 1999. The current monthly rental rate is $924. Both
facilities are in satisfactory condition and are adequate for the Company's use.
 
ITEM 3.  LEGAL PROCEEDINGS
 
     There are no pending legal proceedings to which the Company or its
properties is subject. A former employee has raised the possibility of
instituting a legal or arbitration proceeding regarding the alleged breach by
the Company of an employment agreement with the former employee. The Company
believes that it has meritorious defenses against his claims, and if a
proceeding is commenced, intends to vigorously defend itself. Management
believes that if a legal or arbitration proceeding were instituted and decided
against the Company, it would not have a material adverse effect on the Company.
 
                                        4
<PAGE>   7
 
ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 
     By written consent in lieu of an annual or special meeting, the security
holders of the Company took the following actions effective as of October 18,
1996:
 
          (a) elected C. Thomas McMillen, James J. McMillen, Robert J. Mrazek,
     Robert S. Libauer, and E. Eugene Sharer directors of the Company to serve
     until the annual meeting of stockholders in 1997;
 
          (b) approved a Plan of Recapitalization pursuant to which (i) the par
     value of the Company's Common Stock was increased from $.0000555 per share
     to $.0001665 per share and (ii) each three shares of Common Stock with a
     par value of $.0000555 per share immediately prior to effectiveness of the
     Plan were combined into and became one share of Common Stock with a par
     value of $.0001665 per share;
 
          (c) voted to amend the Company's Certificate of Incorporation to
     effectuate the foregoing Plan of Recapitalization; and
 
          (d) voted to approve two new stock option plans -- the 1996 Stock
     Option Plan and the 1996 Restricted Stock Option Plan for Health Care
     Professionals.
 
     Each measure was approved by the unanimous written consent of the holders
of the Company's then outstanding Series A Preferred Stock and by the written
consent of the holders of 710,634 shares of the Company's then outstanding
714,967 shares of Common Stock, or 99.4% of such Common Stock holders.
 
                                    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.
 
                                  COMMON STOCK
 
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                             HIGH        LOW
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1st Quarter, 1997.......     $6.00      $3.25
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                                    WARRANTS
 
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<CAPTION>
                             HIGH        LOW
                             -----      -----
<S>                          <C>        <C>
1st Quarter, 1997.......     $1.43      $ .68
</TABLE>
 
  (b) HOLDERS
 
     As of March 31, 1997, there were 32 holders of record of the Company's
Common Stock and 32 holders of record of its Redeemable Common Stock Purchase
Warrants.
 
  (c) DIVIDENDS
 
     Holders of the Company's Common Stock are entitled to receive such
dividends as may be declared by the Board of Directors out of funds legally
available therefor. There has been no declaration of dividends to date, and none
is expected in the foreseeable future. The Company anticipates that future
earnings will be
 
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<PAGE>   8
 
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
 
     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. Revenue earned at CWC Fredericksburg
through December 31, 1995 was $22,114 and expenses for that period amounted to
$44,232, net of interest income of $86, resulting in a loss from operations of
$22,118.
 
     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 collective marketing
fee of $200 per month beginning six months after the Integration Date (although
this fee is under review and may be eliminated) and 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
 
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<PAGE>   9
 
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 instead for
flat dollar amounts equal to estimated fair market value, 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 at least four of the seven Integrated Medical Centers under
management as of January 31, 1997, 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 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 is developing an
Integrated Medical Center at a Bally Total Fitness Corporation in White Marsh,
Maryland.
 
     As of January 31, 1997, the Company was managing seven Integrated Medical
Centers. The Company ceased operating one Integrated Medical Center and plans to
dissolve the related Medcorp after having terminated its agreement with the
Affiliated Chiropractor and Admincorp for material breach in late January 1997.
The Company anticipates no material adverse financial effect as a result of such
termination. Of the remaining seven Integrated Medical Centers, six were
developed through CWC LLC prior to July 1996.
 
     The Company recognizes all revenue and expenses of the Medcorps formed as
wholly-owned subsidiaries of the Company or CWC LLC. The financial results of
the Medcorp organized as a physician-owned professional corporation are not
consolidated in the Company's financial statements. Rather, the Company
recognizes only the fees derived by the Company from that Medcorp.
 
     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 three to four months to integrate clinics due to the substantial number
of agreements it has pending with chiropractors to develop Integrated Medical
Centers.
 
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<PAGE>   10
 
     The cost to the Company to develop an Integrated Medical Center not
connected with a strategic alliance has averaged $20,000. This cost has
consisted of approximately $10,000 for the purchase of such things as computer
software, legal fees, professional credentialing, training, an administrative
starter kit and travel, and approximately $10,000 (out of a possible $40,000) in
the form of a loan. The loan may be used for items such as professional
salaries, computer hardware, signage and insurance. The loans are evidenced by
promissory notes, bear interest at the rate of 10% per annum, are secured by the
assets of the Medcorps and Admincorps, are guaranteed by the Affiliated
Chiropractors pursuant to a separate guaranty, and are payable within five
years. The Company believes that the average cost to the Company to develop an
Integrated Medical Center in connection with a strategic alliance will be
approximately $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 63 Integrated Medical Centers
(including the 59 for which it had agreements with chiropractors as of January
31, 1997) by December 31, 1997, of which one is expected to be developed in
connection with a strategic alliance. 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 January 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, 1997 are expected to be financed by a portion of the
net proceeds of the IPO.
 
RESULTS OF OPERATIONS
 
  Twelve months ended December 31, 1996 compared to twelve months ended December
31, 1995
 
     Revenue.  During the twelve months ended December 31, 1996 and December 31,
1995, the Company had total revenue of $1,338,085 and $22,114, respectively. At
December 31, 1995, the Company managed only one Integrated Medical Center, which
began operations in September 1995. The increase of $1,315,971 was due primarily
to the addition of seven Integrated Medical Centers after September 1995.
 
     Salary and Consulting Costs.  During the twelve months ended December 31,
1996 and December 31, 1995, the Company incurred salary and consulting costs of
$733,367 and $93,131, respectively. The increase of $640,236 was due to an
increase of $416,376 in costs resulting from the hiring of additional employees,
an increase of $11,645 in compensation expense resulting from the grant of stock
options the fair market value of which exceeded their exercise price, and an
increase of $212,215 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, 1996 and
December 31, 1995, the Company incurred management fees of $468,991 and $29,669,
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 $439,322 was due primarily to the
addition of seven Integrated Medical Centers after September 1995.
 
     Rent.  During the twelve months ended December 31, 1996 and December 31,
1995, the Company incurred rent expenses of $102,149 and $4,501, 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
 
                                        8
<PAGE>   11
 
increase of $97,648 was due primarily to the addition of seven Integrated
Medical Centers after September 1995.
 
     Advertising and Marketing.  During the twelve months ended December 31,
1996 and December 31, 1995, the Company incurred advertising and marketing
expenses of $75,907 and $25,821, respectively. The increase of $50,086 was
attributable primarily to additional national advertising for marketing and
recruitment purposes.
 
     Bad Debt Expense.  During the twelve months ended December 31, 1996 and
December 31, 1995 the Company incurred bad debt expense of $301,618 and $5,650,
respectively. The increase of $295,968 was due to an increase in reserves for
doubtful accounts of $137,772 and an increase in uncollectable accounts written
off of $163,846.
 
     General and Administrative.  During the twelve months ended December 31,
1996 and December 31, 1995, the Company incurred general and administrative
expenses of $1,025,327 and $247,374, respectively. The increase of $777,953 was
due primarily to the addition of seven Integrated Medical Centers after
September 1995 and consists of an increase of (i) $135,358 in accounting costs,
(ii) $247,480 in legal costs, (iii) $15,963 in employment agency fees, (iv)
$294,152 in various costs, such as automobile, travel and entertainment,
telephone, and insurance, and (v) $85,000 in costs attributable to a bridge
financing completed in August 1996 (the "Bridge Financing" ) and the IPO.
 
     Depreciation and Amortization.  During the twelve months ended December 31,
1996 and December 31, 1995, the Company incurred depreciation and amortization
expense of $36,698 and $6,490, respectively. The increase of $30,208 resulted
from the addition of fixed assets, primarily computer equipment, which tend to
have depreciable lives of five years or less.
 
     Net Interest Income (Expense).  During the twelve months ended December 31,
1996 and December 31, 1995, the Company had net interest expense of $47,023 and
net interest income of $176, respectively. The $47,199 increase in net interest
expense was attributable primarily to an increase of $52,010 in interest payable
on notes issued in connection with the Bridge Financing, amortization of a loan
discount of $3,920, an increase of $2,234 in interest payable on a note issued
in connection with the acquisition of assets for use at the first Integrated
Medical Center developed by the Company, and offset by an increase of $10,965 in
interest income.
 
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, 1996 and December 31, 1995 the Company had incurred
a net loss of $990,693 and of $195,889, respectively. At December 31, 1996, the
Company had a deficit in working capital of $1,222,437, and an accumulated
deficit of $1,187,982. Net cash used in operations for the years ended December
31, 1996 and December 31, 1995 was $1,117,079 and $252,114, 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, 1996 and
December 31, 1995, the Company used $194,989 and $38,814, respectively, for
purchases of equipment.
 
     From November 1994 to December 1996 development costs, capital expenditures
and working capital needs of the Company have been financed through the issuance
of notes, shares of Common Stock, and shares of preferred stock of the Company,
and the sale of membership interests in CWC LLC.
 
     During 1995 the Company issued 1,350 shares of Series A Preferred Stock for
$100 per share. Each share of Series A Preferred Stock converted to 108 shares
(an aggregate of 145,800 shares) of Common Stock upon
 
                                        9
<PAGE>   12
 
the closing of the IPO. The Company raised $135,000 as a result of this
issuance. The proceeds were used for working capital and general corporate
purposes.
 
     In November 1995, the Company issued $39,730 in aggregate principal amount
of promissory notes and warrants to purchase an aggregate of 13,243 shares of
Common Stock at an exercise price of $.003 per share. The warrants are
exercisable for a period of five years commencing November 1996. The notes have
been repaid or converted into membership interests in CWC LLC.
 
     During 1995 and 1996, CWC LLC sold an aggregate of $665,000 of Class A
Units. The Company acquired 1% of the membership interests of CWC LLC. The net
equity of the other investors accounts for the minority interest shown in the
Company's consolidated financial statements.
 
     In connection with the acquisition of assets used to establish CWC
Fredericksburg, CWC LLC issued a note in the principal amount of $25,000 that
bears interest at the rate of 8% per annum, is payable on July 17, 2000, is
secured by the assets of CWC Fredericksburg.
 
     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.
 
     The Company intends to develop no fewer than 63 Integrated Medical Centers
(including the 59 for which it had agreements with chiropractors as of January
31, 1997) by December 31, 1997, including one in connection with a strategic
alliance. The average cost to the Company to develop an Integrated Medical
Center not connected with a strategic alliance is approximately $20,000. The
Company believes the average cost to the Company to develop an Integrated
Medical Center in connection with a strategic alliance will be approximately
$150,000. 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 January 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 intends to finance its expansion strategy with a
portion of the net proceeds of the IPO. In addition, with a portion of the net
proceeds of the IPO, the Company intends to upgrade its management information
system. Management believes that the net proceeds of the IPO together with net
cash from operations will be sufficient to finance the Company's activities
until at least February 1998; however, there can be no assurance that such net
proceeds and cash from operations will be sufficient to finance the Company's
activities for such period.
 
NET OPERATING LOSSES
 
     At December 31, 1996, the Company and CWC LLC's wholly owned subsidiaries
had combined net operating loss carryforwards for income tax purposes of
approximately $1,113,000, which expire $192,000 in 2010 and $921,000 in 2011.
The company will file 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
 
                                       10
<PAGE>   13
 
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
Series A Preferred Stock financing and other equity offerings. A valuation
allowance of approximately $457,592 has been established at December 31, 1996 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.
 
NEW ACCOUNTING PRONOUNCEMENT
 
     In October 1995, the Financial Accounting Standards Board issued Statement
No. 123, Accounting for Stock-Based Compensation, which provides an alternative
to APB Opinion No. 25, Accounting for Stock Issued to Employees, in accounting
for stock-based compensation issued to employees. The statement allows for a
fair value based method of accounting for employee stock options and similar
equity instruments. However, for companies that continue to account for
stock-based compensation arrangements under APB Opinion No. 25, Statement No.
123 requires disclosure of the pro forma effect on net income and earnings per
share of its fair value based accounting for those arrangements. These
disclosure requirements are effective for fiscal years beginning after December
15, 1995, or upon initial adoption of the statement, if earlier. The Company has
elected to continue to account for stock-based compensation arrangements under
APB Opinion No. 25, 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 but provided the required pro forma disclosures in the
December 31, 1996 consolidated financial statements. See Note 10 to the
Consolidated Financial Statements.
 
ITEM 7.  FINANCIAL STATEMENTS
 
<TABLE>
<CAPTION>
                                       INDEX                                          PAGE NO.
-----------------------------------------------------------------------------------   --------
<S>                                                                                   <C>
Report of Independent Auditors.....................................................      12
Consolidated Balance Sheets as of December 31, 1996 and 1995.......................      13
Consolidated Statements of Operations for the Years Ended December 31, 1996 and
  1995.............................................................................      14
Consolidated Statements of Stockholders' Equity (Deficit) for the Years
  Ended December 31, 1996 and 1995.................................................      15
Consolidated Statements of Cash Flows for the Years Ended December 31, 1996 and
  1995.............................................................................      16
Notes to Consolidated Financial Statements.........................................      17
</TABLE>
 
                                       11
<PAGE>   14
 
                         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, 1995 and 1996, 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, 1995 and 1996 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 19, 1997,
except for Note 13, as to which the date is
April 7, 1997
 
                                       12
<PAGE>   15
 
                        COMPLETE WELLNESS CENTERS, INC.
                          CONSOLIDATED BALANCE SHEETS
 
<TABLE>
<CAPTION>
                                                                 DECEMBER 31            PRO FORMA
                                                           ------------------------    DECEMBER 31
                                                             1995          1996           1996
                                                           ---------    -----------    -----------
                                                                                       (UNAUDITED)
                                                                                        (NOTE 13)
<S>                                                        <C>          <C>            <C>
                                              ASSETS
Current assets:
     Cash and cash equivalents..........................   $  63,834    $   298,509    $ 3,665,499
     Patient receivables, net of allowance for doubtful
       accounts of $5,650 and $143,422..................       3,120        540,444        540,444
     Advances to officers and other assets..............       1,753         43,232         43,232
     Deferred tax assets................................          --         15,487         15,487
                                                           ---------    -----------    -----------
          Total current assets..........................      68,707        897,672      4,264,662
Furniture and equipment, net............................      57,324        215,615        215,615
                                                           ---------    -----------    -----------
          Total assets..................................   $ 126,031    $ 1,113,287    $ 4,480,277
                                                           =========     ==========     ==========
<CAPTION>
                               LIABILITIES AND STOCKHOLDERS' EQUITY
<S>                                                        <C>          <C>            <C>
Current liabilities:
     Accounts payable and accrued expenses..............   $ 135,925    $   412,725    $   263,725
     Accrued wages......................................          --         91,000             --
     Accrued management fees and leases.................          --        442,646        442,646
     Accrued interest...................................          --         52,010             --
     Deferred tax liability.............................          --         23,728         23,728
     Notes payable......................................         730      1,098,000             --
                                                           ---------    -----------    -----------
          Total current liabilities.....................     136,655      2,120,109        730,099
Convertible note payable................................      25,000         25,000             --
Minority interest.......................................      24,543             --             --
Stockholders' equity:
     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, 1,350 shares issued and
       outstanding......................................          14             14             --
     Common Stock, $.0001665 par value per share,
       10,000,000 shares authorized, 567,300 shares and
       714,967 shares issued and outstanding at December
       31, 1995 and 1996, respectively..................          95            119            310
     Additional capital.................................     137,013        156,027      4,937,850
     Accumulated deficit................................    (197,289)    (1,187,982)    (1,187,982)
                                                           ---------    -----------    -----------
          Total stockholders' (deficit) equity..........     (60,167)    (1,031,822)     3,750,178
                                                           ---------    -----------    -----------
          Total liabilities and stockholders' (deficit)
            equity......................................   $ 126,031    $ 1,113,287    $ 4,480,277
                                                           =========     ==========     ==========
</TABLE>
 
                            See accompanying notes.
 
                                       13
<PAGE>   16
 
                        COMPLETE WELLNESS CENTERS, INC.
                     CONSOLIDATED STATEMENTS OF OPERATIONS
 
<TABLE>
<CAPTION>
                                                                              YEAR ENDED
                                                                             DECEMBER 31
                                                                       ------------------------
                                                                         1995          1996
                                                                       ---------    -----------
<S>                                                                    <C>          <C>
Operating revenue:
     Patient revenue................................................   $  22,114    $ 1,307,859
     Management services income.....................................          --         30,226
                                                                       ---------    -----------
                                                                          22,114      1,338,085
Direct expenses:
     Salary and consulting costs....................................      93,131        733,367
     Management fees................................................      29,669        468,991
     Rent...........................................................       4,501        102,149
     Advertising and marketing......................................      25,821         75,907
     Bad debt expense...............................................       5,650        301,618
                                                                       ---------    -----------
          Total direct expenses.....................................     158,772      1,682,032
General and administrative..........................................     247,374      1,025,327
Depreciation and amortization.......................................       6,490         36,698
                                                                       ---------    -----------
Operating deficit...................................................    (390,522)    (1,405,972)
Interest expense....................................................         930         59,094
Interest income.....................................................       1,106         12,071
Minority interest...................................................     194,457        470,543
                                                                       ---------    -----------
Net loss before income taxes........................................    (195,889)      (982,452)
Income taxes........................................................          --          8,241
                                                                       ---------    -----------
          Net loss after income taxes...............................   $(195,889)   $  (990,693)
                                                                       =========     ==========
Pro forma net loss per share data (Unaudited -- Note 10):
     Net loss per common and common equivalent shares...............   $   (0.26)   $     (0.70)
                                                                       =========     ==========
     Weighted average number of common and common equivalent shares
      outstanding...................................................     753,895      1,424,288
                                                                       =========     ==========
</TABLE>
 
                            See accompanying notes.
 
                                       14
<PAGE>   17
 
                        COMPLETE WELLNESS CENTERS, INC.
           CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
 
<TABLE>
<CAPTION>
                                     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, 1994......      --      $ --     378,000     $ 63      $      --    $    (1,400)   $    (1,337)
     Issuance of common stock.....      --        --     189,300       32          1,893             --          1,925
     Issuance of preferred
       stock......................   1,350        14       --          --        134,986             --        135,000
     Recognition of the granting
       of nonqualified stock
       options....................      --        --          --       --              1             --              1
     Recognition of the granting
       of below market common
       stock warrants.............      --        --          --       --            133             --            133
     Net loss.....................      --        --          --       --             --       (195,889)      (195,889)
                                     ------    ------    -------    ------    ----------    -----------    -----------
Balance at December 31, 1995......   1,350        14     567,300       95        137,013       (197,289)       (60,167)
     Issuance of common stock.....      --        --     110,000       18             --             --             18
     Exercise of stock options for
       shares of Complete Wellness
       Centers, Inc. Common
       Stock......................      --        --      37,667        6          1,449             --          1,455
     Recognition of the granting
       of nonqualified stock
       options....................      --        --          --       --         11,645             --         11,645
     Recognition of the granting
       of below market common
       stock warrants.............      --        --          --       --          5,920             --          5,920
     Net loss.....................      --        --          --       --             --       (990,693)      (990,693)
                                     ------    ------    -------    ------    ----------    -----------    -----------
Balance at December 31, 1996......   1,350      $ 14     714,967     $119      $ 156,027    $(1,187,982)   $(1,031,822)
                                     =====     ======    =======    ======      ========     ==========     ==========
</TABLE>
 
                            See accompanying notes.
 
                                       15
<PAGE>   18
 
                        COMPLETE WELLNESS CENTERS, INC.
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
 
<TABLE>
<CAPTION>
                                                                                       YEAR ENDED
                                                                                      DECEMBER 31
                                                                                ------------------------
                                                                                  1995          1996
                                                                                ---------    -----------
<S>                                                                             <C>          <C>
OPERATING ACTIVITIES
Net loss.....................................................................   $(195,889)   $  (990,693)
Adjustments to reconcile net loss to net cash used in operating activities:
     Minority interest.......................................................    (194,457)      (470,543)
     Depreciation and amortization...........................................       6,490         36,698
     Amortization of debt discount...........................................          --          3,920
     Provision for bad debts.................................................       5,650        301,618
     Recognition of the compensatory granting of nonqualified stock
      options................................................................           1         11,645
     Recognition of the granting of common stock warrants....................         133             --
     Recognition of common stock issued for services rendered................       1,893             --
     Changes in operating assets and liabilities:
          Patient receivables................................................      (8,770)      (838,942)
          Advances to officers and other current assets......................      (1,753)       (41,479)
          Deferred taxes.....................................................          --          8,241
          Accounts payable and other current liabilities.....................     134,588        862,456
                                                                                ---------    -----------
               Net cash used in operating activities.........................    (252,114)    (1,117,079)
INVESTING ACTIVITIES
Purchase of equipment........................................................     (38,814)      (194,989)
                                                                                ---------    -----------
               Net cash used in investing activities.........................     (38,814)      (194,989)
FINANCING ACTIVITIES
Proceeds from bridge notes and warrants......................................      39,730      1,100,000
Payments on note payable.....................................................     (39,000)          (730)
Proceeds from sale of common stock...........................................          32             18
Proceeds from sale of preferred stock........................................     135,000             --
Proceeds from sale of equity in Complete Wellness Centers, LLC...............     219,000        446,000
Exercise of stock options....................................................          --          1,455
                                                                                ---------    -----------
               Net cash provided by financing activities.....................     354,762      1,546,743
                                                                                ---------    -----------
Net increase in cash and cash equivalents....................................      63,834        234,675
Cash and cash equivalents at beginning of year...............................          --         63,834
                                                                                ---------    -----------
               Cash and cash equivalents at end of year......................   $  63,834    $   298,509
                                                                                =========     ==========
</TABLE>
 
                            See accompanying notes.
 
                                       16
<PAGE>   19
 
                        COMPLETE WELLNESS CENTERS, INC.
 
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                     YEARS ENDED DECEMBER 31, 1995 AND 1996
 
1. ORGANIZATION AND PRESENTATION
 
     Complete Wellness Centers, Inc. (the "Company") was incorporated in
Delaware in November 1994. The Company develops and operates integrated medical
centers (the "Integrated Medical Centers") primarily in the states of Virginia
and Florida.
 
     The Company is the managing member of Complete Wellness Centers, LLC ("CWC,
LLC") and has a 1% equity ownership interest. CWC, LLC was formed in Delaware in
March 1995 and was capitalized through the issuance of 13.3 Class A units. The
Company has an option for a seven-year period to purchase all of the units at an
exercise price in an amount such that the Class A members shall receive a 12%
cumulative preferred return plus a multiple of their capital contribution
ranging from two in the first year to four in the seventh year. The exercise
price shall be paid by the Company to the Class A members within 120 days of the
Company exercising the call option and is payable either in cash or a
combination of cash and, if it is publicly traded at the exercise date, stock of
the Company. The Company has obtained irrevocable proxies valid for the life of
CWC, LLC from the holders of a majority of the Class A units to exercise all of
their voting rights.
 
     In 1995, CWC, LLC acquired certain furniture and equipment of a
chiropractic clinic for $15,000 in cash and a $25,000 note payable. The assets
were used to establish an Integrated Medical Center at the same location as the
previous chiropractic clinic. No working capital, patient files or employees
were transferred as a result of the transaction. Throughout 1996 CWC, LLC
developed six additional Integrated Medical Centers. All of the Integrated
Medical Centers owned by CWC, LLC are managed by the Company.
 
     The consolidated financial statements reflect the accounts of Complete
Wellness Centers, Inc. and CWC, LLC and its wholly owned subsidiaries Complete
Wellness Center of Fredericksburg, Inc., Complete Wellness Medical Center of
Dale City, Inc., Complete Wellness Medical Center of 4th Street, St. Petersburg,
Inc., Complete Wellness Medical Center of Paula Drive, Dunedin, Inc., Complete
Wellness Medical Center of Centreville, Inc., and Complete Wellness Medical
Center of Sarasota, Inc. Significant intercompany 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 operations of the Company. The Company has
recorded the net equity of the Class A members holding 99% of the members'
interest of CWC, LLC as minority interest.
 
     The Company developed one Integrated Medical Center and entered into
contracts with 42 chiropractors during 1996 to develop Integrated Medical
Centers. Under the agreements entered into in 1996, 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. 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.
 
     The Company also entered into contractual arrangements with each
chiropractor whereby (1) the Company will lease from the chiropractor or the
chiropractor's existing chiropractic practice certain facilities and equipment
for the use of the Integrated Medical Center, (2) the Company will provide
certain management services to the Integrated Medical Centers, (3) a management
company controlled by the chiropractor will provide substantially all
administrative services to the Integrated Medical Center on behalf of
 
                                       17
<PAGE>   20
 
                        COMPLETE WELLNESS CENTERS, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
1. ORGANIZATION AND PRESENTATION -- (CONTINUED)

the Company, and (4) the Integrated Medical Center will pay the chiropractor a
fixed salary to render chiropractic services to patients of the Integrated
Medical Center. The Company will not provide management services to, and will
not receive any fees from, the existing Affiliated Practice. The agreements are
for an initial period of either five or ten years.
 
     The Integrated Medical Center developed in 1996 by the Company and the six
Integrated Medical Centers developed by CWC, LLC were all organized using
agreements substantially the same as those described above.
 
     The Company recognizes all revenue and expenses of the Integrated Medical
Centers formed as wholly owned subsidiaries of the Company or CWC, LLC. The
financial results of Integrated Medical Centers organized as physician-owned
professional corporations are not consolidated in the Company's financial
statements. In such cases, the Company recognizes only the fees derived by the
Company through its management agreements.
 
     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.
 
     Management or other contractual fees earned by the Company that are related
to wholly owned Integrated Medical Centers, regardless of the source of payment,
are eliminated in the Company's consolidated financial statements. Net
management fees to be received by the Company related to physician-owned
Integrated Medical Centers are computed as a percentage of the patient billings
of the Integrated Medical Center. Such fees are recognized monthly based upon
the reported accrual basis operating results of the Centers.
 
2. SIGNIFICANT ACCOUNTING POLICIES
 
  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.
 
  Furniture and Equipment
 
     Furniture and equipment are recorded at the lower of cost or net realizable
value. 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.
 
                                       18
<PAGE>   21
 
                        COMPLETE WELLNESS CENTERS, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
2. SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)

  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 statement carrying amounts of existing assets
and liabilities and their respective tax basis (i.e., temporary differences).
 
  Stock-Based Compensation
 
     The Company grants stock options for a fixed number of shares to employees.
In October 1995, the FASB issued Statement No. 123, "Accounting for Stock-Based
Compensation," which provides an alternative to APB Opinion No. 25, "Accounting
for Stock Issued to Employees," in accounting for stock-based compensation
issued to employees. The Statement allows for a fair-value-based method of
accounting for employee stock options and similar equity instruments and
requires certain disclosure of the pro forma effect on net income and earnings
per share of its fair-value-based accounting for those arrangements if the fair
value method of accounting is not adopted. These disclosure requirements are
effective for fiscal years beginning after December 15, 1995, or upon initial
adoption of the statement, if earlier. The Company adopted Statement No. 123
during 1996 and has elected to continue to account for stock-based compensation
arrangements under APB Opinion No. 25 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 required pro forma information has
been disclosed in Note 8.
 
  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.
 
3. ALLOWANCE FOR DOUBTFUL ACCOUNTS
 
     Details of the allowance for doubtful accounts receivable are as follows:
 
<TABLE>
<CAPTION>
                                                                        DECEMBER 31,
                                                                     ------------------
                                                                      1995       1996
                                                                     ------    --------
        <S>                                                          <C>       <C>
        Beginning balance.........................................   $   --    $  5,650
        Bad debt expense..........................................    5,650     301,618
        Accounts written off......................................       --    (163,846)
                                                                     ------    --------
        Ending balance............................................   $5,650    $143,422
                                                                     ======    ========
</TABLE>
 
                                       19
<PAGE>   22
 
                        COMPLETE WELLNESS CENTERS, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
4. FURNITURE AND EQUIPMENT
 
     Furniture and equipment consists of the following:
 
<TABLE>
<CAPTION>
                                                                                DECEMBER 31,
                                                                         --------------------------
                                                          ASSET LIVES       1995           1996
                                                          -----------    -----------    -----------
        <S>                                               <C>            <C>            <C>
        Furniture and equipment........................        5           $  63,814     $  258,804
        Less accumulated depreciation and
          amortization.................................                       (6,490)       (43,189)
                                                                         -----------    -----------
                                                                           $  57,324     $  215,615
                                                                             =======       ========
</TABLE>
 
     No interest was capitalized during 1995 or 1996.
 
     The Company leases space of its wholly owned Integrated Medical Center
(Complete Wellness Center of Fredericksburg) and its corporate office space on a
month-by-month basis.
 
5. DEBT
 
  Convertible Note Payable
 
     The convertible note payable 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, the note, at the lender's option, will be convertible into common
stock of CWC, LLC at the initial public offering price.
 
  1995 Financing
 
     In November 1995, the Company issued $39,730 of subordinated promissory
notes bearing interest at 12%. In connection with the financing, the lenders
have been issued detachable warrants with an exercise price of $.003333 to
purchase 13,243 shares of the Company's Common Stock. Interest expense of $133
was recorded for these warrants. The company repaid $39,000 of these notes in
1995.
 
  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, assuming an initial public offering price of $6.00 per
share. An additional 3,333 warrants with an exercise price of $0.003 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. (See Note 13.)
 
6. 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
 
                                       20
<PAGE>   23
 
                        COMPLETE WELLNESS CENTERS, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
6. INCOME TAXES -- (CONTINUED)

effects of temporary differences that give rise to significant portions of the
deferred tax assets and deferred tax liabilities recognized as of December 31,
1995 and 1996 are presented below:
 
<TABLE>
<CAPTION>
                                                                      DECEMBER 31,
                                                                  ---------------------
                                                                    1995        1996
                                                                  --------    ---------
        <S>                                                       <C>         <C>
        Deferred tax assets:
             Start-up costs....................................   $    448    $      --
             Nonqualified stock options........................         --        4,658
             Bad debt expense..................................      2,260       24,450
             Operating loss carryforward.......................     76,687      445,080
                                                                  --------    ---------
                  Total deferred tax assets....................     79,395      474,188
        Less valuation allowance...............................    (78,915)    (457,592)
                                                                  --------    ---------
        Net deferred tax assets................................        480       16,596
        Deferred tax liabilities:
             Depreciation......................................       (480)      (1,109)
                                                                  --------    ---------
        Total deferred tax liabilities.........................       (480)      (1,109)
                                                                  --------    ---------
        Net deferred tax amount................................   $     --    $  15,487
                                                                  ========    =========
</TABLE>
 
     At December 31, 1996, the Company and CWC, LLC's wholly owned subsidiaries
had combined net operating loss carryforwards for income tax purposes of
approximately $1,112,649, which expire between 2010 and 2011. The Company will
file 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 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 financings 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 any earnings or
any specific level of earnings in future years. Therefore, the Company
established a valuation allowance on deferred tax assets of $78,915 and $457,592
as of December 31, 1995 and 1996, respectively.
 
                                       21
<PAGE>   24
 
                        COMPLETE WELLNESS CENTERS, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
6. INCOME TAXES -- (CONTINUED)

     Significant components of the provision for income taxes are as follows for
the years ended:
 
<TABLE>
<CAPTION>
                                                                       DECEMBER 31,
                                                                   --------------------
                                                                    1995        1996
                                                                   -------    ---------
        <S>                                                        <C>        <C>
        Current:
             Federal............................................   $    --    $  16,778
             State..............................................        --        6,950
                                                                   -------    ---------
        Total current...........................................        --       23,728
        Deferred:
             Federal............................................   (65,971)    (279,856)
             State..............................................   (12,385)    (114,308)
             Increase in valuation allowance....................    78,356      378,677
                                                                   -------    ---------
        Total deferred..........................................        --      (15,487)
                                                                   -------    ---------
        Total provision for income taxes........................        --    $   8,241
                                                                   =======    =========
</TABLE>
 
     The effective tax rate on income before income taxes varies from the
statutory federal income tax rate for the years ended December 31, 1995 and 1996
as follows:
 
<TABLE>
<CAPTION>
                                                                          DECEMBER 31,
                                                                        ----------------
                                                                        1995       1996
                                                                        -----      -----
        <S>                                                             <C>        <C>
        Statutory rate...............................................    (34)%      (34)%
        State taxes, net.............................................     (6)%       (4)%
        Other differences, net.......................................    --           1%
        Valuation allowance..........................................     40%        38%
                                                                        -----      -----
                                                                           0%         1%
                                                                        ====       ====
</TABLE>
 
7. STOCKHOLDERS' EQUITY
 
  Stock Split
 
     During 1995, the Company effected a 180 for 1 stock split of the Company's
Common Stock and increased the number of authorized shares from 20,000 to
10,000,000. Pursuant to the authorization of the Board of Directors and
Stockholders, the Company effected, on November 13, 1996, a 1 for 3 stock split.
Authorized shares of Common Stock remain 10,000,000. All share amounts reflected
herein reflect the stock splits.
 
  Convertible Preferred Stock
 
     The Series A Convertible Preferred Stock ("Series A Preferred Stock") has a
12% cumulative preferred return payable upon declaration by the Board of
Directors and liquidation preference equal to $100 per share plus accrued but
unpaid dividends. There are no accrued, undeclared dividends at December 31,
1996. At the date of the Company's Initial Public Offering (see Note 13), each
share of Series A Preferred Stock converted to 108 shares of Common Stock.
 
     A total of 545,800 and 845,800 shares of Common Stock have been reserved
for stock option plans and conversion of preferred stock as of December 31, 1995
and 1996, respectively.
 
                                       22
<PAGE>   25
 
                        COMPLETE WELLNESS CENTERS, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
8. STOCK OPTION PLAN
 
     The Company has a stock option plan providing for the grant of incentive
and nonqualified stock options to employees, directors, consultants and
advisors. Pursuant to the Plan, 400,000 shares of Common Stock have been
reserved for issuance. At December 31, 1996 the following options have been
granted:
 
<TABLE>
<CAPTION>
                                               NUMBER OF
                                               OPTIONS/     EXERCISABLE AT
                                               WARRANTS      DECEMBER 31,     EXERCISE
                   DATE OF GRANT                GRANTED          1996          PRICE      FAIR VALUE
        ------------------------------------   ---------    --------------    --------    ----------
        <S>                                    <C>          <C>               <C>         <C>
        Employee Options
        December 1, 1995....................     36,667             --         $  .03       $ .01
        January 1, 1996.....................     56,667         26,667         $  .03       $ .03
        March 1, 1996.......................     40,000         13,334         $  .03       $ .04
        March 18, 1996......................      1,500             --         $  .03       $ .04
        April 1, 1996.......................    116,667          6,667         $  .03       $ .04
        May 30, 1996........................      1,000             --         $  .03       $ .05
        June 14, 1996.......................      1,000             --         $  .03       $ .06
        June 15, 1996.......................      1,000             --         $  .03       $ .06
        August 26, 1996.....................     46,667         16,667         $  .60       $ .06
        September 23, 1996..................      5,000             --         $ 4.50       $ .06
        Non-Employee Options
        December 1, 1995....................      4,333             --         $  .03       $ .004
        January 19, 1996....................     23,333             --         $  .03       $ .01
        January 31, 1996....................     50,000             --         $  .03       $ .01
        May 1, 1996.........................     13,332         13,332         $  .03       $ .03
        July 1, 1996........................      5,000          5,000         $  .60       $ .02
        September 12, 1996..................     16,667             --         $ 4.50       $ .48
        September 26, 1996..................      6,667          6,667         $ 4.50       $ .48
        November 1, 1996....................     11,000             --         $ 4.50       $ .48
</TABLE>
 
     Options generally vest 33 1/3% each year beginning on the anniversary of
the grant date. During 1996, 36,667 of the 1995 employee options were forfeited.
The weighted average remaining contractual life of the options outstanding at
December 31, 1996 is 4.28 years. The weighted average exercise price of
exercisable options at December 31, 1996 is $0.51.
 
     During 1996, the Company instituted another nonqualified stock option plan
for employees, directors, consultants and advisors. Pursuant to the plan, up to
200,000 shares of Common Stock have been reserved for issuance. No options have
been granted, exercised or forfeited.
 
     Also during 1996, the Company instituted a separate nonqualified stock
option plan for persons employed by or associated with the Company's Integrated
Medical Centers. Pursuant to the plan, up to 100,000 shares of Common Stock have
been reserved for issuance. No options have been granted, exercised or
forfeited.
 
     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 options 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 or the excess of the market price of the stock over the exercise price on
the
 
                                       23
<PAGE>   26
 
                        COMPLETE WELLNESS CENTERS, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
8. STOCK OPTION PLAN -- (CONTINUED)

measurement date. The Company has recorded $0 and $1,050 of compensation expense
and $1 and $10,595 of consulting expense related to stock options granted below
market value as of December 31, 1995 and 1996, respectively.
 
     Had compensation costs for the Company's stock option plan been determined
based on the fair value at the date of grant for awards in 1996 consistent with
the provisions of SFAS 123, the Company's net loss and loss per share would have
been as indicated below:
 
<TABLE>
<CAPTION>
                                                                              1996
                                                                            ---------
        <S>                                                                 <C>
        Net loss -- as reported..........................................   $(990,693)
        Net loss -- pro forma............................................   $(993,221)
        Loss per share -- as reported....................................   $    (.70)
        Loss per share -- pro forma......................................   $    (.70)
</TABLE>
 
     The effect of SFAS 123 on pro forma 1995 net loss is insignificant.
 
     For 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. The weighted average fair value of
options granted during the year was $.01.
 
     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.
 
9. COMMITMENTS
 
     The Company's Chief Executive Officer's (employed since inception of the
Company) employment contract required him to serve without cash compensation
until July 1, 1996. As of July 1, 1996, he began accruing compensation at
$90,000 per annum, payable upon the closing of an IPO. The Company's Chief
Operating Officer's (employed in the second quarter of 1996) employment contract
required him to serve without cash compensation until the closing of an IPO.
 
     The Company leases certain furniture and equipment located at the corporate
office from its Chief Executive Officer. The lease payments are $1,000 per month
and are on a month-by-month basis.
 
     In September 1996, the Company entered into a master license agreement (the
"License Agreement") with Bally Total Fitness Corporation ("Bally's"), with
respect to the development of Integrated Medical Centers within selected Bally's
health clubs throughout the United States. Pursuant to the License Agreement,
the Company will pay Bally's a license fee equal to the greater of $15 ($10 for
the first year) per square foot of the space used by the Integrated Medical
Center or 12.5% of the fees the Company receives for its services to each
Integrated Medical Center the Company develops at a Bally's Total Fitness
Center. The initial term of the license agreement is five years, with five
one-year mutual renewals. Bally's may terminate the agreement as to an
Integrated Medical Center after September 16, 1998 absent the periodic payment
of certain minimum license fees with respect to that Integrated Medical Center.
The Company is developing an Integrated Medical Center at Bally Total Fitness
Center in White Marsh, Maryland. If it meets the
 
                                       24
<PAGE>   27
 
                        COMPLETE WELLNESS CENTERS, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
9. COMMITMENTS -- (CONTINUED)

Company's expectations, the Company expects to develop additional Integrated
Medical Centers at other Bally's Total Fitness Centers. In such event, the
Company expects to select Bally's Total Fitness Centers located near other
Integrated Medical Centers. Integrated Medical Centers developed pursuant to the
License Agreement will not treat patients covered by any federal or state funded
health care program.
 
10. PRO FORMA NET LOSS PER COMMON SHARE
 
     The Company's pro forma net loss per share calculations are based upon the
weighted average number of shares of Common Stock outstanding and the number of
shares of Common Stock resulting from the assumed conversion of the Series A
Preferred Stock. Pursuant to the requirements of the Securities and Exchange
Commission (SEC) Staff Accounting Bulletin No. 83, options and warrants to
purchase Common Stock issued at prices below the initial public offering price
during the twelve months immediately preceding the initial filing of the
registration statement relating to the IPO have been included in the computation
of net loss per share as if they were outstanding for all periods presented
(using the treasury stock method, assuming repurchase of common stock at the
estimated IPO price). Subsequent to the Company's IPO, options and warrants
under the treasury stock method will be included to the extent they are
dilutive.
 
     The following table summarizes the computations of share amounts used and
the computation of pro forma net loss per common share presented in the
accompanying statements of operations:
 
<TABLE>
<CAPTION>
                                                                         DECEMBER 31,
                                                                    -----------------------
                                                                      1995          1996
                                                                    ---------    ----------
    <S>                                                             <C>          <C>
    Common and common equivalent shares:
         Number of shares of common stock outstanding............     567,300       714,967
         Assumed conversion of the preferred stock as of January
           1, 1995...............................................     145,800       145,800
                                                                    ---------    ----------
         Number of shares of common stock outstanding during the
           period, assuming conversion of the preferred stock as
           of January 1, 1995....................................     713,100       860,767
         Options to purchase common stock issued within one year
           of registration statement using the treasury stock
           method................................................      40,795       563,521
                                                                    ---------    ----------
              Total common and common equivalent shares of stock
                considered outstanding during the year...........     753,895     1,424,288
                                                                    =========     =========
    Net loss.....................................................   $(195,889)   $ (990,693)
                                                                    =========     =========
    Pro forma net loss per common and common equivalent shares...   $   (0.26)   $    (0.70)
                                                                    =========     =========
</TABLE>
 
11. 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
Senior Director of Operations and Development, 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,
 
                                       25
<PAGE>   28
 
                        COMPLETE WELLNESS CENTERS, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
11. RELATED PARTY -- (CONTINUED)

upon termination of the employment agreement between Dr. Kaplan and the Company,
or by JEM's failure to meet certain performance goals.
 
     The Company has advanced approximately $23,000 to the Chairman of the Board
without interest at December 31, 1996. The amount has been repaid in 1997.
 
12. CONTINGENCIES
 
  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 Center 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 statements.
 
  Consulting Agreement
 
     In November 1996, the Company entered into a five-year 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 Medial 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 20% of the Company's integration fee under such agreement during the initial
term of the agreement, (ii) a fixed fee not to exceed $350, and (iii) a bonus of
$10,000 for each of the first five such agreements and $5,000 for each of the
next 25 such agreements. In addition, the Company granted Kats Management,
subject to a vesting schedule, nonqualified options to purchase 11,000 shares of
Common Stock under the Company's 1994 Stock Option Plan. The Company neither
paid nor will pay any percentage-based compensation under the Kats Agreement
pending review of the agreement with counsel.
 
13. SUBSEQUENT EVENTS
 
  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 $.0001665, and 1 million
redeemable common stock purchase warrants were sold on a public market for $6
per share and $.01 per warrant, respectively. Net proceeds to the Company after
expenses of the Offering were $4,965,000. In conjunction with the offering, all
of the Preferred Stock 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. The 1996 pro forma balance sheet (Unaudited)
assumes that the Offering was closed as of December 31, 1996. The pro forma
balance sheet also reflects the
 
                                       26
<PAGE>   29
 
                        COMPLETE WELLNESS CENTERS, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
13. SUBSEQUENT EVENTS -- (CONTINUED)

repayment of the notes payable, convertible note payable, accrued interest and
wages and certain accounts payable that was repaid with the proceeds of the
Offering.
 
  Integrated Medical Centers
 
     As of April 7, 1997, the Company was managing 26 Integrated Medical Centers
and had signed contracts with Affiliated Chiropractors to develop 64 additional
Integrated Medical Centers. The Company estimates the costs of fully integrating
these new clinics to be approximately $1,300,000.
 
     The CWC, LLC ceased operating one Integrated Medical Center in January 1997
and plans to dissolve the Medcorp after having terminated its agreement with the
affiliated chiropractor and the related management company for material breach.
The Company anticipates no material adverse financial effect as a result of such
termination.
 
                                       27
<PAGE>   30
 
ITEM 8.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
         FINANCIAL DISCLOSURE
 
     Not applicable.
 
                                    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>
                        NAME                            AGE    YEAR FIRST ELECTED    YEAR OF EXPIRATION
-----------------------------------------------------   ---    ------------------    ------------------
<S>                                                     <C>    <C>                   <C>
C. Thomas McMillen...................................   44            1994                  1997
E. Eugene Sharer.....................................   63            1996                  1997
Robert J. Mrazek.....................................   51            1995                  1997
James T. McMillen....................................   51            1994                  1997
Robert S. Libauer....................................   77            1995                  1997
Eric S. Kaplan, D.C. ................................   44            1997                  1997
</TABLE>
 
  (b) IDENTIFICATION OF EXECUTIVE OFFICERS
 
<TABLE>
<CAPTION>
                              NAME                                  AGE    YEAR FIRST SERVED AS OFFICER
-----------------------------------------------------------------   ---    ----------------------------
<S>                                                                 <C>    <C>
C. Thomas McMillen...............................................   44                 1994
  Chairman of the Board
  and Chief Executive Officer

E. Eugene Sharer.................................................   63                 1996
  President, Chief Operating Officer,
  Chief Financial Officer, and Treasurer

Danielle F. Milano, M.D. ........................................   41                 1996
  Vice President -- Medical Affairs
  and Secretary

Eric S. Kaplan, D.C. ............................................   44                 1997
  Senior Vice President
</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. Mr.
McMillen is currently a member of the Board of Directors of Kellstrom
Industries, Inc., Commodore Applied Technologies, Inc., CHG Inc., a subsidiary
of Chemring Group, PLC, and Orion Acquisition Corporation I (of which he is also
the secretary and treasurer). Mr. McMillen was also a director of Integrated
Communication Network, Inc. ("ICNI") until his resignation in December 1996. In
July and September 1996, two class action lawsuits were filed against ICNI and
all of its directors and officers alleging that the prospectus for ICNI's
initial public offering in June 1995 did not adequately disclose certain risks
associated with an investment in its securities. Mr. McMillen became a director
of ICNI upon the effectiveness of the
 
                                       28
<PAGE>   31
 
registration statement of which such prospectus formed a part. 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. 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. 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.
 
     Eric S. Kaplan, D.C., has been Senior Vice President and a director since
April 1997. He served as Senior Director of Operations and Development from
August 1996 to April 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.
 
     Robert S. Libauer has been a director of the Company since June 1995. Since
1971, he has been the managing partner of Libauer and Company, a financial
consulting firm.
 
     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.
 
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....................................................    1996        *
  Chief Executive 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.
 
                                       29
<PAGE>   32
 
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. In addition, each of the Company's directors receives
reimbursement of all ordinary and necessary expenses incurred in attending any
meeting or any committee meeting of the Board of Directors. Currently, all
directors hold office until the next annual meeting of stockholders and until
their successors have been duly elected and qualified. The Company's executive
officers are appointed annually and serve at the direction of the Board of
Directors, subject to the terms of existing employment agreements.
 
EMPLOYMENT AGREEMENTS
 
     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 shall
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. 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.
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.
 
     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 13,333 shares and will
vest as to 16,667 shares on August 26, 1997 and as to 16,667 shares on August
26, 1998. The agreement also provides, among other
 
                                       30
<PAGE>   33
 
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 and Sharer and with
Drs. Milano and 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.
 
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 February
24, 1997, options to purchase 362,166 shares of Common Stock at a weighted
average per share exercise price of $0.60 were outstanding. A total of 167
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, which expires in September 2006, will be 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 February 24, 1997,
options to purchase an aggregate of 24,000 shares, exercisable at the IPO price
per share for a ten-year period, were to be granted to all three of the members
of the Company's Advisory Board.
 
                                       31
<PAGE>   34
 
     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. No
options had been granted under the 1996 Professionals Plan as of March 31, 1997.
 
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, 10% to Dr. Milano,
and 20% to Dr. Kaplan, with 10% 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 February 24, 1997 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
                                                                    OF CLASS
                                                                  BENEFICIALLY      PERCENTAGE OF CLASS
            NAME AND ADDRESS OF BENEFICIAL OWNER                     OWNED          BENEFICIALLY OWNED
-------------------------------------------------------------   ----------------    -------------------
<S>                                                             <C>                 <C>
COMMON STOCK
C. Thomas McMillen(1)........................................        394,500               21.2%
725 Independence Avenue, S.E.
Washington, D.C. 20003

Robert S. Libauer(2).........................................         79,199                4.2%
3701 Old Court Road, Unit 9
Baltimore, MD 21208

Danielle F. Milano, M.D.(3)..................................         22,667                1.2%
725 Independence Avenue, S.E.
Washington, D.C. 20003

Robert J. Mrazek(4)..........................................         16,500                 *
301 Constitution Ave., N.E.
Washington, D.C. 20002
</TABLE>
 
                                       32
<PAGE>   35
 
<TABLE>
<CAPTION>
                                                                NUMBER OF SHARES
                                                                    OF CLASS
                                                                  BENEFICIALLY      PERCENTAGE OF CLASS
            NAME AND ADDRESS OF BENEFICIAL OWNER                     OWNED          BENEFICIALLY OWNED
-------------------------------------------------------------   ----------------    -------------------
<S>                                                             <C>                 <C>
E. Eugene Sharer(5)..........................................         16,667             *
725 Independence Avenue, S.E.
Washington, D.C. 20003

James J. McMillen, M.D.(4)...................................          6,000             *
4004 Miller Road
St. Joseph, MO 64505

Reach Laboratories, Inc.(6)..................................        110,000                5.9%
1000 NBC Center
Lincoln, NE 68508

R. Michael Floyd.............................................         72,866                3.9%
5817 Ogden Court
Bethesda, MD 20816
All officers and directors as a group (six persons)..........        513,033               26.9%
</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.
 
(2) Includes 6,333 shares subject to warrants currently exercisable.
 
(3) Includes 16,667 shares subject to stock options currently exercisable.
    Excludes 3,333 shares subject to warrants that are currently exercisable and
    owned by Dr. Milano's father, as to which she disclaims beneficial interest.
 
(4) Mr. Mrazek and Dr. McMillen have each given Mr. McMillen an irrevocable
    proxy to vote their respective shares until December 31, 2000.
 
(5) Includes 6,667 shares subject to stock options currently exercisable. Does
    not include 33,333 shares subject to stock options that became exercisable
    on April 1, 1997.
 
(6) The beneficial owners of Reach Laboratories, Inc., are Richard R. Endacott
    and Janice G. Peterson.
 
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. As managing member the Company
receives (i) a base fee of $7,500 per month, increased by $2,000 per month for
each clinic acquired and/or managed by CWC LLC in excess of two clinics, and
(ii) a one-time commission in an amount equal to 1% of the prior year's revenue
of any new clinic acquired and/or managed by CWC LLC. In addition, the Company
is entitled to receive 50% of any cash flow distributions after the other
members of CWC LLC have received a 12% preferred cumulative non-compounded
annual return. 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
 
                                       33
<PAGE>   36
 
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; and Robert Libauer, a director of the Company, holds 2 19/50 Class
A Units. Each such person 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 January 31, 1997, Dr. Milano served as an officer, director, and the
sole stockholder of Complete Wellness Medical Center of East Main Street,
Carbondale, P.C., Carbondale, Illinois ("CWC Carbondale"). In October 1996, Dr.
Milano, CWC Carbondale, and the Company entered into a Stock Transfer Agreement
(the "Stock Transfer Agreement") pursuant to which (i) Dr. Milano agreed not to
sell, encumber, or otherwise transfer the shares of stock in CWC Carbondale
owned by her without the written consent of CWC Carbondale 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 State of Illinois. 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 CWC
Carbondale, and an Agreement for Sale of Business by Transfer of Capital Stock
under which Dr. Milano agreed to transfer her shares in CWC Carbondale 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 CWC
Carbondale and the Company, from amending the charter or bylaws of CWC
Carbondale, agreeing to the merger or consolidation of CWC Carbondale with or
into another corporation, dissolving or liquidating CWC Carbondale, authorizing
 
                                       34
<PAGE>   37
 
the issuance of any additional shares of stock of CWC Carbondale, 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 CWC Carbondale.
 
     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) EXHIBITS.
 
<TABLE>
<CAPTION>
EXHIBIT NUMBER                                     DESCRIPTION
-------------- -----------------------------------------------------------------------------------
<C>            <S>  <C>
     3.2*      --   By-Laws of the Company
     4.1*      --   Specimen Common Stock Certificate
     4.2*      --   Form of proposed Representative's Warrant Agreement between the Company and
                    the Representative, including form of Representative's Warrant Certificate
     4.3*      --   Form of Warrant Agreement between the Company and American Stock Transfer &
                    Trust Company as Warrant Agent, including form of Warrant Certificate
    10.1*      --   Form of Stockholders' Agreement dated March 20, 1995 among the Company,
                    certain holders of its Common Stock, and all holders of its Series A, 12%
                    Cumulative Convertible Preferred Stock
    10.2*      --   Form of Warrant issued by the Company to each person or entity that provided
                    funds to the Company in connection with a financing in November 1995
    10.3*      --   Form of Promissory Note and Warrant issued by the Company to each person or
                    entity that provided funds to the Company in connection with a bridge
                    financing completed in August 1996 and related to Loan and Security Agreement
    10.4*      --   Form of Warrant issued to placement agent for the bridge financing completed
                    in August 1996
    10.5*      --   Form of Management and Security Agreement
    10.6*      --   Form of Integrated Medical Center Management and Security
    10.7*      --   Form of Affiliated Chiropractor Employment Agreement
    10.8*      --   Form of Medical Doctor Employment Agreement
    10.9*      --   Form of Physical Therapist Employment Agreement
    10.10*     --   Form of Acupuncturist Employment Agreement
    10.11*     --   Form of Nutrition Counselor Employment Agreement
    10.12*     --   Form of Fitness Specialist Employment Agreement
    10.13*     --   Form of Promissory Note from Integrated Medical Center
    10.14*     --   Form of Guaranty from Affiliated Chiropractor
    10.15*     --   Form of Medical Office Sublease
    10.16*     --   Form of Equipment Sublease
    10.17*     --   Employment Agreement dated as of July 1, 1996 between the Company and C.
                    Thomas McMillen
    10.18*     --   Employment Agreement dated as of March 21, 1996 between the Company and E.
                    Eugene Sharer
</TABLE>
 
                                       35
<PAGE>   38
 
<TABLE>
<CAPTION>
EXHIBIT NUMBER                                     DESCRIPTION
-------------- -----------------------------------------------------------------------------------
<C>            <S>  <C>
        10.19* --   Employment Agreement dated as of January 1, 1996 between the Company and
                    Danielle F. Milano
        10.21* --   Employment Agreement dated as of August 26, 1996 between the Company and Eric
                    S. Kaplan
        10.22* --   Consulting Agreement dated as of November 21, 1996 between the Company and
                    Kats Management, L.L.C.
        10.23* --   Consulting Agreement dated as of August 26, 1996 between the Company and
                    J.E.M., Inc.
        10.24* --   Company's 1994 Stock Option Plan
        10.25* --   Company's 1996 Stock Option Plan
        10.26* --   Company's 1996 Restricted Stock Option Plan for Health Care Professionals
        10.27* --   Company's Executive Bonus Plan for Key Executives
        10.28* --   Master License Agreement dated as of September 16, 1996 between the Company
                    and Bally Total Fitness Corporation
        10.29* --   Management Subcontract Agreement dated as of November 1, 1996 between the
                    Company and Integrated Physicians Management Co., LLC
        10.30* --   Subordinate Chiropractor Employment Agreement
         21.1* --   Subsidiaries of the Company as of February 19, 1997
</TABLE>
 
---------------
* Previously filed as an exhibit to the Company's Registration Statement on Form
  SB-2, as amended, Registration No. 333-18291, and incorporated herein by
  reference.
 
  (b) REPORTS ON FORM 8-K.
 
     The Company filed no reports on Form 8-K during 1996.
 
                                       36
<PAGE>   39
 
                                   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/ E. EUGENE SHARER
       ------------------------------
       E. EUGENE SHARER, PRESIDENT        April 15, 1997
 
     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>
<S>                                              <C>
/s/ C. THOMAS MCMILLEN
---------------------------------------------
C. THOMAS MCMILLEN, CHAIRMAN OF THE BOARD,
CHIEF EXECUTIVE OFFICER, AND DIRECTOR             April 15, 1997
 
/s/ E. EUGENE SHARER
---------------------------------------------
E. EUGENE SHARER, PRESIDENT, CHIEF
OPERATING OFFICER, CHIEF FINANCIAL OFFICER,
TREASURER AND DIRECTOR                            April 15, 1997
 
/s/ ROBERT S. LIBAUER
---------------------------------------------
ROBERT S. LIBAUER, DIRECTOR                       April 15, 1997
 
/s/ JAMES T. MCMILLEN
---------------------------------------------
JAMES T. MCMILLEN, DIRECTOR                       April 15, 1997
 
            /s/ ROBERT J. MRAZEK
---------------------------------------------
         ROBERT J. MRAZEK, DIRECTOR               April 15, 1997
 
             /s/ ERIC S. KAPLAN
---------------------------------------------
          ERIC S. KAPLAN, DIRECTOR                April 15, 1997
</TABLE>
 
                                       37