SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D.C. 20549
                                  FORM 10-K

     [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. OR

     [ ]  TRANSITION  REPORT  PURSUANT TO SECTION 13 OR 15(D) OF THE  SECURITIES
          AND EXCHANGE ACT OF 1934.

                         COMMISSION FILE NUMBER: 0-26502
                         COMMUNITY CARE OF AMERICA, INC.
             (Exact name of registrant as specified in its charter)

             DELAWARE                                  52-1823411
  (State or other jurisdiction of                   (IRS Employer
  incorporation or organization)                  Identification No.)

                     3050 NORTH HORSESHOE DRIVE, SUITE 260,
                              NAPLES, FLORIDA 34104
                    (Address of principal executive offices)

      REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (941) 435-0085

       SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE

SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: COMMON STOCK,
                               $.0025 PAR VALUE


   Indicate  by check mark  whether  the  registrant  (1) has filed all  reports
required to be filed by Section 13 or 15(d) of the  Securities  Exchange  Act of
1934  during  the  preceding  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. [X] Yes [ ] No

   Indicate by check mark if disclosure of  delinquent  filers  pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best  of  the  registrant's   knowledge,  in  definitive  proxy  or  information
statements  incorporated  by  reference  in Part  III of this  Form  10-K or any
amendment to this Form 10-K. [ ]


   The  aggregate  market  value of Common Stock held by  non-affiliates  of the
registrant  as of March  31, 1997, was  approximately  $19,161,858.  Solely  for
purposes of this computation,  the registrant's directors and executive officers
have been deemed to be  affiliates.  Such  treatment  is not intended to be, and
should not be construed to be, an admission by the  registrant or such directors
and officers that any of such persons are  "affiliates," as that term is defined
under the Securities Act of 1933.

   The number of shares of common stock  outstanding  as of March 31, 1997,  was
7,597,801.




<PAGE>

                              TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                                                       PAGE
                                                                                      ------
<S>        <C>                                                                        <C>
                                     PART I

Item 1.    Business
           General                                                                     1
           Acquisition History                                                         2
           Business Strategy                                                           3
           Services                                                                    4
           Revenue Sources and Reimbursement                                           6
           Government Regulation                                                       8
           Competition                                                                10
           Employees                                                                  11
           Insurance                                                                  11
Item 2.    Properties                                                                 11
Item 3.    Legal Proceedings                                                          13
Item 4.    Submission of Matters to a Vote of Security Holders                        13
           Executive Officers of the Company                                          14

                                     PART II

Item 5.    Market for Registrant's Common Stock and Related Stockholder Matters       15
Item 6.    Selected Financial Data                                                    15
Item 7.    Management's Discussion and Analysis of Financial Condition and 
           Results of Operations                                                      17
Item 8.    Financial Statements and Supplementary Data                                24
Item 9.    Changes in and Disagreements with Accountants on Accounting and 
           Financial Disclosure                                                       24
</TABLE>
                                    PART III


   The information called for by Part III (Items 10, 11, 12 and 13) of Form 10-K
(except information as to the Company's  executive  officers,  which information
follows  Item 4 in this  Report) is  incorporated  herein by  reference  to such
information which will be contained in the Company's  definitive Proxy Statement
to be used in connection  with the Company's  1997 Annual  Meeting,  which Proxy
Statement will be filed pursuant to Regulation 14A under the Securities Exchange
Act of  1934 or in an  amendment  to  this  Report,  which  Proxy  Statement  or
amendment will be filed within 120 days following the end of the year covered by
this Report.


<TABLE>
<CAPTION>
<S>         <C>                                                                      <C>
                                     PART IV
Item 14.    Exhibits, Financial Statement Schedules and Reports on Form 8-K          26
            Signatures                                                               32

</TABLE>


<PAGE>

                          FORWARD LOOKING STATEMENTS

   When used in this Report,  the words  "anticipates",  "believes",  "expects",
"intends",  "may",  "plans",  "seeks to" and "strategy is to" and  variations of
such words and similar  expressions  are  intended  to identify  forward-looking
statements that involve risks and uncertainties.

   In order to keep its  stockholders and the investment  community  informed of
the  Company's  future  plans,  the Company and certain  officers,  directors or
employees  of  the  Company,   acting  on  behalf  of  the  Company,   may  make
forward-looking  statements  concerning,   among  other  things,  the  Company's
revenues, earnings, capital expenditures,  capital structure and other financial
items, plans and objectives and economic performance. Forward-looking statements
may be made in  writing  or orally.  The  Company's  ability to do this has been
fostered by the Private Securities  Litigation Reform Act of 1995 which provides
a "safe harbor" for forward-looking statements to encourage companies to provide
prospective   information  so  long  as  those  statements  are  accompanied  by
meaningful cautionary statements  identifying important factors that could cause
actual results to differ  materially from those discussed in the statement.  The
Company  believes it is in the best interest of the Company and its stockholders
to take advantage of the "safe harbor" provisions of that Act. Among the factors
that could cause the Company's future actual results, performance or achievement
to  differ  materially  from  those  described  or  implied  in  forward-looking
statements  (including  any that may be  contained  in this Report) are: (a) the
Company's  ability to obtain,  on a timely and economically  feasible basis, the
financing  required  to  (i)  meet  its  various  obligations  (including  those
discussed in Notes 6 and 13 of the Notes to the Company's Consolidated Financial
Statements),  (ii) increase its working  capital and tangible net worth in order
to meet  the  working  capital  maintenance covenants  and  tangible  net  worth
covenant  contained in the Company's  master  leases with Health and  Retirement
Properties  Trust  (as  discussed  in  Note 7 of  the  Notes  to  the  Company's
Consolidated Financial Statements), and (iii) finance any future acquisitions or
other  transactions  that the  Company  may  consider  to  implement  its growth
strategy (see "Business-Acquisition History",  "Business-Business Strategy," and
"Business-Services"  and  Note 13 of the  Notes  to the  Company's  Consolidated
Financial  Statements);  (b) the  Company's  ability to  successfully  integrate
acquisitions  and  effectuate  economies of scale and  otherwise  implement  its
growth strategy (see "Business-Business  Strategy");  (c) the government climate
towards  healthcare  (see  "Business-Revenue   Sources  and  Reimbursement"  and
"Business-Government  Regulation");  (d) the  continuation of third-party  payor
programs,  including  Medicare  and  Medicaid,  at  current  benefit  levels and
reimbursement rates (see "Business-Revenue Sources and Reimbursement");  (e) the
Company's   ability  to  remain  in  compliance   with  the   requirements   for
participation  in such programs,  as well as remain in compliance with the other
government  regulations  to  which  it  is  subject  (see   "Business-Government
Regulation");  (f) the level of, and the Company's ability to meet,  competition
(see  "Business-Competition");  (g) the Company's  ability to avoid  significant
claims and defense costs, and maintain adequate  insurance to cover any material
claims  and costs it may  incur,  which may arise out of  malpractice  and other
claims (see "Business-Insurance"); (h) the Company's ability to retain qualified
personnel (see "Business-Employees"); and (i) general economic conditions.

                                    PART I


ITEM 1: BUSINESS

GENERAL

   Community  Care of America,  Inc.  (unless the context  indicates  otherwise,
together with its  subsidiaries,  "CCA" or the "Company")  develops and operates
skilled nursing  facilities in medically  underserved rural  communities.  CCA's
strategy is to enter  rural areas  through the  acquisition  of  long-term  care
facilities  which serve as platforms from which to develop networks that provide
an array of healthcare and related services. The Company believes that long-term
care facilities in rural communities generally represent underutilized assets to
which  other  services  can be  added to  extend  high  quality,  cost-effective
solutions to address  unmet basic  healthcare  needs for those who live in rural
locations.   The  Company's   strategy  is  designed  to  coordinate   flexible,
community-based healthcare services, includ-


<PAGE>

ing long-term care,  rehabilitation,  adult day care, home healthcare,  assisted
living and  transportation  services.  The Company  also  affiliates  with other
healthcare  providers  whose  patients can benefit from  utilizing the Company's
other services.  During 1996, the Company achieved a growth of 37.4% in revenues
(before a $1.9 million  revenue  adjustment in 1996) above 1995 levels which was
largely attributable to the acquisition or management of eight facilities in the
Southeast.

   As of March 31,  1997,  the  Company  operated  54  licensed  long-term  care
facilities  with 4,450 licensed beds, one 22-bed rural  hospital,  two physician
practices,  two   primary  care  clinics,   one  rural  healthcare  clinic,  one
outpatient  rehabilitation  center, one child day care center, a home healthcare
agency and 115 assisted  living units  within six of the  communities  which the
Company serves.  The Company currently operates in Alabama,  Colorado,  Florida,
Georgia, Iowa, Kansas, Louisiana, Maine, Missouri, Nebraska, Texas and Wyoming.

   The Company was  incorporated on December 28, 1992 as a Delaware  corporation
under the name ElderCare of America, Inc. and changed its name to Community Care
of America,  Inc. on October 13, 1993. The Company's principal executive offices
are located at 3050 North Horseshoe Drive, Suite 260, Naples, Florida 34104, and
its telephone number is (941) 435-0085.

ACQUISITION HISTORY

   The Company began  operations in December 1993 with its acquisition of all of
the capital stock of MeritWest and the  refinancing  of the acquired  facilities
through  mortgage and lease  arrangements  (the "MeritWest  Transaction").  As a
result, the Company began operations with 28 long-term care facilities, of which
14 were owned, 13 were leased and one was managed,  in six states.  In May 1995,
the management agreement with respect to the managed facility was terminated and
in January 1996, the Company closed one of the acquired facilities.  On November
1, 1994,  the  Company  entered  into  long-term  leases  for,  and  assumed the
operation of, two additional long-term care facilities in two states.  Effective
February 1, 1995,  the Company  acquired a 22-bed  rural  hospital,  a physician
practice and two associated primary care clinics and a home healthcare agency in
Alabama  (the  "Georgiana  Transaction").  The Company is  presently  engaged in
negotiations to sell these operations  (together with another physician practice
and  associated  primary  care  clinic in the same  geographic  area,  which the
Company  acquired in August 1995).  On April 1, 1995,  the Company leased 11 and
purchased  three  additional  long-term care facilities in four of the states in
which the Company  already had a presence.  Effective  July 1, 1995, the Company
leased three  additional  long-term  care  facilities in Alabama.  On August 15,
1995, the Company  assumed the  management of nine long-term care  facilities in
Maine pursuant to a series of management agreements (which also contemplated the
Company managing one additional facility upon completion of construction and the
achievement  of  certain  occupancy  levels).  As part of the  arrangement,  the
Company  also  obtained an option to acquire  these ten  facilities  pursuant to
which the Company  made a $5.0  million  non-refundable  deposit.  On August 15,
1996,  the Company  terminated  these  arrangements  as they were not generating
sufficient cash flows to pay their management fees to the Company. This resulted
in charges  to  earnings  of $9.9  million.  See  "Management's  Discussion  and
Analysis of Financial  Condition and Results of Operations," and Notes 12 and 16
of the  Notes  to the  Company's  Consolidated  Financial  Statements  contained
elsewhere  in this Report.  Effective  October 1, 1995,  the Company  acquired a
long-term  care  facility  in Nebraska  and,  on  November 1, 1995,  acquired an
outpatient head trauma therapy center in Maine.  Effective  January 1, 1996, the
Company acquired a certified rural healthcare clinic in Florida.  As a result of
a series of  transactions,  on May 16, 1996,  the Company  began  leasing   five
long-term  care  facilities  in  Georgia  and one  long-term  care  facility  in
Louisiana  and entered  into an agreement  to manage an  additional  facility in
Texas.  During the  second  quarter  of 1996,  as a result of their  unfavorable
performance,  the Company  determined to close four primary care  clinics,  four
adult  day  care  centers  and  one   physician   practice.   This  resulted  in
non-recurring charges to earnings of $4.5 million. See "Management's  Discussion
and Analysis" and Note 12 of the Notes to the Company's  Consolidated  Financial
Statements.  The terms and certain effects of each of the foregoing transactions
are  described  in  greater  detail  in  Note 2 of the  Notes  to the  Company's
Consolidated  Financial  Statements contained elsewhere in this Report. See also
"Management's  Discussion  and  Analysis of Financial  Condition  and Results of
Operations."

                                2


<PAGE>

   The  continuation  of the  Company's  strategy of entering  rural  markets by
acquiring a long-term  care  facility and  improving  and expanding the services
offered by the facility  will require  substantial  capital  investment  for the
acquisition  and  integration  of  the  facilities,   improvements  to  acquired
facilities  and working  capital to expand the Company's  operations  generally.
There can be no assurance that additional borrowings or other sources of capital
will be available to the Company or, if available, as to the terms on which they
may  be  obtained.  See  "Management's  Discussion  and  Analysis  of  Financial
Condition and Results of Operations -- Liquidity and Capital Resources."

   The Company has engaged the investment banking firm of Smith Barney,  Inc. as
the Company's  financial  advisor to assist the Company in evaluating  strategic
alternatives for enhancing shareholder value, including the possible sale of the
Company.


BUSINESS STRATEGY


   The Company's business strategy is to improve and expand the services offered
in rural skilled nursing facilities to provide cost-effective services to people
who live in medically  underserved rural areas throughout the United States. CCA
has  historically  entered these markets by acquiring  existing  long-term  care
facilities  or, in one case,  a small rural  hospital.  CCA works with  existing
local  practitioners  and  other  providers  in these  communities  to create an
integrated delivery network that allows access to quality healthcare services.

   The Company  believes that  long-term  care  facilities in rural  communities
generally represent underutilized assets to which other services can be added to
extend high quality,  cost-effective solutions to address unmet basic healthcare
needs for rural Americans.  By providing  professional  management,  introducing
management  information  systems and making  capital  improvements,  the Company
seeks to improve the  quality  and  availability  of local  healthcare  services
within targeted rural communities.

   The  Company's  target market is rural  communities  with  populations  under
50,000 that the Company believes are medically underserved. However, the Company
has  acquired  and  may in the  future  acquire  facilities  located  in  larger
communities  if the  facility  is included  in a group of  facilities  which the
Company desires to acquire.  In determining  which markets to enter, the Company
assesses  the needs and  available  healthcare  resources  in areas  meeting its
population and demographic profile to determine if the Company's strategy can be
profitably implemented.

   The Company's  strategy  involves a two-phased plan. The first phase involves
conforming  acquired  facilities to the Company's basic operating  standards and
procedures.  The Company also  undertakes a  community-wide  survey and performs
local  market  research,  including  consultation  with  community  leaders  and
healthcare and social  service  providers,  to analyze the healthcare  needs and
available  resources  in the  community.  Based on this  analysis,  the  Company
proceeds, where appropriate,  to implement the second strategic phase within the
community.  This phase involves the development of an expanded  delivery network
designed to provide a broad array of healthcare and healthcare related services.

   Operational Improvement

   Acquired facilities generally have a basic  infrastructure  largely in place,
including  a  skilled   nursing   staff,   clinical   aides,   qualified   local
practitioners,  a support staff,  administrators and a medical director.  In the
first phase of the Company's strategy, the Company improves an acquired facility
by providing professional management, introducing management information systems
and making capital improvements  necessary to attain the Company's standards for
quality of care and operating  efficiency and, where such certification does not
exist at the time of acquisition, meet the standards for Medicare certification.
The Company has substantially completed this process at most of the 54 currently
owned,  leased or managed  long-term care facilities.  The Company believes that
enhanced  long-term care facilities  provide a base for delivering a broad array
of  healthcare  and  healthcare  related  services.  This process  involves four
strategic investments:


   o Capital  Improvements.  The Company makes repairs and  improvements  to the
     physical plant,  builds or expands areas for therapy  services and upgrades
     equipment.  These  enhancements  to the  facility  are  designed to achieve
     compliance  with all pertinent  regulatory  standards and improve its image
     and reputation in the local community.

                                3

<PAGE>

   o Training.  The Company  invests in recruiting and training its employees to
     upgrade  clinical and management  skills and enhance the quality of patient
     care.  The Company  believes that these  programs for  employees  give it a
     competitive  advantage in  attracting  qualified  applicants  and result in
     reduced turnover and higher productivity.

   o Medicare  Certification.  The Company  generally  seeks to obtain  Medicare
     certification  for  those  acquired  long-term  care  facilities  that  are
     eligible to  participate  in the Medicare  program but were not  previously
     certified. Obtaining Medicare certification enables the Company to increase
     its  access  to  higher  acuity   patients  and  thereby   realize   higher
     reimbursement levels.


   o Information  Systems.  The Company automates medical records,  patient care
     plans,  financial  reporting  and  reimbursement.  The  Company has engaged
     Integrated  Health Services,  Inc. ("IHS") under a management  agreement to
     assist  the  Company in  providing  these  services,  as well as to provide
     certain financial,  accounting,  MIS,  reimbursement and ancillary services
     directly  to the  Company  for a term of five years  commencing  January 1,
     1997. See Note 14 of the Notes to the Consolidated Financial Statements.


   DEVELOPMENT OF THE INTEGRATED HEALTHCARE DELIVERY NETWORK


   The second  phase of the  Company's  strategy  involves  the  development  in
targeted rural communities of expanded  healthcare  services designed to provide
an array of  healthcare  services.  The  Company's  strategy is to identify  the
specific  needs of each  community  by  conducting  local  market  research  and
tailoring the array of services to meet those needs. The core services which may
be be offered by the Company include:

     o  Long-Term Care               o  Assisted Living
     o  Rehabilitation               o  Transportation 
     o  Home Healthcare              

   The Company's  strategy is designed to expand and  coordinate the delivery of
basic healthcare  services in underserved rural markets and to maximize profits,
while enhancing quality.  The Company intends to tailor the range of services it
provides  in each  network  based  upon  consultations  with local  leaders  and
healthcare and social service providers,  as well as local market research, that
enables  it to assess  community-specific  needs.  Based on this  analysis,  the
Company  intends  to  develop  and  operate,  alone or in  alliance  with  other
providers,  a broad array of healthcare and healthcare related services tailored
to the community's  unmet healthcare  needs. This strategy is designed to enable
patients  to avoid the  necessity  for  travel to  distant  locations  to obtain
services not available in their local communities. The Company's objective is to
utilize its rural healthcare  facilities to provide  accessible,  cost-effective
healthcare  and become the  provider  preferred  by  patients as well as payors,
physicians and other referral sources.

   The degree to which the Company will be able to expand the services  which it
may offer will  depend  upon its  ability to obtain  additional  financing.  See
"Management's  Discussion  and  Analysis of Financial  Condition  and Results of
Operations-Liquidity  and  Capital  Resources,"  and Note 13 of the Notes to the
Consolidated Financial Statements.


SERVICES

   The Company  intends to include at its facilities  those core services needed
by the particular  communities the Company serves. The Company believes that, by
linking and integrating the healthcare service components of its facilities,  it
will be well  positioned  to contract with managed care  organizations  in rural
markets. The core services of the Company's strategy are:


   Long-Term Care. CCA provides nursing, rehabilitation,  custodial services and
other long-term care to patients  resident at its 54 long-term care  facilities.
In addition to nursing  care,  which is provided on a 24-hour  basis by licensed
practical nurses and certified  nursing aides, the Company also provides a broad
range  of  support  services,   including  speech,   physical  and  occupational
rehabilitation  therapy,  recreational  activities,  social  services,  dietary,
housekeeping and laundry services and furnishes pharmaceuti-


                                4

<PAGE>

cal,  nutritional  and  medical  supplies.   Each  long-term  care  facility  is
supervised by a licensed healthcare administrator and employs a medical director
to supervise the delivery of healthcare  services to residents and a director of
nursing to  supervise  the  nursing  staff.  The  Company  maintains a corporate
quality  assurance  program  designed  to ensure  regulatory  compliance  and to
enhance the standard of care provided in each facility.

   Rural Hospital. The Company operates the Georgiana Doctors Hospital, a 22-bed
acute care hospital in Georgiana,  Alabama,  in  conjunction  with two physician
practices,  and a home healthcare  agency.  This rural delivery network serves a
county of approximately  22,000  residents.  The Company is presently engaged in
negotiations to sell  Georgiana Doctors Hospital (together with  its two related
primary care clinics and home healthcare  agency and two physician  practices in
Alabama).  In addition on May 1, 1996,  the Company  acquired  one  hospital and
obtained an option to acquire  three  additional  hospitals,  a  long-term  care
facility and a home care agency,  as well as to manage one additional  hospital,
all in  Georgia.  Largely as a result of an  inability  to obtain  financing  to
consummate the transaction,  on December 31, 1996, the Company sold the acquired
hospital back to the former  owners and  terminated  the  agreement  pursuant to
which it was to acquire the remaining facilities. This resulted in non-recurring
charges to earnings of approximately $4.4 million in the fourth quarter of 1996.
See "Management's  Discussion and Analysis of Financial Condition and Results of
Operations"  and  Note 12 to the  Notes  to  Consolidated  Financial  Statements
elsewhere in this Report.

   Out-Patient  Rehabilitation.   The  Company  currently  provides  out-patient
rehabilitation services at its Ashland, Nebraska and Saratoga, Wyoming long term
care  facilities.  The  Company  intends  to expand  this core  service at other
facilities.   Outpatient   rehabilitation  services  include  physical  therapy,
occupational therapy and speech therapy, and the Company intends to expand these
services to cover respiratory therapy. The rehabilitation services,  provided by
the Company's employees or independent contractors,  would typically be provided
at locations within the Company's facility for in-patients, as well as to others
in  the  surrounding  community  who  are  not  residents  of the  facility.  If
rehabilitation  services are provided at its  long-term  care  facilities  on an
outpatient  basis,  the  Company  intends  to  provide  separate  access  to its
facilities for such patients.  At some  locations,  the Company  intends to make
available  rehabilitation  services  in  facilities  adjacent  to  or  near  the
Company's  long-term  care facility.  In November  1995, the Company  acquired a
freestanding  outpatient  head  trauma  center  in Maine and, in April 1996, the
Company established another head trauma location in Lewiston, Maine.

   Home  Healthcare.  The Company intends to provide a broad range of healthcare
services  to  individuals  in  their  homes,   affording  these  individuals  an
alternative to institutional  care. The Company expects that these services will
be rendered by licensed and  registered  nurses,  therapists  and medical social
workers,  who  would  provide  services  such  as  intravenous   therapy,   pain
management,  ventilator care,  dressing changes,  injections,  administration of
medication and other nursing procedures.  In addition,  the Company expects that
personal  care  services  will be provided by home health  aides who will assist
patients  with their  activities of daily living.  At present,  home  healthcare
services are offered as part of the Company's  operations in Georgiana,  Alabama
and,  through a joint  venture,  at the Company's  long-term care  facilities in
Nebraska.

   Assisted Living.  The Company  presently has 115 assisted living units in six
of the  communities  it serves,  and intends to  construct  additional  separate
residences  adjacent to or in the vicinity of its long-term care facilities,  in
order to provide living units for adults who require some  assistance with their
daily living  activities.  Such services would be provided to individuals who do
not require the 24-hour  nursing care provided in the Company's  long-term  care
facilities,  but who may not be able to live  without  some form of  assistance.
Support  services  may  include  meals,  laundry,   housekeeping,   maintenance,
transportation  and social and recreational  activities.  In addition,  personal
care services,  including bathing,  dressing and grooming, as well as ambulatory
assistance, will be provided.

   Transportation  Services.  The Company  operates  vans,  primarily with wheel
chair  lifts,  and other  vehicles to  transport  patients  to and from  service
providers  within its  networks.  The Company views this service as an important
and integral  component of its  marketing  program as a means of  alleviating  a
major burden on the patient's family and facilitate patient  utilization of each
service the Company offers.

                                5


<PAGE>

   Other. In addition to its two physician practices in Alabama discussed above,
the Company operates a certified rural healthcare clinic in Arcadia, Florida.


REVENUE SOURCES AND REIMBURSEMENT

   General. The following table sets forth the sources of net patient service
revenues by payor type for the periods indicated:

<TABLE>
<CAPTION>
                           YEARS ENDED DECEMBER 31,
                          --------------------------
                            1994     1995     1996
                          -------- -------- --------
   <S>                    <C>      <C>      <C>
   Private pay and
   other................   36.3%    31.3%    30.1%
   Medicare.............   15.8     17.1     20.3%
   Medicaid.............   47.9     51.6     49.6%
                          -------- -------- --------
   Total................  100.0%   100.0%   100.0%
                          ======== ======== ========

</TABLE>


   The Company  believes  that the  foregoing  percentages  are not  necessarily
indicative  of the  relative  percentage  of  revenues  to be derived  from such
sources in the future.

   The Company's  revenues  from  long-term  care  services are  determined by a
number of factors,  including:  (i) the licensed bed capacity of its facilities,
(ii) the occupancy  rates of its  facilities,  (iii) the mix of patients and the
rates of  reimbursement  among  payor  categories  (private  pay,  Medicaid  and
Medicare) and (iv) the extent to which certain ancillary  services  available in
the Company's facilities are utilized by patients and paid for by the respective
payor  sources.  The Company  monitors  both  Medicaid and  Medicare  regulatory
developments and seeks to comply with all reporting  requirements with a view to
increasing reimbursement payments.

   Private Pay.  Private pay revenues  include payments from individuals who pay
directly for services without governmental assistance, commercial insurers, Blue
Cross   organizations,   HMOs,   preferred  provider   organizations,   workers'
compensation  programs and other similar  payment  sources.  Payments from these
private  pay  sources  may be  charge-based,  cost-based  or based on  contracts
negotiated with these payors. Many conditions treated by rehabilitation services
are covered by liability  insurance,  rather than health benefits  policies.  In
such  cases,  reimbursement  rates  are  established  on a  case-by-case  basis.
Although  the  level of  charges  by the  Company  to  private  patients  in its
facilities  is not subject to the same  regulatory  control as with  Medicaid or
Medicare,  its charges are still  generally  limited to customary and reasonable
charges for such healthcare services.  In addition,  many HMOs and other private
payors are under  pressure to contain or reduce costs  through  increasing  case
management  review of services,  lowering  reimbursement  rates and  negotiating
reduced contract pricing.

   Medicaid.   The  Medicaid  program  refers  to  various  state   administered
reimbursement  programs created by Federal law to provide a joint  Federal-state
medical  insurance  assistance  program for  individuals  who fit within defined
resource and income standards. Skilled nursing facilities, such as the Company's
long-term care facilities, are required to meet state licensing requirements and
Federal Omnibus Budget Reconciliation Act of 1987 ("OBRA-87") requirements to be
certified to receive  reimbursement  under applicable Federal and state Medicaid
guidelines.  Similarly,  hospitals  are  subject  to  regulation,  and must meet
certain standards for Medicaid  certification,  under both Federal law and state
health  codes,  which  vary  from  state to  state.  Medicaid  reimbursement  is
available for qualified  individuals in most state programs for long-term  care,
primary care, out-patient rehabilitation programs, assisted living and adult day
care programs.  States have a wide degree of flexibility in the establishment of
Medicaid reimbursement  systems, and Federal waivers permitting  experimentation
in the  methodology  of delivery of care to Medicaid  patients have been granted
with increasing  frequency.  These waiver programs have increased  substantially
the  number  of  Medicaid  patients  receiving  services  through  managed  care
intermediaries,  which can affect,  positively or negatively,  the amount of the
reimbursement  entitlement  for rural  hospitals and primary care provided in an
outpatient   setting.   Most  states  operate  on  the  basis  of  a  cost-based
reimbursement  system  under  which  the  reimbursement  rate for an  individual
healthcare facility is determined by cost reports filed on an annual basis.

   Most of the Company's  long-term care facilities  participate in the Medicaid
program.  The Medicaid  cost-based  reimbursement  system is a prospective  rate
system, subject to retroactive adjustment. Under

                                6

<PAGE>

a prospective  system,  per diem rates are  established  (generally on an annual
basis) based upon certain  historical  costs of  providing  services  during the
prior year,  adjusted to reflect  factors such as inflation  and any  additional
services required to be performed. Retroactive adjustments, if any, are based on
a recomputation of the applicable  reimbursement rate following an audit of cost
reports.  To date,  adjustments  from  Medicaid  audits  have not had a material
adverse effect on the Company. The Company believes that it has properly applied
the  various  payment  formulas  and that  any  future  adjustments  will not be
material, although there can be no assurance to that effect.

   Providers must accept  reimbursement from Medicaid as payment in full for the
services rendered. The provider may not bill the patient for services covered by
the Medicaid program but may bill the patient for noncovered services. There can
be no assurance that Medicaid  reimbursement  will be sufficient to cover actual
costs incurred by the Company with respect to Medicaid services rendered.  State
Medicaid plans also require that providers must be subject to governmental audit
to  ensure  the  propriety  of costs  incurred,  which are used as the basis for
payments.

   Certain  states are  studying  methods  for  reducing  expenses  under  their
Medicaid programs,  which initiatives could have an adverse effect on applicable
Medicaid rates. If enacted,  current Federal initiatives,  including a change in
the  methods  for  paying  the  Federal  share of  Medicaid  costs,  may cause a
reduction in the  availability  of Federal  Medicaid funds in future years.  The
Company cannot currently determine the potential effect of any such changes.

   The  Company  currently   operates  long-term  care  facilities  in  Alabama,
Colorado,  Georgia,  Iowa,  Kansas,  Louisiana,  Missouri,  Nebraska,  Texas and
Wyoming,  a rural  hospital  and three  primary  care  clinics in Alabama  and a
certified rural healthcare clinic in Florida.  Kansas uses a prospective payment
facility specific Medicaid  reimbursement system and establishes a new rate plan
each year.  Wyoming has a similar  program and recently  increased the inflation
index in its Medicaid reimbursement formula.

   Medicare.  Medicare is a Federally funded and  administered  health insurance
program that provides coverage for  beneficiaries  who require  in-patient acute
care and certain  intensive  rehabilitation  therapy services or skilled nursing
and certain related medical services, such as physical,  occupational and speech
therapy,  pharmaceuticals,  medical supplies and ancillary, diagnostic and other
necessary services of the type provided by skilled nursing facilities.  Medicare
benefits generally cover only a short portion of a patient's stay in a long-term
care  facility.  Medicare  benefits are not  available  for  patients  requiring
intermediate  and custodial  levels of care. In general,  Medicare  payments for
skilled nursing services and  rehabilitative  care are based on allowable costs.
With certain  exceptions,  Medicare is a  retrospective  payment system in which
each  facility  receives  an interim  payment  during  the year,  which is later
adjusted  upward or downward to reflect  actual  allowable  direct and  indirect
costs of services  based on the  submission  of a cost report at the end of each
year.  Of  the  Company's  54  long-term  care  facilities   (including  managed
facilities),  48 are  currently  certified to receive  benefits  provided  under
Medicare.  In  addition,  the  Company's  rural  hospital is also  certified  to
participate in the Medicare program.

   Medicare reimbursement for services provided in skilled nursing facilities is
based upon the lesser of (i) actual  allowable  routine,  ancillary  and capital
costs or (ii) charges.  Facilities that have been in operation longer than three
full cost  reporting  periods are subject to limits on their actual  routine per
diem costs. The routine service cost limits,  which are regionally  adjusted for
labor costs, are updated annually by the Healthcare Financing  Administration of
the United States Department of Health and Human Resources ("HCFA"). Most of the
Company's  facilities  are  subject  to these  limits.  Medicare  also  provides
reimbursement  for in-patient care at hospitals and skilled nursing  facilities,
and hospice and home health agency care. Reimbursement for hospitalization costs
is determined on a national  weighted  cost basis,  known as Diagnostic  Related
Groups,  related to the type of illness being treated,  rather than the duration
of the patient's hospitalization.

   Healthcare Reform;  Governmental  Budgetary  Constraints;  Proposed Budgetary
Legislation.   Numerous  Federal  and  state  governmental  and  private  sector
proposals  have  been  advanced  to  address  the  nationwide  concerns  on  the
availability and affordability of quality  healthcare.  As a result of these and
other  proposals,  the healthcare  industry is subject to considerable and rapid
change.  In addition,  the  significant  impact of market forces,  including the
formation of provider networks and the grouping of


                                7

<PAGE>

consumers into large managed care organizations sponsored by insurance companies
and other  entities,  has caused  market-induced  healthcare  reform to become a
significant factor in restructuring the delivery system. Although the failure of
passage of the Health  Security Act may have deterred  comprehensive  healthcare
reform at the Federal level, the potential for healthcare  reform at the Federal
level cannot be  disregarded  nor can any such reform be predicted as to content
or timing  with any degree of  certainty.  The  enactment  of Federal  and state
reform  proposals  which might cause a reduction of revenue in certain states in
which the Company  operates  remains a  continuing  possibility  which cannot be
predicted. Further, no assurance can be given that any such reform will not have
a material adverse impact on the Company.


   Both the Federal  government  and  various  states are  considering  imposing
limitations on the amount of funding available for various healthcare  services.
A Presidential  task force has reported that the Medicare "trust fund" is likely
to become insolvent by the year 2002 if the current growth rate of approximately
10% per annum  continues.  The U.S.  Congress  passed a fiscal  year 1996 budget
reconciliation  bill with an objective of  balancing  the Federal  budget by the
year  2002,  which  was  vetoed  by the  President.  The U.S.  Congress  and the
Executive  Branch of government are presently  working toward  developing a 1998
federal  budget.  Certain  provisions  of the  proposed  1996 budget  were,  and
provisions  of 1998 budget are  expected  to be,  designed to reduce the rate of
increase in Medicare  expenditures through cost savings and other measures,  the
magnitude  of  which  is  the  subject  of  debate  between  the  Executive  and
Legislative  Branches of the Federal  government.  The effect of any legislation
upon the  Company's  operations  cannot be predicted at this time.  In addition,
various states are themselves  considering reduced levels of spending in various
areas  which  also  could  affect  the  amount of  available  Medicaid  funding.
Accordingly,  Medicare  and  Medicaid  reimbursements  may not  continue  at the
current levels or rates of increase.


GOVERNMENT REGULATION

   The healthcare  industry is subject to substantial  Federal,  state and local
regulation.  The various layers of governmental  regulation affect the Company's
business by requiring  licensure or certification of its facilities,  regulating
the use of its properties, controlling reimbursement to the Company for services
provided and controlling  growth.  See "-- Revenue  Sources and  Reimbursement."
Licensing, certification and other applicable governmental regulations vary from
jurisdiction to jurisdiction  and are revised  periodically,  and vary among the
long-term care,  rehabilitation therapy and other operations. It is not possible
to predict the content or impact of future legislation and regulations affecting
the healthcare industry.

   Of the  twelve  states  in which  the  Company  operates,  Alabama,  Florida,
Georgia,  Iowa, Louisiana,  Maine,  Missouri,  Nebraska,  Texas and Wyoming have
adopted  certificate  of  need  ("CON")  statutes  applicable  to  the  services
presently provided by the Company in such states. CON statutes provide generally
that, prior to the construction of new beds, the addition of new services or the
making of certain capital expenditures  exceeding defined levels, a state agency
must determine that a need exists for such proposed activities.  The Company has
generally been able to obtain requisite CONs without material delay.

   Medicare  certification is a critical factor contributing to the revenues and
profitability of a long-term care facility and, accordingly,  is a key objective
of the Company's facility enhancement program.  Such certification  depends on a
favorable review of the Company's facilities by HCFA. Any suspension or delay in
the administration of the survey and certification  program of HCFA (as had been
proposed on an  industry-wide  basis by HCFA early in 1995) could delay Medicare
certification of the Company's facilities and adversely effect implementation of
the Company's facility enhancement program.

   Both initial and  continuing  qualification  of a long-term  care facility to
participate  in the Medicaid or Medicare  programs  depends  upon many  factors,
including accommodations,  equipment, services, patient care, safety, personnel,
physical environment and adequate policies,  procedures and controls. Licensing,
certification   and  other  applicable   standards  vary  from  jurisdiction  to
jurisdiction and are revised  periodically.  State agencies survey all long-term
care  facilities on a regular basis to determine  whether such facilities are in
compliance  with the  requirements  for  participation  in government  sponsored
third-party payor programs.


                                8

<PAGE>

   Similarly,  a  hospital  must meet  certain  standards  and  observe  certain
operating procedures to be eligible for Medicare certification.  These standards
include   maintaining   adequate  records,   adoption  of  and  compliance  with
appropriate  patient treatment plans and self-review  procedures,  and providing
24-hour care rendered or supervised by a registered  professional nurse. Waivers
of certain  Medicare  requirements,  such as nurse staffing,  are available upon
application,  to rural hospitals with fewer than 50 beds.  Hospitals are subject
to periodic review and may be disqualified  from  participation  in the Medicare
program if they fail to satisfy the applicable  conditions  without  obtaining a
waiver.

   The Company believes that all of its facilities are in substantial compliance
with the various  Medicare and Medicaid  requirements and all are in substantial
compliance with other regulatory  requirements  applicable to them.  However, in
the  ordinary  course  of  its  business,   the  Company   receives  notices  of
deficiencies for failures to comply with various  regulatory  requirements.  The
Company reviews such notices and seeks to take appropriate corrective action. In
most cases,  the Company and the reviewing  agency have agreed upon the measures
to be  taken  to bring  the  facility  into  compliance.  In some  cases or upon
repeated  violations,  the  reviewing  agency has the authority to impose fines,
temporarily  suspend  admission  of new  patients  to the  facility,  suspend or
decertify  from  participation  in the  Medicare  or Medicaid  programs  and, in
extreme  circumstances,   revoke  a  facility's  license.  These  actions  could
adversely affect a facility's ability to continue to operate, the ability of the
Company  to  provide  certain   services  and  the  facility's   eligibility  to
participate  in the Medicare or Medicaid  programs.  Additionally,  a finding of
abusive or fraudulent  behavior with respect to one facility could subject other
facilities   under  common  control  or  ownership  to   disqualification   from
participation in the Medicare and Medicaid programs.

   In March 1996, the Company's Toledo, Iowa long-term care facility voluntarily
withdrew from  participating  in the Medicare and Medicaid  programs rather than
risk being decertified from participating in those programs.  In September 1996,
this  facility  was  recertified  by the state for only nine beds until  further
notice.  Subject to  obtaining  financing,  the Company  intends to convert this
facility  into a  multi-use  facility  which  would  include a  skilled  nursing
facility  operating  on a  private  pay  basis,  assisted  living  to add to its
existing assisted living operations in the community,  a home healthcare agency,
outpatient  rehabilitation  and a primary care clinic.  Also,  in March 1996 the
Company's Council Bluffs North facility was terminated from participation in the
Medicare and Medicaid programs. The facility has been resurveyed and found to be
deficiency free and, accordingly, the facility was recertified in April 1996.

   Effective  October 1, 1990,  OBRA-87  eliminated the different  certification
standards for "skilled" and  "intermediate  care" nursing  facilities  under the
Medicaid program in favor of a single "nursing facility" standard. This standard
requires,  among other  things,  that the Company  have at least one  registered
nurse on each day  shift  and one  licensed  nurse on each  other  shift.  Final
regulations of HCFA implementing the nursing home reform requirements in OBRA-87
took  effect on  September  30,  1995,  although  to date only the most  serious
violations  are  being  immediately  enforced.  The final  regulations  create a
variety of remedies that both Federal and state governments may utilize to bring
nursing homes into compliance with Federal guidelines,  including the imposition
of fines up to $10,000 per day. The rules define conduct which constitutes abuse
and  neglect  of a  nursing  home  patient,  and  changes  have been made in the
qualification  requirements  for managers and  surveyors of nursing  homes.  The
standards  additionally  require increased nursing staffing to ensure compliance
with quality care initiatives; increased training of nursing assistants; uniform
approaches to resident  assessment and  preparation  of patient care plans;  and
implementation  of specific  procedures  when there is reason to believe that an
identifiable individual was responsible for an act of patient abuse and neglect.

   The Company's  rural  long-term  care strategy  entails the risk of violating
Federal antitrust laws. The healthcare industry has recently been an active area
of antitrust enforcement action by the Federal Trade Commission (the "FTC"). The
principally  rural primary care and skilled  nursing  facility  structure of the
Company's  operation sites has been developed to comply with existing Department
of Justice and FTC guidelines,  including  jointly issued  antitrust  guidelines
that were promulgated in September 1994. Although the Company's acquisitions and
existing delivery structure arrangements have not been the subject of Department
of  Justice  or FTC  enforcement  action,  there  can be no  assurance  that  an
enforcement action will not be brought in the future.

                                9

<PAGE>

   Various  federal and state laws  regulate  relationships  among  providers of
healthcare  services,  including  employment or service contracts and investment
relationships.  These laws include the fraud and abuse  provisions of the Social
Security Act that are  applicable to the Medicare and Medicaid  programs,  which
prohibit various transactions involving Medicare or Medicaid covered patients or
services.  These laws also include  anti-kickback  provisions which prohibit the
payment or receipt of any  remuneration  by anyone in return  for, or to induce,
the referral of patients for items or services that are paid for, in whole or in
part,  by Medicare or Medicaid.  A violation of these  provisions  may result in
civil or criminal  penalties for individuals or entities  and/or  exclusion from
participation  in the  Medicare and  Medicaid  programs.  Among such laws is the
so-called  "Stark"  amendments of the Social Security Act provide,  with certain
exceptions,  that if a physician or member of the physician's  immediate  family
has a  "financial  interest"  in an  entity  (which  may  consist  of  either an
ownership interest or a compensation  arrangement),  the physician is prohibited
from making a referral to the entity for the  provision  of certain  "designated
health  services" for which  payment may be made by Medicare or Medicaid.  Also,
the entity is  prohibited  from  billing the  Medicare or Medicaid  programs for
designated  health  services   rendered  pursuant  to  a  prohibited   referral.
Submission  of a claim that a provider  knows or should know is for services for
which payment is  prohibited  under the Stark law could result in refunds of any
amounts  billed,  civil money  penalties  of not more than $15,000 for each such
service billed, and possible exclusion from the Medicare and Medicaid programs.

   The Company's healthcare operations,  including its acquisitions of physician
practices and relationships with physicians, potentially subject it to the Stark
law (as well as to certain state anti-referral statutes, which may vary from the
Stark law) and the Medicare and Medicaid anti-kickback  provisions of the Social
Security  Act.  These  provisions  are broadly  worded and often vague,  and the
future  interpretation  of  these  provisions  and  their  applicability  to the
Company's  operations cannot be fully predicted with certainty.  There can be no
assurance that the Company will be able to arrange its  acquisitions or business
relationships  so as to comply with these laws or that the Company's  present or
future  operations  will not be accused of  violating,  or be determined to have
violated, such provisions.  Any such result could have a material adverse effect
on the Company.

   Additionally,  business  corporations  such as the Company are  generally not
permitted  under  state law to  practice  medicine,  exercise  control  over the
medical  judgments or decisions of  physicians  or engage in certain  practices,
such as fee splitting,  with physicians.  While the Company intends to structure
its  relationships  with  physicians to comply with these laws,  there can be no
assurance that regulatory  authorities or other parties will not assert that the
Company's relationship with physicians violates these laws.

   In addition, the Company, as an operator of healthcare facilities, is subject
to various Federal,  state and local environmental laws (including,  among other
laws, those regarding the disposal of medical wastes).


COMPETITION

   The healthcare  industry is highly  competitive.  The Company expects that it
will face  increasing  levels of competition  with respect to its operations and
the  healthcare  services it expects to provide.  The Company  will be competing
with others who provide  similar  healthcare  services,  such as other long-term
care facilities,  regional hospitals, physician practice groups, home healthcare
agencies,   community-based   service  programs,   retirement   communities  and
convalescent  centers.  The Company also  expects that it will have  competition
from new entrants in the rural healthcare services market. Moreover, in the

                                10

<PAGE>

implementation  of the Company's  growth  strategy,  the Company expects to face
competition for  acquisition  opportunities.  Some of the Company's  present and
potential  competitors are significantly larger and have, or may have access to,
greater financial and other resources than those of the Company.


   The Company competes with other  facilities based on key competitive  factors
such as reputation for the quality and  comprehensiveness of care provided;  the
commitment  and  expertise  of staff;  local  physician  and  hospital  support;
marketing programs; charges for services; and the physical appearance,  location
and condition of facilities.  The range of specialized  services,  together with
the price  charged for  services,  are also  competitive  factors in  attracting
patients from large referral sources. Conversely, because of the limits on rates
charged for services performed and uniform cost  reimbursement  principles there
is minimal price competition for Medicaid and Medicare patients. See "-- Revenue
Sources and Reimbursement."

   The Company may also face  opposition  from other  facilities,  hospitals  or
healthcare  companies  when it initiates a CON project or seeks to acquire a CON
or a facility covered by an existing CON. CON programs affect the opportunity to
develop or acquire new  facilities  by creating a regulatory  system that can be
used by competitors to delay the implementation of growth strategies.  CON laws,
applicable in most of the states in which the Company's  facilities are located,
also  currently  restrict  the number of  facilities  that can compete  with the
Company in such states.


EMPLOYEES

   As of  December  31,  1996,  the  Company  had 4,169  full-time  and  regular
part-time  employees,  of which there were approximately  4,010 employees at the
Company's owned,  leased and managed  long-term care  facilities,  including 944
nurses (421 of which are registered nurses).  Three of the Company's facilities,
encompassing approximately 233 employees, are covered by a collective bargaining
agreement. The Company believes its relationship with its employees is generally
satisfactory.

   Although  the  Company  believes it is able to employ  sufficient  nurses and
therapists  to provide  its  services,  a shortage  of  healthcare  professional
personnel in any of the  geographic  areas in which it operates could affect the
Company's  ability to recruit and retain qualified  employees and could increase
its operating costs.  The Company  competes with other healthcare  providers for
both  professional  and  non-professional   employees  and  with  non-healthcare
providers for non-professional employees.

INSURANCE

   Healthcare companies are subject to medical professional liability,  personal
injury and other  liability  claims  that are  customary  risks  inherent in the
operation of healthcare  facilities.  The Company maintains property,  liability
and professional liability insurance policies in amounts and with such coverages
and deductibles that are deemed appropriate by management, based upon historical
claims, industry standards and the nature and risks of its business. The Company
also  requires  that  physicians  practicing  at its  facilities  carry  medical
professional   liability   insurance  to  cover  their   respective   individual
professional liabilities.

ITEM 2: PROPERTIES

   The executive offices of the Company occupy  approximately  9,375 square feet
in a modern office building in Naples,  Florida under a lease expiring in August
1998.  The Company  believes  that this office space is adequate for its present
needs and is  attempting  to sublease  part of the space which,  in light of its
management agreement with IHS, it no longer requires.

                                11

<PAGE>

   The  following  table  sets forth  certain  information  with  respect to the
Company's current long-term care facilities;


<TABLE>
<CAPTION>
                                                            1990 CENSUS
                    OWNED/                OCCUPANCY          POPULATION
                   LEASED/    NUMBER       RATE AT      ------------------------
 MARKET SERVED     MANAGED   OF BEDS   MARCH 31, 1997      TOWN        COUNTY 
-------------------------------------------------------------------  ---------
<S>               <C>       <C>       <C>              <C>          <C>
Alabama
 Bessemer.......  Leased     81        94.1%            33,400      651,500
 Bessemer.......  Leased     69        94.3%            33,400      651,500
 Greensboro.....  Leased    102        92.8%             3,200       23,100
Colorado
 Canon City.....  Owned     157        83.1%            12,700       32,300
 Colorado
  Springs.......  Owned     132        75.9%           281,100      397,000
 Colorado
  Springs.......  Leased     49        76.1%           281,100      397,000
 Delta..........  Owned     100        77.3%             3,800       21,000
 Grand Junction.  Leased    116        83.5%            29,000       93,100
 Grand Junction.  Leased     82        91.1%            29,000       93,100
 Paonia.........  Leased     60        65.2%             1,400       21,000
Georgia
 College Park...  Leased    100        99.1%            20,000      118,000
 Dublin.........  Leased    130        98.7%            16,000       40,000
 Glenwood.......  Leased     62        90.1%             1,000        4,900
 Harbor City....  Managed    62        93.3%             3,000       42,000
 Macon..........  Leased    130        88.5%           107,000      150,000
 Marietta.......  Leased    109        93.9%            46,000      476,000
Iowa
 Clarinda.......  Leased    117        79.5%             5,100       16,900
 Council Bluffs.  Leased    110        72.0%            54,300       82,600
 Council Bluffs.  Leased     62        94.0%            54,300       82,600
 Glenwood.......  Leased    128       100.0%               500       13,200
 Glenwood.......  Leased     12       100.0%               500       13,200
 Mediapolis.....  Leased     66        97.2%             1,600       42,600
 Muscatine......  Leased    148        80.2%            22,900       39,900
 Toledo.........  Leased    117        57.4%             2,400       17,400
 Winterset......  Leased    118        88.6%             4,200       12,500
Kansas
 Arma...........  Leased     92        69.7%             1,600       35,600
 Ellinwood......  Leased     59        96.1%             2,400       29,400
 Smith Center...  Leased     75        85.1%             2,000        5,100
 Topeka.........  Leased     46       -0-              119,900      161,000
 Topeka.........  Leased     50        98.2%           119,900      161,000
 Topeka.........  Leased     79        80.4%           119,900      161,000
Louisiana
 Luling.........  Leased    117        82.7%             3,000       42,400
Missouri
 Oak Grove......  Leased     90        97.2%             4,600      633,200
 Tarkio.........  Leased     95        78.1%             2,200        7,500
Nebraska
 Ainsworth......  Owned      50        98.6%             1,900        3,700
 Ashland........  Owned     101        87.2%             2,100       18,300
 Blue Hill......  Owned      68        66.9%               800        4,300

                                       12

<PAGE>

                                                            1990 CENSUS
                    OWNED/                OCCUPANCY          POPULATION
                   LEASED/    NUMBER       RATE AT     -------------------------
 MARKET SERVED     MANAGED   OF BEDS   MARCH 31, 1997     TOWN          COUNTY 
--------------------------------------------------------------------  ---------
                                                       

 Campbell.......  Leased     49       88.8%                400         4,000
 Central City...  Owned      70       76.0%              2,900         8,000
 Columbus.......  Owned      48       99.1%             19,500        55,500
 Edgar..........  Owned      54       97.1%                600         7,000
 Exeter.........  Owned      59       64.6%                700         7,100
 Grand Island...  Leased     81       76.6%             39,400        48,900
 Gretna.........  Owned      63       97.8%              2,200       102,600
 Lyons..........  Owned      84       81.9%              1,100         7,900
 Milford........  Owned      66       78.2%              1,900        15,400
 Palmer.........  Owned      39       85.1%                400         8,000
 Sutherland.....  Owned      61       95.6%              1,000        32,500
 Utica..........  Owned      41       76.5%                700        15,400
 Waverly........  Owned      50       98.7%              1,900       213,600
Texas
 Sycamore.......  Managed    48       83.2%            470,000     1,400,000
Wyoming
 Laramie........  Leased    144       82.1%             26,700        30,800
 Saratoga.......  Leased     52       89.4%              2,000        16,700
 Worland........  Leased    100       86.3%              5,700         8,400

</TABLE>


   In addition,  the Company operates, in owned premises, a 22-bed hospital, two
physician  practices and a home  healthcare  agency in Georgiana,  Alabama (town
population,  2,000;  county  population,  21,900);  two  outpatient  head trauma
rehabilitation  units  in  Bangor,  Maine  (town  population,   33,100;   county
population,  146,600) and in Lewiston,  Maine (town population,  39,757;  county
population,  105,259);  and a  certified  rural  healthcare  clinic in  Arcadia,
Florida (town population, 6,600; county population, 26,300).

   To date,  the Company's  major  acquisitions  have been financed  principally
through  mortgage and lease financing by Health and Retirement  Properties Trust
("HRPT").  The  Company  has  granted to HRPT an option to  purchase  all of the
capital stock of the Company's  subsidiaries which own the 17 facilities subject
to  HRPT  mortgages.  See  Note 6 of the  Notes  to the  Company's  Consolidated
Financial  Statements  contained  elsewhere in this Report.  Of the Company's 35
leased long-term care facilities (one of which is a capital lease), 30 are under
leases with HRPT for terms expiring on December 31, 2010, with options entitling
the  Company to extend each lease,  on a premises  by  premises  basis,  for two
additional  consecutive periods of 6 and 13 years. The Company's three long-term
care  facilities  in Alabama are under leases for terms  expiring June 30, 2007,
with  options  entitling  the  Company to extend  each  lease,  on a premises by
premises basis, for an additional  period of five years. The remaining lease (in
Campbell,  Nebraska) expires on February 1, 2006. See Note 7 of the Notes to the
Company's Consolidated Financial Statements contained elsewhere in this Report.


ITEM 3: LEGAL PROCEEDINGS

   From  time to time,  the  Company  is  party  to  certain  claims  and  legal
proceedings which arise in the ordinary course of business. Currently, there are
no claims or legal proceedings which, in the opinion of the Company,  would have
a material  adverse  effect on the  Company's  financial  position or results of
operation.

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

   Not applicable.


                                13

<PAGE>

EXECUTIVE OFFICERS

   The executive officers of the Company are:

   Deborah A. Lau  joined the  Company as  Executive  Vice  President  and Chief
Operating  Officer in  October  1995 and became  President  and Chief  Executive
Officer of the  Company  on April 4, 1997.  From March 1989 until she joined the
Company,  Ms.  Lau  served  in  various  capacities  with IHS,  serving  as Vice
President of Financial  Operations from January 1995, Vice President  Healthcare
Controller  from November 1993 to December 1994 and Regional Vice President from
March  1989 to  November  1993.  Prior  thereto,  Ms.  Lau  served as  Assistant
Controller at Continental  Medical  Systems.  Ms. Lau received a B.S.  degree in
Accounting and Business Administration from Towson State University.

   William J. Krystopowicz  joined the Company in July 1993,  serving as interim
President  until  February  1994,  since which time he has been  Executive  Vice
President. Mr. Krystopowicz also served as the Company's Chief Financial Officer
from  February  1994  until  June  1995.  Prior  to  joining  the  Company,  Mr.
Krystopowicz  served as IHS's Senior Vice  President of Financial  Services from
August 1988 and Vice President -- Controller  from June 1986 to July 1988.  From
July 1985 until he joined  IHS,  Mr.  Krystopowicz  was  Director of Finance and
Reimbursement of Genesis Health Ventures,  Inc., a long-term care operator.  Mr.
Krystopowicz received a B.S. degree in Accounting from LaSalle University.

   Officers are elected by the Board of Directors and may be removed at any time
by the Board.  The officers of the Company are elected  annually by the Board of
Directors  at its  meeting  held  immediately  after the  annual  meeting of the
stockholders,  and hold their respective offices until their successors are duly
elected and qualified.

                                14

<PAGE>

                                   PART II

ITEM 5: MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS

   The Company's  Common Stock was initially  offered to the public on August 9,
1995 and has been traded, since that date, on the Nasdaq Stock Market's National
Market under the symbol "CCAI." The following  table sets forth the high and low
sale  prices  for the  Common  Stock  as  reported  by  Nasdaq  for the  periods
indicated.


<TABLE>
<CAPTION>
                                               HIGH     LOW
                                              ------  ------
        <S>                                   <C>     <C>
        Fiscal 1995:
          Third Quarter (from August 9).....  $ 14    $ 9 3/4
          Fourth Quarter................... . 14 5/8    9 3/4
                                       
</TABLE>
<TABLE>
<CAPTION>
                                               HIGH      LOW
                                              -------- --------
        <S>                                   <C>      <C>
        Fiscal 1996:
          First Quarter ....................  $15 1/2  $ 9
          Second Quarter....................   13 5/8    9 1/4
          Third Quarter.....................   12 3/8    6
          Fourth Quarter....................    8 1/8    3 1/2

</TABLE>


   As of March 31, 1997, the Company had approximately 75 stockholders of record
(which does not include  stockholders  whose shares are held in "street name" by
brokers, depositaries or nominees).

   The Company has never paid cash  dividends  on the Common  Stock and does not
anticipate paying cash dividends in the foreseeable  future, but intends instead
to retain any future earnings for  reinvestment  in its business.  The Company's
$15.0  million bank  revolving  credit  facility  prohibits  the payment of cash
dividends  on the  Common  Stock,  and  each  of the  Company's  leases  for its
long-term care facilities  contain  provisions that may limit the amount of cash
dividends  that  the  Company  may pay.  Any  future  determination  to pay cash
dividends  will be at the  discretion  of the  Board  of  Directors  and will be
dependent upon the Company's financial condition, results of operations, capital
requirements,  the terms of the Company's  debt  instruments  and leases then in
effect and such other factors as the Board of Directors deems relevant.


ITEM 6: SELECTED FINANCIAL DATA

   The  selected  consolidated  financial  data  for CCA set  forth  below as of
December  31,  1995 and 1996 and for each of the years in the three year  period
ended  December  31,  1996 have been  derived  from the  consolidated  financial
statements  of the  Company,  which have been  audited by KMPG Peat Marwick LLP,
independent certified public accountants, included elsewhere in this Report. The
selected  consolidated  financial  data  presented  below  for  MeritWest,   the
Company's  predecessor,  as of June 30,  1992 and 1993 and for each of the years
then ended have been  derived  from the  consolidated  financial  statements  of
MeritWest,  which have been audited by Arthur Andersen LLP,  independent  public
accountants.  The  selected  consolidated  financial  data set  forth  below for
MeritWest  for the period  from July 1, 1993 to  December  30, 1993 (the date of
acquisition  by the Company) have been derived from the  consolidated  financial
statements  of MeritWest  for such period,  which have been audited by KPMG Peat
Marwick LLP,  independent  certified  public  accountants.  The following tables
should  be  read  in  conjunction  with  the  Company's  Consolidated  Financial
Statements,  the related Notes to such financial  statements  and  "Management's
Discussion  and  Analysis of  Financial  Condition  and  Results of  Operations"
included elsewhere in this Report.


                                15

<PAGE>

                     SELECTED CONSOLIDATED FINANCIAL DATA
                   (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
                                                          PREDECESSOR COMPANY(1)                          CCA(2)
                                                      ------------------------------------  ----------------------------------
                                                                               PERIOD        PERIOD
                                                                                FROM          FROM
                                                                               JULY 1,      INCEPTION 
                                                      YEARS ENDED JUNE 30,    TO DEC. 30,   TO DEC. 31,    YEARS ENDED DEC. 31,
                                                     ----------------------                               ----------------------
                                                       1992         1993        1993          1993    1994        1995      1996
                                                      ------       ------      ------        ------  ------      ------    ------
<S>                                                    <C>        <C>       <C>           <C>      <C>      <C>             <C>
STATEMENT OF OPERATIONS DATA:
Total revenues.....................................   $53,905    $57,103   $29,431       $   --        $57,492   $94,178   $127,512
Facility operating expenses........................    45,113     46,069    26,638           --         46,035    73,693    111,171
Corporate administrative and general expenses .....     2,137      2,455     1,332          914          2,935     4,765      5,226
Rent...............................................        --         --        --           --          3,806     6,404      8,999
Depreciation and amortization......................     3,585      3,587     1,657           --          1,465     2,033      3,021
Interest, net......................................     5,064      4,616     2,453           --          2,857     3,795      5,337
Loss on impairment of investments and other
non-recurring charges(3)...........................        --         --        --           --             --        --     22,128
                                                       ---------- --------- ------------- ------------- --------- --------- --------
Operating income (loss)............................    (1,994)       376    (2,649)        (914)           394     3,488    (28,370)
Non-operating losses, net..........................      (508)        (3)     (193)          --             --        --         --
                                                       ---------- --------- ------------- ------------- --------- --------- --------
Earnings (loss) before income taxes and
 extraordinary charge..............................    (2,502)       373    (2,842)        (914)           394     3,488    (28,370)
Income taxes.......................................        --         33        19           --             --     1,047    (9,465)
                                                       ---------- --------- ------------- ------------- --------- --------- --------
Earnings (loss) before extraordinary charge .......    (2,502)       340    (2,861)        (914)           394     2,441    (18,905)
Extraordinary charge(4)............................        --         --      (173)          --             --      (992)        --
                                                       ---------- --------- ------------- ------------- --------- --------- --------
Net earnings (loss)................................   $(2,502)   $   340   $(3,034)        (914)           394     1,449   $(18,905)
                                                       ========== ========= =============
Dividends-preferred stock(5).......................                                          --           (653)     (408)        --
                                                                                          ------------- --------- --------- --------
Net earnings (loss) applicable to common stock ....                                      $ (914)       $  (259)  $ 1,041    (18,905)
                                                                                          ============= ========= ========= ========
Per common share:
 Earnings (loss) before extraordinary charge.......                                      $(0.52)       $ (0.13)  $   .42   $  (2.56)
 Extraordinary charge..............................                                          --             --      (.20)        --
                                                                                          ------------- --------- --------- --------
 Net earnings (loss)...............................                                      $(0.52)       $ (0.13)  $   .22   $  (2.56)
                                                                                          ============= ========= ========= ========
Weighted average number of common and common
 equivalent shares outstanding.....................                                       1,755          2,041     4,840      7,385
                                                                                          ============= ========= ========= ========

</TABLE>
<TABLE>
<CAPTION>
                                                               PREDECESSOR
                                                               COMPANY(1)                        CCA(2)
                                                          -------------------- -----------------------------------------
                                                                JUNE 30,                      DECEMBER 31,
                                                          -------------------- -----------------------------------------
                                                             1992       1993      1993      1994     1995       1996
                                                          ---------- --------- ---------- -------- -------- ------------
<S>                                                       <C>        <C>       <C>        <C>      <C>      <C>
BALANCE SHEET DATA:
Working capital (deficit)...............................  $(1,170)   $  (223)  $(3,444)   $ 2,276  $ 4,488  $(10,952)
Total assets............................................   54,867     54,328    59,541     62,375   93,290   102,119
Long-term debt, including current portion...............   57,068     56,628    26,600     33,086   35,665    60,371
Redeemable preferred stock and common stock subject to
repurchase..............................................       --         --     5,536      5,908    2,181        --
Shareholders' equity (deficit)..........................   (8,487)    (8,147)    3,910      4,745   31,241    16,003
</TABLE>

----------
   (1) Effective  December 30, 1993, the Company acquired all of the outstanding
       common stock of the Predecessor Company, MeritWest. During the year ended
       June 30, 1993,  MeritWest  operated 30 long-term care facilities,  one of
       which was sold to Integrated  Health Services,  Inc. and another of which
       was sold to the prior  manager of the  facility  in  connection  with the
       MeritWest Transaction. Accordingly, the Company's operations for the year
       ended December 31, 1994 include only 28 of the 30 facilities  operated by
       MeritWest prior to December 30, 1993.

   (2) The  Company  had  no  significant  operations  prior  to  the  MeritWest
       Transaction.   The  Company  believes  that  results  of  operations  and
       financial  positions of the Company and  MeritWest,  and of the Company's
       period-to-period  results, are not comparable because (a) while MeritWest
       financed its facilities  through  mortgages under which it paid interest,
       the Company refinanced the facilities utilizing a combination of mortgage
       and  lease  financing  under  which  it pays  interest  and rent at rates
       determined  at the time of the  refinancing  which  varied from the rates
       applicable  to  MeritWest's  debt;  (b)  MeritWest  and the  Company  had
       significantly different capital structures;  (c) the financial statements
       of the Company  reflect a new basis of accounting for the  acquisition of
       MeritWest  and the  related  depreciation  and  amortization  on such new
       basis;  (d) two  facilities  operated  by  MeritWest,  which  contributed
       revenues of approximately $8.8 million and contribution margin (operating
       income  before fixed  charges and  corporate  administrative  and general
       expenses)  of  approximately  $1.7  million  during the  12-month  period
       immediately prior to the MeritWest Transaction,  were not acquired by the
       Company;  (e) during the year ended  December 31, 1994,  the Company made
       substantial  improvements  to,  and  operational  changes  in, the former
       MeritWest  facilities  and  obtained  Medicare  certification  for the 19
       MeritWest   facilities   which   were  not   previously   certified   for
       participation in the Medicare program;  (f) the Company's  operations are
       managed  directly by employees of the Company,  while the  facilities  of
       MeritWest were managed for MeritWest by a management company which had an
       equity  interest in MeritWest and earned  management fees of $2.4 million
       for the year ended June 30, 1993; and (g)  MeritWest's  fiscal year ended
       on June 30 (the latest of which ended six months  prior to the  MeritWest
       Transaction) while the Company's fiscal year ends on December 31.

   (3) See note 12 of Notes to Consolidated Financial Statements.

   (4) See note 15 of Notes to Consolidated Financial Statements.

   (5) Neither the Company nor  MeritWest  declared any common  stock  dividends
       during the periods presented.


                                16

<PAGE>

ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION

RESULTS OF OPERATIONS

General

   The Company began  operations in December  1993 with its  acquisition  of the
business  of  MeritWest,   Inc.  and   subsequently   consummated  a  series  of
acquisitions  and entered into various  lease and  management  agreements, which
transactions  are discussed in Note 2 of the Company's Notes to the Consolidated
Financial Statements. As of March 31, 1997, the Company owned, leased or managed
an  aggregate  of 54  licensed  long-term  care  facilities,  one  22-bed  rural
hospital,  two  physician  practices,   two  primary  care  clinics,  one  rural
healthcare  clinic,  one outpatient  rehabilitation  center,  one child day care
center, a home healthcare agency and 115 assisted living units within six of the
communities which the Company serves.

   The following table shows, for the periods indicated,  certain items from the
Company's and MeritWest's Consolidated Statements of Operations,  expressed as a
percentage of total revenues:

<TABLE>
<CAPTION>
                                                          YEARS ENDED DECEMBER 31,
                                                        ----------------------------
                                                          1994     1995      1996
                                                        -------- -------- ----------
<S>                                                     <C>      <C>      <C>
Total revenues........................................  100.0%   100.0%   100.0%
Facility operating expenses...........................   80.1     78.2     87.2
Corporate administrative and general expenses ........    5.1      5.1      4.1
Rent..................................................    6.6      6.8      7.0
Depreciation and amortization.........................    2.5      2.2      2.4
Interest, net.........................................    5.0      4.0      4.2
Non-recurring charges.................................     --       --     17.3
                                                        -------- -------- ----------
Earnings (loss) before income taxes and extraordinary
charge................................................    0.7      3.7    (22.2)
Income taxes..........................................     --      1.1      7.4
                                                        -------- -------- ----------
Earnings (loss) before extraordinary charge ..........    0.7      2.6    (14.8)
Extraordinary charge..................................     --     (1.1)      --
                                                        -------- -------- ----------
Net earnings (loss)...................................    0.7%     1.5%   (14.8)%
                                                        ======== ======== ==========

</TABLE>


                                17


<PAGE>

Summary of Write-offs and Non-recurring Charges

   As previously announced, the Company recorded $19.2 million and $10.7 million
of write-offs  in the second and fourth  quarters of 1996,  respectively,  for a
total year-end pre-tax  adjustment of $29.9 million.  The following is a summary
of these charges (in millions):


<TABLE>
<CAPTION>
<S>                                                                                     <C>

Termination of the Sandy River management contract:
 Loss on investment in purchase option deposit and transaction costs..................  $ 5.4
 Write-off of receivables and other exit costs........................................    4.2
                                                                                        --------
                                                                                          9.6
Closure of physician practices, primary care clinics, adult day care centers,
 and facility shutdowns:
 Impairment of long-lived assets related to Toledo and Aurora facilities..............    1.5
 Investment, asset and receivable write-downs for the physician practices, primary
  care clinics and adult day care programs............................................    4.0
 Exit costs, employee termination costs and other operating closing costs.............    4.1
                                                                                        --------
                                                                                          9.6
                                                                                        --------
Total Second Quarter charges..........................................................   19.2
Termination of proposed Memorial Health Group acquisition
 Loss on investment...................................................................    3.9
 Asset write-offs and other exit costs................................................     .5
                                                                                        --------
                                                                                          4.4
Terminated debt and equity offering costs.............................................    1.6
Contractual allowance and other revenue adjustments...................................    1.9
Other financing write-offs, balance sheet adjustments and revisions to second
 quarter estimates....................................................................    2.8
                                                                                        --------
Total Fourth Quarter charges..........................................................   10.7
                                                                                        --------
Total 1996 Write-offs and Charges.....................................................  $29.9

   The charges were classified in the statements of operations as adjustments to
the following line items:

Revenue reduction.....................................................................  $ 1.9
Operating expense increase............................................................    5.9
Loss from impairment of investments and other non-recurring charges (see
note 12 of Notes to Consolidated Financial Statements)................................   22.1
                                                                                       --------
                                                                                        $29.9
</TABLE>

   The $5.9 million operating expense increase relates to the bad debt allowance
adjustment  and  operating  and  certain  closure  costs   associated  with  the
discontinued clinics,  physician practices and day care programs.  Also included
in such operating charges are the write down of costs associated with developing
higher  acuity  programs  and  the  write-off  of  costs   associated  with  the
termination of employment of the Chief  Executive  Officer during 1996 and Chief
Operating Officer during 1995.

Year Ended December 31, 1996 Compared to Year Ended December 31, 1995

   Revenues  prior to the $1.9 million  adjustment to revenue  referred to above
which  related to a change in the  allowance  for  contractual  adjustments  for
certain third party  receivables,  increased $35.2 million,  or 37.4%, to $129.4
million in 1996 from $94.2  million in 1995.  This  growth was  attributable  to
acquisitions  and  increases  in revenues  per patient  day and  management  fee
revenue. Revenues,

                                18

<PAGE>


in 1996  included  $17.3  million  related to 6 long term care  facilities,  one
hospital and a physician  practice acquired in 1996 and the operation of 17 long
term care facilities and a head trauma unit acquired in 1995  contributed  $15.7
million  more to 1996  revenues  than they did from  their  respective  dates of
acquisitions  through  December 31, 1995.  Management  fees were $3.4 million in
1996 as compared to $1.3 million in 1995.  Long-term care  facilities  accounted
for 87.0% of total revenues in 1996, a decrease from 93.2% in 1995. The decrease
was  primarily the result of revenues  totaling  $4.4 million,  or 3.4% of total
revenues  from Smith  Hospital  (acquired on April 29, 1996 and sold on December
31,  1996);  $1.6  million,  or 1.2% of total  revenues  from Maine Head  Trauma
Center; and $.5 million, or .4% of total revenues from Family Medical Center.

   Net  operating  revenues per patient day for  long-term  and assisted  living
facilities  increased 8.0% to $91.18 in 1996 from $84.42 in 1995, resulting from
an increased proportion of higher acuity patients. Medicare days increased 20.9%
to 61,291 in 1996 from 50,670 in 1995 as a result of operations acquired in 1995
and 1996.  Occupancy rates were 85.8% in 1996 compared to 87.4% in 1995. Patient
days  increased  to  1,234,518,  or by 18.4%,  in 1996 from  1,042,692  in 1995,
primarily due to the facilities acquired subsequent to December 31, 1995 and the
inclusion for a full year in 1996 of operations acquired at various times during
1995.

   Facility operating  expenses increased by $37.5 million,  or 50.9%, to $111.2
million  in 1996 from  $73.7  million  in 1995 and  increased  as a  percent  of
revenues to 87.2% in 1996 from 78.2% in 1995.  The increase  from 1995  includes
$5.9 million,  or 8.0%,  resulting from  write-offs and charges  incurred in the
second  and  fourth  quarters  related  to  operating  expenses,   as  discussed
previously.  The remaining  increase resulted  primarily from a full year impact
($16 million) of operations acquired in 1995 as well as the impact of operations
acquired in 1996 ($14.1  million).  The payroll  related  component  of facility
operating expenses  increased by $17.8 million,  or 36.2%, to $67.0 million from
$49.2 million in 1995, primarily relating to acquisitions.

   Corporate  administrative and general expenses increased by $461, or 9.7%, to
$5.2 million in 1996 from $4.8  million in 1995.  Corporate  administrative  and
general  expenses as a percent of revenues were 4.1% in 1996 as compared to 5.1%
in 1995. The percentage  decrease was primarily the result of increased  revenue
related to acquisitions in 1996.

   The Company has engaged  Integrated  Health  Services,  Inc.  ("IHS") under a
management   agreement  to  assist  in  the  provision  of  certain   financial,
accounting,  MIS,  reimbursement and ancillary services for a term of five years
commencing  on January 1, 1997.  The  Company  believes  that this will  provide
access to more sophisticated and responsive systems at a lower cost enabling the
Company to reduce its overhead.  The  management  agreement  provides for IHS to
receive a maximum of (subject to possible  increase to 2.5% by mutual  agreement
following a review by IHS) 2% of the Company's gross revenues for its services.

   Rent expense increased by $2.6 million or 40.5%, to $9.0 million in 1996 from
$6.4 million in 1995.  The dollar  increase was due  primarily due to additional
rental costs  associated  with the  inclusion of 5 additional  operating  leases
acquired during 1996, 17 facilities acquired during 1995 for which a full year's
lease  expense was incurred in 1996,  and an increase of $549,000 in  additional
rental costs  resulting  from landlord  financed  renovations  at certain leased
facilities.

   Depreciation and amortization  expenses  increased by $988, or 48.6%, to $3.0
million in 1996 from $2.0  million in 1995 and  increased to 2.4% of revenues in
1996 from 2.2% of revenues in 1995.  The  increase was  primarily  the result of
1995 and 1996 acquisitions and renovations of certain owned facilities.

   Net interest expense increased by $1.5 million,  or 40.6%, to $5.3 million in
1996 from $3.8 million in 1995.  Net  interest  expense as a percent of revenues
increased to 4.2% in 1996 from 4.0% in 1995.  The dollar  increase was primarily
due to the increase in debt obligations  during the year,  primarily relating to
acquisitions  and the  $10.0  million  loan  from  HRPT  (see note 6 of Notes to
Financial Statements),  to $60.4 million at December 31, 1996 from $35.7 million
at December 31, 1995. The percentage  increase was the result of the increase in
debt obligations offset, in part, by an increase in revenues.

   Federal and state income  taxes were a $9.5  million  benefit in 1996 related
entirely to deferred taxes.  Federal and state income taxes were $1.0 million in
1995 after  utilization  of $260,000 of net operating loss  carryforwards  which
resulted in an estimated annualized effective tax rate of 30%.

                                19

<PAGE>

   Earnings  before  income taxes and before the impact of the second and fourth
quarter 1996  write-offs and  non-recurring  charges of $29.9 million  discussed
above,  were $1.5 million as compared to $3.5 million in 1995.  After the impact
of the  non-recurring  charges,  the net loss applicable to common stock for the
year ended  December 31, 1996 was $18.9  million or $2.56 per share  compared to
net earnings  applicable  to common stock of $1.0 million or $0.22 per share for
the year ended December 31, 1995.  Weighted average shares  outstanding for 1996
increased to 7,384,697 from 4,840,457 in 1995.

Year Ended December 31, 1995 Compared to Year Ended December 31, 1994

   Revenues increased by $36.7 million,  or 63.8%, to $94.2 million in 1995 from
$57.5 million in 1994. This growth was attributable to acquisitions, an increase
in revenues per patient day, an increase in  management  fees and an increase in
revenues from the Company's expanded network services, other than long-term care
facilities,  including primary care clinics,  adult day care,  hospital and home
healthcare  operations.  Revenues  included  in 1995  from  operations  acquired
subsequent to December 31, 1994 approximated $28.1 million. Management fees were
$1.3 million in 1995 (of which $487,000 represents the portion of the management
fee that is subordinated to certain  obligations of the facilities and which was
earned but unpaid at December 31, 1995  because  cash flows from the  facilities
being  managed have been  insufficient  to pay the  subordinated  portion of the
management  fees)  compared  to  $126,000  in 1994.  Long-term  care  facilities
accounted  for 93.2% of total  revenues in 1995, a decrease  from 97.7% in 1994.
The Company expects the proportion of revenues from long-term care facilities to
continue  to  decline  as it  further  establishes  its  networks  to provide an
expanded range of services in its  communities.  In connection with a litigation
brought by the Company to recover  depreciation  recapture of Medicaid  revenues
related to the MeritWest Transaction,  a court awarded the Company $1.0 million.
The  Company  recorded  revenues  of  $600,000  in the  fourth  quarter of 1995,
representing the portion of the court-awarded  refund which the Company believes
to be the minimum probable outcome.  This award has been appealed.  The ultimate
outcome of this matter may result in additional revenue being recognized or in a
reversal of some or all of the amount recorded.

   Net operating revenues per patient day for long-term care and assisted living
facilities  increased  10.2% to $84.42 in 1995  from  $76.63 in 1994,  primarily
resulting  from  increased  Medicare  occupancy  and an increased  proportion of
higher acuity  patients.  Medicare days  increased  18.2% to 50,670 in 1995 from
42,875 in 1994 as a result of  operations  acquired  subsequent  to December 31,
1994 and the certification of 19 additional facilities into the Medicare program
during the second and third quarters of 1994. Occupancy rates were 87.4% in 1995
compared  to  88.5% in  1994.  This  decrease  resulted  from a lower  occupancy
percentage  for those  operations  acquired  subsequent  to December  31,  1994.
Patient days  increased to  1,042,692,  or 39.0%,  in 1995 from 750,168 in 1994,
primarily due to the facilities acquired subsequent to December 31, 1994.

   Facility operating  expenses  increased by $27.7 million,  or 60.2%, to $73.7
million  in 1995 from  $46.0  million  in 1994,  but  decreased  as a percent of
revenues to 78.2% in 1995 from 80.1% in 1994. The percentage  decrease  resulted
from higher margins  derived from the higher acuity patients and the increase in
operations  other  than  long-term  care.   Facility   operating  expenses  from
operations  acquired  subsequent to December 31, 1994 were  approximately  $23.0
million in 1995. The payroll related  component of facility  operating  expenses
increased by $21.1  million,  or 75.1%,  to $49.2  million from $28.1 million in
1994, primarily as a result of an increased proportion of higher acuity patients
and an increased level of rehabilitation  and ancillary  long-term care services
provided.

   Corporate  administrative and general expenses increased by $1.8 million,  or
62.4%, to $4.8 million in 1995 from $2.9 million  (including  start-up costs) in
1994.  Corporate  administrative  and general  expenses as a percent of revenues
were  5.1% in both 1995 and 1994.  The  dollar  increase  was  primarily  due to
staffing increases related to the Company's  expansion and, to some extent, wage
increases.

   Rent expense  increased by $2.6  million,  or 68.3%,  to $6.4 million in 1995
from $3.8 million in 1994.  Rent  expense as a percent of revenues  increased to
6.8% in 1995 from 6.6% in 1994.  The dollar  increase was  primarily due to $1.9
million of additional  rental costs  resulting  from  inclusion of 14 additional
leased  facilities  and  $235,000 of  additional  rental  costs  resulting  from
landlord financed renovations at certain leased facilities.

                                20

<PAGE>

   Depreciation and amortization  expenses  increased by $568,000,  or 38.8%, to
$2.0  million  in 1995 from  $1.5  million  in 1994,  but  decreased  to 2.2% of
revenues in 1995 from 2.5% of revenues in 1994. The dollar increase was due to a
$306,000 increase related to facilities acquired subsequent to December 31, 1994
and to renovations of certain owned facilities.  The percentage decrease was due
to a higher  percentage of leased facilities to total facilities in 1995 than in
1994.

   Net interest expense increased by $938,000, or 32.8%, to $3.8 million (net of
interest  income of  $96,000)  in 1995  from $2.8  million  (net of  $63,000  of
interest  income)  in 1994.  Net  interest  expense  as a  percent  of  revenues
decreased to 4.0% in 1995 from 5.0% in 1994.  The dollar  increase was primarily
due to the indebtedness incurred for the renovation of certain owned facilities.
The  percentage  decrease was due to a lower  percentage of owned  facilities to
total facilities in 1995 than in 1994.

   Federal and state income taxes were $1.0 million in 1995. The  utilization of
net  operating  loss  carryforwards  of $260,000 in 1995  resulted in  estimated
annualized  effective rate of approximately  30% for 1995. In 1994, there was no
provision for income taxes as the  provision  was offset by net  operating  loss
carry forwards of approximately $150,000.

   Net  earnings  before  extraordinary  charge  increased  $2.0 million to $2.4
million in 1995 from $394,000 in 1994.  Net earnings  applicable to common stock
was $1.0 million, or $.22 per share in 1995. This compares to a loss of $259,000
or $.13 per share for 1994.

   The early  extinguishment  of $15.4 million of long-term debt (resulting from
the  application of a portion of the proceeds from the Company's  initial public
offering and the  repayment of certain  indebtedness  with  borrowings  from the
Company's  revolving  credit  facility)  resulted  in  extraordinary  charges to
earnings totaling  $992,000,  net of income tax benefit of $404,000 in 1995. The
extraordinary  charge was comprised of $683,000 of  unamortized  debt  placement
costs and $713,000 of prepayment penalties and charges.

SEASONALITY

   The  admittance  of  patients to  long-term  care  facilities  and demand for
certain  of the  Company's  other  core  services  tends to be lower  during the
Thanksgiving  through  January  period.  Accordingly,  revenues and earnings are
generally lower in the Company's  fourth fiscal quarter and, to a lesser degree,
in its first fiscal quarter.

INFLATION

   The  Company's  business  may be affected by  increases in the cost of labor,
food and medical and other supplies.  To date,  inflation has not had a material
effect on the Company's  operations.  The Company  cannot predict its ability to
recover increases in operating costs.

LIQUIDITY AND CAPITAL RESOURCES

General

   To date,  the Company's  principal  sources of cash have been from  financing
activities.  Based upon the operations of the Company,  management believes that
available cash and funds generated from operations,  as well as revolving credit
facilities,  the refund of the HRPT deposit,  and the  renegotiation  of payment
terms  with  Daiwa,  Sandy  River  and  IHS  (see  note 13 of the  Notes  to the
Consolidated  Financial  Statements) will be sufficient to enable the Company to
satisfy its capital expenditure and working capital requirements for its current
operations  for at least the next year.  The  Company  will seek to satisfy  its
capital  requirements  for internal  growth and acquisition  activities  through
borrowings from commercial  lenders,  seller-financed  debt,  financing obtained
from sale-leaseback  transactions with real estate investment trusts, the public
and  private  equity,  debt  capital  markets  and  proceeds  from  the  sale of
discontinued operations and, to the extent available,  internally generated cash
from operations. On a longer term basis, management believes the Company will be
able to satisfy the principal repayment  requirements on its indebtedness with a
combination of funds generated from operations and from

                                21

<PAGE>

securing  refinancings with existing or new commercial  lenders.  Management has
also  engaged  Smith  Barney,  as financial  advisor,  to review  interest  from
potential  acquirers,  joint  venture  partners  and other  sources  of  capital
infusion.  There can be no assurance that any necessary  funds will be available
to the Company or, if available, the terms thereof.

   At December 31, 1996, the Company had a working  capital  deficiency of $11.0
million,  compared with positive working capital of $4.5 million at December 31,
1995.

   Net cash used in operating  activities  in 1996 was $2.4 million  compared to
$3.0  million  provided  by  operating  activities  in 1995.  Net  cash  used in
operating  activities  in 1996  resulted  from the  Company's  net  loss  ($18.9
million) and non-cash charges for  depreciation and amortization  ($3.4 million)
and the loss on impairment of investments and other non-recurring charges ($22.1
million),  offset by non-cash  credit for the deferred  income tax benefit ($9.5
million).

   Net accounts  receivable  (patients  accounts  receivable,  third-party payor
settlements receivable and other receivables) were $16.4 million at December 31,
1996,  compared  with $12.9  million at  December  31,  1995.  The $3.5  million
increase was primarily attributable to the inclusion of $2.9 million of accounts
receivable of operations acquired subsequent to December 31, 1995. The number of
days  average net  revenues in net  receivables  was 47.0 at December  31, 1996,
compared to 50.1 at December 31, 1995.  The decrease  from 1995 to 1996 resulted
primarily from the total revenue  increase from 1995 to 1996, as compared to the
total   accounts   receivable   increase   during  the  same  period.   Medicare
reimbursements  are  typically  received 90 to 100 days in arrears.  The Company
anticipates that its number of days average net revenues in net receivables will
fluctuate in the future, and will depend, in large part, on the mix of revenues,
as well as the timing of  payments  by private,  third-party,  and  governmental
payors.

   The  allowance  for  doubtful  accounts  and  contractual  adjustments  as  a
percentage of account  receivables  was 22.8% at December 31, 1996,  compared to
13.3% at December 31, 1995.  This increase is primarily  attributable to adverse
settlements  or related  notices  from  third-party  payor  intermediaries,  the
closure of facilities and programs discussed previously and 1996 acquisitions.

   Net cash used in investing activities was $18.2 million in 1996 primarily for
property,   plant  and  equipment   additions  of  $12.1  million  and  business
acquisitions of $6.1 million.

   Net cash provided by financing activities was $19.9 million in 1996. Net cash
provided by financing  activities  in 1996 resulted from the receipt of proceeds
from the Company's long term debt borrowings ($41.9 million),  offset by the use
of $2.4 million to pay  transaction  costs  associated  with borrowings and debt
repayments of $19.8 million.

   At  December  31,  1996,  the  Company  had total debt  outstanding  of $60.4
million, of which $43.4 million bears interest at fixed rates, primarily ranging
from  7.0% to  15.1%.  The  Company's  remaining  debt is drawn  under its $15.0
million  revolving  credit  facility  with Daiwa  Securities  of  America,  Inc.
("Daiwa")  entered into in December 1996, and its $5.0 million  revolving credit
facility  with IHS entered into in December  1996,  both of which are  discussed
below.

   To date,  the Company's  major  acquisitions  have been financed  principally
through mortgage and lease financing by Health and Retirement  Properties Trust.
At  December  31,  1996,  the  Company was  obligated  to Health and  Retirement
Properties Trust ("HRPT") under  installment notes with respect to 17 facilities
having an outstanding aggregate principal balance of approximately $36.4 million
and as a tenant  under three  master  leases  covering 30  facilities  having an
aggregate  minimum  rent of  approximately  $197  million  (subject to increase)
during the  remainder  of their  initial  terms and first  renewal  period.  The
Company was  required to pay $5.7  million of  refundable  deposits  under these
leases.  In  accordance  with a waiver and amendment  agreement  dated April 14,
1997,  CCA is required to pay a financing  fee of  $870,000,  maintain a deposit
balance of $1.5 million and utilize the remaining  deposits,  net of payments in
arrears,  up to 50% of the monthly lease expense,  not to exceed a total deposit
return of approximately $4.1 million.  In connection  therewith,  IHS guaranteed
$10.0 million of  obligations to HRPT. See Note 13 to the Notes to the Company's
Consolidated  Financial  Statements.  The master  leases  require the Company to
maintain  consolidated tangible net worth of at least $5.0 million and a current
ratio (ratio of current assets to current  liabilities)  of at least one to one.
At December 31, 1996, the Company was in default with these financial  covenants
but has obtained the

                                22

<PAGE>

necessary  waivers of these covenants from HRPT through  February 1998.  Certain
debt instruments with HRPT (aggregating approximately $19.5 million in principal
amount) have been  modified to provide that  interest only will be payable until
July 31, 1998, at which time principal will again become payable, with interest,
in  installments.  The notes and leases contain cross default  provisions,  such
that a default under any note or lease would entitle HRPT to accelerate  payment
of all of  such  notes  and  terminate  all of  such  leases  (and,  subject  to
mitigation of damages, to receive future rents).

   Included in the installment notes is $10.0 million which the Company borrowed
from HRPT pursuant to an 11% promissory note ("the HRPT Note") on April 4, 1996,
to provide  additional  renovation and  acquisition  funding and general working
capital.  No principal payments are required until the maturity date of December
31, 2008 with interest payments made monthly.  However, this loan, together with
a $2.6 million  prepayment  premium,  must be prepaid from the first proceeds of
certain equity or debt (or any combination  thereof) issued by the Company after
August 30,  1996.  The HRPT Note is secured  by all of the  collateral  security
which secure the Company's  current  obligations to HRPT and is subject to cross
default with other  obligations  to HRPT. As a result of closing this loan,  the
Company  increased  the  security  deposit held by HRPT for all  obligations  by
$550,000.

   On December 27,  1996,  the Company  entered  into a  Healthcare  Receivables
Purchase and Transfer  Agreement with Daiwa  providing for a 36 month  revolving
credit facility pursuant to which the Company may borrow from time to time up to
$15.0  million,  subject to a borrowing  base  formula.  The Loan  Agreement  is
secured by all patient and  third-party  settlement  receivables.  This facility
replaces,  and the proceeds from the line of credit were used to repay,  a $15.0
million  revolving credit facility with  NationsBank of Florida,  N.A., of which
$14.5  million was  outstanding  on December 27, 1996.  As of December 31, 1996,
Daiwa advanced the Company approximately $4.8 million in excess of the borrowing
base. In accordance with a waiver  and  amendment agreement dated April 14, 1997
the Company is required to pay such amount in monthly  installments of $300,000.
The $4.8  million has been  guaranteed  by IHS.  In  connection  therewith,  the
Company  issued a five year  warrant to Daiwa to  purchase  1,787,568  shares of
Common Stock (subject to reduction as $300,000  payments are made) at an initial
price of $2.25 per share (subject to adjustment in certain  circumstances).  See
Note 13 to the Notes to the Company's  Consolidated  Financial  Statements.  The
remaining  outstanding  loan will  mature on  December  27,  1999.  Each  amount
advanced is to bear interest at a rate equal to the LIBO Rate at the time of the
revolving advance plus 2.00% per annum. The Company's  interest rate at December
31,  1996 was  7.9065%. 

   Additionally,  the  Company  entered  into a  subordinated  revolving  credit
agreement with IHS Financial  Holdings,  Inc., a subsidiary of IHS,  pursuant to
which,  as of December 27,  1996,  the Company may borrow up to $5.0 million for
additional  working capital until December 27, 1998.  Borrowings under this line
of credit are to bear  interest  at a rate equal to the annual rate set forth in
IHS's  revolving  credit  agreement with Citibank,  N.A. plus 2% per annum.  The
Company's interest rate at December 31, 1996 was 10.25% per annum. In connection
therewith,  the Company  issued  warrants to  purchase an  aggregate  of 752,182
shares of the Company's Common Stock, one-half of which are exercisable at $3.22
per share (the average of the high and low trading price of the Company's Common
Stock on  January  14 and 15,  1997) for a  two-year  period  and the  remaining
one-half of which are exercisable at $6.44 per share for a five-year period. The
Company has granted IHS  registration  rights relating to the shares  underlying
the warrants.  In connection with certain  guarantees  issued by IHS to HRPT and
Daiwa of  obligations  of the Company on April 14,  1997,  the Company  issued a
warrant to IHS to purchase  379,900  shares of Common Stock at $1.937 per share.
See  Notes  13 and 14 of the  Notes  to  the  Company's  Consolidated  Financial
Statements.

   In addition to  borrowings,  the liquidity of the Company is dependent on the
timing of payments by governmental and private third-party payors. The Company's
operations could be adversely  affected if it experiences  significant delays in
reimbursement  of its costs.  Continued  efforts by governmental and third-party
payors  to  contain  or  reduce  the  acceleration  of  costs,  as  well  as any
significant  increase  in the  Company's  proportion  of Medicare  and  Medicaid
patients,  could  adversely  affect  the  Company's  liquidity  and  results  of
operations.

                                23

<PAGE>

ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

   The following  financial  statements  are annexed to this Report  starting at
   page F-2:

   Consolidated Balance Sheets as of December 31, 1995 and 1996

   Consolidated  Statements of Operations for the Years Ended December 31, 1994,
   1995 and 1996

   Consolidated  Statements of Shareholders' Equity for the Years Ended December
   31, 1994, 1995 and 1996

   Consolidated  Statements of Cash Flows for the Years Ended December 31, 1994,
   1995 and 1996

   Notes to Consolidated Financial Statements

ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

   Not applicable

                                       24

<PAGE>

                                   PART III

   The information called for by Part III (Items 10, 11, 12 and 13) of Form 10-K
(except information as to the Company's  executive  officers,  which information
follows  Item 4 in this  Report) is  incorporated  herein by  reference  to such
information which will be contained in the Company's  definitive Proxy Statement
to be used in connection  with the Company's  1997 Annual  Meeting,  which Proxy
Statement will be filed pursuant to Regulation 14A under the Securities Exchange
Act of 1934,  or in an  amendment  to this  Report,  which  Proxy  Statement  or
amendment will be filed within 120 days following the end of the year covered by
this Report.

                                       25

<PAGE>
                                   PART IV

ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a) (1) Financial Statements

                        INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>

                                                                                           PAGE
                                                                                          --------
<S>                                                                                         <C>
COMMUNITY CARE OF AMERICA, INC.
 Independent Auditors' Report.............................................................  F-1
 Consolidated Balance Sheets as of December 31, 1995 and 1996.............................  F-2
 Consolidated Statements of Operations for the Years Ended December 31, 1994, 1995 and
  1996....................................................................................  F-3
 Consolidated Statements of Shareholders' Equity for the Years Ended December 31, 1994,
  1995 and 1996...........................................................................  F-4
 Consolidated Statements of Cash Flows for the Years Ended December 31, 1994, 1995 and
  1996....................................................................................  F-5
 Notes to Consolidated Financial Statements...............................................  F-6
</TABLE>

   (2) The following  financial  statement  schedules are filed  herewith on the
       page indicated:

<TABLE>
<CAPTION>

                                    SCHEDULE                                   PAGE
----------------------------------------------------------------------------- -------
<S>                                                                              <C>
Community Care of America, Inc. Schedule II -- Valuation and Qualifying
Accounts.......................................................................  S-1
</TABLE>

(b) Reports on Form 8-K.

   The only Report on Form 8-K filed during the fourth  quarter of the Company's
year ended  December 31, 1996 was dated October 8, 1996 (date of earliest  event
reported),  reporting Item 5, Other Events. In January 1997, the Company filed a
report on Form 8-K dated  December  23,  1996 (date of earliest  event  report),
reporting  Item 5, Other Events,  and Item 7,  Financial  Statements,  Pro Forma
Financial  Information  and Exhibits.  No financial  statements  were filed with
either Report.

(c) Exhibits:

   EXHIBIT
    NUMBER                                              DESCRIPTION
-------------  -----------------------------------------------------------------
2.01           Stock  Purchase  Agreement  dated as of July 1,  1993  among  the
               Company  and PNC Venture  Corp.,  Primus  Capital  Fund I Limited
               Partnership,  Primus  Capital  Fund II Limited  Partnership,  PNC
               Venture Group I, New York Life  Insurance  Company and MeritWest,
               Inc.
2.02(a)        Amended and Restated  Agreement and Plan of Reorganization  dated
               as of May 10, 1996 among the Company,  Newco,  Southern Care, and
               Wallace  Olson  and  Michael  Himmelstein,  the  shareholders  of
               Southern Care.  (Incorporated  by reference to Exhibit 2.1 to the
               Company's  Current Report on Form 8-K, date of earliest  reported
               event: May 16, 1996, File No. 0-26502.)
2.02(b)        Consulting  and  Advisory  Services  Agreement  effective  as  of
               January 1, 1996 among the Company,  Southern Care  Centers,  Inc.
               and its  Shareholders.  (Incorporated  by  reference  to  Exhibit
               2.02(b) to the Company's  Annual Report on Form 10-K for the year
               ended December 31, 1995 1996, File No. 0-26502.)

                                       26

<PAGE>



   EXHIBIT
    NUMBER                              DESCRIPTION
-------------  -----------------------------------------------------------------
 2.02(c)       Management  Agreement  dated as of May 10,  1996  between  CCA of
               Texas,   Inc.   and  Southern   Care   Centers  of  Texas,   Inc.
               (Incorporated  by  reference  to  Exhibit  2.3 to  the  Company's
               Current Report on Form 8-K, date of earliest  reported event: May
               16, 1996, File No. 0-26502.)
 2.02(d)       Agreement to Provide  Accounting and Auditing  Services and Rural
               Healthcare  Provider  Network  Services  dated as of May 10, 1996
               among Newco and Buchanan/SCC,  Inc. (Incorporated by reference to
               Exhibit 2.4 to the Company's  Current Report on Form 8-K, date of
               earliest reported event: May 16, 1996, File No. 0-26502.)
 3.01(a)       Certificate of  Incorporation  of the Company,  as filed with the
               Secretary of State of the State of Delaware on December 28, 1992.
 3.01(b)       Certificate of Amendment of Certificate of  Incorporation  of the
               Company,  as filed  with the  Secretary  of State of the State of
               Delaware on October 13, 1993.
 3.01(c)       Certificate of Amendment of Certificate of  Incorporation  of the
               Company,  as filed  with the  Secretary  of State of the State of
               Delaware on December 28, 1993.
 3.01(d)       Certificate of  Designations,  Preferences and Rights of Series A
               8%  Cumulative  Preferred  Stock,  as filed with the Secretary of
               State of the State of Delaware on December 28, 1993.
 3.01(e)       Certificate of Amendment of Certificate of  Incorporation  of the
               Company,  as filed  with the  Secretary  of State of the State of
               Delaware on June 7, 1994.
 3.01(f)       Certificate of Amendment of Certificate of  Incorporation  of the
               Company,  as filed  with the  Secretary  of State of the State of
               Delaware on July 28, 1995.
 3.02          By-laws of the Company, as amended to date.
 4.01(a)       Healthcare  Receivables  Purchase  and Transfer  Agreement  dated
               December  23, 1996 among the  Company  and each of the  providers
               named in the Agreement  and CCA Funding,  LLC.  (Incorporated  by
               reference to Exhibit 4.1 to the Company's  Current Report on Form
               8-K, date of earliest reported event: December 23, 1996.)
 4.01(b)       Loan and Security  Agreement  dated December 23, 1996 between CCA
               Funding,  LLC  and  Daiwa  Healthco-2,   LLC.   (Incorporated  by
               reference to Exhibit 4.2 to the Company's  Current Report on Form
               8-K, date of earliest reported event: December 23, 1996.)
 4.01(c)       Assignment  of  Healthcare   Receivables  Purchase  and  Transfer
               Agreement as Collateral  Security.  (Incorporated by reference to
               Exhibit 4.3 to the Company's  Current Report on Form 8-K, date of
               earliest reported event: December 23, 1996.)
*4.01(d)       Waiver and  Amendment  dated April 14, 1997  between CCA Funding,
               LLC and Daiwa Healthco-2, LLC.
*4.01(e)       Warrant  Acquisition  Agreement dated April 14, 1997 between CCA,
               Inc. and Daiwa Healthco-2, LLC.
 4.02          Promissory  Note dated December 30, 1993 in the principal  amount
               of  $7,000,000  made by ECA  payable to HRPT,  with  Allonge  and
               Amendment dated April 1, 1995.
 4.03(a)       Promissory  Note dated December 30, 1993 in the principal  amount
               of  $13,600,000  made by ECA  payable to HRPT,  with  Allonge and
               Amendment dated April 1, 1995.
 4.03(b)       Allonge and Amendment dated as of May 10, 1996 to Promissory Note
               dated  December 30, 1993 in the principal  amount of  $13,600,000
               made by ECA Holdings, Inc. ("ECA") payable to HRPT. (Incorporated
               by reference to Exhibit 4.1 to the  Company's  Current  Report on
               Form 8-K, date of earliest reported event: May 16, 1996, File No.
               0-26502.)

                                       27

<PAGE>


   EXHIBIT
    NUMBER                              DESCRIPTION
-------------  -----------------------------------------------------------------
4.04(a)        Promissory  Note dated December 30, 1993 in the principal  amount
               of $6,000,000  made by Community  Care of Nebraska  Inc.  ("CCN")
               payable to HRPT, with Allonge and Amendment dated April 1, 1995.
4.04(b)        Allonge and Amendment dated as of May 10, 1996 to Promissory Note
               dated  December 30, 1993 in the  principal  amount of  $6,000,000
               made by CCN  payable  to  HRPT.  (Incorporated  by  reference  to
               Exhibit 4.2 to the Company's  Current Report on Form 8-K, date of
               earliest reported event:  May 16, 1996, File No. 0-26502.)
4.05           Promissory  Note dated April 1, 1995 in the  principal  amount of
               $3,800,000 made by the Company payable to HRPT.
4.06(a)        Promissory  Note dated April 1, 1995 in the  principal  amount of
               $2,045,000 made by CCN and certain of its subsidiaries payable to
               HRPT.
4.06(b)        Allonge and Amendment to Promissory Note dated as of May 10, 1996
               to Promissory Note dated April 1, 1995 in the principal amount of
               $2,045,000,  made by CCN and certain of its subsidiaries  payable
               to  HRPT.  (Incorporated  by  reference  to  Exhibit  4.3  to the
               Company's  Current Report on Form 8-K, date of earliest  reported
               event: May 16, 1996, File No. 0-26502.)
4.07(a)        Renovation  Funding Agreement dated April 1, 1995 between ECA and
               HRPT.
4.07(b)        ECA Holdings  Renovation  Funding  Promissory Note dated April 1,
               1995 in the principal amount of $6,466,700 made by ECA payable to
               HRPT.
4.07(c)        Allonge and Amendment to Promissory Note dated as of May 10, 1996
               to ECA Holdings Renovation Funding Promissory Note dated April 1,
               1995 in the principal amount of $6,466,700 made by ECA payable to
               HRPT.  (Incorporated by reference to Exhibit 4.4 to the Company's
               Current Report on Form 8-K, date of earliest  reported event: May
               16, 1996, File No. 0-26502.)
4.08(a)        Renovation  Funding Agreement dated April 1, 1995 between CCN and
               HRPT.
4.08(b)        CCN Group Renovation  Funding Promissory Note dated April 1, 1995
               in the  principal  amount  of  $2,833,300  made  by CCN  and  its
               subsidiaries payable to HRPT.
4.08(c)        Allonge and Amendment to Promissory Note dated as of May 10, 1996
               to CCN Group  Renovation  Funding  Promissory Note dated April 1,
               1995 in the principal  amount of  $2,833,300  made by CCN and its
               subsidiaries  payable  to HRPT.  (Incorporated  by  reference  to
               Exhibit 4.5 to the Company's  Current Report on Form 8-K, date of
               earliest reported event: May 16, 1996, File  No. 0-26502.)
4.09(a)        Amended  and  Restated  Revolving  Credit  Agreement  dated as of
               December  27, 1996  between the  Company  and  Integrated  Health
               Services, Inc ("IHS").  (Incorporated by reference to Exhibit 4.4
               to the  Company's  Current  Report on Form 8-K,  date of earliest
               reported event: December 23, 1996.)
4.09(b)        Subordinated Note dated December 27, 1996 from the Company to IHS
               in the principal sum of $5,000,000. (Incorporated by reference to
               Exhibit 4.5 to the Company's  Current Report on Form 8-K, date of
               earliest reported event: December 23, 1996.)
10.01          Stockholders  Agreement  dated  June 30,  1993  among  Robert  N.
               Elkins,  Robert  N.  Elkins,  as  voting  trustee,  Equity-Linked
               Investors,  L.P.  ("ELI-I"),   Equity-Linked  Investors,  L.P.-II
               ("ELI-II") and the Company.
10.02          Voting  Agreement  dated  January 26, 1996 among Robert N. Elkins
               and certain stockholders of the Company.
10.03(c)+      Restated Employment  Agreement between the Company and William J.
               Krystopowicz.

                                       28

<PAGE>


   EXHIBIT
    NUMBER                              DESCRIPTION
-------------  -----------------------------------------------------------------
 10.03(d)+     Employment  Agreement  between  the  Company  and David H. Fater.
               (Incorporated  by reference to Exhibit  10.03(d) to the Company's
               Annual Report on Form 10-K for the year ended  December 31, 1995,
               File No. 0-26502.)
 10.03(e)+     Employment   Agreement  between  the  Company  and  Deborah  Lau.
               (Incorporated  by reference to Exhibit  10.03(e) to the Company's
               Annual Report on Form 10-K for the year ended  December 31, 1995,
               File No. 0-26502.)
*10.03(f)(i)+  Employment Agreement dated April 19, 1996 between the Company and
               Gary W. Singleton.
*10.03(f)(ii)+ Severance Agreement  dated  April 4, 1997 between the Company and
               Gary W. Singleton.
 10.04(a)+     1993 Stock Option Plan, as amended to date.
 10.04(b)+     1993 Senior Executive Stock Option Plan, as amended to date.
 10.04(c)+     1995 Stock Option Plan, as amended to date.
 10.04(d)+     1995 Non-Employee Director Stock Option Plan, as amended to date.
 10.05(a)      Master  Lease  Document,   General  Terms  and  Conditions  dated
               December 30, 1993 between  Health and  Rehabilitation  Properties
               Trust (currently known as Health and Retirement Properties Trust,
               "HRPT"),  as landlord,  and ECA  Holdings,  Inc., a  wholly-owned
               subsidiary  of the Company  ("ECA"),  as tenant,  as amended by a
               First  Amendment  dated July 22, 1994, a Second  Amendment  dated
               November 1, 1994 and a Third Amendment dated April 1, 1995.
 10.05(b)      Fourth  Amendment  dated  as of May  10,  1996  to  Master  Lease
               Document,  General Terms and  Conditions  dated December 30, 1993
               between HRPT and ECA.  (Incorporated by reference to Exhibit 99.1
               to the  Company's  Current  Report on Form 8-K,  date of earliest
               reported event: May 16, 1996, File No. 0-26502.)
 10.06(a)      Master Lease Document,  General Terms and Conditions  dated April
               1, 1995 between HRPT, as landlord, and ECA, as tenant.
 10.06(b)      First  Amendment  dated  as of  May  10,  1996  to  Master  Lease
               Document,  General  Terms  and  Conditions  dated  April 1,  1995
               between HRPT and ECA.  (Incorporated by reference to Exhibit 99.2
               to the  Company's  Current  Report on Form 8-K,  date of earliest
               reported event: May 16, 1996, File No. 0-26502.)
 10.7(a)       Purchase  Agreement  dated  September 15, 1994 among the Company,
               Leonard Louis  Healthcare  Properties,  Prospect Lake  Healthcare
               Center, Inc. and Valley View Healthcare Center, Inc.
 10.7(b)       Amendment to Purchase  Agreement dated October 31, 1994 among the
               Company,  Leonard  Louis  Healthcare  Properties,  Leonard  Louis
               Healthcare  Properties I, Leonard Louis Healthcare Properties II,
               Prospect Lake Healthcare Center,  Inc. and Valley View Healthcare
               Center, Inc.
 10.08(a)      Stock  Purchase  Agreement  dated  November  16,  1994  among the
               Company and Quality  Health  Care,  Inc.  and Timothy J.  Juilfs,
               Sally M. Juilfs and Brighton  Place West,  Inc.,  Quality Care of
               Topeka, Inc., W.R.T. Care, Inc., Care Centers, Inc., Quality Care
               of Council  Bluffs North,  Inc.,  Quality Care of Council  Bluffs
               South,  Inc.,  Oak Grove Medical  Center,  Inc.,  Quality Care of
               Pacific  Junction,  Inc.,  Quality  Care of  Glenwood,  Inc.  and
               W.T.F.D.R. Care, Inc.
 10.08(b)      Stock  Purchase  Agreement  dated  November  16,  1994  among the
               Company and Quality  Health  Care,  Inc.,  and Timothy J. Juilfs,
               Sally M. Juilfs and W.S.T.  Care,  Inc.,  Quality  Care of Lyons,
               Inc.,  Quality Care of  Columbus,  Inc. and Quality Care of Grand
               Island, Inc.
 10.09         Asset  Purchase  Agreement  dated  February  1,  1995  among  the
               Company,  Georgiana Doctors Hospital,  Inc., Reliable Home Health
               Services, Inc., Herbert Kinsey, M.D. and Mary Kinsey.

                                       29

<PAGE>



   EXHIBIT
    NUMBER                              DESCRIPTION
-------------  -----------------------------------------------------------------
10.10          Stock  Purchase  Agreement  dated as of  November  1, 1995  among
               Community Care of America,  Inc., CCA of Maine,  Inc., Maine Head
               Trauma Center,  Inc., and the  shareholders  of Maine Head Trauma
               Center,  Inc.  (Incorporated  by  reference to Exhibit 2.1 to the
               Company's  Current  Report on Form 8-K,  date of  earliest  event
               reported: November 3, 1995, File No. 0-26502).
10.11(a)       Implementation  Contract  dated  January  19,  1994  between  the
               Company and Health Care Consulting, Inc.
10.11(b)       Agreement  dated  August 17, 1994  between the Company and Health
               Care Consulting, Inc.
10.12          Mortgage  Facilities  Fee  Agreement  (ECA)  dated  April 1, 1995
               between the Company and HRPT.
10.13          Mortgage  Facilities  Fee  Agreement  (CCN)  dated  April 1, 1995
               between the Company and HRPT.
10.14          Right of First Refusal and Option  Agreement  dated  December 30,
               1993  between  ECA  and  HRPT  with  respect  to  certain  of the
               Company's facilities in Colorado.
10.15          Right of First Refusal  Agreement dated December 30, 1993 between
               CCN and HRPT with respect to certain of the Company's  facilities
               in Nebraska.
10.16          Right of First  Refusal  Agreements  dated April 1, 1995  between
               W.S.T.  Care, Inc.,  Quality Care of Lyons, Inc. and Quality Care
               of Columbus, Inc., respectively, and HRPT with respect to certain
               of the Company's facilities in Nebraska.
10.17          Amended and Restated Option Agreement dated April 1, 1995 between
               ECA and HRPT with respect to the capital stock of CCN.
10.18(a)       Lease dated June 21, 1995 between  Midwest Health  Enterprises of
               Bessemer,  Inc.  ("Bessemer")  and  Community  Care of America of
               Alabama, Inc. ("CCAA").
10.18(b)       Lease Guaranty dated June 21, 1995 by the Company for the benefit
               of Bessemer.
10.18(c)       Subordination, Non-Disturbance, Attornment and Security Agreement
               among  Bessemer,  CCAA and Bankers Trust  Company of  California,
               N.A. ("BT").
10.19(a)       Lease  dated  June 21,  1995  between  South Gate  Village,  Inc.
               ("'South Gate") and CCAA.
10.19(b)       Lease Guaranty dated June 21, 1995 by the Company for the benefit
               of South Gate.
10.20(a)       Lease dated June 21, 1995 between  Greensboro  Health Care,  Inc.
               ("Greensboro") and CCAA.
10.20(b)       Lease Guaranty dated June 21, 1995 by the Company for the benefit
               of Greensboro.
10.20(c)       Subordination, Non-Disturbance, Attornment and Security Agreement
               among Greensboro, CCAA and BT.
10.21          Non-Competition  and Secrecy  Agreement dated June 21, 1995 among
               the Company, CCAA and Stanley L. Stein.
10.22(a)       Form of nine Management  Agreements  dated June 23, 1995 pursuant
               to  which  the  Company  is  to  mangemen  nine   long-term  care
               facilities  in  Maine,  together  with  a  schedule  pursuant  to
               Instruction  2 to Item 601(a) of  Regulation  S-K  setting  forth
               material  details that differ from the attached form of Managment
               Agreement.
10.22(b)       Management   Agreement   dated  June  23,   1995  among   Nursing
               Administrators,  Inc.,  David  L.  Friedmman,  Mary  Bayer,  Leon
               Bresloff and CCA of Maine, Inc.
10.22(c)       Purchase Option Agreement dated June 23, 1995 relating to the ten
               long-term facilities in Maine to be managed by the Company.
10.22(d)       Services Agreement dated June 23, 1995 between CCA of Maine, Inc.
               and Sandy River Development, Inc.
10.22(e)       Letter  Agreement dated June 23, 1995 from the Company to David I
               Friedman  regarding the Purchase Option  Agreement dated June 23,
               1995 relating to the ten long-term care facilities in Maine to be
               managed by the Company.
10.22(f)       Agreement dated June 23, 1995 between the Company and Harbor Hill
               Limited Liability Company.


10.23(a)       Letter of Intent dated July 12, 1995 between the Company and Jeff
               Voreis, M.D.
10.23(b)       Employment  Agreement  dated July 11, 1995  between  Jeff Voreis,
               M.D. and the Company.
10.23(c)       Amended and Restated  Employment  Agreement  dated August 4, 1995
               between the Company and Jeff Voreis, M.D.
10.23(d)       Asset  Purchase  Agreement  dated  August  4, 1995  between  Jeff
               Voreis, M.D. and Community Care of America of Alabama, Inc.

                                       30

<PAGE>



   EXHIBIT
    NUMBER                         DESCRIPTION
-------------  -----------------------------------------------------------------
 10.25         Master Lease Document,  General Terms and Conditions  dated as of
               May 10, 1996 between HRPT and Marietta/SCC,  Inc.,  Glenwood/SCC,
               Inc.,  Dublin/SCC,  Inc., Macon/SCC,  Inc., and College Park/SCC,
               Inc.  (Incorporated by reference to Exhibit 99.3 to the Company's
               Current Report on Form 8-K, date of earliest  reported event: May
               16, 1996, File No. 0-26502.)
*10.26         Waiver  Agreement  dated April 14, 1997 between CCA, Inc. and its
               Subsidiaries and HRPT.
 10.27(a)      Warrant  Acquisition  Agreement  dated as of  January  13,  1997,
               between the Company and IHS, including Form of Series A Warrants,
               Form of Series B  Warrants  and  Registration  Rights  Agreement.
               (Incorporated  by  reference  to  Exhibit  4.6 to  the  Company's
               Current  Report on Form 8-K,  date of  earliest  reported  event:
               December 23, 1996.)
*10.27(b)      Warrant  Acquisition  Agreement dated April 14, 1997 between CCA,
               Inc. and IHS, Inc.
 10.28(a)      Management  Agreement  dated as of December  27, 1996 between the
               Company and IHS (Incorporated by reference to Exhibit 99.0 to the
               Company's  Current Report on Form 8-K, date of earliest  reported
               event: December 23, 1996).
*10.28(b)      Amendment  No. 1 to  Management  Agreement  dated  April 14, 1997
               between CCA, Inc. and IHS, Inc.
*11.01         Calculation of Earnings per Share.
*21.01         Subsidiaries of the Company.
*23.01         Consent of KPMG Peat Marwick LLP

                                 UNDERTAKING

   The Company  hereby  undertakes  to furnish to the  Securities  and  Exchange
Commission,  upon request,  all constituent  instruments  defining the rights of
holders of long-term debt of the Company and its  consolidated  subsidiaries not
filed  herewith.  Such  instruments  have not been filed since none are, nor are
being,  registered  under Section 12 of the Securities  Exchange Act of 1934 and
the total amount of securities  authorized  under any such  instruments does not
exceed  10% of the  total  assets  of the  Company  and  its  subsidiaries  on a
consolidated basis.

----------
 
*    Filed herewith. All other exhibits, unless otherwise noted by parenthetical
     cross  references,  are  incorporated  by  reference  to the  corresponding
     numbered  exhibit  to  Company's   Registration   Statement  on  Form  S-1,
     Registration No. 33-92692.

+    Management contract or compensatory plan.

                                       31

<PAGE>



                                   SIGNATURES

   Pursuant  to 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  on the 14th day of
April, 1997.

                              COMMUNITY CARE OF AMERICA, INC.


                              By: /s/ DEBORAH A. LAU
                                  ---------------------------------------------
                              Deborah A. Lau
                              President
                              Chief Executive Officer & Chief Financial Officer

   Pursuant to the  requirements  of 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.

        SIGNATURE                          TITLE                       DATE
-------------------------  ------------------------------------ ----------------
/s/ DEBORAH A. LAU         President, Chief Executive Officer
-------------------------  and Chief Financial Officer          April 14, 1997
Deborah A. Lau              

/s/ MICHAEL S. BLASS       Director                             April 14, 1997
-------------------------
Michael S. Blass          

/s/ ROBERT N. ELKINS       Director                             April 14, 1997
-------------------------
Robert N. Elkins 

-------------------------  Director
John L. Silverman         

                                       32

<PAGE>



                         INDEPENDENT AUDITORS' REPORT

The Board of Directors
Community Care of America, Inc.:

   We have audited the  accompanying  consolidated  balance  sheets of Community
Care  of  America,  Inc.  and  subsidiaries  (the  Company)  as  listed  in  the
accompanying index. We also have audited the financial statement schedule listed
in the  accompanying  index.  These  consolidated  financial  statements and the
financial statement schedule are the responsibility of the Company's management.
Our  responsibility  is to express an  opinion on these  consolidated  financial
statements and schedule 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 financial  position of Community
Care of America,  Inc. and subsidiaries as of December 31, 1995 and 1996 and the
results  of their  operations  and their cash flows for each of the years in the
three-year period ended December 31, 1996 in conformity with generally  accepted
accounting  principles.  Also, in our opinion,  the related financial  statement
schedule,  when  considered  in  relation  to the basic  consolidated  financial
statements taken as a whole,  presents  fairly,  in all material  respects,  the
information set forth therein.

   As discussed in notes 1 (m) and 12 to the consolidated  financial statements,
in 1996 the Company adopted the provisions of the Financial Accounting Standards
Board's Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of."

                                             KPMG PEAT MARWICK LLP

Baltimore, Maryland
April 14, 1997

                                       F-1

<PAGE>



               COMMUNITY CARE OF AMERICA, INC. AND SUBSIDIARIES
                         CONSOLIDATED BALANCE SHEETS
                            (DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>

                                                                                DECEMBER 31,
                                                                           ---------------------
                                                                              1995       1996
                                                                           --------- -----------
                                  ASSETS
<S>                                                                        <C>       <C>     
Current Assets:
 Cash and cash equivalents...............................................  $ 2,485   $  1,709
 Accounts receivable (note 3)............................................   12,934     16,407
 Inventories.............................................................    1,534      1,761
 Prepaid expenses and other current assets...............................    3,662      1,095
                                                                           --------- -----------
  Total current assets...................................................   20,615     20,972
Property, plant and equipment, net of accumulated depreciation (notes 4
 and 6)..................................................................   54,327     58,424
Notes receivable (note 16)...............................................    2,533         --
Deposits.................................................................   10,244      6,637
Excess of cost over fair value of net assets acquired, net of
 accumulated amortization of $139 in 1995 and $710 in 1996 (note 2)......    3,299     13,666
Deferred financing costs.................................................      948      1,066
Other assets.............................................................    1,324      1,354
                                                                           --------- -----------
                                                                           $93,290   $102,119
                                                                           ========= ===========
                   LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
 Current maturities of long-term debt (note 6)...........................  $ 1,258   $  6,341
 Accounts payable and accrued expenses (note 5)..........................   14,869     23,402
 Put option contracts payable (219,798 shares)(note 16)..................       --      2,181
                                                                           --------- -----------
  Total current liabilities..............................................   16,127     31,924
                                                                           --------- -----------
Long-term debt, less current maturities (note 6).........................   34,407     54,030
Deferred income taxes (note 8)...........................................    9,334        162
Commitments and contingencies (notes 2, 7, 12, 13 and 16)................
Common stock subject to repurchase (219,798 shares) (notes 2 and 16) ....    2,181         --
Shareholders' equity (notes 10 and 15):
 Common stock, $.0025 par value; authorized 15,000,000 shares; issued and
  outstanding 6,982,789 shares in 1995 and 7,597,801 shares in 1996
  (including 219,798 shares subject to repurchase).......................       17         19
 Additional paid-in capital..............................................   31,356     36,465
 Deficit.................................................................     (132)   (19,037)
 Receivable from shareholders (note 2)...................................       --     (1,444)
                                                                           --------- -----------
  Net shareholders' equity...............................................   31,241     16,003
                                                                           --------- -----------
                                                                           $93,290   $102,119
                                                                           ========= ===========
</TABLE>

          See accompanying notes to consolidated financial statements.

                                       F-2

<PAGE>



               COMMUNITY CARE OF AMERICA, INC. AND SUBSIDIARIES
                    CONSOLIDATED STATEMENTS OF OPERATIONS
               (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>

                                                                YEARS ENDED DECEMBER 31,
                                                          ------------------------------------
                                                              1994        1995        1996
                                                          ----------- ----------- ------------
<S>                                                       <C>         <C>         <C>       
Operating revenues:
 Net patient service revenues...........................  $   56,699  $   92,259  $  123,143
 Other operating revenues...............................         793       1,919       4,369
                                                          ----------- ----------- ------------
  Total operating revenues..............................      57,492      94,178     127,512
                                                          ----------- ----------- ------------
Operating expenses:
 Facility operating expenses............................      46,035      73,693     111,171
 Corporate administrative and general...................       2,935       4,765       5,226
 Rent (note 7)..........................................       3,806       6,404       8,999
 Depreciation and amortization..........................       1,465       2,033       3,021
 Interest, net of interest income (note 6)..............       2,857       3,795       5,337
 Loss on impairment of investments and other
  non-recurring charges (note 12).......................          --          --      22,128
                                                          ----------- ----------- ------------
  Total operating expenses..............................      57,098      90,690     155,882
                                                          ----------- ----------- ------------
  Earnings (loss) before income taxes and extraordinary
   charge...............................................         394       3,488     (28,370)
Federal and state income taxes (note 8).................          --       1,047      (9,465)
                                                          ----------- ----------- ------------
  Earnings (loss) before extraordinary charge...........         394       2,441     (18,905)
Extraordinary charge, net of income taxes (note 15) ....          --        (992)         --
                                                          ----------- ----------- ------------
  Net earnings (loss)...................................         394       1,449     (18,905)
Dividends-preferred stock...............................        (653)       (408)         --
                                                          ----------- ----------- ------------
  Net earnings (loss) applicable to common stock........  $     (259) $    1,041  $  (18,905)
                                                          =========== =========== ============
Per common share:
 Earnings (loss) before extraordinary charge............  $    (0.13) $     0.42  $    (2.56)
 Extraordinary charge...................................          --       (0.20)         --
                                                          ----------- ----------- ------------
 Net earnings (loss)....................................  $    (0.13) $     0.22  $    (2.56)
                                                          =========== =========== ============
Weighted average number of common and common equivalent
 shares outstanding.....................................   2,041,154   4,840,457   7,384,697
                                                          =========== =========== ============
</TABLE>

          See accompanying notes to consolidated financial statements.

                                       F-3

<PAGE>



               COMMUNITY CARE OF AMERICA, INC. AND SUBSIDIARIES
               CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
                 YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
                            (DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>

                                                                     ADDITIONAL                  RECEIVABLE
                                                            COMMON     PAID IN    ACCUMULATED       FROM
                                                             STOCK     CAPITAL     (DEFICIT)    SHAREHOLDERS     TOTAL
                                                           -------- ------------ ------------- -------------- -----------
<S>                                                        <C>      <C>          <C>           <C>            <C>     
Balance at December 31, 1993.............................  $    4   $ 5,251      $   (914)     $    --        $  4,341
Issuance of 216,428 shares of common stock at $6.19 per
share, net of stock issuance costs.......................       1     1,034            --           --           1,035
Accretion of discount on redeemable preferred stock
(note 9).................................................      --      (372)           --           --            (372)
Dividends declared -- redeemable preferred stock ........      --        --          (653)          --            (653)
Net earnings.............................................      --        --           394           --             394
                                                           -------- ------------ ------------- -------------- -----------
Balance at December 31, 1994.............................       5     5,913        (1,173)          --           4,745
Issuance of 3,450,000 shares of common stock at $9.50
per share, net of stock issuance costs (note 13) ........       9    27,580            --           --          27,589
Redemption of preferred stock of $8,167 and exercise of
warrants for 1,331,814 shares of common stock at par
value....................................................       3    (2,006)           --           --          (2,003)
Amortization of restricted stock awards..................      --       100            --           --             100
Accretion of discount on redeemable preferred stock
(note 9).................................................      --      (231)           --           --            (231)
Dividends declared -- redeemable preferred stock ........      --        --           (408)         --            (408)
Net earnings.............................................      --        --          1,449          --           1,449
                                                           -------- ------------ ------------- -------------- -----------
Balance at December 31, 1995.............................      17    31,356          (132)          --          31,241
Exercise of employee stock options for 33,385 shares of
common stock at prices ranging from $3.71 to $10.11 per
share....................................................      --       160            --           --             160
Issuance of 581,627 shares of common stock in connection
with acquisitions at prices ranging from $8.44 to $11.77
per share (note 2).......................................       2     4,949            --       (1,444)          3,507
Net loss.................................................      --        --       (18,905)          --         (18,905)
                                                           -------- ------------ ------------- -------------- -----------
Balance at December 31, 1996.............................  $   19   $36,465      $(19,037)     $(1,444)       $ 16,003
                                                           ======== ============ ============= ============== ===========
</TABLE>

          See accompanying notes to consolidated financial statements.

                                       F-4

<PAGE>



               COMMUNITY CARE OF AMERICA, INC. AND SUBSIDIARIES
                    CONSOLIDATED STATEMENTS OF CASH FLOWS
                            (DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>

                                                                     YEARS ENDED DECEMBER 31,
                                                                ----------------------------------
                                                                   1994       1995        1996
                                                                ---------- ---------- ------------
<S>                                                             <C>        <C>        <C>      
Cash flows from operating activities:
 Net earnings (loss)..........................................  $    394   $  1,449   $(18,905)
 Adjustments to reconcile net earnings (loss) to net cash
  provided by (used in) operating activities:
  Loss on impairment of investments and other non-recurring
   charges....................................................        --         --     22,128
  Depreciation and amortization...............................     1,465      2,033      3,021
  Amortization of deferred financing costs....................        68        123        399
  Extraordinary charge, net of tax............................        --        992         --
  Amortization of restricted stock award......................        --        100         --
  Deferred income taxes.......................................        --        541     (9,465)
  Net change in operating assets and liabilities:
   Increase in accounts receivables...........................    (4,479)    (4,609)    (3,615)
   Decrease (increase) in inventory, prepaid expenses and
    other current assets......................................       (89)    (1,787)     2,999
   Increase (decrease) in accounts payable and accrued
    liabilities...............................................    (4,154)     4,179        993
                                                                ---------- ---------- ------------
   Net cash provided by (used in) operating activities........    (6,795)     3,021     (2,445)
                                                                ---------- ---------- ------------
Cash flows from investing activities:
 Property, plant and equipment additions, including costs of
  terminated activities of $9,258 in 1996 ....................    (2,472)    (6,647)   (12,117)
 Business acquisitions (note 2)...............................       (78)   (10,719)    (6,132)
 Notes receivable.............................................        --     (2,533)      (233)
 Deposits.....................................................     2,000     (3,194)      (519)
 Other assets.................................................      (443)      (877)       798
                                                                ---------- ---------- ------------
   Net cash used in investing activities......................      (993)   (23,970)   (18,203)
                                                                ---------- ---------- ------------
Cash flows from financing activities:
 Proceeds from issuances of common stock, net of stock
  issuance costs..............................................       402     27,589        160
 Redemption of preferred stock and warrants (notes 9 and 15)..        --     (8,142)        --
 Dividends on preferred stock.................................      (490)      (571)        --
 Principal reductions on long-term debt.......................   (24,233)   (60,404)   (19,782)
 Proceeds from long-term debt borrowings......................    30,719     61,733     41,931
 Deferred financing costs, including terminated offerings of
  $1,677 in 1996..............................................    (1,179)      (696)    (2,437)
                                                                ---------- ---------- ------------
   Net cash provided by financing activities..................     5,219     19,509     19,872
                                                                ---------- ---------- ------------
Decrease in cash..............................................    (2,569)    (1,440)      (776)
Cash and cash equivalents, beginning of period................     6,494      3,925      2,485
                                                                ---------- ---------- ------------
Cash and cash equivalents, end of period......................  $  3,925   $  2,485   $  1,709
                                                                ========== ========== ============
</TABLE>

          See accompanying notes to consolidated financial statements.

                                       F-5
<PAGE>

                COMMUNITY CARE OF AMERICA, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
                (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

   (a) Organization and Basis of Presentation

   Community Care of America,  Inc. (CCA) is a Delaware  corporation  originally
incorporated on December 28, 1992. CCA began incurring start-up expenses in 1993
but had no significant operations until its acquisition of all the capital stock
of MeritWest, Inc. ("MeritWest") on December 30, 1993. For accounting  purposes,
this  acquisition  has been  treated as  effective  as of December 31, 1993 and,
accordingly,  the results of operations of this acquired company are included in
CCA's consolidated financial statements beginning on January 1, 1994.

   The  consolidated  financial  statements  include the accounts of CCA and its
wholly-owned  subsidiaries  (collectively the Company).  In  consolidation,  all
significant  intercompany  balances and transactions  have been  eliminated.  At
December 31, 1996, CCA owned,  leased or managed 54 long-term  care  facilities,
one hospital,  two  physician  practices,  two primary care  clinics,  one rural
healthcare clinic, one outpatient  rehabilitation center, one child care center,
one home healthcare  agency and an aggregate of 115 assisted living units in six
communities the Company serves.

   (b) Patient Service Revenues

   Patient service  revenues are recorded at established  rates and adjusted for
differences between such rates and estimated amounts reimbursable by third-party
payors. Estimated settlements under third-party payor retrospective rate setting
programs (primarily Medicare and Medicaid) are accrued in the period the related
services are rendered.  Settlements  receivable and related  revenues under such
programs are based on annual cost reports  prepared in  accordance  with Federal
and state  regulations,  which  reports  are  subject  to audit and  retroactive
adjustment in future periods.  In the opinion of management,  adequate provision
has been made in the  consolidated  financial  statements for such  adjustments;
however,  the  ultimate  amount of  adjustments  could be in  excess of  amounts
provided.

   (c) Management Fee Revenues

   Management  fee revenues are  recognized  when earned and  collectibility  is
reasonably assured.

   (d) Cash and Cash Equivalents

   Cash  equivalents  consist of highly  liquid debt  instruments  with original
maturities of three months or less.

   (e) Property, Plant and Equipment

   The  Company   capitalizes   costs  associated  with  acquiring  health  care
facilities and related interests therein. Pre-acquisition costs represent direct
costs of the  investigation  and  negotiation  of the  acquisition  of operating
facilities;  indirect  and  general  expenses  related  to such  activities  are
expensed as incurred.  Pre-acquisition  costs and  construction  in progress are
transferred to depreciable  asset categories when the related tasks are achieved
or are charged to  operating  expenses  when it is  determined  that the related
acquisition will not be consummated. Interest costs incurred during construction
and renovation are capitalized.

   The Company  capitalizes  development  costs which  represent  the direct and
incremental costs of developing healthcare delivery networks using the Company's
long-term  care  facilities  or rural  hospitals as platforms  for  providing an
expanded  range of services  (i.e.  primary care clinics,  rehabilitation,  home
health,  etc.).  Development costs include consulting fees, salaries and related
costs of  development  personnel and other direct costs of performing  functions
such as market research and feasibility, promotion and marketing, recruitment of
physicians  and other service  providers,  training and related costs during the
period the new facility or service attains complete operational status.

                                       F-6

<PAGE>

               COMMUNITY CARE OF AMERICA, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
          (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)-(CONTINUED)


(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)

   Total costs of facilities  acquired are allocated to land, land improvements,
equipment  and  buildings  (or  leasehold  interests  therein)  based  on  their
respective fair values determined generally by independent appraisal.

   (f) Depreciation and Amortization

   Depreciation and amortization  are provided on the  straight-line  basis over
the estimated useful lives of the assets,  generally 40 years for buildings,  25
years for land  improvements,  10 years for equipment,  5 years for  development
costs and the initial term and expected renewal terms of the leases for costs of
leasehold interests and improvements.

   (g) Deferred Financing Costs

   The Company  defers  financing  costs  incurred to obtain  long-term debt and
amortizes  such costs  using the  interest  method  over the term of the related
debt.

   (h) Excess of Cost Over Fair Value of Net Assets Acquired

   The assets and  liabilities  of  acquired  entities  accounted  for under the
purchase  method of accounting are adjusted to their estimated fair values as of
the acquisition dates. The amounts recorded as excess of cost over fair value of
net assets  acquired  represent  amounts paid that exceed  estimated fair values
assigned to the assets and liabilities of each acquired  business.  Such amounts
are being amortized on a straight-line  basis over periods ranging from 10 to 40
years, depending on the specific circumstances of each acquisition.

   (i) Income Taxes

   Deferred  income taxes are recognized for the tax  consequences  of temporary
differences  between  financial  statement  carrying amounts and the related tax
bases of assets and  liabilities,  primarily  related to business  acquisitions.
Such tax effects are measured by applying enacted statutory tax rates applicable
to future years in which the differences are expected to reverse, and the effect
of a change in tax rates is  recognized  in the period that includes the date of
enactment.

   (j) Earnings per Common Share

   Earnings per share is computed based on the weighted average number of common
and common  equivalent  shares  outstanding  during the  periods.  Common  stock
equivalents include options and warrants to purchase common stock, assumed to be
exercised using the treasury stock method.  Options and warrants issued from May
1994 through  August 15, 1995 have been treated as  outstanding  for all periods
presented.  Dividends  related to the Company's 8% redeemable  preferred  stock,
Series A, of $653 in 1994 and $408 in 1995,  are deducted  from net earnings for
the purpose of calculating earnings per share. On August 15, 1995, the preferred
stock was  redeemed  with the  proceeds  of the initial  public  offering of the
Company's common stock and related warrants were exercised (see note 9). Had the
redemption of preferred  stock and related  issuance of common stock occurred on
January 1, 1995,  earnings per common share for the year ended December 31, 1995
would be as follows:

           Earnings before extraordinary charge.................  $.45
           Net earnings.........................................   .26

                                      F-7

<PAGE>
               COMMUNITY CARE OF AMERICA, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
          (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)-(CONTINUED)



(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)

   (k) Accounting for Stock Options

   The Company applies  Accounting  Principles Board Opinion No. 25, "Accounting
for Stock Issued to  Employees"  ("APB No.  25"),  in  accounting  for its stock
options.  Additional  information  required by Statement of Financial Accounting
Standards No. 123,  "Accounting for Stock-Based  Compensation" ("SFAS No. 123"),
is discussed in Note 10.

   (l) Use of Estimates

   Management  of the Company  has made a number of  estimates  and  assumptions
relating  to the  reporting  of assets and  liabilities  and the  disclosure  of
contingent  assets and  liabilities  to prepare  these  financial  statements in
conformity with generally accepted accounting  principles.  Actual results could
differ from those estimates.

   (m) Impairment of Long-Lived Assets

   Management  regularly  evaluates  whether events or changes in  circumstances
have  occurred  that could  indicate an  impairment  in the value of  long-lived
assets.  During the second  quarter of 1996,  the Company  adopted SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of." In accordance  with the provisions of SFAS No. 121, if there is
an  indication  that the  carrying  amount of an asset is not  recoverable,  the
Company estimates the projected  undiscounted cash flows, excluding interest, of
the related  individual  facilities to determine if an impairment loss should be
recognized.  The  amount of  impairment  loss is  determined  by  comparing  the
carrying value of the asset to its estimated fair value. Estimated fair value is
determined  through an evaluation of recent financial  performance and projected
discounted  cash  flows of its  facilities  using  standard  industry  valuation
techniques,   including  the  use  of  independent  appraisals  when  considered
necessary.  If an asset  tested for  recoverability  was  acquired in a business
combination  accounted for using the purchase  method,  the related  goodwill is
included as part of the  carrying  value and  evaluated  as  described  above in
determining the recoverability of that asset.

   In  addition to  consideration  of  impairment  upon the events or changes in
circumstances  described  above,  management  regularly  evaluates the remaining
lives of its long-lived assets. If estimates are changed,  the carrying value of
affected assets is allocated over the remaining lives.

   Prior to adoption of SFAS No. 121 in 1996, the Company performed its analyses
of  impairment  of  long-lived   assets  by   consideration   of  the  projected
undiscounted  cash flows on an entity-wide  basis. The effect of the adoption of
SFAS 121 in the second  quarter of 1996  required  the  Company to perform  this
analysis on a facility-by-facility basis (see note 12).

(2) BUSINESS ACQUISITIONS

   The following is a summary of significant business acquisitions by year. Such
acquisitions  have been accounted for by the purchase  method and,  accordingly,
the  results of  operations  have been  included in the  Company's  consolidated
financial statements from the respective dates of acquisition.

1994 ACQUISITIONS

   In November 1994, the Company acquired  leasehold  interests in two long-term
care facilities  located in Colorado and Wyoming  (Tealwood) for a total cost of
approximately  $400,  including  legal  fees  and  other  direct  costs  of  the
acquisition of $78 and accrued liabilities of $322.

                                      F-8

<PAGE>

               COMMUNITY CARE OF AMERICA, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
          (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)-(CONTINUED)


(2) BUSINESS ACQUISITIONS -- (CONTINUED)

1995 ACQUISITIONS

   Effective as of February 1, 1995, the Company  acquired all the assets of the
Georgiana  Doctor's  Hospital,  two primary care  clinics and a home  healthcare
agency (Georgiana)  located in Alabama.  The Company issued a 9% promissory note
for $1,250 to the seller at closing (see note 6).

   Effective  April 1, 1995,  the Company  acquired all of the capital  stock of
three  subsidiaries  of Quality  Health Care,  Inc.  (Quality),  which owned and
operated three long-term care facilities located in Nebraska. In connection with
the transaction,  Quality sold 11 facilities to Health and Retirement Properties
Trust (HRPT) for $14,200.  The Company  borrowed $5,845 from HRPT and leased the
latter facilities from HRPT as discussed more fully in notes 6 and 7.

   Effective  July  1,  1995,  the  Company   obtained   operating  leases  with
wholly-owned  subsidiaries of American Health  Corporation  (American) for three
long-term care facilities in Alabama. The agreements provide for an initial term
of twelve years,  with one five-year  renewal  option,  annual minimum rental of
$1,200 and rights of first refusal with respect to the sale of the facilities.

   Effective August 1, 1995, the Company purchased all the assets of a physician
practice,  including a primary care clinic (Voreis),  located in Alabama, and on
October 1,  1995,  the  Company  acquired  substantially  all of the assets of a
39-bed long-term care facility in Palmer, Nebraska (Coolidge Center).

   Effective  November 1, 1995, the Company acquired all of the capital stock of
an outpatient  rehabilitation  head trauma  clinic in Maine  (MHTU).  As partial
consideration  in this  transaction,  the Company issued 25,061 shares of common
stock to the seller. These shares are subject to repurchase under the terms of a
settlement  agreement  dated  October 27, 1996 as amended on March 1, 1997, at a
price equal to the greater of the average  closing price of the stock for the 15
days  prior to the date of  repurchase  or $13.21  per share  (see note 13).  In
addition,  the Company may be required to make additional payments to the Seller
up to $200 if operating  results for the five year period  beginning  January 1,
1996 exceed base year amounts.

   Acquisitions in 1995 and the manner of payment are summarized as follows:
<TABLE>
<CAPTION>

                                                                                     CASH PAID
                                                                 COOLIDGE           FOR ACCRUED
     DESCRIPTION       GEORGIANA   QUALITY   AMERICAN   VOREIS    CENTER     MHTU      COSTS      TOTAL
--------------------  ----------- --------- ---------- -------- ---------- ------- ------------ ---------
<S>                   <C>         <C>         <C>        <C>      <C>      <C>      <C>         <C>    
Seller financing ...  $1,250         --        --         --       --         --       --       $ 1,250
Common stock
issued(1)...........      --         --        --         --       --        331       --           331
Accrued
liabilities.........     540      1,000        50         --      100        280   (1,970)           --
Cash paid...........     372      5,864       500        925      450        638    1,970        10,719
                      ----------- --------- ---------- -------- ---------- ------- ------------ ---------
Total cost..........  $2,162      6,864       550        925      550      1,249       --       $12,300
                      =========== ========= ========== ======== ========== ======= ============ =========
</TABLE>
----------
   (1) Represents 25,061 shares of common stock.

                                      F-9

<PAGE>

               COMMUNITY CARE OF AMERICA, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
          (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)-(CONTINUED)



(2) BUSINESS ACQUISITIONS -- (CONTINUED)

   The  allocation  of the total  cost of the 1995  acquisitions  to the  assets
acquired and liabilities assumed is summarized as follows:
<TABLE>
<CAPTION>

                                                                                COOLIDGE
              DESCRIPTION           GEORGIANA   QUALITY   AMERICAN      VOREIS   CENTER       MHTU         TOTAL
--------------------------------   ----------- --------- ----------   --------  ----------   -------   ----------
<S>                                <C>            <C>       <C>            <C>      <C>       <C>     <C>     
Current assets .................   $    618       1,512          --        140         --        129    $  2,399
Property, plant and equipment ..      2,040       4,818          --        385        550         --       7,793
Other assets ...................         --       1,241         400         --         --         --       1,641
Intangible assets (10, 20 and 20
years) .........................         --          --         150        400         --      1,142       1,692
Current liabilities ............       (496)       (525)         --         --         --        (22)     (1,043)
Long-term liabilities ..........         --        (182)         --         --         --         --        (182)
                                   --------    --------    --------   --------   --------   --------    --------
Total cost .....................   $  2,162       6,864         550        925        550      1,249    $ 12,300
                                   ========    ========    ========   ========   ========   ========    ========
</TABLE>

1996 ACQUISITIONS

   Effective January 1, 1996, the Company purchased certain assets of the Family
Care Medical Center of Arcadia,  Inc.  (Arcadia),  a certified rural  healthcare
clinic in Florida.  Pursuant to the asset purchase agreement, the Company issued
a promissory  note for $110 and 12,739  shares of common stock with a fair value
of $150 to the seller at  closing.  The  promissory  note was paid in full as of
December 31, 1996.

   On May 16, 1996,  Southern Care Centers,  Inc.  ("Southern  Care") was merged
into CCA Acquisition I, Inc., ("Newco"), a newly formed wholly-owned  subsidiary
of the Company.  As a result of the merger,  the  subsidiaries  of Southern Care
("Acquired  Subsidiaries"),  which  leased five  long-term  care  facilities  in
Georgia  and  one  long-term  care  facility  in  Louisiana,   became   indirect
wholly-owned  subsidiaries  of the Company.  In addition,  another  wholly-owned
subsidiary of the Company became the manager, under a Management Agreement dated
as of May 1, 1996,  of a  long-term  care  facility  in Texas  owned by a former
subsidiary of Southern Care which was not acquired by the Company. Additionally,
Newco is providing accounting,  internal auditing, billing, accounts payable and
certain other  services  under an Agreement to Provide  Accounting  and Auditing
Services and Rural Healthcare  Provider Network Services dated as of May 1, 1996
to a company owned by the former  shareholders  of Southern Care which  operates
another long-term care facility in Georgia.

   Pursuant to the merger  agreement,  the  shareholders  of Southern  Care (the
selling shareholders) received $2,700 of cash and 568,888 shares of common stock
of  the  Company  with  a  fair  value  of  $4,800.  In  addition,  the  selling
shareholders were entitled to receive, on or before March 31, 1997, up to $2,000
in common  stock of the  Company  based on the amount  that  Newco's  annualized
contribution margin on a consolidated basis for the year ended December 31, 1996
exceeds $4,400.  As of December 31, 1996, no such events  occurred.  The Company
has agreed to file two shelf registration statements under the Securities Act of
1933,  as amended,  covering  the shares  issued and issuable in the merger and,
upon request of the holders, to "piggyback" such shares in certain  registration
statements filed by the Company.

   The  merger  agreement   provides  that  the  consideration  to  the  selling
shareholders  shall be reduced to the extent that current  liabilities  exceeded
current  assets by more  than  $1,850  at the  closing  date.  The  Company  has
determined  that such  condition  existed at the closing date and has recorded a
receivable  from the selling  shareholders  of $1,444 at December 31, 1996. Such
claim has been disputed by the selling  shareholders.  The Company  believes the
claim is valid and fully collectible;  accordingly,  no valuation  allowance has
been  recorded  with respect to this  matter.  Because the  receivable  arose in
connection with the issuance of the Company's  common stock, the related balance
at December 31, 1996 is presented as a reduction of stockholder's equity.

                                      F-10

<PAGE>


               COMMUNITY CARE OF AMERICA, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
          (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)-(CONTINUED)


(2) BUSINESS ACQUISITIONS -- (CONTINUED)

   In a series of  related  transactions,  the  subsidiaries  of  Southern  Care
acquired the five leased Georgia  facilities and, in turn, sold those facilities
to Health and Retirement  Properties  Trust ("HRPT").  HRPT thereupon leased the
five Georgia  facilities back to the Acquired  Subsidiaries  for an initial term
ending on December  31, 2010 with two renewal  options for six year and thirteen
year terms,  each at the option of the  Acquired  Subsidiaries.  After the first
lease year,  rent is subject to increase based on year over year  increases,  if
any, in net patient revenues and non-inpatient  revenues, each as defined in the
master lease agreement.  The Louisiana facility continues to be leased under the
terms of the lease existing prior to the merger.

   Acquisitions in 1996 and the manner of payment are summarized as follows:

                                                       CASH PAID FOR
        DESCRIPTION           ARCADIA   SOUTHERN CARE  ACCRUED COSTS    TOTAL
---------------------------  --------- -------------- --------------- ---------
Seller financing ..........  $  110        --             --          $   110
Common stock issued(1) ....     150     4,800             --            4,950
Accrued liabilities........      --     2,500         (3,409)            (909)
Cash paid..................      40     2,683          3,409            6,132
Receivable from
shareholders...............      --    (1,444)            --           (1,444)
                                       -------------- --------------- ---------
Total cost.................  $  300     8,539             --          $ 8,839
                             ========= ============== =============== =========
----------
(1)  Represents shares of common stock as follows: 12,379 shares for Arcadia and
     568,888 shares for Southern Care Centers, Inc.

   The  allocation  of the total  cost of the 1996  acquisitions  to the  assets
acquired and liabilities assumed is summarized as follows:

             DESCRIPTION               ARCADIA   SOUTHERN CARE    TOTAL
------------------------------------  --------- -------------- ----------
Current assets......................  $   36          753         $   789
Property, plant, and equipment .....      60        5,400           5,460
Other assets........................      --        1,741           1,741
Intangible assets (10 and 20.67
years)..............................     204       10,855          11,059
Current liabilities.................      --       (4,784)         (4,784)
Long-term liabilities...............      --       (5,426)         (5,426)
                                      --------- -------------- ----------
Total cost..........................  $  300        8,539         $ 8,839
                                      ========= ============== ==========

   The  following  unaudited  pro  forma  consolidated   results  of  operations
information is presented as if the acquisition  transactions described above had
occurred as of the beginning of the respective periods  presented,  after giving
effect to certain  adjustments,  including  depreciation and amortization of the
new cost basis of the assets acquired,  increased  interest and rent expense and
related income tax effects.

                                                      YEARS ENDED DECEMBER 31,
                                                      ------------------------
                                                         1995        1996
                                                      --------   -----------
Total operating revenues............................  $122,495   $133,506
Earnings (loss) before extraordinary charge ........     3,821    (18,652)
Earnings (loss) applicable to common stock before
extraordinary charge................................     2,901    (18,652)
Earnings (loss) per common share before
extraordinary charge................................  $    .53   $  (2.53)
                                                      ========   ===========


                                      F-11

<PAGE>


               COMMUNITY CARE OF AMERICA, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
          (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)-(CONTINUED)


(3) ACCOUNTS RECEIVABLE

   Accounts receivable consist of the following:

                                                    1995       1996
                                                 ---------- ---------
Patient accounts receivable....................  $ 10,909   $15,832
Third-party payor settlements..................     2,696     4,228
Other..........................................     1,307     1,180
                                                 ---------- ---------
                                                   14,912    21,240
Allowance for doubtful accounts and
contractual adjustments........................     1,978     4,833
                                                 ---------- ---------
                                                 $ 12,934   $16,407
                                                 ========== =========

   The  Company  generally  does not  require  collateral  or other  security in
extending credit to patients; however, the Company routinely obtains assignments
of (or is otherwise  entitled to receive)  benefits  receivable under the health
insurance  programs,  plans or policies of patients (e.g.,  Medicare,  Medicaid,
commercial  insurance and managed care  organizations).  The  Company's  patient
service  revenues  derived from the Medicare and Medicaid  programs were 17% and
52%,  respectively,  for the year  ended  December  31,  1995,  and 20% and 50%,
respectively,  for the year ended December 31, 1996. Patient accounts receivable
from the Federal  government  (Medicare)  were $1,777 and $3,421 at December 31,
1995 and 1996,  respectively.  Amounts receivable from various states (Medicaid)
were $4,883 and $6,302, respectively, at December 31, 1995 and 1996.

   Third-party  payor  settlements   receivable  from  the  Federal   government
(Medicare) were  approximately  $1,718 and $2,794 at December 31, 1995 and 1996,
respectively; the remainder relates primarily to net amounts receivable from the
states of Colorado and Nebraska (Medicaid). Certain of the Medicaid and Medicare
cost  reports for prior years were settled  during 1995 and 1996,  the impact of
which was not material.  At December 31, 1996, the Company had open cost reports
for the 1993, 1994 and 1995 years which, after related allowances,  are recorded
at estimated net realizable value.

   The allowance for doubtful accounts and contractual adjustments is determined
by management  using estimates of potential  losses and contractual  settlements
based on an analysis of current and past due accounts,  collection experience in
relation to amounts  billed,  prior  settlement  experience  and other  relevant
information.  Although the Company believes  amounts provided are adequate,  the
ultimate  uncollectible amounts could be in excess of the amounts provided.  The
Company's provision for bad debts was $658 in 1995 and $1,867 in 1996.

(4) PROPERTY, PLANT AND EQUIPMENT

   Property, plant and equipment are summarized as follows:

                                                   1995      1996
                                                --------- ---------
Land..........................................  $ 5,983   $ 5,926
Land improvements.............................      612       613
Buildings and improvements....................   32,214    39,911
Leasehold improvements and leasehold
interests.....................................    8,598     9,135
Equipment.....................................    7,269     7,880
Construction in progress......................      987       255
Pre-acquisition and development costs ........    1,867       425
                                                --------- ---------
                                                 57,530    64,145
Less accumulated depreciation and
amortization..................................    3,203     5,721
                                                --------- ---------
Net property, plant and equipment.............  $54,327   $58,424
                                                ========= =========

                                      F-12

<PAGE>

               COMMUNITY CARE OF AMERICA, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
          (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)-(CONTINUED)



(5) ACCOUNTS PAYABLE AND ACCRUED EXPENSES

   Accounts payable and accrued expenses consist of the following:

                                                              DECEMBER 31,
                                                         --------------------
                                                         1995            1996
                                                      ---------       ----------
Accounts payable ...........................           $ 8,860         $15,595
Accrued compensation .......................             4,422           3,473
Other accrued expenses .....................             1,587           4,334
                                                       -------         -------
                                                       $14,869         $23,402
                                                       =======         =======

(6) LONG-TERM DEBT

   Long-term debt is summarized as follows:
<TABLE>
<CAPTION>

                                                                               DECEMBER 31,
                                                                           --------------------
                                                                              1995      1996
                                                                           --------- ----------
<S>                                                                        <C>       <C>    
Mortgage notes:
 11.5% note payable  in monthly  principal and interest  installments of
  $138 commencing  January 31, 1996 through June 30, 1996; interest only
  payments  of $130  commencing   July 31, 1996  through  June 30, 1998;
  principal and interest payments of $138  commencing  on  July 31, 1998
  and maturing on December 31, 2016.....................................   $13,600   $13,551
 9% note payable in monthly  principal and interest  installments of $50
  commencing January 31, 1996  through June 30, 1996;  interest payments
  of $45 commencing July 31, 1996  through June 30, 1998;  principal and
  interest payments of $50 commencing on  July 31, 1998 and  maturing on
  December 31, 2016......................................................    6,000     5,967
 10% note payable in monthly interest only payments through December 31,
  1996; principal and interest payments of $19 commence January 31, 1997
  through December 31, 2021 .............................................    2,045     2,045
 9% note payable in semi-annual installments through March 9, 1998, plus
  interest payable quarterly ............................................    1,125       750
                                                                           --------- ----------
 Total mortgage notes payable............................................   22,770    22,313
Revolving line of credit with bank, due on December 31, 1996 ............    8,410        --
Revolving line of credit with bank, due on December 27, 1999 ............       --    14,495
Revolving line of  credit with  Integrated Health Services, Inc., due on
 December 27, 1998 (see note 14).........................................       --     2,000
11% note secured by property and  equipment,  interest only due monthly;
 principal due December 31, 2008.........................................       --    10,000
</TABLE>

                                      F-13

<PAGE>

               COMMUNITY CARE OF AMERICA, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
          (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)-(CONTINUED)



(6) LONG-TERM DEBT -- (CONTINUED)
<TABLE>
<CAPTION>

                                                                                 DECEMBER 31,
                                                                             --------------------
                                                                                1995      1996
                                                                             --------- ----------
<S>                                                                          <C>       <C>  
11% notes maturing  December 30, 2016, interest  and principal  payable in
monthly installments of $47 commencing January 31, 1997; secured by a lien
on substantially all of  the leasehold  assets of  several  long-term care
facilities.................................................................    2,892     4,835
Notes payable, secured by  equipment and land, maturing from June 19, 1997
to April 4, 2005; principal  payable in  monthly installments of $25, with
interest payable monthly at variable rates up to 15.13%....................      740       512
13% capital lease  payable in monthly principal  and interest installments
ranging from $54 to  $65 through  April 30, 2015, with  a final payment of
$2,414.....................................................................       --     5,401
7% unsecured note payable, due on demand...................................       --       600
10% unsecured note payable in monthly principal  and interest installments
of $8, maturing on August 1, 1998..........................................       --       141
Other......................................................................      853        74
                                                                             --------- ----------
                                                                              35,665    60,371
Less current portion.......................................................    1,258     6,341
                                                                             --------- ----------
                                                                             $34,407   $54,030
                                                                             ========= ==========
</TABLE>

   Mortgage notes aggregating $21,563 at December 31, 1996 are payable to Health
and Retirement Properties Trust ("HRPT") and are secured by deeds of trust on 18
long-term  care  facilities  located  in  Colorado  and  Nebraska   and liens on
substantially all of the common stock of certain of the Company's  subsidiaries.
These mortgage notes are subject to cross-default provisions under the Company's
leases with HRPT (see note 7). The remaining  mortgage note is secured by a deed
of trust on one hospital (Georgiana) located in Alabama. The mortgage notes also
provide for additional  interest payable  quarterly  commencing in 1996 equal to
the greater of (a) 5% of excess net patient  revenues over a base year amount or
(b) the amount of the  additional  interest for the  immediately  preceding loan
year.

   On April 4, 1996, the Company borrowed $10,000 from HRPT,  pursuant to an 11%
promissory  note  (the  "HRPT  Note"),  to  provide  additional  renovation  and
acquisition  funding and general  working  capital.  No  principal  payments are
required  until the maturity  date of December 31, 2008 with  interest  payments
made monthly.  The HRPT Note is secured by all of the collateral  security which
secures  the  Company's  current  obligations  to HRPT and is  subject  to cross
default with other  obligations  to HRPT. As a result of closing this loan,  the
Company  increased  the  refundable  security  deposit  held  by  HRPT  for  all
obligations by $550.

                                      F-14

<PAGE>
               COMMUNITY CARE OF AMERICA, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
          (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)-(CONTINUED)


(6) LONG-TERM DEBT -- (CONTINUED)

REVOLVING LINES OF CREDIT

   On  August  7,  1995,  the  Company  entered  into  a  Revolving  Credit  and
Reimbursement  Agreement  with  NationsBank  of  Florida,  N.A.  ("NationsBank")
providing for a revolving  credit  facility (the "Loan  Agreement")  pursuant to
which  the  Company  was  entitled  to borrow  from time to time up to  $15,000,
subject to a borrowing  base of 80% of  eligible  accounts  receivable.  In July
1996,  the  agreement  was modified to reflect a revised  scheduled  maturity of
December 31, 1996.  Outstanding loans bore interest equal to, as selected by the
Company, either a floating rate (the greater of the federal funds rate plus .50%
or NationsBank's  prime rate) or a rate equal to the applicable  Eurodollar rate
plus 1.75%  (subject to  adjustment  after  September  30, 1996 based on certain
financial  ratios  achieved by the Company).  The Loan  Agreement was secured by
substantially all of the unencumbered  assets of the borrowing  entities and the
capital  stock of the  Company's  subsidiaries,  Community  Care of  America  of
Alabama,  Inc. and CCA of Maine, Inc. The Loan Agreement required the Company to
maintain a  prescribed  level of tangible net worth (as  defined),  and current,
fixed charge coverage and leverage ratios,  placed  limitations on indebtedness,
liens,  investments and transactions  with affiliates and prohibited the payment
of dividends.  The revolving  credit  facility was paid in full in December 1996
with the proceeds from the Daiwa  Securities of America,  Inc.  revolving credit
facility (see below).

   On December 27,  1996,  the Company  entered  into a  Healthcare  Receivables
Purchase and Transfer Agreement with Daiwa Securities of America, Inc. ("Daiwa")
providing for a 36 month revolving credit facility pursuant to which the Company
may borrow from time to time up to $15,000, subject to a borrowing base formula.
The Loan Agreement is secured by the assignment to the lender of all patient and
third party settlement  receivables.  Proceeds from the line of credit were used
to repay  borrowings  and  terminate  the  Revolving  Credit  and  Reimbursement
Agreement  with  NationsBank  discussed  above.  As of December 31, 1996,  Daiwa
advanced the Company an amount in excess of the borrowing base by  approximately
$4,800.  Such amount has been  classified  as current  portion of long term debt
since repayment is due upon demand.  The remaining  outstanding loan will mature
on December 27, 1999 and amounts  advanced  bear interest at a rate equal to the
LIBOR rate at the time of each  revolving  advance  plus  2.00% per  annum.  The
interest  rate at December  31, 1996 was  7.9065%.  The  agreement  requires the
Company to  maintain a  prescribed  tangible  net worth ratio as well as various
other  financial  and  non-  financial  covenants.  (See  Note  13  for  further
information)

   The Company and IHS entered into a loan agreement which, as amended, entitles
the Company to borrow,  until December 27, 1998,  amounts on a revolving  credit
basis so that no more than  $5,000 is  outstanding  at any time  provided  that,
unless such advance is applied to the payment of management fees that become due
to IHS under the Management  Agreement (see Note 14), IHS consents to the making
of advances,  which consent may not be  unreasonably  withheld.  This  revolving
credit  facility  bears interest at a rate per annum equal to the annual rate of
interest set forth in IHS's revolving credit agreement with Citibank, N.A., plus
2%.  Repayment of amounts advanced under this line of credit are subordinated to
the payment of up to an aggregate  of $30,000 of  principal  and interest on the
Company's obligations to HRPT and Daiwa.

                                      F-15

<PAGE>
               COMMUNITY CARE OF AMERICA, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
          (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)-(CONTINUED)


(6) LONG-TERM DEBT -- (CONTINUED)

   In connection with entering into the revolving credit  facility,  the Company
issued  warrants to purchase an  aggregate  of 752,182  shares of the  Company's
Common Stock,  one-half of which are exercisable until January 13, 1999 at $3.22
per share (the average of the high and low trading price of the Company's Common
Stock on  January  14 and 15,  1997)  and the  remaining  one-half  of which are
exercisable  until  January  13,  2002 at $6.44 per share.  The number of shares
subject to the  warrants and the exercise  prices are subject to  adjustment  in
certain  instances,  including  the Company  issuing  shares of Common Stock (or
securities  convertible into Common Stock) at less than the applicable  exercise
price. In connection therewith, the Company has granted to IHS certain rights to
cause the shares  issuable upon exercise of the warrants to be registered  under
the Securities Act of 1933, as amended, at the Company's expense.

   Aggregate principal  maturities of long-term debt for the next five years are
as follows:  1997, $6,341; 1998, $2,666;  1999, $10,007;  2000, $328; 2001, $356
and thereafter $40,673.

   Information concerning interest expense is as follows:

                                                  YEARS ENDED DECEMBER 31,
                                                  ------------------------
                                                     1994   1995    1996
                                                    ------ ------ -------
Interest income applied to reduce interest
expense...........................................  $63    $ 96   $ 11
Interest capitalized to construction in progress .  $92    $107   $277

(7) LEASES

   The Company is lessee under operating leases of 34 long-term care facilities,
of which one expires in February 2006,  three expire in June 2007, and 30 expire
in December  2010.  The Company  also leases  certain  office space and computer
equipment  expiring in 1998 and 1999.  Minimum rent payments due under operating
leases in effect at December 31, 1996 are summarized as follows:

1997 ..................................................                 $ 10,458
1998 ..................................................                   10,369
1999 ..................................................                   10,014
2000 ..................................................                   10,043
2001 ..................................................                   10,103
Thereafter ............................................                  146,363
                                                                        --------
 Total ................................................                 $197,350
                                                                        ========

   The leases for the 30 health  care  facilities  are with HRPT and provide for
two consecutive renewal options of six and thirteen years, respectively, at fair
market rentals at the  expiration of the initial term. In connection  with these
lease agreements,  the Company was required to pay refundable  deposits totaling
$5,660 as of December  31, 1996 which has been  subsequently  reduced  (see note
13). The leases for the three health care  facilities,  also with HRPT,  provide
for one  renewal  option for five  years.  The lease for one  facility  does not
currently have a renewal option.

                                      F-16

<PAGE>
               COMMUNITY CARE OF AMERICA, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
          (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)-(CONTINUED)


(7) LEASES -- (CONTINUED)

   With respect to the leases for the 30 health care facilities, the Company has
the right of first  refusal and an option to purchase the  facilities at a price
equal to the greater of a formula as defined in the lease  agreement or the fair
market  value of the  facilities.  Minimum  rentals  are  generally  subject  to
adjustment  for  renovations  made to the  facilities by the lessor.  Also,  the
leases provide for contingent  rentals,  based on a percentage of gross revenues
of the facilities in excess of base year amounts.  Contingent  rentals were $150
in 1996;  none were  incurred  during the period from  inception to December 31,
1995. The lease agreements require the Company to maintain a current ratio of at
least one to one and a minimum tangible net worth, as defined, of $5,000,  which
conditions  were  not met as of  December  31,  1996.  In  addition,  the  lease
agreements  restrict the Company's ability to pay dividends,  incur indebtedness
or make distributions to affiliates. See note 13.

   The lease for office space provides for two, one-year renewal options and the
equipment lease may be renewed for one year.

(8) INCOME TAXES

   The income tax benefit for 1996, all of which relates to deferred  taxes,  is
summarized as follows:

   Federal income taxes .........................      $(7,375)
   State income taxes ...........................       (2,090)
                                                      ---------
                                                       $(9,465)
                                                      =========

   In 1995,  the  Federal  and state  income  tax  provision  was  offset by net
operating loss carryovers of $280.

   The expected  income tax rate of 34% differs from the rate resulting from the
provision in the financial statements as follows:

                                                1994     1995      1996
                                              -------  --------  --------
Income tax (benefit) at statutory rate
(34%).......................................   34 %       34 %     (34)%
State income tax, net of federal benefit....    4 %        4 %      (4)%
Tax benefit of net operating loss
carryover...................................  (38)%       (7)%      -- %
Increase (decrease) in valuation allowance .   -- %       (1)%       3 %
Other.......................................   -- %       -- %       2 %
                                             -------  -------- --------
                                               -- %      30 %   $  (33)%
                                             =======  ======== ========

   The sources of deferred income tax (assets) and liabilities are as follows:

                                                            1995       1996
                                                         ---------- ----------
Excess of book over tax basis of assets................  $10,025    $11,179
Allowance for doubtful accounts........................     (651)    (1,262)
Accrued expenses.......................................     (803)    (3,173)
Net operating loss carryovers .........................     (870)    (8,717)
Pre-acquisition separate company net operating loss
carryovers.............................................   (1,365)    (1,406)
Other..................................................       22       (184)
                                                         ---------- ----------
                                                         $ 6,358    $(3,563)
Valuation allowance....................................    2,976      3,725
                                                         ---------- ----------
Deferred income tax liability..........................  $ 9,334    $   162
                                                         ========== ===========
                                      F-17

<PAGE>
               COMMUNITY CARE OF AMERICA, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
          (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)-(CONTINUED)

(8) INCOME TAXES -- (CONTINUED)

   At December 31, 1996, the Company had net operating loss carryovers available
for Federal  income tax purposes of  approximately  $26,293  which expire in the
years 2007 through 2011, including pre-acquisition net operating loss carryovers
of  approximately  $3,652  which  expire in the years  2007  through  2011.  The
utilization of the  pre-acquisition  net operating loss carryovers is subject to
certain annual limitations under the Internal Revenue Code and, under "change in
ownership"  provisions of the Code,  other net operating loss  carryovers may be
subject to similar limitations.

   The valuation  allowance relates,  in part, to deferred tax assets that, when
subsequently  realized,  will be applied to reduce goodwill and other intangible
assets acquired to the extent that such allowances resulted in intangible assets
when  originally  recorded in connection with  acquisitions.  As of December 31,
1996,  the Company did not fully  reserve all  deferred  tax assets since future
operations are expected to generate  sufficient  taxable income to realize these
assets.  As of December 31, 1996,  the portion of the valuation  allowance to be
applied to reduce goodwill in future years is approximately $3,725.

(9) REDEEMABLE PREFERRED STOCK

   On December 30, 1993,  the Company  issued Series A 8% Redeemable  Cumulative
Preferred Stock and warrants to purchase  1,331,814  shares of common stock at a
price of $.0198 per share. The warrants were valued at $2,631 in accordance with
the agreement of the parties and recorded as  additional  paid-in  capital.  The
difference  between the value  allocated to the  preferred  stock at issuance of
$5,536 and the  aggregate  redemption  price of such  shares of $8,167 was being
accreted to preferred  stock and charged  against  common  stockholders'  equity
through the dates of mandatory redemption.  Such accretion was $372 for the year
ended  December  31, 1994 and $231 for the year ended  December  31,  1995.  The
preferred  stock was redeemed at $100 per share and the warrants were  exercised
in August 1995 (see note 15).

(10) CAPITAL STOCK

   On July 28,  1995,  the Company  amended  its  certificate  of  incorporation
decreasing  the  Company's  authorized  common stock from  35,000,000  shares to
15,000,000  shares,  increasing  the  authorized  shares of  preferred  stock to
1,000,000 shares and effecting a reverse common stock split of one-for-7.9.  All
share and per share data presented herein give effect to such changes.

At December  31, 1995 and 1996,  the Company had  outstanding  stock  options as
follows:

Stock options outstanding pursuant to:

                                                            1995         1996
                                                          ---------    ---------
1993 Stock Option Plan .............................       265,196       216,928
1993 Senior Executive Stock Option Plan ............        57,799        16,565
1995 Stock Option Plan .............................       153,910       208,894
1995 Non-Employee Directors Option Plan ............        14,835        71,978
                                                           -------       -------
Total Stock Options Outstanding ....................       491,740       514,365
                                                           =======       =======

                                      F-18

<PAGE>

               COMMUNITY CARE OF AMERICA, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
          (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)-(CONTINUED)


(10) CAPITAL STOCK -- (CONTINUED)

   The  Company  established  the 1993  Stock  Option  Plan and the 1993  Senior
Executive  Stock Option Plan  effective July 1, 1993. The 1993 Stock Option Plan
provides that up to 289,258  shares of common stock may be issued to certain key
employees and  consultants  of the Company.  Options  granted to date under this
plan vest either  immediately  or over three years and expire ten years from the
date of grant.  The 1993 Senior  Executive Stock Option Plan provides that up to
74,364  options  may be issued  to senior  executive  officers  of the  Company.
Options granted to date under this plan vest over a period of seven years,  with
accelerated  vesting in some  instances,  based upon the  occurrence  of certain
events,  including the achievement of earnings targets.  The outstanding options
at December 31, 1996 expire ten years from the date of grant  subject to earlier
termination in certain cases.

   In 1995,  the  Company  established  the 1995 Stock  Option Plan and the 1995
Non-Employee  Directors Option Plan. The 1995 Stock Option Plan provides that up
to 500,000  shares of common  stock may be issued to certain key  employees  and
consultants of the Company  pursuant to options  granted from time to time under
this plan.  Options  granted to date under this plan vest either  immediately or
over  periods  from  three to seven  years,  with  accelerated  vesting  in some
instances,   based  upon  the  occurrence  of  certain  events,   including  the
achievement of earnings  targets.  The outstanding  options at December 31, 1996
expire ten years  from the date of grant subject to the earlier  termination  in
certain cases. The 1995  Non-Employee  Directors Option Plan provides that up to
100,000 shares of common stock may be issued to non-employee  directors pursuant
to options automatically granted under that plan upon election as a director and
annually  following  the annual  meeting  of  shareholders  electing  directors.
Options  granted  to date  under  this  plan  vest in  three  equal  semi-annual
installments  beginning  six months after the date of grant and expire ten years
from the date of grant subject to the earlier termination in certain cases.

   All stock  options  issued by the Company  have been  granted  with  exercise
prices  equal to or greater than the  estimated  fair market value of the common
stock on the date of grant. Stock option transactions are summarized as follows:

                                            1995                  1996
                                   --------------------- ----------------------
                                               WEIGHTED               WEIGHTED
                                                AVERAGE                AVERAGE
                                               EXERCISE               EXERCISE
                                     SHARES      PRICE      SHARES      PRICE
                                   ---------- ---------- ----------- ----------

Outstanding at beginning of
year.............................  292,936    $ 4.44      491,740    $ 7.68
Granted..........................  230,339     11.42      226,132     11.23
Exercised........................       --        --      (33,385)     4.62
Canceled.........................  (31,535)     6.75     (170,122)     8.95
                                   ---------- ---------- ----------- ----------
Outstanding at end of year ......  491,740    $ 7.68      514,365    $ 9.03
                                   ========== ========== =========== ==========
Options Exercisable at end of
year.............................  206,006    $ 5.10      222,310    $ 6.34
                                   ========== ========== =========== ==========

   The following  summarizes  information about stock options  outstanding as of
December 31, 1996:
<TABLE>
<CAPTION>

                                OPTIONS OUTSTANDING                     OPTIONS EXERCISABLE
                  ----------------------------------------------- ------------------------------
                                  WEIGHTED AVG.
    RANGE OF          NUMBER        REMAINING        WEIGHTED         NUMBER        WEIGHTED
    EXERCISE       OUTSTANDING     CONTRACTUAL        AVERAGE      EXERCISABLE       AVERAGE
     PRICES        AT 12/31/96        LIFE        EXERCISE PRICE   AT 12/31/96   EXERCISE PRICE
----------------  ------------- ---------------- ---------------- ------------- ----------------
<C>               <C>                <C>              <C>            <C>           <C>  
      $3.71       150,685            6.54             $ 3.71         141,219       $ 3.71
 $9.50 - $10.50   210,048            8.93               9.84          61,567        10.11
$10.51 - $14.00   153,632            9.10              13.12          19,524        13.49
                  ------------- ---------------- ---------------- ------------- ----------------
                  514,365            8.28             $ 9.03         222,310       $ 6.34
                  ============= ================ ================ ============= ================
</TABLE>                                                                        

                                      F-19

<PAGE>

               COMMUNITY CARE OF AMERICA, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
          (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)-(CONTINUED)


(10) CAPITAL STOCK -- (CONTINUED)

   The  Company  applies  APB  Opinion  No. 25 and  related  interpretations  in
accounting for its stock options.  Accordingly, no compensation expense has been
recognized in connection with its stock options.  Had  compensation  expense for
the  Company's  stock  options  been  determined  consistent  with  Statement of
Financial   Accounting   Standards   No.  123,   "Accounting   for   Stock-Based
Compensation," the Company's net earnings and earnings per share would have been
reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>

                                                         1995                      1996
                                              ------------------------- -------------------------
                                               AS REPORTED   PRO FORMA   AS REPORTED   PRO FORMA
                                              ------------- ----------- ------------- -----------
<S>                                             <C>           <C>         <C>           <C>      
Net earnings (loss) applicable to common stock  $1,041        $  890      $(18,905)     $(19,283)
Per common share:
 Earnings (loss) before extraordinary charge..    0.42          0.49         (2.56)        (2.61)
 Extraordinary charge.........................   (0.20)        (0.26)         0.00          0.00
                                              ------------- ----------- ------------- -----------
 Net earnings (loss)..........................    0.22          0.23         (2.56)        (2.61)
                                              ============= =========== ============= ===========
</TABLE>

   The fair value of the options for purposes of the above pro-forma  disclosure
was calculated  using the  Black-Scholes  option pricing model and the following
assumptions:  risk free interest rate of 6.58%,  weighted average expected lives
of 5 to 8.5 years, no dividend payments,  and a volatility of 35.8% based on the
annualized 10 year industry average. The effects of applying SFAS No. 123 in the
pro  forma  net  earnings  and  earnings  per share for 1995 and 1996 may not be
representative of the effects on such pro-forma information for future years.

(11) FAIR VALUE OF FINANCIAL INSTRUMENTS

   The  carrying  amount  of  cash  and  cash   equivalents,   patient  accounts
receivable,  other  current  assets,  accounts  payable,  and  accrued  expenses
approximates fair value because of the short-term maturity of these instruments.
The fair value of  third-party  payor  settlements  receivable  is  estimated by
discounting  anticipated  cash flows using  estimated  market  discount rates to
reflect the time value of money.  The fair value of the Company's long term debt
is  estimated  based  on  current  rates  offered  to the  Company  for  similar
instruments  with the  same  remaining  maturities.  Management  of the  Company
believes the carrying amount of the above financial instruments approximates the
estimated fair value.

(12) LOSS ON IMPAIRMENT OF LONG-LIVED ASSETS AND OTHER NON-RECURRING CHARGES

   Operating  expenses for 1996  include  total  non-recurring  charges of $22.1
million and consist of the following:
<TABLE>
<CAPTION>

                                                                                            EXIT
                                                              LOSS ON         OTHER       COSTS AND
                                                           IMPAIRMENT OF      ASSET       EMPLOYEE
                                                             INVESTMENT    WRITE-OFFS   TERMINATIONS    TOTAL
                                                          --------------- ------------ -------------- ---------

<S>                                                           <C>            <C>           <C>        <C>    
Sandy River management contract termination.............      $ 5,453        $1,086        $3,360     $ 9,899
Aurora and Toledo facilities closed or voluntarily                                         
decertified.............................................        1,450            --           207       1,657
Costs of a physician practice, primary care clinics,                                       
adult day care centers, and other programs closed ......        3,013            --         1,484       4,497
Memorial Health Group acquisition termination ..........        3,924           264           210       4,398
Termination of offerings of debt and equity securities .           --         1,677            --       1,677
                                                          -------------- ------------- -------------- ---------
                                                              $13,840        $3,027        $5,261     $22,128
                                                          ============== ============= ============== =========
</TABLE>      

                                      F-20

<PAGE>


               COMMUNITY CARE OF AMERICA, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
          (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)-(CONTINUED)


(12) LOSS ON IMPAIRMENT OF LONG-LIVED ASSETS AND OTHER NON-RECURRING CHARGES
-- (CONTINUED)

   In the second quarter of 1996,  management  made the decision to exit certain
activities,  including the  termination of the management  agreement and related
purchase  option for the Sandy River  facilities and the closing of four primary
care clinics, four adult day care centers and one physician practice.

   The Company terminated its management and purchase option agreements with the
Sandy River Group since the facilities were not generating sufficient cash flows
to pay the  Company's  management  fees. As a result,  management  evaluated its
investment  related  to  the  management   agreement  and  purchase  option  for
impairment.   This  analysis  identified  approximately  $9,899  in  write-offs,
including  the  write-offs  of (1)  the  $5,000  purchase  option  deposit,  (2)
unsecured  management fees of $1,086,  (3) direct  acquisition costs of $453 and
(4) accrued exit and termination costs of $3,360 to transfer the properties back
to the Sandy River Group. As of December 31, 1996, substantially all exits costs
have been paid.

   The four primary care clinics,  four adult day care centers and one physician
practice were closed as a result of their unfavorable  financial performance and
the negative impact these centers had on the Company's  long-term care business.
As a result, the Company wrote-off  development costs and property and equipment
relating  to these  activities  of $3,013.  In  addition,  the  closure of these
clinics resulted in eliminating  approximately 14 positions,  primarily  doctors
and clinical staff,  through an involuntary  severance  program.  Total employee
termination  benefits  provided  in the  financial  statements  were  $454 as of
December 31, 1996,  of which $138 was unpaid as of December 31, 1996 and will be
paid in 1997.  Other costs to exit these  activities  include lease  termination
costs of $964  which  will paid over the  remaining  lease  terms and other exit
costs  of  $66.  Both of  these  obligations  were  incurred  under  contractual
obligations  that existed prior to the  commitment  date and will continue after
the plan is  completed  with no  economic  benefit to the  Company.  Total lease
termination  and other exit costs  accrued but not paid as of December  31, 1996
was  $873.  Management  anticipates  that an  additional  $750 of costs  will be
incurred in 1997 .  Management  expects the  necessary  activities to exit these
operations will be complete by December 31, 1997.

   On December 31, 1996,  the Company  terminated  an agreement to acquire other
rural hospitals in Georgia and transferred Memorial Healthcare, Inc. d/b/a Smith
Hospital  (Smith)  back to the  sellers  since  CCA was not able to  secure  the
necessary financing to complete the transaction.  The total non-recurring charge
to income related to this transaction was approximately  $4,398 and consisted of
(1) the write-off of the investment in Smith's net assets, including transaction
costs of $3,924 (2) other asset write-offs of $264 and (3) exit costs of $210.

   Other non-recurring  charges represent the write-off of approximately  $1,677
in  deferred  financing  costs as a result  of  unsuccessful  attempts  to raise
capital through a secondary stock offering and a high yield debt offering. Also,
the Company reviewed the long-lived  assets of the Aurora and Toledo  facilities
for  recoverability  and determined that an additional  write-down of $1,450 was
required.  Such write-down has been reflected in  non-recurring  charges for the
period ended December 31, 1996.

   The  revenues  and net  operating  losses  from  activities  that will not be
continued are as follows:
<TABLE>
<CAPTION>

                                                                                                           1994    1995     1996
                                                                                                          ------ -------- --------
<S>                                                                                                         <C>  <C>      <C>   
Revenue from primary care clinics, adult day care centers, a physician practice and other programs closed    --   $1,177   $5,107
Net operating losses from primary  care  clinics, adult  day  care  centers,  a  physician  practice  and
other programs closed....................................................................................    --   $  (95)  $ (880)
Revenue from management contracts and agreements terminated..............................................    --   $1,318   $3,336
Net operating income from management contracts and agreements terminated ................................    --   $  427   $1,126
</TABLE>

                                      F-21

<PAGE>

               COMMUNITY CARE OF AMERICA, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
          (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)-(CONTINUED)



(12) LOSS ON IMPAIRMENT OF LONG-LIVED ASSETS AND OTHER NON-RECURRING CHARGES
-- (CONTINUED)

   In 1996, the Company adopted  Financial  Accounting  Standard (SFAS) No. 121,
"Loss on  Impairment  of  Long-Lived  Assets  and for  Long-Lived  Assets  to be
Disposed Of." As a result,  the Company  performed a review of the events and/or
changes in  circumstances  that would  suggest that the  carrying  amount of the
Company's asset may not be recoverable.  This analysis  included a consideration
of (1) the business,  legal and economic climate for events that could adversely
affect the carrying value of an asset, (2) any physical  changes in assets,  (3)
the accumulated  costs in excess of the amounts  originally  expected to acquire
and/or  construct an asset,  (4) decreases in the market value of assets and (5)
current period operating or cash flow losses that demonstrate  continuing losses
associated with an asset used for the purpose of producing revenue. In addition,
the Company estimated the future cash flows expected to result from assets to be
held and used.

   In  estimating  the  future  cash flows for  determining  whether an asset is
impaired, the Company grouped its assets at the lowest level for which there are
identifiable  cash flows  independent  of other groups of assets (i.e.,  by long
term care facility).  The results of comparing future undiscounted cash flows to
historical  carrying  value,  together  with the  evaluation  of the  facts  and
circumstances that may indicate an asset may not be recoverable,  indicated that
the Toledo and Aurora facilities were eligible for an impairment charge. None of
the Company's remaining  facilities were reduced since the carrying value of the
assets were less than the undiscounted cash flows.

   During 1996, the Company closed its Aurora facility and voluntary decertified
its Toledo  facility  from the  Medicare  program due to quality of care issues,
unfavorable market  conditions,  the reduction in reimbursement from third-party
payors and competition.  Accordingly,  these events and circumstances,  together
with the  unfavorable  undiscounted  future  cash  flows,  caused the Company to
perform further  evaluations of whether the carrying amount of these assets were
recoverable.

   After  determining  that an  impairment  charge  for  Toledo  and  Aurora was
appropriate,  the Company determined the estimated fair value of such facilities
using  standard  industry  valuation  techniques.  The excess  carrying value of
goodwill, buildings and improvements, leasehold improvements and equipment above
the fair value was $1,450 and is included in the  statement  of  operations  for
1996 as loss on impairment of long-lived assets.

   Prior to the adoption of SFAS 121, the Company  evaluated  impairment  on the
entity level. Such evaluation yielded no impairment charge.

(13) CERTAIN SIGNIFICANT RISKS AND UNCERTAINTIES

   The Company has undergone  major  restructuring  and  reorganization  in 1996
resulting  in the closure or  termination  of certain  business  activities  and
acquisitions  and the  termination  of offerings of debt and equity  securities.
During the year ended  December 31, 1996 the Company  incurred a loss of $18,905
and had negative cash flow from operating  activities.  As of December 31, 1996,
the Company had a working capital  deficiency of $10,952 and was in default with
respect to certain of its debt, lease and other agreements.  These circumstances
would naturally  raise doubt about the Company's  ability to continue as a going
concern. Management's plans with respect to this matter are discussed below.

                                      F-22

<PAGE>

               COMMUNITY CARE OF AMERICA, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
          (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)-(CONTINUED)

(13) CERTAIN SIGNIFICANT RISKS AND UNCERTAINTIES -- (CONTINUED)

   In October 1996,  management engaged Smith Barney,  Inc. as financial adviser
to assist in evaluating debt and equity  financing  alternatives,  including the
possible sale of the Company.  Management is evaluating the  possibilities  with
respect to the interest expressed by potential acquirers, joint venture partners
and organizations which might provide an infusion of capital.  Also,  management
is pursuing a financial  restructuring  plan and, in order to obtain  sufficient
financial  resources,  the Company has accomplished the following  subsequent to
December 31, 1996:

     1.   Refinanced  the  revolving  line of credit with its bank to extend the
          payment  terms related to $4,800 of debt due on demand at December 31,
          1996 and issued five year  warrants to  purchase  1,787,568  shares of
          Common  Stock  (subject to reduction as payments of such debt is made)
          at $2.25 per share subject to adjustment in certain circmustances).

     2.   Obtained  the release of  approximately  $4,000 of  security  deposits
          through  a  modification  of the  lease  with  HRPT to  reduce  rental
          payments.

     3.   Obtained  a  settlement   agreement  dated  March  1,  1997  with  the
          shareholders  of 219,798  shares of common stock subject to repurchase
          (the put contract),  which provides that, in lieu of repurchasing  the
          shares,  the  Company  pay $500 and issue an 8.5% note  payable due on
          September 1, 1997 in an amount equal to $1,681 less the proceeds  from
          the sale of the shares by the shareholders..

     4.   Obtained waivers of financial covenant violations and related defaults
          under debt and lease agreements through February 1998.

     5.   Obtained  a  guarantee  from  IHS with  respect  to debt  payments  of
          approximately  $4,800 and lease  payments of up to $10,000 in exchange
          for warrants  which allow IHS to purchase up to 379,900  shares of the
          Company's common stock at $1.937 per share.

     6.   Obtained an  extension on the payment of fees payable to IHS under the
          management   agreement   discussed  in  Note  14  through  April  1998
          (estimated to be $2,200 for 1997.)

   In  addition,   the  Company  continues  to  pursue  negotiations  to  obtain
additional  debt or equity  capital and  anticipates  finalizing  its  financial
restructuring  plan  soon.  The  Company  believes  it has  obtained  sufficient
financing commitments for the next year. However,  other commitments will likely
be necessary to successfully  accomplish the financial restructuring plan beyond
the next year.

   The Company acquires or leases and operates  long-term health care facilities
in  medically-underserved  rural  communities,   and  uses  such  facilities  as
platforms to develop  networks  offering a range of other  healthcare  services.
Facilities  owned  or  leased  by the  Company  are in the  states  of  Alabama,
Colorado,  Georgia,  Iowa,  Kansas,  Louisiana,  Missouri,  Nebraska,  Texas and
Wyoming.  The  Company  and others in the  healthcare  business  are  subject to
certain inherent risks, including the following:

     o    Substantial  dependence on revenues derived from  reimbursement by the
          Federal Medicare and state Medicaid programs;

     o    Government  regulation,  government budgetary constraints and proposed
          legislative and regulatory changes; and

     o    Lawsuits alleging malpractice and related claims.

   Such inherent  risks require the use of certain  management  estimates in the
preparation of the Company's financial  statements and it is reasonably possible
that a change in such estimates may occur.

                                      F-23

<PAGE>


               COMMUNITY CARE OF AMERICA, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
          (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)-(CONTINUED)


(13) CERTAIN SIGNIFICANT RISKS AND UNCERTAINTIES -- (CONTINUED)

   The Medicare and various state Medicaid  reimbursement  programs  represented
20% and 50%, respectively, of the Company's revenues for the year ended December
31,  1996,  and the  Company's  operations  are  subject  to a variety  of other
Federal, state and local regulatory  requirements.  Failure to maintain required
regulatory approvals and licenses and/or changes in such regulatory requirements
could have a significant  adverse effect on the Company.  Changes in Federal and
state reimbursement funding mechanisms, related government budgetary constraints
and differences between final settlements and estimated  settlements  receivable
under  Medicare and Medicaid  retrospective  reimbursement  programs,  which are
subject to audit and retroactive adjustment as discussed in note 3, could have a
significant  adverse  effect on the Company.  Also,  the Company is from time to
time subject to malpractice and related claims and lawsuits,  which arise in the
normal  course of  business  and which  could have a  significant  effect on the
Company.  The Company believes that adequate  provision for these items has been
made in the  accompanying  consolidated  financial  statements  and  that  their
ultimate  resolution  will  not  have a  material  effect  on  the  consolidated
financial statements.

   Since  its  inception,  the  Company  has  grown  through  acquisitions,  and
realization of acquisition costs,  including excess costs over fair value of net
assets   acquired,   is  dependent   initially  upon  the  consummation  of  the
acquisitions  and  subsequently  upon  the  Company's  ability  to  successfully
integrate and manage  acquired  operations.  Also, the Company's  development of
integrated   healthcare  networks  is  dependent  upon  successfully   effecting
economies of scale,  the  recruitment of skilled  personnel and the expansion of
services and related  revenues.  The Company has not completed  implementing its
network strategy at any facilities, and realization of related development costs
cannot  be  assured.  Finally,  see note 12 for  certain  significant  risks and
uncertainties,  resulting in the loss on  impairment  of  investments  and other
non-recurring charges in 1996.

(14) RELATED PARTY TRANSACTIONS

   On January 19, 1994, the Company entered into a Medicare consulting agreement
with  Symphony  Care  Consulting,  Inc.  (SCCI),  a  wholly-owned  subsidiary of
Integrated  Health  Services,  Inc., as amended on May 1, 1995.  The  consulting
agreement provided Medicare  reimbursement and certification  services including
training,  cost report preparation and accounting services through January 1996.
Costs paid to SCCI were $410 in 1994,  $453 in 1995,  and $148 in 1996. In 1996,
the Company paid Symphony  Rehabilitation  Services (SRS) and Symphony  Pharmacy
Services (SPS),  wholly owned  subsidiaries of IHS, $162 for therapy and $98 for
pharmacy services,  respectively.  Also, the Company paid IHS approximately $500
in 1994 and $186 in 1995 to reimburse IHS for expenses incurred on behalf of the
Company in connection with the start-up of CCA's operations,  the acquisition of
MeritWest and due diligence  service in connection with the public offering.  No
amounts were paid to IHS in 1996. Two of the Company's  directors are employees,
directors and  stockholders  of IHS. The Company  believes that the terms of the
agreement with SCCI and the amounts paid to IHS, SRS and SPS for services are on
terms as favorable as could have been obtained from unaffiliated third parties.

   Loans  receivable  from  officers and  directors of $425 at December 31, 1996
mature on various dates with accrued interest at 8% per annum.

                                      F-24

<PAGE>

               COMMUNITY CARE OF AMERICA, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
          (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)-(CONTINUED)


(14) RELATED PARTY TRANSACTIONS -- (CONTINUED)

   On December  27,  1996,  the Company  and IHS entered  into a loan  agreement
which,  as amended,  entitles  the Company to borrow,  until  December 27, 1998,
amounts on a revolving  credit basis so that no more than $5,000 is outstanding.
Loan  advances  are subject to the  consent of IHS   making of  advances,  which
consent may not be unreasonably  withheld.  This revolving credit facility bears
interest at a rate per annum  equal to the annual rate of interest  set forth in
IHS's revolving  credit  agreement with Citibank,  N.A.,  plus 2%.  Repayment of
amounts advanced under this line of credit are subordinated to the payment of up
to  an  aggregate  of  $30,000  of  principal  and  interest  on  the  Company's
obligations  to HRPT and Daiwa.  As of December 31,  1996,  IHS had advanced the
Company $2,000.

   In connection with entering into the revolving credit  facility,  the Company
issued  warrants to purchase an  aggregate  of 752,182  shares of the  Company's
Common Stock,  one-half of which are exercisable until January 13, 1999 at $3.22
per share (the average of the high and low trading price of the Company's Common
Stock on  January  14 and 15,  1997)  and the  remaining  one-half  of which are
exercisable  until  January  13,  2002 at $6.44 per share.  The number of shares
subject to warrants and the exercise prices are subject to adjustment in certain
instances, including if the Company issues shares of Common Stock (or securities
convertible  into Common Stock) at less than the applicable  exercise  price. In
connection therewith, the Company has granted to IHS certain rights to cause the
shares  issuable  upon  exercise  of the  warrants  to be  registered  under the
Securities Act of 1933, as amended, at the Company's expense.

   On December 27, 1996,  the Company  entered into a Management  Agreement (the
"Management  Agreement") with Integrated Health Services,  Inc. ("IHS") pursuant
to which the  Company is  employing  IHS to  supervise,  manage and  operate the
financial,  accounting,  MIS,  reimbursement and ancillary services  contracting
functions  for the Company until  December 31, 2001.  The  Management  Agreement
provides  for the Company to pay to IHS for its  services,  until  December  31,
1997,  an amount equal to the lesser of 2% of the Company's  gross  revenues (as
defined) or the Company's  annualized  cost of performing  those services itself
based on the period July 1, 1996  through  December 31,  1996.  Thereafter,  the
management  fee payable to IHS is to be the lesser of 2% of the Company's  gross
revenues or a percentage of gross revenues determined by comparing the Company's
cost of  performing  such  functions  during  the  period  July 1, 1996  through
December  31, 1996 to its gross  revenues for that  period.  The gross  revenues
percentage which is fixed may be increased from 2.0% to 2.5% by mutual agreement
of the parties following IHS's review of the Company.

(15) INITIAL PUBLIC OFFERING

   In August 1995,  the Company issued  3,450,000  shares of common stock to the
public in an initial public offering at a price of $9.50 per share. Net proceeds
after underwriting discounts and expenses of the offering were $27,589.

   The Company used the net proceeds of the offering to, among other things, pay
$10,800 of indebtedness to HRPT plus a prepayment  penalty of approximately $600
and redeem the Series A Preferred Stock for approximately  $8,167.  Concurrently
with  the  completion  of the  offering,  the  Series A  Preferred  Stockholders
purchased  an  aggregate  of  1,331,814  shares of Common  Stock  through  their
exercise of warrants by applying 263 shares of Series A Preferred Stock,  having
an aggregate  redemption value of $26,300, in payment of the full exercise price
of the warrants.

   As a result of the repayment of certain  indebtedness through the application
of a  portion  of the  proceeds  from  the  offering  and  the  proceeds  from a
concurrent  borrowing,  the Company recorded an extraordinary charge to earnings
of  $1,398  related  to  prepayment  penalties  and the  write-off  of  deferred
financing costs ($992, net of income tax benefit of $406).

                                      F-25
<PAGE>

               COMMUNITY CARE OF AMERICA, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
          (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)-(CONTINUED)

(16) SANDY RIVER TRANSACTION

   Effective  as of  August  15,  1995,  the  Company  entered  into  management
agreements for ten long-term  care  facilities  (the "Sandy River  Facilities"),
obtained an option to acquire all of the entities  which own the ten  facilities
(the "Option") and agreed to make fully secured loans to such entities for up to
$3,100.  Effective as of August 15, 1996, the Company  terminated the management
agreements since the Sandy River Facilities were not generating  sufficient cash
flows to pay CCA's management fees.

   Under the prior management agreements,  the Company's monthly base management
fee was 7% of gross  revenues (as defined)  during the initial term.  Management
fees were  subordinated  to the prior  payment of all costs,  expenses,  certain
capital  expenditures,  lease  payments and scheduled  payments of principal and
interest on the  indebtedness of the facilities,  and a portion was subordinated
to certain  advances and fees of  approximately  $400 per annum payable to Sandy
River  Development,  Inc. ("SRD"),  a service company whose four principals were
also principals of certain owners of the Sandy River  Facilities.  In accordance
with the settlement  agreement,  unpaid management fees of $1,086 were waived by
the Company upon the termination of the management agreements. See note 12.

   The Company  recorded  management fee revenue of $1,136 in 1995 and $1,266 in
1996. As part of the Company's strategy to make operational  improvements at the
time it assumed the  operations of facilities  acquired or managed,  the Company
implemented  an  action  plan to  improve  the  cash  flows of the  Sandy  River
Facilities,  which included specific steps to increase patient census,  increase
Medicare  utilization (which program has a higher per diem reimbursement  rate),
maximize total third party  reimbursement  and introduce a cost savings  program
through  efficiencies and other  professional  management  techniques.  However,
despite  the  implementation  of  management's  action  plan,  the  Sandy  River
Facilities did not generate  sufficient cash flows to pay the entire  management
fee, and it became apparent in 1996 that the facilities  could not be managed on
a profitable basis.

   The Company had also loaned $2,533 under secured  revolving  credit notes and
term promissory notes to certain entities (the "Borrowing  Entities") which owed
indebtedness  that was  personally  guaranteed by the principals of the entities
which own the Sandy River  Facilities.  The loans were  primarily  to enable the
Borrowing  Entities  to  retire  such  indebtedness  and  thereby  release  such
principals from their personal  guaranties.  The loans to the Borrowing Entities
matured on August 10, 1996. The Company's  loans to the Borrowing  Entities bore
interest at the rate payable by the Company under the Company's revolving credit
facility  and were  secured (on a several  basis) by,  among other  assets,  the
accounts  receivable of the Sandy River  Facilities  and mortgages on certain of
the Sandy River Facilities.  Pursuant to the settlement agreement,  CCA released
the Borrowing  Entities from their  obligations as consideration for the amounts
the Company owed to the Sandy River Group as a result of the  termination of the
management agreement and related agreements.

   Under a related option  agreement,  the Company had the right to purchase the
entities which own the ten facilities, during the initial three year term of the
management  agreements,  and the Company  had a  nonrefundable  $5,000  purchase
option deposit,  of which $1,850 was paid through the issuance of 194,737 shares
of Common Stock valued at $9.50 per share.  In 1996, the Company  terminated the
option and wrote-off the purchase option deposit of $5,000.

                                      F-26

<PAGE>

               COMMUNITY CARE OF AMERICA, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
          (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)-(CONTINUED)

(16) SANDY RIVER TRANSACTION -- (CONTINUED)

   The Company granted the holders of the 194,737 shares of Common Stock, issued
as partial payment of the purchase option deposit, the right to "piggyback" such
shares on one occasion in certain  registration  statements filed by the Company
under the  Securities  Act.  As of April  14,  1997  such  shares  have not been
included  in certain  registration  statements  filed by the  Company  under the
Securities  Act. In addition,  each holder was also granted the right to require
the Company to  repurchase up to 25%, 25% and 50% of their shares during the one
month period following each of March 15, 1996,  September 15, 1996 and March 15,
1997,  respectively,  at a price  equal to $9.50 per  share,  or if higher and a
registration  statement  under the Securities Act with respect to such shares is
not then  effective,  the market price of the shares.  On October 27, 1996, as a
result of the  terminated  management  agreement,  the  holders of these  shares
exercised  rights  under the  Option  agreement  and  required  the  Company  to
repurchase the  aforementioned  shares for $9.50 per share. The total amount due
to holders of stock of $2,181 has been  classified as a current  liability as of
December 31, 1996. The agreement was superseded by a settlement  agreement dated
March 1, 1997. See note 13 for further information.

(17) SUPPLEMENTAL CASH FLOW INFORMATION

   Significant  non-cash  financing and investing  activities  are summarized in
notes 2 and 12 and as follows:

     o    Accretion of the discount on preferred  stock  resulted in an increase
          in preferred  stock and a decrease in  additional  paid-in  capital of
          $371 in 1994 and $231 in 1995.

     o    Preferred stock dividends of $163 in 1994 were accrued but not paid.

     o    Common Stock with fair value of $150 was issued for legal  services in
          connection with acquisitions in 1994.

     o    The  realization  of deferred  tax assets  relating  to the  MeritWest
          acquisition and the corresponding reduction of the valuation allowance
          decreased the excess of cost over fair value of net assets acquired by
          $215 in 1995.

     o    The Sandy  River  transaction  resulted  in an increase in deposits of
          $1,850 which was financed by issuance of common stock in 1995.

     o    The  transfer  in 1996 of  Smith  Hospital  back to the  prior  owners
          resulted  in a non cash charge to income of $4,398  which  consists of
          the following:

             Property, plant and equipment ....................    $ 5,907
             Long term debt ...................................     (3,000)
             Deferred financing costs .........................        264
             Other ............................................      1,227
                                                                   -------
                                                                   $ 4,398
                                                                   =======
      
   Cash payments for interest,  net of amounts capitalized,  were $3,678 in 1995
and $5,008 in 1996.  Cash  payments  for income taxes were $3 in 1995 and $32 in
1996.

                                      F-27

<PAGE>

               COMMUNITY CARE OF AMERICA, INC. AND SUBSIDIARIES


                       COMMUNITY CARE OF AMERICA, INC.
               SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>

                                                               YEARS ENDED DECEMBER 31,
                                                             ---------------------------
                                                               1994     1995      1996
                                                             -------- -------- ---------
<S>                                                          <C>      <C>      <C>   
Allowance for doubtful accounts and contractual adjustments:
 Balance at beginning of period............................  $1,200   $1,100   $1,978
 Provisions for bad debts charged to operations............      52      658    1,867
 Provisions for contractual adjustments charged to
  operations...............................................      --      310      495
 Acquired companies........................................      --      307      984
 Accounts receivable written off, net of recoveries........    (152)    (397)    (491)
                                                             -------- -------- ---------

 Balance at end of period..................................  $1,100   $1,978   $4,833
                                                             ======== ======== =========
</TABLE>

                               S-1