<PAGE>   1


                  U. S. SECURITIES AND EXCHANGE COMMISSION
                           Washington, D.C.  20549

                                 FORM 10-K/A
                               Amendment No. 1
            (Amending Part I- Item 1 and Part II - Items 7 and 8)

[X]          ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
             SECURITIES EXCHANGE ACT OF 1934

             For the Fiscal Year ended:  June 30, 1996

             OR

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

             For the transition period from:

                         Commission File No. 1-14114

                      RETIREMENT CARE ASSOCIATES, INC.
           (Exact Name of Registrant as Specified in its Charter)

           COLORADO                                    43-1441789
(State or Other Jurisdiction of                  (I.R.S. Employer Identi-
Incorporation or Organization)                      fication Number)

         6000 Lake Forrest Drive, Suite 200, Atlanta, Georgia 30328
        (Address of Principal Executive Offices, Including Zip Code)

Registrant's telephone number, including area code:  (404) 255-7500

Securities registered pursuant to Section 12(b) of the Act:

    TITLE OF EACH CLASS             NAME OF EACH EXCHANGE ON WHICH REGISTERED
Common Stock, $.0001 Par Value               New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act: Common Stock,
$.0001 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.  Yes [X]  No [ ]

As of September 18, 1996, 13,180,918 shares of common stock were outstanding.
The aggregate market value of the common stock of the Registrant held by
nonaffiliates on that date was approximately $67,925,000.

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 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. [ ]

Documents incorporated by reference:  Part III is incorporated by reference to
the Registrant's Proxy Statement relating to the Annual Meeting of Shareholders
to be held in December 1996.
<PAGE>   2

                                   PART I

ITEM 1.  BUSINESS.

THE COMPANY

         Retirement Care Associates, Inc. is a leading provider in the
southeastern United States of senior residential care services, which include
long-term care, assisted living and independent living services.  The Company's
long-term care facilities provide skilled nursing care, specialty care services
and ancillary services to patients, while its assisted/independent living
centers provide services to residents in need of varying degrees of assistance
with the activities of daily living.  Its facilities are located primarily in
rural and non-urban areas in the United States, and it is the largest provider
of senior residential care services in Georgia.  As of August 20, 1996, the
Company operated 69 facilities which it owned or leased, and managed an
additional 24 facilities for others.

         The Company's headquarters are located in Atlanta, Georgia.  Its
executive offices are located at 6000 Lake Forrest Drive, Suite 200, Atlanta,
Georgia 30328.  Its telephone number at that address is (404) 255-7500.

         The Company was formed under the laws of the State of Colorado on
March 24, 1986, under the name "New Frontiers Investments, Inc." to create a
corporate vehicle to seek and acquire a business opportunity.

         In February, 1987, the Company completed a public offering of units
consisting of shares and warrants.  The gross proceeds to the Company from the
offering were approximately $236,455.

         On April 2, 1987, the Company acquired 100% of the outstanding shares
of Retirement Care Associates, Inc.  ("RetireCare") in exchange for shares of
the Company's Common Stock.  RetireCare is a corporation formed in 1987 to
engage in the business of consulting to, marketing and managing retirement
centers.  RetireCare eventually planned to expand its operations to include
acquisition and syndication of retirement centers.

         At the time of the acquisition, the Company changed its name to
"Retirement Care Associates, Inc."  Also as a result of the acquisition, there
was a complete change in control of the Company.

         The Company attempted to operate in several facets of the retirement
industry including development, contract management, acquisition and
consulting.  Although the Company had some success turning around distressed
properties, it was not able to retain long-term management contracts.  In
September, 1988, the Company narrowed its goals to focus on long-term marketing
and management contracts of distressed properties.

         In October, 1988, the Company purchased The Paxton Manor, a 250 unit
retirement facility located in Omaha, Nebraska.  This property, constituting
essentially all of the assets of the Company at the time, was subsequently sold
on November 12, 1991, with shareholder approval.  In September 1991,
Chris Brogdon and Edward E. Lane agreed to become Directors of the Company and
the existing directors and several major shareholders of the Company verbally
agreed that if Messrs. Brogdon and Lane would invest $50,000 in the Company,
the Company would issue to them 1,447,031 shares of the Company's Common Stock.
The $50,000 was used to pay the expenses of preparing and filing the Company's
delinquent SEC reports and tax returns, and paying the state and federal taxes
owed as a result of the sale of the Paxton Manor during 1991.  During this
period of time, the Company's Officers and Directors resigned and Chris Brogdon
and Edward Lane became Officers and Directors of the Company.




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         From November 1991 to November 1992, the Company had no significant
activities other than the filing of delinquent SEC reports and tax returns.

         In November 1992, the Company merged with Capitol Care Management
Company, Inc. ("CCMC"), a Georgia corporation engaged in the business of
providing management services to retirement facilities, personal care
facilities and nursing homes.  In connection with the merger the Company issued
964,688 shares of the Company's Common Stock and Promissory Notes in the
aggregate amount of $1,000,000 to the CCMC shareholders.  Simultaneously with
the merger, all of the assets, liabilities and operations of CCMC were placed
into a newly formed Georgia corporation named Capitol Care Management Company,
Inc. ("Capitol Care") which is a wholly-owned subsidiary of the Company.  On
December 31, 1992, the promissory notes aggregating $1 million were canceled
and in consideration therefor the holders of the promissory notes were issued
1,000,000 shares of Series C Convertible Preferred Stock which were
subsequently converted into 964,688 shares of Common Stock.

         In December 1993, the Company acquired Retirement Management
Corporation, a Nevada corporation engaged in the business of providing
management and marketing services to retirement care facilities, in a merger
transaction in which it was merged into Capitol Care.  Immediately after the
merger, all of the assets, liabilities and operations of Retirement Management
Corporation were transferred into Retirement Management Corporation ("RMC"), a
newly formed Georgia corporation which is a subsidiary of Capitol Care.  In
this transaction, the Company issued 92,610 shares of its Common Stock and
shares of preferred stock which were later converted into 115,763 shares of
Common Stock and $100,000 in cash in exchange for all of the outstanding stock
of RMC.  During the period from January 1, 1993 to December 10, 1993, RMC had
$668,861 in revenue and net income of $85,511.

         On September 30, 1994, the Company acquired approximately 63% of the
outstanding stock of Contour Medical, Inc., a publicly-held Nevada corporation
located in St. Petersburg, Florida, which manufactures a full line of
orthopedic care and rehabilitation products.  The Company currently owns
approximately 60% of the outstanding stock of Contour Medical, Inc.

         In July, 1993, the Company effected a 1 for 12 reverse stock split of
the shares of the Company's outstanding Common Stock.  The Company paid 5%
stock dividends on its outstanding Common Stock in February 1994, February 1995
and May 1996.  All financial information and share data in this Report give
retroactive effect to the reverse split and stock dividends.

INTRODUCTION

         The Company is a leading provider in the southeastern United States of
senior residential care services, which include long-term care, assisted living
and independent living services.  The Company's long-term care facilities
provide skilled nursing care, specialty care services and ancillary services to
patients while the Company's assisted/independent living centers provide
services to residents in need of varying degrees of assistance with the
activities of daily living.  Most of the Company's facilities are located in
rural and non-urban areas in the southeastern United States, and the Company is
the largest provider of senior residential long term care services in Georgia.

         The Company's strategy is to increase the number of facilities that it
operates (i) primarily by acquiring by purchase or lease independently-owned
long-term care facilities and assisted/independent living centers located in
the Southeast and (ii) secondarily by developing assisted/independent living
centers adjacent or complementary to it existing facilities.  Upon the
acquisition of a facility, the Company implements its management information
and control systems and provides capital for necessary physical plant
improvements to enable its 



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professionals to increase occupancy and attain the Company's standards for
quality of care.

         The Company's operating strategy with respect to its
assisted/independent living centers is to increase its center occupancy rates
by maintaining high quality social and support services for its residents, to
develop relationships with community leaders and other referral sources and to
implement a strong marketing program, including direct mail marketing and
advertising and special events.  Assisted living is an increasingly popular
form of senior housing which offers seniors who need or desire help with the
activities of daily living and limited health care services a residential
alternative which allows them more independence and is less costly than a
long-term care facility.  The Company's independent living centers offer
residents complete independence and provide basic support services as well as
customized services to meet their individual needs.

         The Company's operating strategy with respect to its long-term care
facilities is to improve its payer mix by (i) making capital improvements which
the Company believes are necessary to attract more private pay residents, (ii)
aggressively marketing such facilities to prospective private pay residents and
(iii) seeking Medicare certification for newly acquired facilities.  The
Company seeks to enhance the revenue of its existing facilities by offering its
long-term care patients physical, speech, occupational and respiratory therapy,
wound care and other ancillary services.  At June 30, 1996, all of the
Company's long-term care facilities were Medicare certified.

         The following table sets forth the percentage of the Company's total
revenue attributable to each of Medicare, Medicaid and private payors during
each of the last three consecutive fiscal years.
<TABLE>
<CAPTION>

           Payor                  Fiscal 1994          Fiscal 1995         Fiscal 1996
           -----                  -----------          -----------         -----------
      <S>                            <C>                  <C>                 <C>
      Medicaid                        65%                  65%                 55%
      Medicare                         8%                  10%                 10%
      Private                         27%                  25%                 35%
                                     ---                  ---                 ---
      Total                          100%                 100%                100%
</TABLE>

         SENIOR RESIDENTIAL CARE INDUSTRY

         GENERAL. The senior residential care industry encompasses a broad
range of residential and health care services provided to the elderly and to
patients who can be cared for outside the acute care hospital environment. The
Company believes that demand for the services provided by long-term care
facilities and assisted/independent living centers will increase substantially
during the next decade primarily due to demographic and social trends and, to a
lesser extent, the growth of private insurance and governmental payment sources
for assisted living services. Other factors which affect the senior residential
care industry are (i) the limited supply of long-term care facilities, (ii) the
effects of government cost containment measures and (iii) the fragmentation of
the long-term care industry. Furthermore, given the cost containment pressure
at the federal, state and local levels, government and private payers are
attracted to, and motivated to support, long-term care facilities as a more
cost effective alternative to subacute care facilities and to hospitals and
assisted living centers as a less expensive and still effective alternative to
traditional long-term care facilities when ongoing care is needed.

         DEMOGRAPHIC AND SOCIAL TRENDS.  The consumers of the Company's senior
residential care services are persons generally over 65 years of age.  In the
United States, the number of individuals over 65 years of age has increased
from approximately 25 million in 1980 to more than 31 million in 1990.  The
number of persons 65 years of age and over is expected to grow to approximately
35 million in 2000.




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         GROWTH OF LONG-TERM CARE INSURANCE. Numerous insurance companies
currently offer long-term care insurance which provides the beneficiary
coverage for expenses associate with long-term care and assisted/independent
living services.  Furthermore, the number of long-term care policies in
existence is increasing rapidly.  According to the Health Insurance Association
of America, approximately 2.4 million long-term care policies were in existence
as of December 1991, representing a compound average annual growth rate of
31.5% from 1987 to 1991. In calendar 1994, 1.4 million long-term care policies
were purchased as compared to 0.6 million in 1991.  In addition, employers have
started to offer long-term care insurance in their "cafeteria plans," and
Congress is considering a proposal to make long-term care insurance premiums
tax deductible.  Based upon these factors and the demographic and social trends
of the United States population, the Company expects more people to be covered
by long-term care insurance.

         LIMITED SUPPLY OF LONG-TERM CARE BEDS. The Company believes that
certain factors impacting the available supply of long-term care beds will
favorably impact the demand for the services offered by the Company in the
future. All of the states in the southeastern United States, including the
states in which the Company operates, have enacted certificate of need ("CON")
or similar legislation which restricts the supply of licensed long-term care
facility beds. These laws generally limit the construction of long-term care
facilities, and the addition of beds or services to existing long-term care
facilities, and hence tend to limit the available supply of traditional
long-term care beds. In addition, some long-term care facilities have started to
convert traditional long-term care beds into sub-acute beds.

         FRAGMENTED INDUSTRY.  Market share data indicate that the long-term
care industry is a highly fragmented and competitive industry in which the 30
largest providers operate approximately 352,000 beds, or 22% of total industry
beds. Competitive dynamics in the industry, including increasing complexity of
medical needs, growing regulatory and compliance requirements and increasingly
complicated reimbursement systems, have resulted in smaller operators (who lack
the sophisticated management information systems, operating efficiencies and
financial resources necessary to compete effectively) selling their businesses
and operations to companies, such as the Company, that have the management
information systems, operating efficiencies and financial resources necessary
to compete effectively.

         The result of these factors is a relative increase in the demand for
long-term facility care, which, in turn, increases the demand for residential
options, such as assisted living facilities, to serve patients historically
served by long-term care facilities. In addition, long-term care facility
operators are continuing to focus on expanding services to sub-acute patients
requiring very high levels of nursing care. As such, the supply of long-term
care beds likely will be increasingly occupied by patients with higher acuity
levels, thereby increasing the supply of lower acuity patients who may be
served by assisted living facilities.  The Company believes that, as a result
of these trends, there will be opportunities for assisted living to more cost
effectively provide accommodation and service facilities to provide
accommodations and services on a cost-effective basis to residents requiring
lower levels of care than is generally provided to patients in long-term care
facilities.

         STRATEGY

         The Company's strategy is to increase the number of facilities that it
operates primarily by (i) acquiring by purchase or lease independently-owned
long-term care facilities and assisted/independent living centers located in
the southeastern United States and secondarily by (ii) developing
assisted/independent living centers adjacent or complementary to its existing
facilities.  Key elements of this strategy include: (i) acquiring and
developing additional long-term care and assisted/independent living
facilities; (ii) 



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increasing facility occupancy rates; (iii) improving the payer mix at the
Company's long-term care facilities; and (iv) achieving operating efficiencies.

         ACQUIRE AND DEVELOP FACILITIES.  The Company intends to acquire and
develop additional long-term care facilities and assisted/independent living
facilities in its existing markets and contiguous areas.  Management believes
that such expansion will allow the Company to take better advantage of its
existing expertise and organizational resources and improve margins by
reducing overhead costs. As a result of the growing complexity of regulatory
requirements and the continued pressure on reimbursement rates, the Company
believes that other smaller, independent providers may be more willing to
consider selling or leasing their facilities on terms acceptable to the
Company.  The Company believes it is well positioned to make acquisitions
because of its reputation and established geographic presence.  In addition,
the Company intends to offer a broad range of senior residential care services.
Towards that end, the Company has recently implemented a strategy to develop
assisted living centers adjacent to its long-term care facilities or
independent living centers, thereby creating senior residential care campuses
which offer a greater variety of senior residential care services in one
location.  At August 31, 1996, the Company had nine of these senior residential
care campuses.

         In evaluating an existing facility for acquisition, the Company
primarily considers the facility's historical occupancy rates and payor mix,
reputation and compliance history, physical condition and appearance, labor
force stability, the availability of financing on acceptable terms and, in the
case of assisted/independent living facilities, the demographics of the
surrounding area. In evaluating a development project, the Company primarily
considers the strength of the market demand for the senior residential care
services.

         Upon the acquisition of a facility, the Company implements its
management information and control systems and provides capital for necessary
physical plant improvements to enable its professionals to increase occupancy
and attain the Company's standards for quality of care.  The Company's strategy
with respect to its long-term care facilities is to seek Medicare certification
while simultaneously marketing the facility to attract more Medicare and
private pay residents.  The Company believes that with effective cost controls,
the Company's facilities can continue to be profitable with a highly
concentrated Medicaid payer mix.

         INCREASE FACILITY OCCUPANCY RATES. The Company believes its occupancy
rates in existing assisted/independent living centers should increase primarily
due to three factors: (I) an enhanced emphasis on facility-specific marketing
efforts; (ii) the continued growth of the elderly segment of the population in
the Company's markets; and (iii) the limited supply of long-term care beds and
assisted/independent living units. Increasing occupancy rates will allow the
Company to further reduce its fixed costs per patient day.

         IMPROVE PAYOR MIX. The Company seeks to improve its payer mix at its
long-term care facilities by making capital improvements which management
believes are necessary to attract more private pay residents, by aggressively
marketing such facilities to prospective private pay residents and by seeking
Medicare certification for newly acquired facilities. The Company has recently
implemented a strategy to develop assisted living centers adjacent to its long-
term care facilities or independent living centers, thereby creating a senior
residential care campus which offers a greater variety of senior residential
care services in one location. Management believes that providing a "continuum
of care" to its residents enhances the marketing efforts of its
assisted/independent living centers and that these centers should provide a
referral source to the other facilities on the same campus. The Company also has
intensified efforts to provide the full range of Medicare services to eligible
patients and is increasingly concentrating its marketing efforts on private
third party payers, such as managed care and insurance companies, as well as
hospital discharge 




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planners, thereby developing referral sources for both its long-term care and
assisted/independent living centers.

         ACHIEVE OPERATING EFFICIENCIES.  The Company seeks to reduce its ratio
of general and administrative expenses to total operating revenue as a result
of economies of scale resulting from acquisitions and as a result of efforts to
more efficiently control and manage its businesses.  The effective operation of
the Company's managerial and financial information and control systems are
fundamental to its performance.  These systems allow the Company, among other
things, to assimilate acquisitions and control costs by achieving reductions of
administrative staff, economies in purchasing, efficient management of patient
care personnel and reduced use of nurses from employment agencies.

         LONG-TERM CARE SERVICES. Basic resident services are those
traditionally provided to elderly patients in long-term care facilities with
respect to daily living activities and general medical needs.  The Company
provides in all of its facilities room and board, 24 hour skilled nursing care
by registered nurses, licensed practical nurses and certified nursing aides,
and a broad range of support services, including dietary services, therapeutic
recreational activities, social services, housekeeping and laundry services,
pharmaceutical and medical supplies, physical, speech, occupational and
respiratory therapy, wound care and other ancillary services.

         ASSISTED LIVING SERVICES.  The Company's assisted living centers are
designed to assist those persons generally 75 years of age or over who may
require assistance with any of the five basic activities of daily life (i.e.,
bathing, dressing, eating, walking and toileting).  The Company assesses
incoming residents and develops an individualized care plan based on their
acuity level. The Company reassesses each of its residents on a regular basis
to determine if they require additional care. Each of the Company's assisted
living facilities offers its residents with private or semi-private
accommodations, ongoing health assessments, three meals per day and snacks
approved by a registered dietician, as well as 24-hour assistance with
activities of daily life, housekeeping service, linen and personal laundry
service, organized social activities and transportation.  The Company's
assisted living services are provided in freestanding assisted living centers
and in certain units in each of the Company's independent living centers.

         INDEPENDENT LIVING SERVICES.  The Company's independent living centers
offer independent living to seniors.  Each center offers a standard package of
services that typically include meal service, laundry and linen service,
housekeeping, organized social activities and transportation.  In addition,
each of the Company's independent living facilities offers a menu of separately
priced additional services available at the option of the resident.

         LONG-TERM CARE OPERATIONS

         FACILITY OPERATIONS.  The Company's facilities are currently divided
into eight regions, each of which is supervised by a regional director of
operations and contains four to eight facilities.  The regional director of
operations monitors and supervises all aspects of operations of the facilities
in the region and acts as liaison between such facilities and corporate
headquarters.  The regional director of operations is responsible for, among
other things, ensuring compliance with federal, state and local regulations,
reviewing and monitoring compliance with corporate policies and procedures and
monitoring adherence to budgets.  In addition, each region has a quality
assurance nurse and a dietary consultant who meet regularly with their regional
director of operations and report to the vice president of compliance.

         The regional and facility personnel are supported by a corporate staff
based at the Company's headquarters.  Corporate personnel work with regional
directors of operations and facility administrators with respect to the




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establishment of facility goals and strategies; quality assurance oversight;
reimbursement, accounting, cash management and treasury functions; development
of monitoring systems and operational procedures; human resources management;
and development and implementation of new programs.

         Each facility is managed by an on-site, state licensed administrator
who is responsible for the overall operation of the facility, including quality
of care, marketing and financial performance. The administrator is assisted by
various professional and nonprofessional personnel (some of whom may be
independent contractors), including a medical director, nurses and nursing
assistants, social workers, dietary personnel, therapeutic recreation staff and
housekeeping, laundry and maintenance personnel.

         The medical treatment of residents is the responsibility of the
residents' attending physicians, who are not employed by the Company and bill
their patients directly for services.  The support services provided by the
Company, including therapeutic recreation, speech, occupational, respiratory
and physical therapy, wound care and other ancillary services, are provided
primarily by independent providers under contractual commitments with the
facility.

         MARKETING.  The Company engages in facility-specific marketing efforts
to maintain and improve occupancy rates and to promote the services, including
a full range of medical services offered by the Company's long-term care
facilities.  The Company's marketing activities are conducted primarily by each
facility's admissions director and administrator who together seek to establish
relationships with potential referral sources, such as hospital discharge
planners and managed health care organizations.  The Company believes that many
of the services and programs provided by its facilities in the normal course of
business supplement formal marketing efforts by promoting the reputation of
each facility in the community as a provider of quality care.  Each facility
offers a variety of community programs and activities which are designed
primarily as a service to the community and as a means to enhance the quality
of patient life.

         QUALITY ASSURANCE.  The Company's quality assurance program with
respect to its long-term care facilities involves personnel at all levels.  The
Company has established a quality assurance team comprised of the facility's
administrator and the facility's senior medical professionals that periodically
visits and inspects each of the Company's long-term care facilities and
evaluates all aspects of the facility's operations, including patient care,
physical environment, patients' rights, patient activities and dietary regimen.
The Company's corporate director of nursing receives quarterly quality
assurance reports from each facility, reviews them against prior quarterly
reports and against applicable state survey results for the facility, and works
with the relevant regional director of operations and the facility's quality
assurance committee to address any deficiencies and work toward continual
improvement. All regional directors of operations, medical and other consulting
personnel are required to prepare and submit reports at the end of each
scheduled visit identifying any patient care or other quality related issues.

         ASSISTED/INDEPENDENT LIVING OPERATIONS

         CENTER OPERATIONS.  The Company's assisted/independent living centers
are currently divided into five regions, each of which is supervised by a
regional director of operations and contains four to seven centers.  The
regional director of operations monitors and supervises all aspects of
operations of the centers in the region and acts as liaison between such
facilities and corporate headquarters.  The regional director of operations is
responsible for, among other things, ensuring compliance with applicable
federal, state and local regulations, reviewing and monitoring compliance with
corporate policies and procedures and monitoring adherence to budgets.





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         Each of the Company's assisted/independent living centers is managed
by an executive director who is responsible for monitoring the day-to-day
operations of the center and the resident assistants who provide the personal
care to the center's residents.  Each center also has a social activities
coordinator, a community service representative, a kitchen manager and dietary
staff.  The regional and center personnel are supported by a corporate staff
based at the Company's headquarters.  Corporate personnel work with regional
directors of operations and the executive director of each center with respect
to the establishment of goals and strategies; quality assurance oversight;
budgeting, accounting, cash management and treasury functions; development of
monitoring systems and operational procedures; human resources management; and
development and implementation of new marketing programs.

         In connection with the Company's delivery of services to its assisted
living residents, a resident assistant is responsible for the personal care,
medication supervision (when state law so permits), meal service, housekeeping,
laundry and linen service and social activities of a small number of residents.
In addition, management believes that its method of service delivery permits
the care-giver to establish a better relationship with the resident and in some
cases become an extension of the resident's family.

         The Company's Extended Care Program reassesses each of its assisted
living residents on a regular basis to develop a daily care plan that provides
each of the residents with the appropriate level of care and assistance.  The
Company has adopted an objective assessment system whereby each resident
receives points based upon his or her acuity level.  The Company is then able
to determine the appropriate level of care based on this point acuity
assessment.

         MARKETING.  The Company develops a comprehensive marketing plan for
each of its assisted/independent living centers.  The marketing plan identifies
the strengths and weaknesses of the center, the demographic and competitive
profile of the geographic area in which the center is located and provides a
strategy for marketing the center in light of these factors.  The plan consists
of a combination of advertising, primarily directed to the adult children of
potential residents, special events, direct mail and community networking, all
of which are designed to generate a sufficient number of inquiries to fill the
center.

         The Company's marketing effort sets goals for the number of inquiries,
facility tours, deposits and new residents resulting from such efforts on a
monthly basis. With this targeted marketing approach, management believes that
it has been successful in marketing its assisted/independent living centers.

         QUALITY ASSURANCE.  The Company's quality assurance program with
respect to its assisted independent living centers involves personnel at all
levels.  The Company has established a quality assurance team that periodically
visits and inspects each of the Company's assisted/independent living centers
and evaluates all aspects of the center's operations, including resident care,
physical environment, staff appearance, residents' rights, resident activities
and dietary regimen.  The management receives the reports from the quality
assurance team, reviews them against prior reports, and works with the relevant
regional director of operations and the facility's administrators to address
any deficiencies and work toward continual improvement.

         GENERAL FACILITY OPERATION

         MANAGEMENT AND FINANCIAL CONTROLS.  The Company has developed
integrated management and financial information systems and controls intended
to maximize operating efficiency.  These systems enable management to monitor
key operations and financial data on a timely basis.  Key operating data, such
as payables and billing data, cash collections and admissions/discharge data,
are entered into the system daily.  This information forms the basis for a
variety of management 





                                     -9-
<PAGE>   10

and financial reports, including monthly financial statements, for each
facility.

         PURCHASING.  The Company's focus in purchasing is to develop national
pricing contracts for nursing supplies and dietary, housekeeping and laundry
products. Each facility, however, is responsible for purchasing the required
supplies and products pursuant to those contracts.

         MANAGEMENT AND MARKETING SERVICES

         The Company provides management services to all its owned or leased
facilities, as well as to 17 assisted/independent living centers and long-term
care facilities owned by its affiliates and 7 assisted/independent living
centers owned by unaffiliated third parties.  See "ITEM 2. PROPERTIES."

         Pursuant to its management agreements with the owners of each
facility, the Company supervises the management of the facility as to staffing,
accounting, billing, collections, rate setting and general administration, and
provides marketing services, which include identifying target markets,
developing appropriate marketing strategies and procedures, hiring, training
and supervising qualified leasing counselors as employees of the manager and
budgeting and controlling costs.  The Company is responsible for hiring, on
behalf of the owner, all staff, including a facility administrator or executive
director.  The management agreements provide for management fees of a flat rate
per month, a percentage of net operating revenues (total revenues less
deductions and allowances for contractual adjustments to third party payors and
charitable allowances) or a combination of a flat rate and a percentage of net
operating revenues.  For long-term care facilities, which require the greatest
amount of management services, the Company charges management fees of $6,000 to
$24,000 per month, depending primarily on the number of beds, or, in some
cases, 6% of net operating revenues.  For assisted/independent living centers,
which involve fewer management services, the Company charges $1,000 to $15,000
per month, depending primarily on the amount of revenues of the center.  The
management agreements also provide a separate fee for the marketing services
provided by the Company to assisted/independent living centers.

         The obligations to pay management fees to the Company are general
obligations of the owners of the facilities.  In many cases the facilities have
incurred substantial debt in the form of municipal bonds, debentures or similar
debt instruments.  The payment of management fees to the Company is generally
subordinated to the payment of these obligations.

         SOURCES OF REVENUES

         The Company derives its patient service revenue primarily from a
combination of state Medicaid programs, the federal Medicare program and
private payment sources.  The Company's revenues are determined by a number of
factors, including the licensed bed capacity of its facilities, occupancy rates
at the facilities and the payer mix.  While management believes that it has
been successful in obtaining reimbursement, there can be no assurance that
reimbursement rates will remain at present levels or increase at rates
necessary to offset the effects of inflation.  In particular, cost containment
proposals at both the state and federal levels may impact the Company's ability
to recover its costs of providing services to Medicaid and Medicare patients.
See "-- Governmental Regulation.".

         MEDICAID. Medicaid refers to the various state-administered
reimbursement programs that are eligible for matching federal funds.  Each of
the Company's long-term care facilities participates in the Medicaid program of
the state in which it is located.  Under the federal Medicaid statute and
regulations, state Medicaid programs must provide reimbursement rates that are
reasonable and adequate to cover the costs that would be incurred by
efficiently and 





                                     -10-
<PAGE>   11

economically-operated facilities in providing services in conformity with state
and federal laws, regulations and quality and safety standards. Furthermore,
payments must be sufficient to enlist enough providers so that services under
the state's Medicaid plan are available to recipients at least to the extent
that those services are available to the general population.

         The Medicaid programs in which the Company's facilities participate
pay a per diem rate based on each facility's reasonable allowable costs
incurred in providing services, subject to cost ceilings applicable to both
operating and fixed costs, plus a return on equity.  Reimbursement rates are
typically determined by the state, on a prospective or retrospective basis,
from cost reports filed by each facility.  Under a prospective system, per diem
rates are established (generally on an annual basis) based on 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; no subsequent adjustment is made to reflect variations in actual
costs from the rates established.  All of the Company's long-term care
facilities are reimbursed on a prospective rate system.  Providers must accept
reimbursement from Medicaid as payment in full for the services rendered.  The
Georgia and Tennessee Medicaid programs currently include incentive allowances
for providers whose costs are less than certain ceilings and who meet other
requirements.  See "-- Governmental Regulation."

         All Medicaid programs conduct periodic financial audits of
participating facilities. To date, adjustments from Medicaid audits have not
had a material adverse effect on the Company.  While there can be no assurance
that future adjustments will not have such an effect, the Company believes that
the actual reimbursable amounts determined after audit will approximate the
estimated reimbursable amounts at which Medicaid revenue has been recorded.

         MEDICARE. Medicare is a federally-funded and administered health
insurance program primarily designed for individuals who are age 65 or over and
are entitled to receive Social Security benefits.  The Medicare program
consists of two parts: Part A covers in-patient hospital services and services
furnished by other institutional health care providers, such as long-term care
facilities; Part B covers the services of doctors, suppliers of medical items
and services, and various types of outpatient services.  Part B services
include physical, speech and occupational therapy, pharmaceuticals and medical
supplies, certain intensive rehabilitation and psychiatric services and
ancillary diagnostic and other services of the type provided by long-term care
or acute care facilities.  Part A coverage is limited to a specified term
(generally 100 days in a long-term care facility) and requires beneficiaries to
share some of the cost of covered services through the payment of a deductible
and a co-insurance payment.  There are no limits on duration of coverage for
Part B services, but there is a co-insurance requirement for most services
covered by Part B.

         All of the Company's long-term care beds are certified for Medicare
services. Generally, the Company's Medicare participating facilities receive
monthly reimbursement payments during the year at interim rates based on
historical costs. These rates are later adjusted to reflect actual allowable
direct and indirect costs of services based on the submission of a cost report
at the end of each year. Actual costs incurred and reported by each facility are
subject to retrospective audits which can result in upward or downward
adjustments of payments received. To date, adjustments from Medicare audits have
not had a material adverse effect on the Company. While there can be no
assurance that future adjustments will not have such an effect, the Company
believes that the actual reimbursable amounts determined after audit will
approximate the estimated reimbursable amounts at which Medicare revenue has
been recorded.

         PRIVATE PAY.  Private pay revenues include payments from individuals
who pay directly for services without governmental assistance and include
payments




                                     -11-
<PAGE>   12

from commercial insurers, Blue Cross organizations, health maintenance
organizations, preferred provider organizations, workers' compensation programs
and other similar payment sources. The Company's rates for private pay residents
are typically higher than rates for patients eligible for assistance under
governmental reimbursement programs. The amount the Company charges to private
pay residents is not subject to regulatory control in any state in which the
Company operates. However, the private pay rates charged by the Company are
influenced primarily by the rates charged by other providers in the local market
and by Medicaid and Medicare reimbursement rates.

         All of the Company's patient service revenue attributable to its
assisted/independent living centers is derived exclusively from private pay
sources.  Monthly resident fees for the Company's independent living centers
typically range from approximately $1,250 to $1,800 and monthly resident fees
for the Company's assisted living centers typically range from $1,500 to $3,000
based upon the resident's level of required care.  Government payments for
assisted living services have been limited and are not material to the
Company's assisted/independent living operations.

         ANCILLARY BUSINESSES

         On September 30, 1994, the Company acquired approximately 63% of the
outstanding capital stock of Contour Medical, Inc. ("Contour") from certain
shareholders of Contour.  In exchange for such shares, the Company issued
125,000 shares of the Company Common Stock and 300,000 shares of the Company's
Series AA Convertible Preferred Stock.  The Company currently owns
approximately 60% of Contour's outstanding capital stock.

         Contour is a publicly-held company based in St. Petersburg, Florida
which manufactures and sells a full line of orthopedic care and rehabilitation
products. These products range from braces designed for reconstructive
rehabilitation of patients after surgery to finger and leg spreaders, leg
positioning devices (designed to prevent muscle atrophy and speed recovery after
surgery) and a full line of proprietary orthopedic devices used in
rehabilitative therapy procedures. Some of these products are utilized for the
care of wheelchair or bed-bound patients in the hospital, long-term care
facility and the home. Contour also manufactures and sells disposable surgical
procedure products for outpatient surgery, X-ray, radiology, and other imaging
technology within the hospital, emergency room, integrated care facilities and
clinic markets. These products, such as pads, bags, equipment covers and drapes,
are used to protect equipment, patients and attending personnel in the surgery
or emergency room environment, and are designed to meet the requirements of
infection control for medical, industrial and institutional applications. In
addition, Contour markets its REDINURSE SYSTEMS product line, which provides
custom-packaged procedural trays for use in clinics and long-term care centers
as well as by home health care nurses, and distributes medical supplies and
equipment produced by other manufacturers.

         In March 1996, Contour acquired AmeriDyne Corporation, a bulk medical
supply company based in Jackson, Tennessee, which has annual sales of
approximately $10 million.

         In August 1996, Contour acquired all of the outstanding stock of
Atlantic Medical Supply Company, Inc. ("Atlantic Medical"), a distributor of
disposable medical supplies and a provider of third-party billing services to
the nursing home and home health care markets.  Contour paid $1,400,000 in cash
and promissory notes totaling $10,500,000 for the stock of Atlantic Medical.
The promissory notes bear interest at 7% per annum and are due in full on
January 10, 1997.  In the event of a default in the payment of the promissory
notes, they are convertible into shares of common stock of the Company
(Retirement Care Associates, Inc.).




                                     -12-
<PAGE>   13

         Retirement Care holds approximately 27% of the outstanding capital
stock of Perennial Development Corporation, a publicly held company based in
Louisville, Kentucky, whose wholly owned subsidiary, In-House Rehab, Inc.,
provides rehabilitation services to approximately 26 of Retirement Care's
long-term care facilities.

         COMPETITION

         The senior residential care industry is highly competitive.  The
Company competes with other providers of senior residential care on the basis
of the breadth and quality of its services, the quality of its facilities and,
with respect to private pay patients or residents, price.  The Company also
competes in the acquisition and development of additional facilities.  The
Company's current and potential competitors include national, regional and
local operators of long-term care facilities, acute care hospitals and
rehabilitation hospitals, extended care centers, assisted/independent living
centers, retirement communities, home health agencies and similar institutions,
many of which have significantly greater financial and other resources than the
Company.  In addition, the Company competes with a number of tax-exempt
nonprofit organizations which can finance capital expenditures on a tax-exempt
basis or receive charitable contributions unavailable to the Company and which
are generally exempt from paying income tax. There can be no assurance that the
Company will not encounter increased competition which could adversely affect
the Company's operating results.

         While the Company's competitive standing varies from market to market,
management believes that the Company competes favorably in substantially all of
the markets it serves based on key competitive factors such as the breadth and
quality of services it offers, the quality of its facilities, its recruitment
and retention of qualified health care personnel and its reputation among local
referral sources.

         Competition for the acquisition of long-term care facilities has
remained steady in recent years, but is expected to increase as the demand for
long-term care increases.  Construction of new long-term care facilities near
the Company's facilities could adversely affect its business.  However, state
laws generally require a CON, which is only issued if the applicant proves that
the need for additional long-term care beds exists under the state devised
formula, before a new long-term care facility can be built or beds can be added
to existing facilities.  The Company believes that these laws reduce the
possibility of overbuilding and promote higher utilization of existing
facilities.  CON laws are in place in all states where the Company operates.
While such measures may limit the Company's expansion of current facilities and
possible future acquisitions, they may also reduce competition in the affected
service area.

         The Company competes with other health care providers for both
professional and nonprofessional employees and with non-health care providers
for non-professional employees.  In recent years the health care industry has
experienced a shortage of qualified health care personnel.  While the Company
has been able to retain the services of an adequate number of qualified
personnel to staff its facilities appropriately and maintain its standards of
quality care, there can be no assurance that continued shortages will not
affect the ability of the Company to maintain the desired staffing levels.  A
lack of qualified personnel at any facility could result in significant
increases in labor costs or otherwise adversely affect the operations at that
facility.  Any of these developments could adversely affect the Company's
operating results or expansion plans.

         GOVERNMENT REGULATION

         The federal government and all states in which the Company operates
regulate various aspects of the Company's business. In addition to the
regulation of rates by governmental payer sources, the development and
operation of long-




                                     -13-
<PAGE>   14

term care and assisted living facilities and the provision of long-term care
services are subject to federal, state and local licensure and certification
laws which regulate with respect to a facility, among other matters, the number
of beds, the services provided, the distribution of pharmaceuticals, the
condition and use of medical equipment, staffing requirements, operating
policies and procedures, fire prevention measures and compliance with building
and safety codes and environmental laws. There can be no assurance that federal,
state or local governments will not impose additional restrictions which might
impact the Company's business.

         LICENSURE AND CERTIFICATION. All of the facilities operated by the
Company are licensed under applicable state laws and have all required CONs from
responsible state authorities. All of the Company's long-term care facilities
are certified or approved as providers under the Medicaid program, and all of
its long-term care facilities are certified or approved as providers under the
Medicare program. Both initial and continuing qualification of a long-term care
facility to participate in the Medicaid and Medicare programs depend on many
factors, including accommodations, equipment, services, non-discrimination
policies against indigent patients, patient care, quality of life, residents'
rights, safety, personnel, physical environment and adequacy of policies,
procedures and controls. Licensing, certification and other applicable standards
vary from jurisdiction to jurisdiction and are revised periodically. State
agencies survey or inspect 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 payer programs. In some cases
or upon repeat violations, the reviewing agency has the authority to take
various adverse actions against a facility, including the imposition of fines,
temporary suspension of admission of new patients to the facility, suspension or
decertification from participation in the state Medicaid or the Medicare
program, denial of payment under Medicaid for new admissions, reduction of
payments, and, in extreme circumstances, revocation of a facility's license or
closure of a facility. The compliance history of a prior operator may be used by
state or federal regulators in determining possible action against a successor
operator.

         REGULATORY COMPLIANCE AND ENFORCEMENT.  The Company believes that its
facilities comply in all material respects with all applicable statutes,
regulations, standards and requirements, including applicable Medicaid and
Medicare regulatory requirements.  However, in the ordinary course of its
business, the Company's long-term care facilities are surveyed from time to
time for regulatory compliance and receive notices of deficiencies for failure
to comply with various regulatory requirements.  In most cases, the Company and
the reviewing agency will agree upon corrective measures to be taken to bring
the facility into compliance.  To date, statements of deficiency received by
the Company have not had any material adverse effect on its operations, and
there is no pending or threatened decertification of or moratorium on
admissions at any of its facilities.  While there can be no assurance that
future surveys will not have a material adverse effect on the Company, based on
its operating policies and compliance procedures, quality assurance programs
and past experience, the Company does not expect to receive any statements of
deficiency which would, either individually or in the aggregate, have a
material adverse effect on its operations.

         FRAUD AND ABUSE LAWS. Various federal and state laws regulate the
relationship between providers of health care services and physicians,
including employment or service contracts and investment relationships. These
laws include the broadly-worded fraud and abuse provisions of the Medicaid and
Medicare statutes, which prohibit payments for the referral of Medicaid or
Medicare patients.  Violations of these provisions may result in civil or
criminal penalties for individuals or entities or exclusion from participation
in the Medicaid and Medicare programs.  Management believes that in the past
the Company 





                                     -14-
<PAGE>   15

has been, and in the future it will be, able to arrange its business
relationships so as to comply with these provisions.

         OBRA - 87. Effective October 1, 1990, the Omnibus Budget Reconciliation
Act of 1987 ("OBRA") 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 and increases training
requirements for nurse's aides by requiring a minimum number of training hours
and a certification test before a nurse's aide can commence work. States must
continue to certify that nursing facilities provide "skilled care" in order to
obtain Medicare reimbursement. Management is unable to predict how individual
state licensure laws win conform to this change but believes that the Company
will not be materially adversely affected.

         RESTRICTIONS ON ACQUISITIONS, CONSTRUCTION AND ADDITIONS. All states
in which the Company operates have adopted CON or similar laws which generally
require that, with respect to long-term care facilities, a state agency
determine that a need exists prior to the addition or reduction of beds or
services, the implementation of other changes, the incurrence of certain
capital expenditures or, in certain states, the closure of a facility.  State
approvals are generally issued for a specified maximum expenditure and require
implementation of the proposal within a specified period of time.  Failure to
obtain the necessary state approval can result in the inability of the facility
to provide the service, operate the facility or complete the acquisition,
addition or other change in a facility and in the imposition of sanctions or
other adverse action on the facility's license and reimbursement eligibility.

         GOVERNMENTAL BUDGETARY RESTRAINTS.  Both the federal government and
venous states are considering imposing limitations on the amount of funding
available for various health care services. Among the proposals being
considered by the United States Congress is a "block grant" funding mechanism
for the disbursement of the federal share of Medicaid payments to the
individual states.  If enacted, this could cause a reduction in the
availability of Medicaid funds in future years to the states which, in turn,
provide reimbursement to Medicaid-certified long-term care facilities.  In
addition, various states are themselves considering reduced levels of spending
in various areas which also could affect the amount of available Medicaid
funding.  In November 1995, the United States Senate and House of
Representatives passed a budget reconciliation bill which would establish a
framework for balancing the federal budget in seven years.  While the President
vetoed the bill, the Administration has agreed to achieve a balanced budget in
this time frame.  The bill passed by the Senate and House would have resulted
in a major restructuring of the current Medicaid program.  Rather than
operating as an entitlement program, the new "MediGrant" program would provide
federal block grants to the states for medical assonance prodded to low income
individuals and families.  While the states would be subject to certain federal
requirements, states would also have broad flexibility to establish their
coverage, eligibility and payment standards.  Given the fixed federal funds
that would be available to support state MediGrant programs, there would be no
assurance that, if enacted, these provisions would not have a material adverse
effect on the results of operations of the Company. While Medicare and Medicaid
reimbursements may not continue at the current levels or rates of increase, it
is not possible to predict with certainty the effect of any legislation upon
the Company's operations.

         EMPLOYEES.  As of August 31, 1996, the Company employed in the
aggregate approximately 6,900 employees, including 95 employees at the
Company's executive offices.  The Company believes that its relationship with
its employees is satisfactory.  The Company has collective bargaining
agreements with unions representing two of the facilities that the Company
operates.  The Company is currently negotiating an agreement with the union
representing employees at one 







                                     -15-
<PAGE>   16

other facilities operated by the Company. The employees at the remaining
facilities operated by the Company have not elected to be covered by collective
bargaining agreements.

         The Company believes that the attraction and retention of dedicated,
skilled and experienced nursing and other professional staff has been and will
continue to be a critical factor in the successful development of its business.
In response to this challenge, a compensation program which provides for
regular merit and cost-of-living reviews and a variety of financial and other
incentives have been implemented to promote facility staff motivation and
productivity and to reduce turnover rates.  The Company believes that its wage
rates for nursing and other professional staff are commensurate with market
rates.

         INSURANCE

         Providing health care services entails an inherent risk of liability.
The Company maintains liability insurance providing coverage which it believes
to be adequate.  In addition, the Company maintains property, business
interruption and workers' compensation insurance covering all facilities in
amounts deemed adequate by the Company.  The Company carries malpractice
insurance coverage for each of the facilities that it owns, operates or manages
in the amount of $1 million per incident per facility and $3 million annual
aggregate per facility.  The Company also carries an umbrella excess liability
insurance policy which has a $20 million per incident limit with an aggregate
limit of $20 million. There can be no assurance that any future claims will not
exceed applicable insurance coverage or that the Company will be able to
continue its present insurance coverage on satisfactory terms, if at all.





                                     -16-
<PAGE>   17

                                   PART II

ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.

YEAR ENDED JUNE 30, 1996 COMPARED TO YEAR ENDED JUNE 30, 1995

         The Company's total revenues for the year ended June 30, 1996, were
$134,011,369 compared to $79,616,053 for the year ended June 30, 1995.

         Management fee revenue decreased from $4,169,694 in the year ended
June 30, 1995, to $3,781,433 in the year ended June 30, 1996.  The Company
purchased or leased six facilities in the year ended June 30, 1996, that it
managed in the year ended June 30, 1995.  Included in the Company's management
fee revenue is $3,472,900 and $3,517,500 from affiliates during the years ended
June 30, 1996 and 1995, respectively.

         Due to the increased number of facilities owned or leased by the
Company, patient service revenue increased from $69,949,822 for the year ended
June 30, 1995 to $119,499,849 for the year ended June 30, 1996.  The cost of
patient services in the amount of $77,776,292 for the year ended June 30, 1996,
represent 65% of patient service revenue, as compared to $47,778,410, or 68%,
of patient service revenue during the year ended June 30, 1995.  The decrease
in the percentage is attributed to an increase in the ratio of retirement
facilities to nursing facilities operated during the current year.  Retirement
facilities require less patient services than nursing homes.  The ratio of
nursing facilities to retirement facilities decreased to 2.7 from 3.8 during
the year ended June 30, 1996.

         Owning or leasing a facility is distinctly different from managing a
facility with respect to operating results and cash flows.  For an owned or
leased facility, the entire revenue/expense stream of the facility is recorded
on the Company's income statement.  In the case of a management agreement, only
the management fee is recorded.  The expenses associated with management
revenue are somewhat indirect as the infrastructure is already in place to
manage the facility.  Therefore, the profitability of managing a facility
appears more lucrative on a margin basis than that of an owned/leased facility.
However, the risk of managing a facility is that the contract generally can be
canceled on a relatively short notice, which results in loss of all revenue
attributable to the contract.  Furthermore, with an owned or leased property
the Company benefits from the increase in value of the facility as its
performance increases.  With a management contract, the owner of the facility
maintains the equity value.  From a cash flow standpoint, a management contract
is more lucrative because the Company does not have to support the ongoing
operating cash flow of the facility.

         The Company owned or leased four additional facilities during fiscal
year ended June 30, 1996 compared to fiscal year ended June 30, 1995, which
resulted in a corresponding increase in top-line revenue of $1 million during
such periods as set forth below:

<TABLE>
<CAPTION>
     Type                  Fiscal 1994        Fiscal 1995        Fiscal 1996
     ----                  -----------        -----------        -----------
  <S>                          <C>                <C>                <C>
  Nursing                      20                 30                 48
  Retirement                    6                  8                 18
                               --                 --                 --
    Total                      26                 38                 66
</TABLE>

         For facilities that were in place for the entire year ended June 30,
1995 and June 30, 1996, revenue increased approximately $3 million, or 5%,
during the year ended June 30, 1996.  For these same facilities, average rates
increased approximately 3% while patient-days increased approximately 2%.

         During the year ended June 30, 1996, the Company had revenue from
medical supply sales of $14,542,421, an approximately $6.2 million increase
compared to 



                                     -17-
<PAGE>   18

fiscal year ended June 30, 1995, of which $4,717,169 was intercompany sales
which were eliminated in consolidation. These sales reflect the operations of
Contour Medical, Inc., of which the Company acquired a majority interest on
September 30, 1994. $1.2 million of the $6.2 million dollar increase in sales is
explained by annualizing the nine-month sales of $3,617,439. Moreover, Contour
acquired AmeriDyne on March 1, 1996, which contributed $3.6 million of revenue
for the period ending June 30, 1996. The remaining $1.4 million in sales
increase is attributable to the internal growth of the Company's business. The
Cost of Goods Sold for the year ended June 30, 1996, was $5,773,934.

         Lease expense increased from $5,769,232 in the year ended June 30,
1995, to $6,198,948 in the year ended June 30, 1996.  This increase is
primarily attributable to the increased numbers of facilities leased during the
year, as well as the full year effect of leased facilities that started during
the year ended June 30, 1995.

         General and administrative expenses for the year ended June 30, 1996,
were $23,886,877, representing 18% of total revenues, as compared to
$12,769,582 representing 16% of total revenues, for the year ended June 30,
1995.

         During the year ended June 30, 1996, the Company recorded a $1,027,593
provision for bad debts.  The amount of the provision for bad debts was based
upon the aging and estimated collectibility of receivables from Medicare,
Medicaid and private payors.  During the year ended June 30, 1996, the aging of
receivables increased compared with the aging of receivables at June 30, 1995.
In addition, at June 30, 1996, a larger amount of the receivables was deemed to
be uncollectible than at June 30, 1995.  As of June 30, 1995, the estimated
allowance for bad debts was immaterial to the financial statements and was,
therefore, not recorded.  See Schedule II attached hereto.

         During the year ended June 30, 1996, the Company had $1,847,868 in
interest income and financing fees as compared to $658,215 in interest income
and financing fees for the year ended June 30, 1995.  Financing fees, which
totaled $150,000 for the year ended June 30, 1996, represents fees received by
the Company for assisting other companies to obtain financing for nursing homes
and retirement facilities.  The increase in interest income is a result of the
increased amount of advances to related parties during the current year.

         Interest expense increased from $1,179,052 in the year ended June 30,
1995, to $7,948,091 in the year ended June 30, 1996.  This increase is
primarily attributable to the increased numbers of facilities acquired by the
Company during the year, as well as the full year effect of facilities that
were acquired by the Company during the year ended June 30, 1995.

         For the year ended June 30, 1996, the Company incurred expenses for
income taxes of $4,228,307 which represents an effective tax rate of 45% as
compared to expenses for income taxes of $3,419,092 which represents an
effective tax rate of 40% for the year ended June 30, 1995.  The increase in
the effective tax rate is mainly the result of a non- deductable tax penalty of
approximately $400,000 which was assessed during the year ended June 30, 1996.

         The net income of $5,569,811 for the year ended June 30, 1996, is
higher than the net income of $5,058,503 for the year ended June 30, 1995, due
to the increased number of facilities operated during the most recent fiscal
year.

         Most of the revenue from the management services division of the
Company's business is received pursuant to management agreements with entities
controlled by Messrs. Brogdon and Lane, two of the Company's officers and
directors.  These management agreements have five year terms; however, they are
all subject to termination on 60 days notice, with or without cause, by either
the Company or the owners.  Therefore, Messrs. Brogdon and Lane have full
control over whether or not these management agreements, and thus the
management services revenue, 




                                     -18-
<PAGE>   19

continue in the future. These fees represent 2.82% and 5.24% of total revenues
of the Company for the years ended June 30, 1996 and 1995, respectively.

YEAR ENDED JUNE 30, 1995 COMPARED TO YEAR ENDED JUNE 30, 1994

         The Company's total revenues for the year ended June 30, 1995, were
$79,616,053 compared to $37,971,052 for the year ended June 30, 1994.

         Management fees increased from $3,292,949 in the year ended June 30,
1994, to $4,169,694 in the year ended June 30, 1995, due to the increased
number of facilities which the Company manages as well as the renegotiation of
management agreements resulting in higher management fees.  Included in the
Company's management fee revenue is $3,517,500 and $3,034,445 from affiliates
during the years ended June 30, 1995 and 1994, respectively.

         Due to the increased number of facilities owned or leased by the
Company, patient service revenue increased from $34,340,394 for the year ended
June 30, 1994, to $69,949,822 for the year ended June 30, 1995.  The cost of
patient services in the amount of $47,778,410 for the year ended June 30, 1995,
represented 68% of patient service revenue, as compared to $23,088,387, or 67%
of patient service revenue during the year ended June 30, 1994.

         During the year ended June 30, 1995, the Company had revenue from
medical supply sales of $3,617,439. These sales reflect the operations of
Contour Medical, Inc., of which the Company acquired a 63% interest on September
30, 1994. As a result, these sales only reflect nine months of operations. The
cost of goods sold for the year ended June 30, 1995, was $3,153,430, or 87% of
medical supply sales.

         Lease expense increased from $3,714,105 in the year ended June 30,
1994, to $5,769,232 in the year ended June 30, 1995.  This increase is
primarily attributed to the increased number of facilities leased during the
year, as well as the full year effect of leased facilities that started during
the year ended June 30, 1994.

         General and administrative expenses for the year ended June 30, 1995,
were $12,769,582 representing 16% of total revenues, as compared to $5,953,793
representing 16% of total revenues, for the year ended June 30, 1994.

         During the year ended June 30, 1995, the Company had $658,215 in
interest income and financing fees.  The Company had no similar revenue during
the year ended June 30, 1994.

         Interest expense increased from $232,365 in the year ended June 30,
1994, to $1,179,052 in the year ended June 30, 1995.  This increase is
primarily attributed to the increased numbers of facilities acquired by the
Company during the year, as well as the full year effect of facilities that
were acquired by the Company during the year ended June 30, 1994.

         For the year ended June 30, 1995, the Company incurred expenses for
income taxes of $3,419,092 which represents an effective tax rate of 40% as
compared to expenses for income taxes of $1,827,483 which represents an
effective tax rate of 39% for the year ended June 30, 1994.

         The net income of $5,058,503 for the year ended June 30, 1995, is
higher than the net income of $2,917,642 for the year ended June 30, 1994, due
to the increased number of facilities operated and managed during 1995.




                                     -19-
<PAGE>   20


LIQUIDITY AND CAPITAL RESOURCES

         At June 30, 1996, the Company had $4,573,744 in working capital
compared to $2,925,302 at June 30, 1995.  The increase was primarily due to the
net income recorded for the year ended June 30, 1996.

         During the year ended June 30, 1996, cash provided by operating
activities was $5,708,460 as compared to $4,208,048 for the year ended June 30,
1995.  The $1,500,412 increase was primarily due to the increased accounts
payable associated with acquiring facilities in the year ended June 30, 1996
and an increase in depreciation from 1,128,183 for the year ended June 30, 1995
to $3,223,543 for the year ended June 30, 1996.

         Cash used in investing activities during the year ended June 30, 1996,
was $45,195,665.  The expenditures primarily related to acquisitions to
purchases of property and equipment of $8,826,151, and advances to affiliates
of $8,855 686 due to capital expenditures and working capital deficits of the
affiliates.

         At June 30, 1996, advances to affiliates had increased to $14,316,661
from $7,328,222 at June 30, 1995, due to additional capital expenditures and
working capital deficits of the affiliates.  These advances were repaid
subsequent to year end.  The repayment transactions included the transfer of
two facilities to the Company at fair market value, as established by an
independent appraisal.  The proceeds of this transfer reduced the balance to
approximately $2.8 million.  The balance was eliminated by the contribution of
shares of the Company's common stock by affiliated shareholders.  The stock
will be retired.

         Cash provided by financing activities during the year ended June 30,
1996, totaled $34,325,385.  Sources of cash included capital investment by
minority shareholders of a subsidiary of $2,088,492, proceeds from issuance of
preferred stock of $9,300,000, proceeds from stock options and warrants
exercised of $630,098, and proceeds from long-term debt and lines of credit of
$35,329,244.  Cash used in financing activities primarily consisted of
$9,443,626 in payments of long-term debt, $2,419,783 in payments of debt
issuance costs, and $600,000 in redemption of preferred stock, $274,040 in
purchaser of treasury stock, and $285,000 for dividends on preferred stock.

         During the year ended June 30, 1995, cash provided by operating
activities was $4,208,048 as compared to $1,523,311  for the year ended June
30, 1994.  The $2,684,737 increase was primarily due to the increased net
income for the year ended June 30, 1995.

         Cash used in investing activities during the year ended June 30, 1995,
was $(10,644,726).  The  expenditures primarily related to purchases of
property and equipment of $6,079,610, purchases of bonds receivable of
$4,487,936, increases in investments and advances to The Atrium Ltd. of
$2,985,833 and advances to affiliates of $1,742,147 due to capital expenditures
and working capital deficits of the affiliates.  These were partially offset by
the proceeds from a sale-leaseback transaction of $4,500,000.

         At June 30, 1995, advances to affiliates had increased to $7,328,222
from $5,605,250 at June 30, 1994, due to additional capital expenditures and
working capital deficits of the affiliates.

         Cash provided by financing activities during the year ended June 30,
1995, totalled $10,683,801.  Sources of cash included capital investment by
minority shareholders of a subsidiary of $1,729,469, net borrowings under lines
of credit of $1,745,316 and proceeds from long-term debt of $9,564,670.  Cash
used in financing activities primarily consisted of $2,130,654 in payments of
long-term debt and $225,000 for dividends on preferred stock.





                                     -20-
<PAGE>   21

         Management's objective is to acquire only those facilities it believes
will be able to generate sufficient revenue to pay all operating costs,
management fees, lease payments or debt service, and still return a 3% to 4%
cash flow.  Management believes that the Company's cash flow from operations,
together with lines of credit and the sale of securities described below, will
be sufficient to meet the Company's liquidity needs for the current year.

         The Company maintains various lines of credit with interest rates
ranging from prime plus .25% to prime plus 1.25%.  At June 30, 1996, the
Company had approximately $1,500,000 in unused credit available under such
lines.

         Subsequent to year end, the Company raised approximately $9,340,000 in
net proceeds from the sale of convertible preferred stock in a private offering
to foreign investors.  The proceeds of this offering are being used for working
capital purposes.

         On September 30, 1994, the Company purchased a majority of the stock
of Contour Medical, Inc. in exchange for shares of the Company's common stock
and preferred stock.  The Company is obligated to redeem the preferred stock
issued in the transaction over the five years for $3,000,000 in cash.  $600,000
was paid on September 30, 1996 pursuant to this obligation.  Management intends
to fund these redemptions from cash flow generated from operations.

         The Company believes that its long-term liquidity needs will generally
be met by income from operations.  If necessary, the Company believes that it
can obtain an extension of its current line of credit and/or other lines of
credit from commercial sources.  Except as described above, the Company is not
aware of any trends, demands, commitments or understandings that would impact
its liquidity.

         The Company intends to use long-term debt financing in connection with
the purchase of additional retirement care facilities and nursing homes on
terms which can be paid out of the cash flow generated by the property.

         The Company intends to continue to lease or purchase additional
retirement care and/or nursing home facilities in the future.

IMPACT OF INFLATION AND PENDING FEDERAL HEALTH CARE LEGISLATION

         Management does not expect inflation to have a material impact on the
Company's revenues or income in the foreseeable future so long as inflation
remains below the 9% level.  The Company's business is labor intensive and
wages and other labor costs are sensitive to inflation.  Management believes
that any increases in labor costs in its management services segment can be
offset over the long term by increasing the management fees.  With respect to
the operations segment, approximately 52% of the Company's net patient service
revenue is received from state Medicaid programs.  The two states which make
Medicaid payments to the Company have inflation factors built into the rates
which they will pay.  Georgia's inflation factor is nine percent and
Tennessee's inflation is eleven percent.  Therefore, increases in operating
costs due to inflation should be covered by increased Medicaid reimbursements.

         Management is uncertain what the final impact will be of pending
federal health care reform packages since the legislation has not been
finalized.  However, based on information which has been released to the public
thus far, Management doesn't believe that there will be cuts in reimbursements
paid to nursing homes.

         Legislative and regulatory action, at the state and federal level, has
resulted in continuing changes in the Medicare and Medicaid reimbursement
programs.  The changes have limited payment increases under these programs.
Also, the timing of payments made under the Medicare and Medicaid programs are



                                     -21-
<PAGE>   22

subject to regulatory action and governmental budgetary constraints.  Within
the statutory framework of the Medicare and Medicaid programs, there are
substantial areas subject to administrative rulings and interpretations which
may further affect payments made under these programs.  Further, the federal
and state governments may reduce the funds available under those programs in
the future or require more stringent utilization and quality review of health
care facilities.

ACCOUNTING PRONOUNCEMENT

         The Financial Accounting Standard Board has adopted Statement of
Financial Accounting Standards No. 115, "Accounting for Certain Investments in
Debt and Equity Securities" (SFAS No. 115).  The Company has adopted this
standard in fiscal 1995.  In management's opinion, adopting SFAS No. 115 did
not materially affect the Company's financial statements for the year ended
June 30, 1995.

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

         The Independent Auditors' Report appears at page F-1, and the
Financial Statements and Notes to Financial Statements appear at pages F-3
through F-32 hereof.




                                     -22-
<PAGE>   23

REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

Board of Directors and Shareholders of
Retirement Care Associates, Inc.

We have audited the accompanying consolidated balance sheet of Retirement Care
Associates, Inc. and subsidiaries as of June 30, 1996 and the related
consolidated statements of income, shareholders' equity and cash flows for the
year then ended.  These consolidated financial statements are the
responsibility of the Company's management.  Our responsibility is to express
an opinion on these financial statements based on our audit.

We conducted our audit 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 audit provides 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 Retirement Care
Associates, Inc. and subsidiaries as of June 30, 1996 and the results of their
operations and their cash flows for the year then ended in conformity with
generally accepted accounting principles.

As described in Note 6 to the consolidated financial statements, the Company
changed its method of accounting for certain costs in inventory.


/s/ Coopers & Lybrand L.L.P.

Atlanta, Georgia
September 27, 1996
except for Note 19, as to which the date is October 14, 1996





                                     F-1
<PAGE>   24


              REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS


Board of Directors and Shareholders of
   Retirement Care Associates, Inc.

We have audited the accompanying consolidated balance sheet of Retirement Care
Associates, Inc. and Subsidiaries as of June 30, 1995 and the related
consolidated statements of income, shareholders' equity and cash flows for each
of the two years in the period ended June 30, 1995.  These consolidated
financial statements are the responsibility of the Company's management.  Our
responsibility is to express an opinion on these financial statements based on
our audits.

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

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Retirement Care
Associates, Inc. and Subsidiaries as of June 30, 1995, and the results of their
operations and their cash flows for each of the two years in the period ended
June 30, 1995 in conformity with generally accepted accounting principles.



                                    /s/ BDO Seidman, LLP
                                        BDO SEIDMAN, LLP


Atlanta, Georgia
October 9, 1995, except for Note 1
which is as of May 1, 1996
                          


                                     F-2

<PAGE>   25
RETIREMENT CARE ASSOCIATES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, 1996 and 1995

<TABLE>
<CAPTION>
                                                      1996            1995   
                                                 ------------     -----------
ASSETS

<S>                                              <C>              <C>
Current assets:

 Cash and cash equivalents                       $     45,365     $ 5,207,185
 Patient accounts receivable, net                  20,556,920      11,282,467
 Notes and advances due from affiliates                     -       2,314,250
 Inventories                                        4,849,819       1,364,569
 Note and accrued interest receivable                 713,750       2,396,667
 Deferred income taxes                                461,214               -
 Restricted bond funds                              2,342,565         719,175
 Prepaid expenses and other assets                  1,791,442       2,498,233

    Total current assets                           30,761,075      25,782,546

Property and equipment, net of accumulated
 depreciation                                     114,682,082      37,233,506

Marketable equity securities                           33,645          99,510
Investments in unconsolidated affiliates              496,800       4,431,235
Deferred lease and loan costs                       7,665,891       3,732,197
Goodwill, net of accumulated amortization           3,976,675       1,798,881
Notes and advances due from non-affiliates          1,422,247               -
Notes and advances due from affiliates             14,316,661       5,013,972
Restricted bond funds                               3,514,969         418,312
Other assets                                        2,687,602       1,747,387

    Total assets                                 $179,557,647      80,257,546
                                                                             
</TABLE>



                                 (Continued)

                                     F-3
<PAGE>   26

RETIREMENT CARE ASSOCIATES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Continued)
June 30, 1996 and 1995

<TABLE>
<CAPTION>
                                                   1996             1995   
                                               ------------     -----------
LIABILITIES AND SHAREHOLDERS' EQUITY

<S>                                            <C>              <C>
Current liabilities:
 Lines of credit                               $  1,456,535     $         -
 Current maturities of long-term debt             2,055,880       8,640,871
 Accounts payable                                11,201,976       7,699,640
 Accrued expenses                                 7,543,131       3,184,233
 Income taxes payable                             3,889,809       3,158,000
 Deferred income taxes                                 -            134,500
 Deferred gain                                       40,000          40,000

    Total current liabilities                    26,187,331      22,857,244

Deferred gain                                       371,370         261,370
Deferred income taxes                             1,465,877               -
Long-term debt, less current maturities         110,375,799      32,426,023

Minority interest                                 4,068,147       1,979,655

Commitments and contingencies

Redeemable convertible preferred stock            2,400,000       3,000,000

Shareholders' equity
 Common stock, $.0001 par value; 300,000,000
  shares authorized; 12,145,875 and 10,317,083
  shares issued, respectively                         1,215           1,031
 Preferred stock                                  8,765,250               -
 Additional paid-in capital                      26,972,655      18,555,677
 Retained earnings (deficit)                       (929,877)      1,176,546
 Treasury stock, at cost                           (120,120)              -

    Total liabilities and
      shareholders' equity                       34,689,123      19,733,254

                                               $179,557,647     $80,257,546
                                                                          
</TABLE>



The accompanying notes are an integral part of these consolidated financial
statements.



                                     F-4
<PAGE>   27

RETIREMENT CARE ASSOCIATES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
for the years ended June 30, 1996, 1995 and 1994

<TABLE>
<CAPTION>
                                       1996            1995          1994
Revenues:                          ------------    -----------    -----------
 <S>                               <C>             <C>            <C>
 Net patient service revenue       $119,499,849    $69,949,822    $34,340,394
 Medical supply revenue               9,825,252      3,617,439              -
 Management fee revenue:
  From affiliates                     3,472,900      3,517,500      3,034,445
  From others                           308,533        652,194        258,504
 Other revenue                          904,835      1,879,098        337,709

    Total revenues                  134,011,369     79,616,053     37,971,052

Expenses:
 Cost of patient services            77,776,292     47,778,410     23,088,387
 Cost of medical supplies sold        5,773,934      3,153,430              -
 Lease expense                        6,198,948      5,769,232      3,714,105
 General and administrative          23,886,877     12,769,582      5,953,793
 Depreciation and amortization        3,223,543      1,128,183        237,277
 Provision for bad debts              1,027,539              -              -

    Total expenses                  117,887,133     70,598,837     32,993,562

    Operating income                 16,124,236      9,017,216      4,977,490

Other income (expense):
 Interest income                      1,847,868        658,215              -
 Interest expense                    (7,948,091)    (1,179,052)      (232,365)

    Income before minority
      interest, income taxes and
      cumulative effect of change
      in accounting principle        10,024,013      8,496,379      4,745,125

Minority interest                      (597,895)       (18,784)             -

Income before income taxes and
 cumulative effect of change in
 accounting principle                 9,426,118      8,477,595      4,745,125

Income taxes                          4,228,307      3,419,092      1,827,483

Income before cumulative effect
 of change in accounting principle    5,197,811      5,058,503      2,917,642

Cumulative effect of change in
 accounting principle, net of
 income tax provision of $228,000       372,000              -              -

Net income                            5,569,811      5,058,503      2,917,642
                                                                             
Preferred stock dividend                270,000        225,000              -

Net income applicable to
 common stock                      $  5,299,811    $ 4,833,503    $ 2,917,642
</TABLE>



                                 (Continued)
                                     F-5

<PAGE>   28
RETIREMENT CARE ASSOCIATES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (Continued)
for the years ended June 30, 1996, 1995 and 1994


<TABLE>
<CAPTION>
                                        1996           1995          1994    
                                   ------------    -----------    -----------
<S>                                <C>             <C>            <C>
Income per common and common
 equivalent share:
  Income before cumulative
   effect of change in account-
   ing principle                   $        .36    $       .38    $       .30
  Cumulative effect of change
   in accounting principle                  .03              -              -

    Net income                     $        .39    $       .38    $       .30

Weighted average shares
  outstanding                        13,586,003     12,616,835      9,839,993
                                                                             
</TABLE>





The accompanying notes are an integral part of these consolidated financial
statements.


                                      F-6


<PAGE>   29


RETIREMENT CARE ASSOCIATES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
for the years ended June 30, 1996, 1995 and 1994

<TABLE>
<CAPTION>
                                            PREFERRED STOCK                     COMMON STOCK
                                 -------------------------------------      --------------------
                                 SERIES A     SERIES C     SERIES E          SHARES      AMOUNT    
                                 --------     --------     --------         ---------    -------
<S>                              <C>          <C>          <C>              <C>          <C>    
Balance, June 30, 1993           $ 670,642    $ 833,000    $        --      5,391,896    $   539
 Issuance of common stock
  upon conversion of Series
  Series A preferred stock        (670,563)          --             --        558,802         56
 Issuance of common stock
  upon conversion of Series
  Series C preferred stock              --     (833,000)            --        833,333         83
 Private placement Reg D                --           --             --      1,494,165        149
 Expenses on private placement          --           --             --             --         --
  Reg D
 Acquisition of Retirement
  Management Corporation                --           --             --         80,000          8
 Stock dividend, 5%                     --           --             --        417,970         42
 Private placement Reg S                --           --             --        750,000         75
 Expenses on private placement
  Reg S                                 --           --             --             --         --
 Recognition of convertibility
  of Series A preferred stock      364,004           --             --             --         --
 Net income                             --           --             --             --         --

Balance, June 30, 1994             364,083           --             --      9,526,166        952
 Issuance of common stock
  upon conversion of Series
  A preferred stock               (364,083)          --             --         69,508          7
 Issuance of common stock
  upon conversion of Series
  D preferred stock                     --           --             --        105,000         11
 Issuance of common stock
  upon Contour Medical,
  Inc. acquisition                      --           --             --        125,000         12
 Preferred stock, 10% dividend          --           --             --             --         --
 Stock dividend, 5%                     --           --             --        491,409         49
 Net income                             --           --             --             --         --

Balance, June 30, 1995           $      --    $      --    $        --     10,317,083    $ 1,031
 Issuance of Series E pre-
  ferred stock                          --           --      9,300,000             --         --
 Issuance of common stock
  upon conversion of Series
  E preferred stock                     --           --       (534,750)        54,516          6
 Treasury stock purchased               --           --             --             --         --
 Retirement of treasury stock           --           --             --        (15,000)        (2)
 Stock issued in exchange for
  cancellation of warrants and
  stock warrants exercised              --           --             --      1,198,391        120
 Stock options exercised                --           --             --         22,076          2
 Preferred stock, 10% dividend          --           --             --             --         --
 Stock dividend, 5%                     --           --             --        568,809         58
 Net income                             --           --             --             --         --
Balance, June 30, 1996           $      --    $      --    $ 8,765,250     12,145,875    $ 1,215
</TABLE>

                                  (Continued)
                                      F-7




<PAGE>   30

RETIREMENT CARE ASSOCIATES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (Continued)
For the years ended June 30, 1996, 1995 and 1994


<TABLE>
<CAPTION>
                                         ADDITIONAL       RETAINED
                                          PAID-IN         EARNINGS       TREASURY
                                          CAPITAL         (DEFICIT)       STOCK
<S>                                      <C>             <C>            <C>       
Balance, June 30, 1993                   $ (1,433,725)   $   705,535    $      --
 Issuance of common stock upon con-
  version of Series A preferred stock         670,507             --           --
 Issuance of common stock upon con-
  version of Series C preferred stock         832,917             --           --
 Private placement Reg D                    5,047,349             --           --
 Expenses on private placement Reg D         (520,580)            --           --
 Acquisition of Retirement Management
  Corporation                                 399,992             --           --
 Stock dividend, 5%                         2,980,092     (2,980,134)          --
 Private placement Reg S                    5,249,925             --           --
 Expenses on private placement Reg S         (470,800)            --           --
 Recognition of convertibility of
  Series A preferred stock                   (364,004)            --           --
 Net income                                        --      2,917,642           --

Balance, June 30, 1994                     12,391,673        643,043           --
 Issuance of common stock upon con-
  version of Series A preferred stock         364,076             --           --
 Issuance of common stock upon con-
  version of Series D preferred stock         499,989             --           --
 Issuance of common stock upon Contour
  Medical, Inc. acquisition                   999,988             --           --
 Preferred stock, 10% dividend                     --       (225,000)          --
 Stock dividend, 5%                         4,299,951     (4,300,000)          --
 Net income                                        --      5,058,503           --

Balance, June 30, 1995                   $ 18,555,677    $ 1,176,546    $      --
 Issuance of Series E preferred stock              --             --           --
 Issuance of common stock upon con-
  version of Series E preferred stock         534,744             --           --
 Treasury stock purchased                          --             --     (274,040)
 Retirement of treasury stock                      --       (153,918)     153,920
 Stock issued in exchange for cancel-
  lation of warrants and stock
  warrants exercised                          473,673             --           --
 Stock options exercised                      156,303             --           --
 Preferred stock, 10% dividend                     --       (270,000)          --
 Stock dividend, 5%                         7,252,258     (7,252,316)          --
 Net income                                        --      5,569,811           --

Balance, June 30, 1996                   $ 26,972,655    $  (929,877)   $(120,120)
</TABLE>




The accompanying notes are an integral part of these consolidated financial
statements.

                                      F-8




<PAGE>   31
RETIREMENT CARE ASSOCIATES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the years ended June 30, 1996, 1995 and 1994

<TABLE>
<CAPTION>
                                              1996            1995           1994   
                                          -----------     -----------     -----------
<S>                                       <C>             <C>             <C>        
Cash flows from operating activities:
 Net income                               $ 5,569,811     $ 5,058,503     $ 2,917,642
 Adjustments to reconcile net income
  to net cash provided by operating
  activities:
   Depreciation and amortization            3,223,543       1,128,183         237,277
   Loss on sale of marketable equity
    securities                                 29,085              --              --
   Cumulative effect of change in
    accounting principle                     (372,000)             --              --
   Amortization of deferred gain              (40,000)        (40,000)        (40,000)
   Provision for bad debts                  1,027,539              --              --
   Equity in income from investees            146,800              --              --
   Amortization of deferred lease and
    loan costs                                698,785              --              --
   Minority interest                          597,895          18,784              --
   Deferred income taxes                     (148,886)        261,092         (91,237)
   Changes in assets and liabilities
    net of effects of acquisitions:
     Accounts receivable                   (9,988,047)     (6,012,900)     (4,071,251)
     Inventories                           (3,096,022)       (996,139)             --
     Prepaid expenses and other assets        703,690        (642,013)     (1,373,827)
     Accrued interest receivable               77,917        (196,667)             --
     Accounts payable and accrued
      expenses                              7,278,350       6,608,148       5,509,837
     Deferred lease and loan costs                 --        (978,943)     (1,565,130)
       Net cash provided by operating
        activities                          5,708,460       4,208,048       1,523,311

Cash flows from investing activities:
 Purchases of property and equipment       (8,826,151)     (6,079,610)     (5,093,344)
 Proceeds from sale leaseback trans-
  action                                           --       4,500,000              --
 Proceeds from repayment of notes
  receivable                                2,200,000              --              --
 Issuance of notes receivable and
  advances to affiliates and non-
  affiliates                               (8,855,686)     (1,742,147)     (5,142,182)
 Purchase of bonds receivable                      --      (4,487,936)             --
 Purchase of note receivable                       --              --      (2,200,000)
 Investments in unconsolidated
  affiliates                                3,787,635      (3,335,833)       (783,904)
 Restricted bond funds                     (4,419,184)        (17,317)        913,857
 Proceeds from sale of fixed assets                --              --       2,481,370
 Cash acquired in acquisition of
  Contour Medical, Inc.                            --          73,254              --
 Decrease (increase) in marketable
  equity securities                                --         444,863        (544,373)
 Proceeds from sale of marketable
  equity securities                            36,780              --              --
</TABLE>



                                  (Continued)
                                      F-9




<PAGE>   32


RETIREMENT CARE ASSOCIATES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
for the years ended June 30, 1996, 1995 and 1994

<TABLE>
<CAPTION>
                                              1996             1995             1994 
                                          -----------      -----------      ----------- 
<S>                                       <C>              <C>              <C>         
 Goodwill paid in acquisitions             (2,327,736)              --          (93,422)


 Acquisitions, net of cash acquired       (26,197,853)              --               --
 Payment of deferred lease costs             (593,470)              --               --

       Net cash used in investing
        activities                        (45,195,665)     (10,644,726)     (10,461,998)

Cash flows from financing activities:
 Capital investment by minority
  shareholders of subsidiary                2,088,492        1,729,469               --
 Redemption of preferred stock               (600,000)              --               --
 Purchase of treasury stock                  (274,040)              --               --
 Dividends on preferred stock                (285,000)        (225,000)              --
 Proceeds from issuance of
  preferred stock                           9,300,000               --               --
 Proceeds from stock options and
  warrants exercised                          630,098               --        9,306,118
 Proceeds from long-term debt and
  net borrowings under line of
  credit                                   35,329,244       11,309,986          112,754
 Payments on long-term debt                (9,443,626)      (2,130,654)              --
 Payments of deferred loan                 (2,419,783)              --               --

       Net cash provided by financing
        activities                         34,325,385       10,683,801        9,418,872

Net increase (decrease) in cash and
 cash equivalents                          (5,161,820)       4,247,123          480,185

Cash and cash equivalents,
 beginning of year                          5,207,185          960,062          479,877

Cash and cash equivalents,
 end of year                              $    45,365      $ 5,207,185      $   960,062
</TABLE>




The accompanying notes are an integral part of these consolidated financial
statements.

                                      F-10





<PAGE>   33


RETIREMENT CARE ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

NATURE OF BUSINESS AND BASIS OF PRESENTATION

Retirement Care Associates, Inc. ("RCA" or the "Company") operates 64 leased
and owned nursing and retirement facilities and manages, for both related and
unaffiliated third parties, an additional 28 nursing and retirement facilities.
The Company also owns a majority interest in Contour Medical, Inc. ("Contour")
whose principal operations consist of distributing medical supplies to
healthcare facilities.

PRINCIPLES OF CONSOLIDATION

The accompanying consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries, as well as its majority-owned
subsidiaries.  All significant intercompany accounts and transactions have been
eliminated in consolidation.

CASH AND CASH EQUIVALENTS

For purposes of financial statement presentation, the Company considers all
highly liquid investments with maturity of three months or less at issuance to
be cash equivalents.

INVENTORIES

Inventories, consisting mainly of medical supplies, are valued at the lower of
cost (first-in, first-out) or market.

ALLOWANCE FOR POSSIBLE LOAN LOSSES

The Company periodically reviews the adequacy of the allowance for possible
loan losses on affiliate notes receivable by considering various factors, among
others, such as the fair value of the underlying facility collateral in excess
of prior and senior liens, the periodic results of operations of the underlying
collateral, the fair value of other collateral or guarantees pledged as
security for the notes receivable, and the Company's ability to foreclose, if
necessary, against prior and senior liens to protect the collateral value.

During 1996, the Company adopted Statement of Financial Accounting Standards
No. 114, "Accounting by Creditors for Impairment of a Loan" (SFAS No. 114).

All affiliated notes receivable were liquidated subsequent to June 30, 1996
(see Note 19).

PROPERTY, EQUIPMENT AND DEPRECIATION

Property and equipment are recorded at cost less accumulated depreciation.
Depreciation, which includes amortization of assets under capital leases, is
computed using the straight-line method over the estimated useful lives of the
related assets (five to thirty years).  Maintenance and repairs are charged to
expense as incurred.  Upon sale, retirement or other disposition of these
assets, the cost and the related accumulated depreciation are removed from the
respective accounts and any gain or loss on the disposition is included in
income.

                                      F-11

<PAGE>   34

RETIREMENT CARE ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued


1.  SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES, continued:

INVESTMENT IN UNCONSOLIDATED AFFILIATES

During the year ended June 30, 1995, the Company acquired a 35% interest in
In-House Rehab, Inc. ("In-House"), a therapy service company, for $350,000.
The Company accounts for their investment in In-House on the equity method.
The Company's share of In-House's net income was $146,800 and $0 for the years
ended June 30, 1996 and 1995, respectively.

Investment in affiliates included the investment in In-House and The Atrium of
Jacksonville, Ltd. ("Atrium") as of June 30, 1995.  The accounts of Atrium are
consolidated with those of the Company as of June 30, 1996.

DEFERRED LEASE AND LOAN COSTS

Deferred lease and loan costs, consisting of lease acquisition fees paid to
lessors and loan commitment fees and related expenditures, are amortized over
the respective terms of the lease or loan using the effective rate method.  The
related amortization of the lease and loan cost is recorded as lease and
interest expense, respectively.

RESTRICTED BOND FUNDS

Restricted bond funds relate to the debt service requirements of RCA's
outstanding bond obligations.  RCA has several industrial revenue bonds,
housing development mortgage revenue bonds and municipal revenue bonds, which
relate to the restricted bond funds.  Current restricted bond funds include
principal and interest funds which are used for payment of principal and
interest on or before the dates required by the trust indenture.  Non-current
restricted bond funds include debt service reserve funds (used for payment of
principal and interest when principal and interest funds are insufficient) and
project funds (used for payment of construction, improvement and equipment
costs at facilities under construction).

GOODWILL

Goodwill arises in connection with business combinations accounted for as
purchases where the purchase price exceeds the fair value of the net assets of
the acquired businesses.  Goodwill is amortized on a straight-line basis over
15 years.  The carrying value of goodwill is reviewed if the facts and
circumstances suggest that it may be impaired.  If this review indicates that
goodwill will not be recoverable, as determined based on undiscounted cash
flows of the acquired entity over the remaining amortization period, the
Company's carrying value of the goodwill is reduced by the estimated shortfall
of cash flows.  Accumulated amortization of goodwill totaled $233,014 and
$110,911 as of June 30, 1996 and 1995, respectively.

ASSESSMENT OF LONG-LIVED ASSETS

The Company periodically reviews the carrying values of its long-lived assets
(primarily property and equipment and intangible assets) whenever events or
circumstances provide evidence that suggest that the carrying amount of
long-lived assets may not be recovered.  If this review indicates that the
long-lived assets may not be recoverable, the Company reviews the expected
undiscounted future net operating cash flows from its facilities, as well as
valuations


                                      F-12


<PAGE>   35
RETIREMENT CARE ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued

obtained in connection with various refinancings.  Any permanent impairment of
value is recognized as a charge against earnings in the statement of income.
As of June 30, 1996, the Company does not believe there is any indication that
the amortization period of its long-lived assets needs to be adjusted.

DEFERRED GAIN

Deferred gain on a sale-leaseback transaction is recorded at cost and is
amortized into income on a straight-line basis over 10 years, the life of the
lease.  The related amortization is recorded as a reduction of lease expense.

STOCK DIVIDENDS

During February 1994, January 1995 and April 1996, the Company declared 5%
stock dividends which were payable on March 1, 1994, February 15, 1995 and May
15,

1.  SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES, continued:

1996, respectively, to shareholders of record on February 15, 1994 and 1995 and
May 1, 1996, respectively.  All common stock information presented has been
retroactively restated to reflect these stock dividends.

NET PATIENT SERVICE REVENUE

Net patient service revenue is derived primarily from services to retirement
center residents and nursing home patients.  Retirement center residents
typically pay rent in advance of the month for which it is due.  Nursing home
patients are predominately beneficiaries of the Medicare and Medicaid programs.

The Medicare program reimburses nursing homes on the basis of allowable costs,
subject to certain limits. Payments are received throughout the year at amounts
estimated to approximate costs. Following year end, cost reports are filed with
the Medicare program and final settlements are made. Provisions for Medicare
settlements are provided in the financial statements in the period the related
services are rendered. Differences between amounts accrued and final
settlements are reported in the year of settlement.

State Medicaid programs pay nursing homes primarily on a per diem basis with no
retroactive settlement.  Revenues from services to Medicaid patients are
recorded at payment rates established by the various state programs in the
period services are rendered.

There have been, and the Company expects that there will continue to be, a
number of proposals to limit Medicare and Medicaid payments for long-term and
rehabilitative services.  The Company cannot predict at this time whether any
of these proposals will be accepted or, if adopted and implemented, what effect
such proposals would have on the Company.

TAXES ON INCOME

Deferred income taxes are recognized for the tax consequences of temporary
differences between the financial reporting bases and the tax bases of the
Company's assets and liabilities. Valuation allowances are established when
necessary to reduce deferred tax assets to the amount expected to be realized.
Income tax expense is the tax payable for the period and the change during the
period in deferred tax assets and liabilities.


                                      F-13



<PAGE>   36
RETIREMENT CARE ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued


NET INCOME PER SHARE

Net income per share is computed on the basis of net income applicable to
common stock and the weighted average number of common and common equivalent
shares outstanding during each year, retroactively adjusted to give effect to
the stock dividends.  Shares used in the calculation consists of the weighted
average number of shares actually outstanding as well as the weighted average
number of common share equivalents which include dilutive convertible preferred
stock, stock options and warrants.  Primary weighted average number of common
and common equivalent shares outstanding approximated the fully diluted
weighted average number of common and common equivalent shares outstanding for
the year ended June 30, 1996.

1.  SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES, continued:

Shares used in the calculation for the year ended June 30, 1995 consisted of
the weighted average number of shares actually outstanding (10,798,292) as well
as the weighted average number of common share equivalents (1,818,543) which
include dilutive stock options and warrants as described below.   Shares used
in the calculation for the year ended June 30, 1994 consisted of the weighted
average number of shares actually outstanding (8,292,882) together with the
weighted average numbers outstanding of common shares expected to be issued
upon the conversion of all of the Series A convertible preferred stock (672,497
shares) issued in the merger since the income levels required to permit
conversion were currently being attained. Shares used in the calculation also
included the weighted average number of common share equivalents (874,614)
which include dilutive stock options and warrants as described below.

USE OF ESTIMATES

The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting period.
Actual results could differ from those estimates.

RECLASSIFICATIONS

Certain 1995 and 1994 amounts have been reclassified to conform with the 1996
presentations.

2.   BUSINESS ACQUISITIONS:

Effective November 30, 1992, the Company acquired the stock of Capitol Care
Management Company, Inc. ("CCMC") in a reverse acquisition in which CCMC's
stockholders acquired voting control of the Company.  For financial reporting
purposes, CCMC was deemed to be the acquiring entity.

The acquisition was recorded using the purchase method of accounting.  Since
RCA had no significant operations or assets at the acquisition date, as
required by the Securities and Exchange Commission, the accounts of RCA have
been recorded at the predecessor's cost basis.




                                      F-14



<PAGE>   37
RETIREMENT CARE ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued

2.  BUSINESS ACQUISITIONS, continued:


CONTOUR

On September 30, 1994, the Company acquired a 63% interest in Contour through
the acquisition of preferred and common stock from the existing shareholders of
Contour.  Contour is a publicly held company based in St. Petersburg, Florida,
which manufactures a full line of orthopedic care and rehabilitation products.
In connection with the acquisition of the 63% interest in Contour, the Company
paid $4,000,000, consisting of 137,813 shares of its common stock and 300,000
shares of a new series of redeemable convertible preferred stock (see Note 9).

The acquisition of Contour was accounted for under the purchase method of
accounting.  The excess of the purchase price over the fair value of
identifiable tangible and intangible assets of $899,792 was allocated to
goodwill and is being amortized over 15 years.

ENCORE

On December 15, 1995, the Company obtained both a sole general and a limited
partnership interest, totaling a 74.25% interest, in Encore Partners, L.P.
("Encore") in exchange for a capital contribution to Encore of $3.5 million.
Encore owns three retirement facilities, totaling 527 beds, and two nursing
homes, totaling 157 beds.  The acquisition was accounted under the purchase
method of accounting.

Profits and losses of Encore are allocated 74.25% to the Company and 25.75% to
other partners.  Available cash, if any, is distributed 74.25% to the Company
and 25.75% to the other partners.

ATRIUM

During the year ended June 30, 1995, Winter Haven Homes, Inc. ("Winter Haven"),
an affiliated entity, assigned to the Company its rights under an agreement
between Atrium and Winter Haven.  The agreement granted Winter Haven the right
to acquire up to a 75% ownership interest in Atrium in exchange for and upon
meeting certain performance requirements.

In addition to the assignment, Winter Haven and the Company entered into a
separate Compensation Agreement requiring the Company to pay Winter Haven an
amount equal to 25% of the appraised values of Atrium upon each transfer of a
25% interest in Atrium to the Company.  The payment of each 25% interest in
Atrium was reflected as an increase in Investment in Unconsolidated Affiliates
and a decrease in Notes and Advances Due From Affiliates in the accompanying
financial statements.

At June 30, 1995, a 50% interest in Atrium had been transferred to the Company
at a carrying value of $1,913,000 plus advances made by the Company to Atrium
of $2,149,060.  This investment was accounted for under the equity method.  In
May 1996, the Company obtained an additional 25% interest for $1,230,000,
bringing the total investment to $3,143,000 plus advances made by the Company
to Atrium of $2,602,942, and the total ownership interest to 75%.  Effective
May 1996, the accounts of Atrium have been consolidated with those of the
Company.



                                      F-15


<PAGE>   38
RETIREMENT CARE ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued

2.  BUSINESS ACQUISITIONS, continued:


The minority partners of Atrium are allocated 25% of the profits and losses and
25% of available cash flow, if any, is distributed to the minority partners.

OTHER

During the year ended June 30, 1996, the Company purchased a number of other
facilities.  Such purchases included both nursing and retirement facilities.
The data related to these purchases is as follows:


<TABLE>
<CAPTION>
                                                      1996    
                                                   -----------
          Number of Facilities Purchased:
          <S>                                      <C>
               Nursing                                       7
               Retirement                                    4
                                                   -----------
                    Total                                   11
                                                   -----------
                                                   -----------
          Cost of acquired facilities:
               Cash paid                           $   775,000
               Debt incurred                        22,736,000
                                                   -----------
                    Total                          $23,511,000
                                                   -----------
                                                   -----------
</TABLE>

During the year ended June 30, 1995, the Company purchased three nursing
facilities and two retirement facilities.

The Company typically obtains financing in excess of the purchase price paid
for acquired facilities.  The excess funds are used to cover certain closing
costs associated with the transactions with any residual amounts retained by
the Company.

The acquisitions referred to above have been accounted for using the purchase
method of accounting.  The operating results of those acquired facilities have
been included in the consolidated statement of operations from the date of
acquisition.

The following table presents unaudited pro forma results of operations data as
if the acquisitions described above had occurred on July 1, 1994.

<TABLE>
<CAPTION>
                                        For the year ended June 30, 
                                        ----------------------------
                                            1996            1995
                                                 (Unaudited)
          <S>                           <C>             <C>
          Revenue                       $148,466,000    $127,671,000
          Net income                       5,652,000       5,568,000
          Net income per share                   .40             .42
</TABLE>



                                      F-16


<PAGE>   39
RETIREMENT CARE ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued


2.  BUSINESS ACQUISITIONS, continued:


The pro forma information includes adjustments for interest expense that would
have been incurred to finance the acquisitions, additional depreciation based
on the fair market value of the facilities and other adjustments, together with
related income tax effects.  The pro forma financial information is not
necessarily indicative of the results of operations as they would have been had
the transactions been effected on the assumed dates.


3.   RELATED PARTY TRANSACTIONS:

The Company provides management and administrative services for 19 facilities
owned by affiliates and also leases one facility from an affiliate.  The
facilities are owned and controlled by two individuals who are officers and
directors of the Company.  These services are provided pursuant to agreements
which have five-year terms and are cancelable with sixty days written notice by
either party.  The agreements provide for monthly fees ranging from $6,000 to
$40,000 per facility and expire through 1999.  Revenue from these management
services totaled $3,472,900, $3,517,500 and $3,034,445 for the years ended June
30, 1996, 1995 and 1994.

CCMC maintains a cash management account where all operating cash funds of the
managed facilities are pooled into one bank account and invested daily.  Notes
and advances due from affiliates consist of advances to facilities, net of
advances from facilities, owned by the following affiliated entities:

<TABLE>
<CAPTION>
                                                         June 30,         
                                                --------------------------
                                                    1996           1995   
                                                -----------     ----------
<S>                                             <C>             <C>
Gordon Jensen Health Care Association, Inc.     $ 2,982,975     $2,117,562
Winter Haven Homes, Inc.                          8,887,833      4,966,589
Southeastern Cottages, Inc.                         679,144        105,533
National Assistance Bureau, Inc.                  1,326,391        748,801
Chamber Health Care Society, Inc.                   336,857       (610,263)
Senior Care, Inc.                                    84,095           -
Other Affiliates                                     19,366           -   
                                                -----------     ----------
                                                 14,316,661      7,328,222
Less current portion                                   -         2,314,250
                                                -----------     ----------
                                                $14,316,661     $5,013,972
                                                ===========     ==========
</TABLE>

During 1995 and 1994, the Company received notes as consideration for advances
totaling $5,360,000.  These notes require quarterly interest payments at 8% per
annum with all principal and accrued interest due on or before June 30, 1998.
The notes are collateralized by second mortgages on facilities owned by
affiliates and certain notes receivables are guaranteed by the principals of
Winter Haven, who are shareholders of the Company.  All notes and advances due
from affiliates were liquidated subsequent to year end (see Note 19).




                                      F-17

                                                                               

<PAGE>   40


RETIREMENT CARE ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued

3.   RELATED PARTY TRANSACTIONS, continued:


FACILITY ACQUISITIONS AND LEASES

On April 28, 1995, the Company purchased a 210-unit nursing home from an
affiliate.  The purchase price was $5,650,000 and was financed with $500,000
from the Company and a $5,150,000 mortgage loan from an unrelated third-party
real estate investment trust.

On February 27, 1996, the Company purchased a 36-unit retirement facility from
an affiliate. The purchase price was $2,000,000 and was financed with $400,000
from the Company and a $1,600,000 mortgage loan from an unrelated third-party
real estate investment trust.

On May 5, 1996, the Company entered into a lease agreement with an affiliate to
rent a 60-unit nursing home.  Terms of the agreement are ten years at $300,000
per year beginning on June 1, 1996.

ADDITIONAL TRANSACTIONS

The Company paid amounts to affiliates for obtaining financing of $190,000 for
the year ended June 30, 1995. During 1994, the Company paid amounts to
affiliates for lease acquisition and buyout costs, financing fees and financial
advisory fees of $350,000, $300,000, and $70,000, respectively.  These amounts
are deferred and included in deferred lease and loan costs in the accompanying
balance sheets.

The Company was paid fees of $150,000 and $400,000 by affiliates in connection
with locating financing for three facilities in 1996 and two facilities in
1995, respectively. These fees were included in interest income on the
accompanying statements of income.


4.  PATIENT ACCOUNTS RECEIVABLE:

Patient accounts receivable and net patient service revenue include amounts
estimated by management to be payable by Medicaid and Medicare under the
provisions of payment formulas in effect.  Medicaid and Medicare programs
accounted for approximately 71% and 72% of net patient service revenue during
1996 and 1995, respectively.

The Company grants credit without collateral to its patients most of whom are
local residents of the respective nursing home and retirement facilities and
are insured under third-party payor agreements.  The mix of receivables from
patients and third party payors is as follows:

<TABLE>
<CAPTION>
                                                 June 30,         
                                       ---------------------------
                                           1996            1995   
                                       -----------     -----------
          <S>                          <C>             <C>
          Medicaid                     $ 8,248,590     $ 5,485,610
          Medicare                       7,943,371       5,088,571
          Other third-party payors       3,139,919         697,402
          Patients                       1,225,040          10,884
                                       -----------     -----------
                                       $20,556,920     $11,282,467
                                       ===========     ===========
</TABLE>

                                      F-18


<PAGE>   41


RETIREMENT CARE ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued


4.  PATIENT ACCOUNTS RECEIVABLE, continued:


The allowance for doubtful accounts was approximately $1,000,000 and $0 as of
June 30, 1996 and 1995, respectively.  In the opinion of management, any
differences between the net revenue recorded and final determination will not
materially affect the consolidated financial statements.


5.   NOTE RECEIVABLE:

On February 7, 1996, the Company loaned $500,000 to an unaffiliated company.
The note, plus interest at 9% per annum, is due on February 7, 1997 and is
collateralized by a first lien on a 38-bed nursing home in Atlanta, Georgia.


6.   CHANGE IN ACCOUNTING FOR SUPPLIES INVENTORY:

During the year ended June 30, 1996, the Company changed methods of accounting
for facility supplies inventory from expensing when purchased to capitalizing
and expensing as used.  The Company believes that this change is preferable in
the circumstances because it more closely matches inventory costs with net
patient service revenue.  In connection with the capitalization of facility
supplies inventory at June 30, 1996, the Company recorded additional inventory
and reduced supplies expense by approximately $1.8 million, of which
approximately $600,000 related to inventory on hand as of June 30, 1995.
Accordingly, the cumulative effect of this change in accounting principle on
beginning retained earnings has been shown, net of tax, as a separate component
of the statement of operations for the year ended June 30, 1996.

Although the cumulative effect on retained earnings at June 30, 1995 resulting
from the change can be determined, the pro forma effects of retroactive
application cannot be computed for individual prior periods.  Accordingly, net
income and income per common share computed on a pro forma basis have not been
presented for the years ended June 30, 1995 and 1994.


7.   PROPERTY AND EQUIPMENT:

Property and equipment consisted of the following:



                                      F-19



<PAGE>   42
RETIREMENT CARE ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued


7.  PROPERTY AND EQUIPMENT, continued:


<TABLE>
<CAPTION>
                               Estimated
                                Useful
                                 Lives         1996            1995    
                               ---------   ------------     -----------
<S>                               <C>      <C>              <C>
Land                               --      $  7,432,502     $ 2,237,133
Buildings                          30        85,615,764      28,917,590
Equipment                         5-10       12,216,740       5,702,897
Leasehold improvements            5-10        2,193,227       1,110,666
Buildings and equipment under
  capital leases                  5-30        8,111,801            -   
                                  ----     ------------     -----------
                                            115,570,034      37,968,286
Less accumulated depreciation                 8,517,213         990,968
                                           ------------     -----------
                                            107,052,821      36,977,318
Construction in progress                      7,629,261         256,188
                                           ------------     -----------
Net property and equipment                 $114,682,082     $37,233,506
                                           ============     ===========
</TABLE>


Construction in progress, consisting of the development of four facilities,
includes approximately $605,000 and $4,600 of capitalized interest costs as of
June 30, 1996 and 1995, respectively.

Substantially all property and equipment is pledged as collateral for long-term
debt.

8.   DEFERRED LEASE AND LOAN COST:

In connection with the execution of certain lease transactions and financing of
acquisitions, the Company incurred lease and loan commitment fees, which are
included in deferred lease and loan costs in the accompanying balance sheets,
as follows:
<TABLE>
<CAPTION>
                                                       June 30,         
                                               -------------------------
                                                  1996           1995   
                                               ----------    -----------
          Lease cost:
          <S>                                  <C>            <C>
               Affiliated                      $  500,000     $  500,000
               Non-affiliated                   1,801,619      1,283,149

          Loan cost:
               Affiliated                         410,000        410,000
               Non-affiliated                   5,800,288      1,897,403
                                               ----------     ----------
                                                8,511,907      4,090,552
          Less accumulated amortization           846,016        358,355
                                               ----------     ----------
          Net deferred lease and loan cost     $7,665,891     $3,732,197
                                               ==========     ==========
</TABLE>





                                      F-20



<PAGE>   43
RETIREMENT CARE ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued



9.   SHAREHOLDERS' EQUITY:

STOCK PURCHASE WARRANTS

In prior years, the Company issued warrants to an investment banker and
consultants to purchase 1,137,899 shares of its common stock at prices ranging
from $1.554 to $6.543 per share.  All exercise prices approximated the market
price at the date of grant.  The warrants were exercisable at varying dates
through June 1998.  During the year ended June 30, 1996, the Company issued
799,090 shares of its common stock in exchange for the cancellation of all of
these warrants.

The Company has issued Class A warrants in connection with a private offering
and Class B and Class C warrants in connection with an offer to Class A warrant
holders to convert their warrants.  The Class A and C warrants are exercisable
at $.864 per share of common stock and the Class B warrants are exercisable at
$5.442 per share of common stock.  At any time during the period the warrants
are exercisable, the Company may redeem the warrants at $.05 per warrant upon
45 days written notice in the event certain listing and registration
requirements are achieved, and the closing bid price of the common stock
exceeds $7.00 per share for the Class A and Class C Warrants, and $10.00 per
share for the Class B


Warrants, for 20 of 30 consecutive trading days.   During the year ended June
30, 1996, Class A and Class C Warrants were exercised to purchase approximately
402,541 shares of common stock and Class B Warrants were exercised to purchase
approximately 50,853 shares of common stock.  As of June 30, 1996, there were
Class A and Class C warrants outstanding which entitles the holders to purchase
377,964 shares of common stock and Class B warrants outstanding which entitles
the holders to purchase 392,116 shares of common stock.

STOCK OPTIONS

In December 1993, the Company adopted the 1993 Stock Option Plan (the "Plan").
A total of 1,682,625 shares of the Company's common stock have been reserved
for issuance under the Plan.  Under the Plan, options are granted at an
exercise price of not less than 100% of the fair market value of the shares on
the date of grant.  Certain options are exercisable immediately, while others
are subject to vesting provisions as specified by the Board of Directors on the
date of grant.  Each option grant under the Plan automatically expires ten
years after the date of grant or at such earlier time as may be determined by
the Board of Directors.

Stock option transactions are summarized as follows:



                                      F-21



<PAGE>   44

RETIREMENT CARE ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued


9.  SHAREHOLDERS' EQUITY, continued:


<TABLE>
<CAPTION>
                                                Exercise Price
                                   Shares          Per Share  
                                  ---------     --------------
     <S>                          <C>           <C>
     Balance at June 30, 1993          -              -
          Granted                   882,110     $4.65 - $ 6.75
                                  ---------     --------------
     Balance at June 30, 1994       882,110      4.65 -   6.75
          Granted                   228,113      6.46 -   8.57
                                  ---------     --------------
     Balance at June 30, 1995     1,110,223      4.65 -   8.57
          Granted                   478,800      9.76 -  10.24
          Exercised                 (22,076)     4.65 -   9.76
          Canceled                  (68,579)     4.65 -   9.76
                                  ---------     --------------
     Balance at June 30, 1996     1,498,368     $4.65 - $10.24
                                  =========     =====   ======
</TABLE>

PREFERRED STOCK

As of June 30, 1996, the Company has authorized 40,000,000 shares of preferred
stock and has designated the following series of preferred stock:

  -  SERIES AA REDEEMABLE CONVERTIBLE PREFERRED STOCK

300,000 shares of Series AA Redeemable Convertible Preferred Stock are
authorized.  These shares were issued in connection with the acquisition of a
majority interest in Contour. Holders of the Series AA Redeemable Convertible
Preferred Stock are entitled to receive cumulative dividends of $1.00 per share
(10%) annually, and are convertible into common stock at any time at the rate
of 5.5125 shares of common stock for each six shares of Series AA Redeemable
Convertible Preferred Stock. Each share is entitled to one vote and has a
preferred rate of $10.00 per share upon voluntary or involuntary liquidation,
dissolution, or winding up of affairs of the Company.

The Company may redeem shares of Series AA Redeemable Convertible Preferred
Stock, in whole or in part, at any time at its option at a price of $10.00 per
share plus any unpaid dividends (the "Redemption Price").  In addition, to the
extent that such funds are legally available, the Company is required to
redeem, at the Redemption Price, at least 20% of each holder's initial number
of shares of Series AA Redeemable Convertible Preferred Stock by September 30,
1995; 40% by September 30, 1996; 60% by September 30, 1997; 80% by September
30, 1998; and 100% by September 30, 1999.  In the event that a holder of Series
AA Redeemable Convertible Preferred Stock shall have converted a portion of his
shares into common stock, such converted shares shall be counted toward the
redemption requirement and shall be deemed redeemed for the purposes of the
mandatory redemption requirement.

In addition, in the event that the Company fails to pay any dividend on the
Series AA Redeemable Convertible Preferred Stock within 30 days of the due
date, the Company is required to redeem all of the outstanding Series AA
Redeemable Convertible Preferred Stock.  During the year ended June 30, 1996,
the Company redeemed 60,000 shares of Series A Redeemable Preferred Stock.



                                      F-22


<PAGE>   45


RETIREMENT CARE ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued


9.  SHAREHOLDERS' EQUITY, continued:

  -   SERIES A CONVERTIBLE PREFERRED STOCK

2,000,000 shares of Series A Convertible Preferred Stock, par value $.10 per
share, are authorized.  Each share is entitled to 10 votes and has a preference
rate of $.01 per share with no dividend rights.

750,000 shares of Series A Preferred Stock were issued in connection with the
RCA merger and converted into common stock in 1994 and 1995.

  -  SERIES C CONVERTIBLE PREFERRED STOCK

1,000,000 shares of Series C Convertible Preferred Stock are authorized. Each
share is entitled to one vote per share and had a preference rate of $1.00 per
share with no dividend rights.

The shares of Series C Convertible Preferred Stock were converted in 1994 into
common stock.

  -  SERIES E CONVERTIBLE PREFERRED STOCK

1,000,000 shares of Series E Convertible Preferred Stock are authorized.  These
shares were sold in an offering to foreign investors in April 1996 at $10.00
per share.  Holders of the Series E Preferred Stock have no voting rights
except as required by law, and have a liquidation preference of $10.00 per
share plus 4% per annum from the date of issuance.  The shares of Series E
Preferred Stock are convertible into shares of common stock at a conversion
price of $12.4025 or 85% of the average closing bid price for the five trading
days prior to the date of conversion, whichever is lower (but no lower than
$5.00).

At the time of conversion, the holder is also entitled to additional shares
equal to $10.00 per share of Series E Preferred Stock converted multiplied by
8% per annum from the date of issuance divided by the applicable conversion
price.  As of June 30, 1996, 57,500 shares of Series E Convertible Preferred
Stock had been converted into 54,516 shares of common stock.

TREASURY STOCK

In November 1995, the Company purchased and retired 15,000 shares of its common
stock at an aggregate cost of $153,920.  In December 1995, the Company
purchased 10,000 shares of its common stock at an aggregate cost of $120,120.



                                      F-23




<PAGE>   46

RETIREMENT CARE ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued


10.  LONG-TERM DEBT:

Long-term debt at June 30, 1996 and 1995 is summarized as follows: 


<TABLE>
<CAPTION>
                                                         1996         1995   
                                                    ------------  -----------
<S>                                                 <C>           <C>
Non-affiliates:
     Notes payable to a real estate investment
       trust ("REIT")                               $ 39,848,938  $12,930,347
     Industrial development revenue bonds             20,066,000    9,345,000
     Municipal revenue bonds                          18,170,000   13,350,000
     Housing development mortgage revenue bonds       21,750,000    1,660,000
     Notes payable to banks
       (8.5% or prime plus 1% to 10% due
       through 2003)                                   4,548,160    2,966,065
     Capitalized lease obligations                     8,048,581         -

Affiliates:
     Note payable to an affiliate (12% due on
       July 31, 1996)                                       -       1,000,000

     Less discount on bonds payable                         -         184,518
                                                    ------------  -----------
                                                     112,431,679   41,066,894
Less current maturities                                2,055,880    8,640,871
                                                    ------------  -----------
                                                    $110,375,799  $32,426,023
                                                    ============  ===========
</TABLE>

Future maturities of debt and capital lease obligations are as follows:

<TABLE>
<CAPTION>
                                        Capital
   Year                                  Lease          Debt         Total   
----------                            -----------  ------------  ------------
<S>                                   <C>          <C>           <C>
   1997                               $   989,657  $  1,986,380  $  2,976,037
   1998                                 3,859,557     4,377,081     8,236,638
   1999                                   656,240     2,364,807     3,021,047
   2000                                   662,136     2,840,171     3,502,307
   2001                                   667,960     2,866,566     3,534,526
Thereafter                              7,317,105    89,948,093    97,265,198
                                      -----------  ------------  ------------
Total                                  14,152,655   104,383,098   118,535,753

Less amount representing imputed
 interest at ll% to 12%                 6,104,074          -        6,104,074
                                      -----------  ------------  ------------
Total obligations                     $ 8,048,581  $104,383,098  $112,431,679
                                      ===========  ============  ============
</TABLE>

The notes payable to the REIT consist of mortgage notes on eight facilities.
Principal amounts are amortized over a 25-year period with monthly installments
payable through 2008.  Interest ranges on these notes from 9.75% to 11.25% and
increases annually at rates ranging from 0.1% to 0.25%.  The notes are
collateralized by property and equipment of the eight facilities.



                                      F-24


<PAGE>   47


RETIREMENT CARE ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued


10.  LONG-TERM DEBT, Continued:

The industrial development revenue bonds consist of bonds on two facilities:  a
retirement community located in San Destin, Florida and Atrium, a nursing and
retirement community located in Jacksonville, Florida.  The San Destin facility
serves as collateral for $9,225,000 of bonds payable to the Walton County
Industrial Development Authority.  Principal payments range from $120,000 to
$1,000,000 annually through 2017 and interest accrues at 10.5%.  The Atrium
facility serves as collateral for three City of Jacksonville Industrial
Development Revenue Refunding bonds totaling $10,841,000.  Principal payments
range from $150,000 to $370,000 annually through 2024 and interest accrues at
rates ranging from 6.38% to 11.5%.

The housing development mortgage revenue bonds include approximately
$18,525,000 of bond debt assumed by the Company in connection with the
acquisition of Encore.  The bond debt, which is collateralized by property and
equipment of four facilities, includes Okaloosa County, Florida Retirement
Rental Housing Revenue Series A bonds totaling $8,425,000 with semi-annual
interest payments at 10.75% due in 2003 and Ohio Rental Housing Revenue Series
A bonds totaling $10,000,000 with semi-annual interest at 10.38% due in 2009.
The remainder of the housing development mortgage revenue bonds consist of
bonds totaling $3,225,000 collateralized by two facilities with interest
ranging from 8% to 11.0%.  The housing development mortgage revenue bonds
require annual principal payments ranging from $10,000 to $2,000,000.

The municipal revenue bonds, which are collateralized by property and equipment
of five facilities and require annual principal payments ranging from $15,000
to $540,000, consist of the following:

  -  Dade City, Florida Series A and B bonds totaling $6,455,000, with
principal payments due through 2025 and interest ranging from 6.75% to 8%.

  -  Highland County Series A and B bonds totaling $4,275,000, with principal
payments due through 2024 and interest ranging from 8.5% to 9.5%.

  -  City of Dublin Series A and B bonds totaling $2,780,000, with principal
payments due through 2024 and interest ranging from 8.5% to 10.5%.

  -  Rome-Floyd County Development Authority Revenue Series A and B bonds
totaling $2,760,000, with principal payments due through 2011 and interest
rates ranging from 7.5% to 9.5%.

  -  Americus-Sumter Series A and B bonds totaling $1,900,000, with principal
payments due through 2026 and interest rates ranging from 8.0% to 10.25%.


11.  LINES OF CREDIT:

The Company maintains various lines of credit with interest rates ranging from
prime plus .25% to prime plus 1.25%.  Available borrowings under the lines of
credit totaled $5,075,000 and $1,750,000 for the years ended June 30, 1996 and
1995, respectively.  Total borrowings against the lines of credit were
$3,556,535 and $1,745,316 at June 30, 1996 and 1995, respectively, which have
been included in long-term debt.  Included in these amounts were borrowings of
$2,100,000 and $1,745,316 at June 30, 1996 and 1995, respectively, which have
been included in long-term debt.




                                      F-25





<PAGE>   48


RETIREMENT CARE ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued

12.  COMMITMENTS AND CONTINGENCIES:

OPERATING LEASES

The Company leases nursing homes and retirement care facilities from
unaffiliated entities (in addition to leasing one nursing home from an
affiliated entity).  The lease agreements commenced on various dates with terms
extending through February 2016.  The Company has options to extend most of the
leases for an additional five to ten years.  The Company also leases certain
facilities under agreements classified as capital leases.  These agreements
include purchase options exercisable at the Company's discretion during, or at
the end of, each of the lease terms.  The capital lease agreements commenced on
various dates with terms extending through January 2006.

Included in the above agreements are three leases whereby a sale to the lessor
preceded the lease agreement ("sale/leaseback transaction").  The Company has
accounted for two of these sale/leaseback transactions as sales with no gains
or losses recognized on the transactions.  The remaining sale/leaseback
transaction was capitalized and included a deferred gain of $381,370 to be
amortized over the term of the lease. Future minimum payments, by year and in
the aggregate, under noncancelable operating leases with initial or remaining
terms of one year or more consist of the following at June 30, 1996:


<TABLE>
<CAPTION>
                  Year                      Amount  
               -----------               -----------
               <S>                       <C>
                  1997                   $ 7,958,940
                  1998                     7,733,171
                  1999                     6,332,600
                  2000                     6,181,636
                  2001                     6,247,504
               Future years               26,890,709
                                         -----------
               Total                     $61,344,560
                                         ===========
</TABLE>


The Company's rental expense under operating leases for nursing homes and
retirement care facilities amounted to approximately $5,890,000, $5,750,000 and
$3,000,000 for the years ended June 30, 1996, 1995 and 1994, respectively.

The Company leases office space under a noncancelable operating lease which
expires in October 2000.  At June 30, 1996, minimum future rental payments
under the noncancelable lease were as follows:

<TABLE>
<CAPTION>
                      Year              Amount 
                   -----------         --------
                      <S>              <C>
                      1997             $303,647
                      1998              325,450
                      1999              341,680
                      2000              358,670
                      2001              120,508
</TABLE>

Total amounts paid for rental of office facilities totaled approximately
$305,000, $60,000 and $35,000 for the years ended June 30, 1996, 1995 and 1994,
respectively.




                                      F-26


<PAGE>   49
RETIREMENT CARE ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued


OTHER

The Company has guaranteed the debt of two facilities owned by affiliates
totaling approximately $6,000,000.  Additionally, the Company has guaranteed
20% of the debt on five facilities owned by unaffiliated entities totaling
$9,370,000 that are currently operated by the Company under operating leases.

The Company is involved in legal proceedings arising in the ordinary course of
business.  In addition, the Company is in dispute with the Internal Revenue
Service ("IRS") concerning the application of certain income and payroll tax
liabilities and payments.  The IRS contends that the Company is delinquent in
the payment of certain taxes and has charged penalties and interest in
connection with the alleged underpayments.  The Company contends that the IRS
has misapplied payments between income and payroll taxes and between the
Company and its affiliates.  The Company has estimated in the accompanying
financial statements amounts for ultimate settlement of this dispute.  The
Company has filed lawsuits against the IRS related to this matter.  In the
opinion of management, the ultimate resolution of pending legal proceedings and
the IRS dispute will not have a material effect on the Company's financial
positions or results of operations.

13.  INCOME TAXES:

The components of the provision for income taxes were as follows:
   

<TABLE>
<CAPTION>
                                                 Year ended June 30,       
                                         ----------------------------------
                                            1996        1995        1994   
                                         ----------  ----------  ----------
<S>                                      <C>        <C>          <C>
Current:
     Federal                             $3,918,693  $2,659,000  $1,630,900
     State                                  686,500     499,000     287,820
                                         ----------  ----------  ----------
                                          4,605,193   3,158,000   1,918,720
                                         ----------  ----------  ----------
Deferred:
     Federal                                (80,660)    221,928     (77,600)
     State                                  (68,226)     39,164     (13,637)
                                         ----------  ----------  ---------- 
                                           (148,886)    261,092     (91,237)
                                         ----------  ----------  ---------- 
          Total income tax provision     $4,456,307  $3,419,092  $1,827,483
                                         ==========  ==========  ==========
</TABLE>

The income tax provision is included in the statements of operations as
follows:

<TABLE>
<CAPTION>
                                          1996          1995          1994   
                                       ----------    ----------    ----------
<S>                                    <C>           <C>           <C>
Income before cumulative effect of
 change in accounting principle        $4,228,307    $3,419,092    $1,827,483

Cumulative effect of change in
 accounting principle                     228,000          -             -   
                                       ----------    ----------    ----------
                                       $4,456,307    $3,419,092    $1,827,483
                                       ==========    ==========    ==========
</TABLE>


                                      F-27



<PAGE>   50

RETIREMENT CARE ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued


13.  INCOME TAXES, Continued:


Deferred income taxes are provided to reflect temporary differences between
financial and income tax reporting.  The sources of the temporary differences
and their effect on the net deferred tax liability at June 30, 1996 and 1995
are as follows:

<TABLE>
<CAPTION>
                                                        1996          1995   
                                                     ----------    ----------
<S>                                                  <C>           <C>
Deferred tax assets:
 Provision for losses on accounts receivable         $  379,600    $     -
 Worker's compensation accrual                           66,430
 Deferred gain                                           99,216       120,590
                                                     ----------    ----------
    Total deferred tax assets                           545,246       120,590

Deferred tax liabilities:
 Property and equipment                               1,434,719       255,090
 Equity in undistributed earnings of subsidiaries       115,190          -   
                                                     ----------     ---------
    Total deferred tax liabilities                    1,549,909       255,090
                                                     ----------     ---------
    Net deferred tax liabilities                     $1,004,663     $ 134,500
                                                     ==========     =========
</TABLE>

The provision for income taxes for the year ended June 30, 1996 varies from the
amount determined by applying the Federal statutory rate to pretax income as a
result of the following:

<TABLE>
<S>                                                  <C>
Income tax expense at federal statutory rate         $3,409,045
Nondeductible tax penalties                             417,658
State income taxes, net of federal tax benefit          384,864
Dividend exclusion of subsidiary earnings                59,464
Other                                                   185,276
                                                     ----------
                                                     $4,456,307
                                                     ==========
</TABLE>

The primary difference between the actual income tax rate of approximately 40%
and 39% for the years ended June 30, 1995 and 1994, respectively, and the
Federal income tax rate of 34% is the amount paid for state income taxes.


14.  FAIR VALUES OF FINANCIAL INSTRUMENTS AND INVESTMENTS:

The following methods and assumptions were used by the Company in estimating
the fair value of its financial instruments.

CASH AND CASH EQUIVALENTS

The carrying amount reported in the balance sheet for cash and cash equivalents
approximates fair value because of the short maturity of these instruments.




                                      F-28

 
                                                                          

<PAGE>   51
RETIREMENT CARE ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued


14. FAIR VALUES OF FINANCIAL INSTRUMENTS AND INVESTMENTS, Continued:


MARKETABLE EQUITY SECURITIES

The carrying amount reported in the balance sheet for marketable equity
securities approximates fair value.  All marketable equity securities are


classified as "available for sale" for accounting purposes and, therefore, are
carried at fair value with unrealized gains and losses recorded directly in
equity.  There were no significant unrealized gains or losses at June 30, 1996.


NOTES RECEIVABLE

The carrying amount approximates fair value for the notes receivable based on
the fair value being estimated as the net present value of cash flows that
would be received on the notes over the remaining notes' terms using the
current market interest rates rather than stated interest rates.


SHORT- AND LONG-TERM DEBT

The fair value of all debt has been estimated based on the present value of
expected cash flows related to existing borrowings discounted at rates
currently available to the Company for debt with similar terms and remaining
maturities.

The cost basis and estimated fair values of the Company's financial instruments
at June 30 are as follows:

<TABLE>
<CAPTION>
                                                    June 30, 1996        
                                            -----------------------------
                                             Carrying             Fair
                                              Amount              Value
<S>                                         <C>              <C>
Financial assets:
     Cash and cash equivalents              $    45,365      $     45,365
     Marketable equity securities                33,645            33,645

Financial liabilities:
     Short-term debt                          3,512,415         3,512,415
     Long-term debt                         110,375,799       111,117,000
</TABLE>

As of June 30, 1995, the carrying amount of all financial instruments
approximated fair value.


15.  SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:

In connection with the purchase of Contour in September 1994, the Company
issued $1,000,000 of common stock, and $3,000,000 of redeemable convertible
preferred stock.  Total assets and liabilities acquired were $5,146,493 and
$1,146,493, respectively.

In June 1995, the Company acquired for $4,488,000 through foreclosure a
116-unit property which secured bonds that the Company held.



                                      F-29




<PAGE>   52

RETIREMENT CARE ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued


15.  SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION, Continued:


Total debt of $20,830,000 was incurred during the year ended June 30, 1995, to
purchase property and equipment totaling $17,825,642, pay loan costs of
$1,004,358, and pay off an existing note for $2,000,000.

As described in Note 2, the Company acquired certain businesses during 1996.
The fair value of assets acquired was $67,155,500 and the fair value of
liabilities assumed was $40,957,647 which resulted in net cash payments of
$26,197,853.

Total debt of $10,200,000 was incurred during the year ended June 30, 1994 to
purchase property and equipment totaling $7,736,490, pay loan costs of $429,483
and fund bond reserves of $2,034,027.

Through the acquisition of a company in December 1993, the Company recorded
$500,000 as goodwill and additional paid-in capital in 1995 based on the fair
value of 105,000 shares of common stock issued in connection with the
conversion of Series D preferred stock.

In conjunction with the Series C preferred stock conversion in September 1993,
$833,000 of preferred stock was capitalized as $87 in common stock and $832,913
in additional paid-in capital.

Cash paid for interest during the years ended June 30, 1996, 1995 and 1994 was
$6,561,954, $1,172,883 and $11,172, respectively.

Cash paid for income taxes during the years ended June 30, 1996, 1995 and 1994
was $3,561,089, $829,292 and $1,360,720, respectively.

Dividends on preferred stock of $15,000 were accrued but not paid at June 30,
1996.

During 1996, approximately $8,112,000 of lease assets and obligations were
capitalized.


16.  ACCRUED EXPENSES:

Accrued expenses consisted of the following as of June 30:

<TABLE>
<CAPTION>
                                           1996                1995   
                                        ----------          ----------
     <S>                                <C>                 <C>
     Payroll and payroll taxes          $3,152,795          $1,936,927
     Interest                            1,872,658             452,173
     Other                               2,517,678             795,133
                                        ----------          ----------
          Total                         $7,543,131          $3,184,233
                                        ==========          ==========
</TABLE>




                                      F-30


<PAGE>   53


RETIREMENT CARE ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued

17.  EMPLOYEE RETIREMENT PLAN:

During the year ended June 30, 1996, the Company company established a defined
contribution retirement plan.  Employees qualify for the plan upon the
completion of three months of service with the Company and reaching the age of
twenty-one.  Company contributions to the plan represent a matching percentage
of certain employee contributions.  The matching percentage is subject to
management's discretion based upon consolidated financial performance.  For the
year ended June 30, 1996, the Company has not made any contributions to the
plan.

18.  BUSINESS SEGMENT INFORMATION:

Retirement Care Associates, Inc. and Subsidiaries is a long-term health care
provider which engages in two distinct business segments. The Retirement Care
Associates entity operates and manages nursing homes and retirement facilities
throughout the Southeast.  As of June 30, 1996, approximately 10,400 beds were
owned or operated by this entity.

The Contour entity manufacturers a full line of orthopedic care and
rehabilitation products and distributes them to nursing facilities throughout
the Southeast.  The Contour entity was acquired in 1995.  The following
represents business segment information for the years ended June 30, 1996 and
1995.

<TABLE>
<CAPTION>
                                                    1996          1995    
                                                ------------   -----------
     <S>                                        <C>            <C>
     Operating revenues:
          Retirement Care Associates            $124,951,954   $76,656,829
          Contour Medical                          9,059,415     3,617,439
                                                ------------   -----------
                                                $134,011,369   $80,274,268
                                                ============   ===========
     Depreciation and amortization expense:
          Retirement Care Associates            $  2,623,194   $ 1,051,842
          Contour Medical                            600,349        76,341
                                                ------------   -----------
                                                $  3,223,543   $ 1,128,183
                                                ============   ===========
     Identifiable assets:
          Retirement Care Associates            $167,159,896   $72,644,179
          Contour Medical                         12,397,751     7,613,367
                                                ------------   -----------
                                                $179,557,647   $80,257,546
                                                ============   ===========
     Capital expenditures:
          Retirement Care Associates            $  8,076,988   $ 5,763,553
          Contour Medical                            749,163       316,057
                                                ------------   -----------
                                                $  8,826,151   $ 6,079,610
                                                ============   ===========
</TABLE>





                                      F-31


<PAGE>   54
RETIREMENT CARE ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued

18.  BUSINESS SEGMENT INFORMATION, Continued:


<TABLE>
<S>                                              <C>            <C>         
         Operating Income
                 Retirement Care Associates      $ 15,285,034   $ 8,865,388 
                 Contour Medical                      839,202       151,820
                                                 ------------   -----------
                                                 $ 16,124,236   $ 9,017,216
                                                 ============   ===========
</TABLE>

19.  SUBSEQUENT EVENT:

Subsequent to year end, the Company entered into a series of transactions with
Winter Haven, Gordon Jensen Health Care Association, Inc. ("Gordon Jensen"),
National Assistance Bureau, Inc. ("NAB"), Southeastern Cottages, Inc.
("Southeastern"), Chamber Health Care Society, Inc. ("Chamber"), and Senior
Care, Inc. ("Senior"); all are entities which principal shareholders of the
Company either own or control.  The result of the transactions was to eliminate
all notes receivable and advances due to the Company from affiliates.  The
following is a summary of the transactions:

  -  Winter Haven assumed the liability for all amounts, totaling $2,426,487,
due to the Company from NAB, Southeastern, Chamber and Senior.

  -  On October 14, 1996, Winter Haven sold to the Company two retirement
facilities for their fair value, based on independent appraisal, totaling
$19,200,000.  The facilities were acquired by the Company subject to bond debt
of $7,670,000, resulting in debt due to Winter Haven from the Company of
$11,530,000.  As part of the sales agreement, the Company and Winter Haven
agreed that the debt of $11,530,000 would be applied to eliminate the
receivable, totaling $11,214,320, due to the Company by Winter Haven.

  -  On September 27, 1996, Gordon Jensen contributed to the treasury of the
Company 400,000 shares of stock in the Company which had a fair market value of
$3,000,000.  This transaction results in the elimination of the debt, totaling
$2,982,000, due to the Company by Gordon Jensen and a reduction of
stockholders' equity of the Company by $3,000,000.

On August 6, 1996, Contour acquired all of the outstanding stock of Atlantic
Medical Supply Company, Inc. ("Atlantic Medical"), a distributor of disposable
medical supplies and a provider of third-party billing services to the nursing
home and home health care markets.  The acquisition was made retroactively to
July 1, 1996.  Contour paid $1.4 million in cash and $10.5 million in
promissory notes for all of the outstanding stock of Atlantic Medical.  The
promissory notes bear interest at 7% per annum and are due in full on January
10, 1997.  In the event of a default in the payment of the promissory notes,
they are convertible into shares of common stock of RCA.

During the period from September 26 through October 2, 1996, the Company sold
1,000,000 shares of Series F Convertible Preferred Stock in an offering to
foreign investors at $10.00 per share.  Holders of the Series F Preferred Stock
have no voting rights except as required by law, and have a liquidation
preference of $10.00 per share plus 4% per annum from the date of issuance.
The shares of Series F Preferred Stock are convertible into shares of common
stock at a conversion price of the lessor of (a) $9.6525 or 110% of the average
closing bid price for the twenty consecutive trading days commencing September
30, 1996,



                                      F-32


<PAGE>   55
RETIREMENT CARE ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued

18.  SUBSEQUENT EVENT, Continued:

whichever is lower, or (b) 85% of the average closing bid price for the five
trading days prior to the date of conversion.  The maximum number of shares of
common stock which can be issued upon conversion of the Series F Preferred
Stock is 2,588,000.  At the time of conversion, the holder is also entitled to
additional shares equal to $10.00 per share of Series F Preferred Stock
converted multiplied by 8% per annum from the date of issuance divided by the
applicable conversion price.



                                      F-33


<PAGE>   56

                                  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.

                        RETIREMENT CARE ASSOCIATES, INC.


Dated: July 29, 1997              By: /s/ Darrell C. Tucker
                                      ----------------------------------
                                          Darrell C. Tucker, Treasurer