<PAGE>   1
                  U. S. SECURITIES AND EXCHANGE COMMISSION
                          Washington, D.C.  20549

                                  FORM 10-K

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

             For the Fiscal Year ended:  June 30, 1997

             OR

[ ]          TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
             OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]

             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, 1997, 14,749,441 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 $84,064,500.

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:  None.


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                                   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 September 19, 1997, the
Company operated 101 facilities which it owned or leased, and managed an
additional nine 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, $.0001 par value per share (the "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, Christopher
F. 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 





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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.

         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 novated 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 whereby 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 and a subsidiary of Capitol Care.

         On September 30, 1994, the Company acquired approximately 63% of the
outstanding capital stock of Contour Medical, Inc., a publicly-held, Nevada
corporation located in Alpharetta, Georgia, which distributes a full line of
disposable medical supplies to nursing homes, home health agencies and other
healthcare providers. The Company currently owns approximately 60% of the
outstanding capital 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.

         On February 17, 1997, the Company entered into an Agreement and Plan of
Merger and Reorganization (the "Merger Agreement") by and among Sun Healthcare
Group, Inc. ("Sun"), Peach Acquisition Corporation, a Colorado corporation and
wholly-owned subsidiary of Sun, and the Company, pursuant to which the
subsidiary of Sun would be merged with and into the Company. The Merger
Agreement was subsequently amended on May 27 and August 21, 1997.

         Subject to the terms and conditions of the Merger Agreement (including,
without limitation, approval by the stockholders of Sun and the shareholders of
the Company), upon the effective time of the Merger, each outstanding share of
common stock of the Company (other than shares held in the treasury of the
Company, owned by Sun or any subsidiary of Sun, or held by persons who exercise
their dissenter's rights under Colorado law) will be cancelled and extinguished
and converted automatically into the right to receive 0.520 shares of the common
stock of Sun. As a result of the Merger, the Company will become a wholly-owned
subsidiary of Sun.




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         On February 17, 1997, Sun also entered into a Stockholders Stock Option
and Proxy Agreement (the "Option Agreement") by and among Sun and Christopher F.
Brogdon, Connie B. Brogdon, Edward E. Lane, Darrell C. Tucker and Winter Haven
Homes, Inc., collectively owners of approximately 36% of the outstanding shares
of common stock of the Company. Pursuant to the Option Agreement, each of these
shareholders granted to Sun an irrevocable option to purchase such shareholder's
shares at a price per share equal to $9.27 under certain circumstances. In
addition, each shareholder agreed to vote, and granted to Sun an irrevocable
proxy to vote, all voting securities of the Company held by such shareholder in
favor of approval of the Merger Agreement and the Merger and against any merger,
consolidation, sale of assets, reorganization or recapitalization of the Company
with any party other than Sun and its affiliates and against any liquidation or
winding up of the Company.

         On February 17, 1997, Sun also entered into a merger agreement to
acquire Contour Medical, Inc.

         The Company and Sun have filed with the Securities and Exchange
Commission (the "SEC"), on a confidential basis, a preliminary proxy statement
with respect to the Merger, and Sun and Contour Medical, Inc. filed with the
SEC, on a confidential basis, a preliminary information statement with respect
to the proposed merger of a wholly-owned subsidiary of Sun with and into Contour
Medical, Inc.

         The Merger is subject to the approval of the shareholders of the
Company and the stockholders of Sun and will be considered at separate meetings
now anticipated to occur in the fourth quarter of calendar year 1997. The Merger
will be effective promptly following shareholder approval, assuming satisfaction
of other conditions to the Merger.

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
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 



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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, 1997, all of the Company's
long-term care facilities were Medicare certified.

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

<TABLE>
<CAPTION>
                          FISCAL 1997     FISCAL 1996     FISCAL 1995

          <S>             <C>             <C>             <C>
          Medicaid             50%             55%             65%
          Medicare             10%             10%             10%
          Private              40%             35%             25%
                              ---             ---             ---
            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.

         GROWTH OF LONG-TERM CARE INSURANCE. Numerous insurance companies
currently offer long-term care insurance which provides the beneficiary coverage
for



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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



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additional long-term care and assisted/independent living facilities; (ii)
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 September 17, 1997, the Company
had 11 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 



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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
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 10 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 



                                      -8-
<PAGE>   9

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
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 vice president of
compliance 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.



                                      -9-
<PAGE>   10

         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.

         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



                                      -10-
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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
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 eight facilities owned by its affiliates and one
facility 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 $4,000 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.



                                      -11-
<PAGE>   12

         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 "--
Government 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 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 "-- Government
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.



                                      -12-
<PAGE>   13

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.

        The majority 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
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 Alpharetta, Georgia which
distributes a full line of disposable medical supplies to nursing homes, home
health agencies and other healthcare providers. These supplies include
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 supplies, 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



                                      -13-
<PAGE>   14

the requirements of infection control for medical, industrial and institutional
applications. In addition, Contour markets its REDI NURSE 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 bore interest at 7% per annum and were paid in full by the
Company on January 10, 1997. In consideration for the Company's payment of such
promissory notes, Contour issued to the Company 1,950,000 shares of the common
stock of Contour

         Retirement Care holds approximately 27% of the outstanding capital
stock of In-House Rehab, Inc., a publicly held company based in Louisville,
Kentucky, whose wholly owned subsidiary, In-House Rehab, Inc., provides
rehabilitation services to approximately 36 of the Company's long-term care
facilities.

         COMPETITION

         The senior residential care industry is highly competitive. The Company
competes with other providers of senior residential care services 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 



                                      -14-
<PAGE>   15

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-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 the majority 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.




                                      -15-
<PAGE>   16

         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
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
various states are considering imposing limitations on the amount of funding
available for various health care services. Among the proposals being considered
by the 



                                      -16-
<PAGE>   17

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 assistance programs
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 June 30, 1997, the Company employed in the aggregate
approximately 7,320 employees, including 106 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
other facility 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.



                                      -17-
<PAGE>   18

ITEM 2.  PROPERTIES.

         The Company currently leases approximately 20,000 square feet of office
space for its corporate offices at 6000 Lake Forrest Drive, Suite 200, Atlanta,
Georgia, from an unaffiliated party. This lease expires in October 2000, and
currently requires base monthly lease payments of approximately $36,015. The
Company believes that these facilities are suitable and adequate to meet its
present and anticipated needs.

         The following table summarizes certain information regarding facilities
leased, owned and managed by the Company as of September 19, 1997.  With
regard to facilities leased from or managed for affiliated companies, the name
of the affiliate is indicated using the following abbreviations:  Winter Haven
Homes, Inc. - WHH; Gordon Jensen Health Care Associates, Inc. - GJ; National
Assistance Bureau, Inc. - NAB; Southeastern Cottages, Inc. - SCI; Chamber
Health Care Society - CHCS; and Retirement Group, L.L.C. - RG.

<TABLE>
<CAPTION>
                                                       Leased/
                                                       Owned/     Occupancy
                                             Number    Managed      As of
                                  Type of    of Beds   (Name of  September 19,
      Name            Location   Facility    or Units  Affiliate)    1997
------------------   ---------- -----------  --------  ---------  ----------
GEORGIA
<S>                  <C>        <C>          <C>       <C>        <C>
 Twin View Health    Twin City   Long-Term     110      Leased        96%
  Care Center                    Care                   (RG)

 Griffin Health      Griffin     Long-Term     148      Owned         99%
  Care Center                    Care

 Midway Health       Midway      Long-Term     169      Managed       94%
  Care Center                    Care                   (GJ)

 Dearfield Nursing   Columbus    Long-Term     210      Owned         95%
  Facility                       Care

 Summer's Landing-   Vidalia     Assisted/      24      Managed      100%
  Vidalia                        Independent            (SCI)
                                 Living

 Summer's Landing-   Cordele     Assisted/      36      Owned         89%
  Cordele                        Independent
                                 Living

 Summer's Landing-   Douglas     Assisted/      58      Leased        95%
  Douglas                        Independent            (GJ)
                                 Living

 Summer's Landing-   Dublin      Assisted/      56      Owned         89%
  Dublin                         Independent
                                 Living

 Summer's Landing-   Dahlonega   Assisted/      24      Leased        83%
  Dahlonega                      Independent
                                 Living

 Summer's Landing-   Griffin     Assisted/      30      Owned         31%
  Griffin                        Independent
                                 Living
</TABLE>




                                      -18-
<PAGE>   19

<TABLE>
<S>                  <C>         <C>            <C>     <C>        <C>
 Summer's Landing-   Plains      Assisted/      40      Owned        Under
 Plains                          Independent                       Construction
                                 Living                             

 Twelve Oaks Health  Riverdale   Long-term     152      Leased        93%
  Care                           Care

 Cedartown Health    Cedartown   Long-term     116      Leased        97%
  Care Center                    Care

 Floyd Health Care   Rome        Long-term     100      Leased        91%
   Center                        Care

 Friendship Health   Cleveland   Long-term      89      Leased        97%
  Care Center                    Care

 Gateway Health      Cleveland   Long-term      60      Leased        98%
  Care Center                    Care

 Gold City Health    Dahlonega   Long-term     102      Leased        97%
  Care Center                    Care

 Mountain View       Clayton     Long-term     117      Leased        91%
  Health Care Center             Care

 Sandmont Health     Trenton     Long-term      71      Leased        97%
  Care Center                    Care

 Rome Health Care    Rome        Long-term     100      Leased        97%
  Center                         Care

 Sun Mountain        Rome        Long-term     100      Leased        95%
  Health Care Center             Care

 Arrowhead Nursing   Jonesboro   Long-term     115      Owned         92%
  Center                         Care

 Roberta Nursing     Roberta     Long-term     100      Leased        93%
  Home                           Care

 West View Health    Port        Long-term      99      Leased        98%
  Care Center        Wentworth   Care

 Peachbelt Health    Warner      Long-term     106      Leased        87%
  Care Center        Robins      Care

 Dogwood Retirement  Warner      Assisted/      18      Leased       100%
  Village            Robins      Independent
                                 Living

New Beginnings       Covington   Long-term     158      Managed       96%
  Health & Rehab                 Care                   (CHCS)
</TABLE>



                                      -19-
<PAGE>   20

<TABLE>
<S>                  <C>         <C>           <C>      <C>     <C>
 Springdale Conva-   Atlanta     Long-term     109      Owned         95%
  lescent Center of              Care
  Atlanta

 Springdale Conva-   Carters-    Long-term     118      Leased        96%
  lescent Center     ville       Care
  of Bartow County

 Summer's Landing-   Carters-    Long-term      50      Owned         46%
  Springdale         ville       Care

 Brunswick Nursing   Brunswick   Long-term     204      Leased        97%
  Center                         Care

 Tattnall Nurse      Reidsville  Long-term      92      Leased        87%
  Care Center                    Care

 Altamaha Conva-     Jesup       Long-term      62      Leased       100%
  lescent Center                 Care

 Summer's Landing-   Rome        Assisted/      60      Owned         95%
  Rome                           Independent
                                 Living

 Riverview Health-   Rome        Long-term     115      Owned         93%
  care Center                    Care

 Marietta Health     Marietta    Long-term     119      Leased        98%
  Care                           Care

 Brown's Health-     Statesboro  Long-term      64      Leased        95%
  care Center                    Care

 Clinch Healthcare   Homerville  Long-term      92      Leased        88%
  Center                         Care

 Jeff Davis Health   Hazelhurst  Long-term      73      Leased        93%
  Care Center                    Care

 Charlton Health     Folkston    Long-term      92      Leased        85%
  Care Center                    Care

 Hartley Woods       Macon       Long-term     147      Leased        92%
  Health & Rehab                 Care                   (RG)
  Center

 The Renaissance -   Warner      Assisted/     132      Owned      Under
  Warner Robbins     Robbins     Independent                    Construction
                                 Living                           

   Total for Georgia                         4,037 (42 facilities)*
---------------
* Excludes facilities under construction.


FLORIDA

 Renaissance of      Sebring     Assisted/     170      Owned         89%
  Sebring                        Independent
                                 Living
</TABLE>




                                      -20-
<PAGE>   21

<TABLE>
<S>                  <C>         <C>           <C>      <C>           <C>
 The Garden at       Green Cove  Assisted/      28      Leased        39%
  Magnolia Manor     Springs     Independent            (RG)
                                 Living

 Magnolia Manor      Green Cove  Long-term      60      Leased        92%
  Nursing Center     Springs     Care                   (RG)

 Lake Forrest        Jackson-    Long-term      60      Leased        98%
  Health Care        ville       Care                   (WHH)
  Center

 Summer's Landing-   Lynn Haven  Assisted/      51      Managed       73%
  Lynn Haven                     Independent            (NAB)
                                 Living

 The Renaissance     Titusville  Assisted/     101      Leased        96%
                                 Independent            (WHH)
                                 Living

 Renaissance of      Sanford     Assisted/      94      Managed       86%
  Sanford                        Independent            (WHH)
                                 Living

 The Atrium          Jackson-    Assisted/     178      Managed       95%
                     ville       Independent            and 75%
                                 Care                   Owned

 The Atrium          Jackson-    Long-term      84      Managed       71%
  Nursing Home       ville       Care                   and 75%
                                                        Owned

 The Preserve        Pompano     Assisted/     297      Managed       99%
                     Beach       Independent
                                 Living

 The Renaissance     Destin      Assisted/     116      Owned         97%
   of Sandestin                  Independent
                                 Living

 The Edwinola        Dade City   Assisted/     214      Owned         76%
                                 Independent
                                 Living

 Westwood            Fort Walton Assisted/     208      Owned         93%
  Retirement                     Independent
                                 Living

 Southside Health    Jackson-    Long-term     120      Leased        64%
  Care Center        ville       Care

 The Renaissance     Lakeland    Assisted/     104      Owned         77%
  of Lakeland                    Independent
                                 Living
</TABLE>


                                      -21-
<PAGE>   22

<TABLE>
<S>                  <C>         <C>           <C>      <C>           <C>
 Bayou Villa         Pensacola   Assisted/     106      Leased        50%
                                 Independent
                                 Living

 Westwood Nursing    Fort Walton Long-term      60      Owned         97%
  Center                         Care

 Summer's Landing-   Jackson-    Assisted/      39      Managed       87%
  Atrium             ville       Independent            and 75%
                                 Living                 Owned

 Summer's Landing-   Titusville  Assisted/      28      Leased       Under
  of Titusville                  Independent            (WHH)        Con-
                                 Living                              struc-
                                                                     tion

 Orlando Health      Orlando     Long-term     132      Leased        92%
  Care Center                    Care

 Gainesville Health  Gainesville Long-term     180      Leased        82%
  & Rehab Center                 Care

 Coventry Square     Ocala       Long-term     132      Leased        89%
  Health & Rehab                 Care
  Center

 St. Cloud Health    St. Cloud   Long-term     131      Leased        86%
  Care Center                    Care

 North Jacksonville  Jackson-    Long-term      60      Leased       Under
  Rehab and Nursing  ville       Care                                Con-
  Center                                                             struc-
                                                                     tion

   Total for Florida                         2,753 (24 facilities)*
---------------
*Excludes facilities under construction.


TENNESSEE

 Marshall C. Voss   Harriman     Long-term     139      Managed       89%
  Health Care                    Care                   (NAB)

 Trenton Health     Trenton      Long-term      58      Leased        95%
  Care Center                    Care                   (RG)

 Summer's Landing-  Trenton      Assisted/      22      Leased       100%
  Trenton                        Independent            (RG)
                                 Living

 Jackson Oaks       Jackson      Assisted/     178      Owned         97%
  Retirement                     Independent
                                 Living
</TABLE>



                                      -22-
<PAGE>   23
<TABLE>
<S>                 <C>          <C>           <C>      <C>           <C>

 Cumberland Green   Henderson-   Assisted/     140      Owned         90%
  Retirement        ville        Independent
                                 Living

 Winchester Health  Winchester   Long-term      80      Leased       100%
  Care                           Care


 Health Care        Ardmore      Long-term      79      Leased        99%
  Center of                      Care
  Ardmore

 Fayetteville       Fayetteville Long-term      79      Leased        98%
  Health Care                    Care
  Center

 River Park Health  Nashville    Long-term      78      Leased        90%
  Care Center                    Care

 Palmyra Inter-     Palmyra      Long-term      75      Leased        97%
  mediate Care                   Care
  Center

 Milan Health       Milan        Long-term      66      Leased        83%
  Care Center                    Care

 Pleasant View      Bolivar      Long-term      67      Leased       100%
  Health Care                    Care
  Center

 Lauderdale         Ripley       Long-term      71      Owned         87%
  Healthcare                     Care

 Oak Manor Health   McKenzie     Long-term      66      Leased        99%
   Care Center                   Care

 Parkway Health     Memphis      Long-term     100      Managed       96%
  and Rehab                      Care                   (CHCS)

 Hillview Nursing   Dresden      Long-term      70      Owned        100%
  Home                           Care

 Crestwood Nursing  Manchester   Long-term      59      Owned        100%
  Home                           Care

 Reelfoot Manor     Tiptonville  Long-term     120      Leased        85%
                                 Care

 Maplewood Health   Jackson      Long-term     172      Leased        87%
  Care Center                    Care                   (RG)

 Laurelwood Health  Laurelwood   Long-term      74      Leased        85%
  Care Center                    Care                   (RG)

   Total for Tennessee                       1,793 (20 facilities)
</TABLE>



                                      -23-
<PAGE>   24


<TABLE>
<S>                 <C>          <C>           <C>      <C>           <C>
ALABAMA

 Gardendale         Gardendale   Long-term     148      Leased        98%
  Health Care                    Care
  Center

 Summer's Landing-  Gardendale   Assisted/      26      Leased       100%
  Gardendale                     Independent
                                 Living

 Summer's Landing-  Hanceville   Assisted/      46      Leased        70%
  Hanceville                     Independent
                                 Living

 Sea Breeze         Mobile       Long-term     140      Managed       99%
  Health Care                    Care                   (WHH)
  Center

 The Renaissance    Decatur      Assisted/     120      Leased        99%
  of Decatur                     Independent
                                 Living

   Total for Alabama                           480 (5 facilities)


NORTH CAROLINA

 Wilkinson Health   Gastonia     Long-term      50      Leased        98%
  Care Center                    Care


 Len-Care           Fayetteville Assisted/     152      Leased        92%
  Rest Home                      Independent
                                 Living

 East Carolina      Greenville   Long-term     150      Leased        85%
  Care                           Care

 Len-Care Nursing   Elizabeth-   Long-term     120      Leased        98%
  and Convalescent  town         Care
  Center

 Carolina           Greenville   Assisted/     120      Leased        71%
  Care                           Independent
                                 Living

 Maplewood Nursing  Reidsville   Long-term     110      Leased        97%
  Center                         Care

 Willow Springs     Carboro      Assisted/     108      Leased        73%
  Health Care                    Independent
  Center                         Living

 Fayetteville       Fayetteville Long-term     100      Leased        55%
  Health Care                    Care
  Center

 Pemberton Place    Pembrooke    Long-term      84      Leased        98%
  Nursing Center                 Care
</TABLE>

                                      -24-
<PAGE>   25

<TABLE>
<S>                  <C>         <C>           <C>      <C>           <C>
 Brookshire Health  Brookshire   Long-term      80      Leased        96%
  Care Center

   Total for North                           1,074 (10 facilities)
    Carolina


VIRGINIA

 West Hampton       Richmond     Long-term     195      Owned         83%
  Health and Rehab               Care
  Center

 New River Health-  Dublin       Long-term     132      Leased        74%
  care Center                    Care

 Tappahannock       Tappahannock Long-term     118      Owned         78%
  Health and Rehab               Care
  Center

 Summer's Landing-  Tappahannock Assisted/      42      Owned         97%
  Tappahannock                   Independent
                                 Living

 Brentlox Health &  Chesapeake   Long-term     120      Owned         98%
  Rehab Center                   Care

 Lynn Shores Manor  Virginia     Long-term     242      Leased        83%
                                 Care

   Total for Virginia                          849 (6 facilities)


OHIO

 Hamlet             Chagrin      Assisted/     222      Owned         87%
  Retirement        Falls        Independent
                                 Care

 Hamlet Nursing     Chagrin      Long-term      88      Owned         85%
  Manor             Falls        Care

    Total for Ohio                             310 (2 facilities)


ARIZONA

 The Carillons      Sun City     Assisted/      76      Owned         90%
                                 Independent
                                 Care
   Total for Arizona                            76 (1 facility)
</TABLE>


ITEM 3.  LEGAL PROCEEDINGS.

         As of October 7, 1997 the Company and certain of its officers and
directors have been named as defendants in nine putative class action lawsuits
which were commenced during the period from August 25, 1997 through October 2,
1997. In 




                                      -25-
<PAGE>   26

these actions the plaintiffs allege that the Company and the individual
defendants disseminated materially false and misleading information and failed
to disclose material information concerning the Company's operating condition
and future business prospects. Generally each of the complaints seeks
unspecified compensatory damages, pre-judgment and post-judgment interest,
reasonable attorneys' fees, expert witness fees and other costs, equitable and
injunctive relief. Following is a list of these class actions:

         1.       Solomon Jacob on behalf of himself and all others similarly
                  situated, Plaintiff v. Retirement Care Associates, Inc., Chris
                  Brogdon, Darrell C. Tucker and Edward E. Lane, Defendants.
                  This complaint was filed on August 29, 1997 in the United
                  States District Court, Northern District Court of Georgia,
                  Atlanta Division, Civil Action No. 1:97-CV-2529.

         2.       Joseph Goldstein, on behalf of himself and all others
                  similarly situated, Plaintiff v. Retirement Care Associates,
                  Inc., Chris Brogdon and Darrell C. Tucker, Defendants. This
                  class action complaint was filed on September 28, 1997 in the
                  United States District Court, Northern District Court of
                  Georgia, Atlanta Division, Civil Action No. 1:97-CV-2503.

         3.       Southland Securities, Inc. on behalf of himself and all others
                  similarly situated, Plaintiff v. Retirement Care Associates,
                  Inc., Chris Brogdon, Darrell C. Tucker and Edward E. Lane,
                  Defendants. This class action complaint was filed on August
                  27, 1997 in the United States District Court, Northern
                  District Court of Georgia, Atlanta Division, Civil Action No.
                  1:97-CV-2494-MHS.

         4.       Pankai Shah, on behalf of himself and all others similarly
                  situated, Plaintiff v. Retirement Care Associates, Inc., Chris
                  Brogdon, Darrell C. Tucker, Julian S. Daley and Harlan
                  Mathews, Defendants. This class action complaint was filed on
                  September 10, 1997 in the United States District Court,
                  Central District of California, Case Number CV-97-6768-GHK
                  (JGx).

         5.       Israel Shurkin, on behalf of himself and all others similarly
                  situated, Plaintiff v. Retirement Care Associates, Inc., Chris
                  Brogdon, Darrell C. Tucker, Julian S. Daley and Harlan
                  Mathews, Defendants. This class action complaint was filed on
                  August 25, 1997 in the United States District Court, Northern
                  District Court of Georgia, Civil Action No. 1:97-CV-2558.

         6.       Michael Gerber, on behalf of himself and all others similarly
                  situated, Plaintiff v. Retirement Care Associates, Inc., Chris
                  Brogdon and Darrell C. Tucker, Defendants. This class action
                  complaint was filed on September 12, 1997 in the United States
                  District Court, Northern District Court of Georgia, Atlanta
                  Division, Civil Action No. 1:97-CV-2680.

         7.       David Applestein, on behalf of himself and all others
                  similarly situated, Plaintiff v. Retirement Care Associates,
                  Inc., Chris Brogdon and Darrell C. Tucker, Defendants. This
                  class action complaint was filed on September 22, 1997 in the
                  United States District Court, Northern District Court of
                  Georgia, Atlanta Division, Civil Action No. 1:97-CV-2850.

         8.       Jean Poulsen, on behalf of himself and all others similarly



                                      -26-
<PAGE>   27

                  situated, Plaintiff v. Retirement Care Associates, Inc., Chris
                  Brogdon and Darrell C. Tucker, Defendants. This class action
                  complaint was filed on October 2, 1997 in the United States
                  District Court, Northern District Court of Georgia, Atlanta
                  Division, Civil Action No. 1:97-CV-3009.

         9.       Tim Semple, on behalf of himself and all others similarly
                  situated, Plaintiff v. Retirement Care Associates, Inc., Chris
                  Brogdon and Darrell C. Tucker, Defendants. This class action
                  complaint was filed on October 1, 1997 in the United States
                  District Court, Northern District Court of Georgia, Atlanta
                  Division, Civil Action No. 1:97-CV-2998.

         The Company intends to defend the above actions vigorously. The Company
cannot predict the financial impact of the costs of defending these actions, or
their settlement, with any certainty, but believes that the costs to the Company
could have a material adverse effect on the Company and its operations.

         On April 30, 1997 a complaint was filed by Theratx, Inc. against the
Company, Darrell C. Tucker, Capitol Care Management Company, Inc. et. al. in the
Superior Court of Fulton County, Georgia (Civil Action File No. E-59089). The
complaint seeks approximately $1,600,000 in damages plus interest of
approximately $239,000 and costs and fees of approximately $24,500 in connection
with past due accounts for therapy services and rehabilitation services. The
Company is attempting to settle this matter and has submitted a settlement offer
to Theratx. The amount at issue is attributable to seven (7) facilities, six (6)
of which are operated by the Company and one (1) of which is operated by Chamber
Health Care Society, Inc. The amount claimed relating to the six facilities
operated by the Company is less than $500,000.

         On July 1, 1997 a complaint was filed by CMS Therapies, Inc. against
the Company in the Superior Court of Mecklenburg County, North Carolina (Civil
Action File No. 97-CVS-8434). The complaint seeks approximately $1,277,000 plus
interest and fees in connection with therapy services agreements.

         On July 1, 1997, a complaint was filed by CMS Therapies, Inc. against
the Company's subsidiary, Capitol Care Management Company, Inc. in the Superior
Court of Mecklenburg County, North Carolina (Civil Action File No. 97-CVS-8435).
The complaint seeks $597,553.80 in damages plus interest and fees in connection
with the alleged breach of a settlement agreement relating to the payment for
therapy services.

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

    Not applicable.



                                      -27-
<PAGE>   28

                                    PART II

ITEM 5.  MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

         (a)  MARKET INFORMATION.  Since December 18, 1995, the Company's
Common Stock has been listed on the New York Stock Exchange under the symbol
"RCA".  The Company's Common Stock was previously traded in the
over-the-counter market, and from  April 7, 1994 through December 15, 1995, it
was quoted on the NASDAQ National Market System.  Prior to April 7, 1994,
quotations were carried on the NASD's OTC Bulletin Board.

         The following table sets forth the high and low sale prices for the
Company's Common Stock as reported on the NASDAQ National Market System through
December 15, 1995, and on the New York Stock Exchange after that date, for the
periods indicated:

<TABLE>
<CAPTION>
     QUARTER ENDED                           HIGH*         LOW*
     <S>                                     <C>           <C>
     September 30, 1995                      $16.65        $10.12
     December 31, 1995                       $12.74        $ 8.15
     March 31, 1996                          $11.31        $ 9.46
     June 30, 1996                           $13.25        $10.00

     September 30, 1996                      $11.125       $ 7.00
     December 31, 1996                       $10.00        $ 5.25
     March 31, 1997                          $10.375       $ 7.625
     June 30, 1997                           $12.375       $ 8.125
</TABLE>

----------------------

  *  As adjusted to give retroactive effect to a 5% stock dividend that was
effected on May 1, 1996.

         (b)  APPROXIMATE NUMBER OF HOLDERS OF COMMON STOCK.  The number of
record holders of the Company's Common Stock at October 3, 1997, was 320, and
the number of beneficial holders is estimated to be approximately 4,500.

         (c)  DIVIDENDS.  The Company has paid no cash dividends on its Common
Stock and has no present intention of paying cash dividends in the foreseeable
future.  In February 1994, the Company declared a 5% stock dividend on its
outstanding Common Stock, in January 1995, the Company declared an additional
5% stock dividend on its outstanding Common Stock, and in April 1996, the
Company declared an additional 5% stock dividend on its outstanding Common
Stock.  It is the present policy of the Board of Directors to retain all
earnings to provide for the growth of the Company.  Payment of cash dividends
in the future  will depend, among other things, upon the Company's future
earnings, requirements for capital improvements and financial condition.  The
Company does, however, intend to consider additional stock dividends in the
future.  The Company's ability to pay any cash dividends on the Company's
Common Stock in the future will be limited by the dividend and redemption
requirements of the Company's Series AA Convertible Preferred Stock.

ITEM 6.  SELECTED FINANCIAL DATA.

         The following selected financial information for the fiscal years ended
June 30, 1996 and 1997, is derived from financial statements of the Company
audited by Cherry, Bekaert & Holland, L.L.P., independent certified public
accountants.  The selected financial information for the fiscal years ended June
30, 1995, 1994 and 1993, is derived from financial statements of the Company
audited by BDO Seidman, LLP, independent certified public accountants.  As
described more fully in the Company's financial statements, financial
information prior to the date of the Company's merger with Capitol Care
Management Company, Inc.


                                    -28-
<PAGE>   29

reflects the financial information of Capitol Care Management Company, Inc.

BALANCE SHEET DATA (in thousands):

<TABLE>
<CAPTION>
                                            AT JUNE 30,
                  1997(1)(2)    1996(1)(2)  1995(1)(2)  1994(1)(2)   1993(1)
<S>               <C>           <C>         <C>         <C>          <C>
Current Assets     $ 64,911     $ 29,479     $25,783      $12,450    $1,404
Total Assets        255,371      177,492      80,258       31,230     2,453
Current Liabili-
 ties                75,401       30,975      22,857        9,329     1,677
Working Capital
 (Deficit)          (10,490)      (1,496)      2,925        3,121      (273)
Long-Term Debt      141,674      108,481      32,426        8,200       -0-
Redeemable Pre-
 ferred Stock         1,800        2,400       3,000          -0-       -0-
Shareholders'
 Equity              30,695       30,866      19,733       13,400       776
</TABLE>

---------------------

(1) Effective November 30, 1992, the Company acquired the stock of CCMC in a
reverse acquisition in which CCMC's stockholders acquired voting control of the
Company.  The transaction was accounted for as a purchase with CCMC as the
acquiring company because CCMC's stockholders acquired a majority of the voting
rights in the combined company.  Accordingly, the results of operations prior
to November 30, 1992, are those of CCMC.  See Note 2 to the Company's financial
statements.

(2) On May 1, 1993, the Company entered into operating lease agreements for
seven licensed nursing homes and one personal care facility.  Prior to May 1,
1993, the Company and its predecessor, Capitol Care Management Company, Inc.,
were engaged exclusively in the management of retirement facilities and nursing
homes.  Subsequent to May 1, 1993, the Company, through the operating leases on
such facilities, began to operate facilities resulting in the recognition of
$2,399,906 of patient service revenues and $222,610 of other revenues for the
year ended June 30, 1993.  During the year ended June 30, 1993, such facilities
incurred $2,037,694 of operating expenses resulting in an operating margin of
$584,822.  During the year ended June 30, 1994, the Company continued its
expansion into the operation of facilities, with the acquisition of two
retirement facilities and two nursing home facilities accounted for using the
purchase method of accounting and new operating lease commitments for eleven
nursing homes and one retirement facility.  The addition of these 16 facilities
either through direct acquisition or operating leases increased patient service
revenues by $16,520,401, total revenues by $136,124 and operating expenses by
$12,774,764.  During the year ended June 30, 1995, the Company purchased three
nursing homes and two retirement facilities and leased seven more nursing
homes.  During the fiscal year ended June 30, 1996, the Company purchased seven
nursing homes and four retirement facilities and leased eight nursing homes and
three retirement facilities.  During the fiscal year ended June 30, 1997, the
Company purchased three retirement homes and leased 21 nursing homes and 14
retirement homes.



                                    -29-
<PAGE>   30
STATEMENT OF INCOME DATA (in thousands, except per share data):

<TABLE>
<CAPTION>
                                FOR THE YEARS ENDED JUNE 30,
                       1997       1996      1995       1994       1993 
                     -------    -------    -------    -------    ------
<S>                  <C>        <C>        <C>        <C>        <C>
Revenues             $253,228   $134,011   $79,616    $37,971    $4,554
Operating Expenses    249,527    124,631    70,599     32,994     3,615
Net Income (Loss)      (7,536)      (520)    5,059      2,918       574
Net Income (Loss)
 Per Common and
 Common Equivalent
 Share(1)            $   (.71)  $   (.05)  $   .38    $   .30    $  .11

Weighted Average
 Shares(1)             13,710     11,325    12,617      9,840     5,010

Cash Dividends Per
 Common Share        $    -0-   $    -0-   $   -0-    $   -0-    $  -0-
-----------------                                                      
</TABLE>

The Company has retroactively restated net income per share and weighted
average shares outstanding for the effect of stock dividends, stock splits and
reverse stock splits.  See "Notes to Financial Statements."

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

YEAR ENDED JUNE 30, 1997 COMPARED TO YEAR ENDED JUNE 30, 1996

         The Company's total revenues for the year ended June 30, 1997 were
$253,227,861 compared to $134,011,369 for the year ended June 30, 1996.

         Management fee revenue decreased from $3,781,433 in the year ended
June 30, 1996, to $2,629,329 in the year ended June 30, 1997.  The Company
purchased or leased nine facilities in the year ended June 30, 1997, that it
managed in the year ended June 30, 1996.  Included in the Company's management
fee revenue is $2,212,500 and $3,472,900 from affiliates during the year ended
June 30, 1997 and 1996, respectively.

         Due to the increased number of facilities owned or leased by the
Company, patient service revenue increased from $119,499,849 for the year ended
June 30, 1996 to $202,603,841 for the year ended June 30, 1997.  The cost of
patient services in the amount of $148,520,849 for the year ended June 30,
1997, represent 73% of patient service revenue, as compared to $81,082,972 or
68%, of patient service revenue during the year ended June 30, 1996.  The
increase in the percentage is attributed to an increase in the number of
nursing facilities to retirement facilities operated during the current year.
Nursing facilities require more skilled patient services than retirement homes.

         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 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





                                    -30-
<PAGE>   31

Company does not have to support the ongoing operating cash flow of the
facility.

         The Company owned or leased 35 additional facilities during fiscal
year ended June 30, 1997 compared to fiscal year ended June 30, 1996, which
resulted in a corresponding increase in net revenues of $36 million during the
fiscal year ended June 30, 1997.  The number of leased or owned properties at
year end are presented in the following table (which does not include managed
facilities):

<TABLE>
<CAPTION>
            Type                       Fiscal 1995          Fiscal 1996   Fiscal 1997
         <S>                           <C>                  <C>           <C>
         Nursing                           30                   48            69
         Retirement                         8                   18            32
                 Total                     38                   66           101
</TABLE>

         For facilities that were in place for the entire year ended June 30,
1996 and June 30, 1997, revenue increased approximately $1 million, or 2%,
during the year ended June 30, 1997.  For these same facilities, average rates
increased approximately 4% while patient-days decreased approximately 2%.

         During the year ended June 30, 1997, the Company had revenue from
medical supply sales of $45,500,712, an approximately $35 million increase
compared to fiscal year ended June 30, 1996.  The Company had cost of goods
sold of $31,832,734 for the fiscal year ended June 30, 1997 as compared to
$5,773,934 for the fiscal year ended June 30, 1996.  The increase in sales
reflects the acquisition of AmeriDyne Corporation on April 1, 1996 and Atlantic
Medical, Inc. on July 1, 1996 by Contour Medical, Inc.

         Lease expense increased from $8,442,671 in the year ended June 30,
1996, to $14,117,392 in the year ended June 30, 1997.  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, 1996.

         General and administrative expenses for the year ended June 30, 1997
were $46,346,051, representing 18% of total revenues, as compared to
$23,192,250 representing 17% of total revenues, for the year ended June 30,
1996.

         During the year ended June 30, 1997, the Company recorded a $2,982,063
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, 1997, the aging of
receivables increased compared with the aging of receivables at June 30, 1996.

         During the year ended June 30, 1997, the Company had $673,655 in
interest income and financing fees as compared to $1,847,868 in interest income
and financing fees for the year ended June 30, 1996.  The decrease in interest
income is a result of the decreased amount of advances to related parties
during the current year.

         Interest expense increased from $7,948,091 in the year ended June 30,
1996 to $14,111,843 in the year ended June 30, 1997.  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, 1996.

         For the year ended June 30, 1997, the Company incurred benefits for
income taxes of $2,343,256 which represents an effective tax benefit rate of
25% as compared to expenses for income taxes of $1,307,091, which represents an
effective tax rate of 48% for the year ended June 30, 1996.

         The net loss of $7,535,810 for the year ended June 30, 1997 is lower
than the net income of $1,746,808 for the year ended June 30, 1996, due to the
fact that the Company's operations have deteriorated due to the delay in the





                                     -31-
<PAGE>   32

consummation of the merger transaction with Sun Healthcare Group, Inc. Turnover
of the Company's personnel, such as nursing home administrators, regional
administrators, as well as all staff functions within the Company's nursing
homes and the assisted living facilities has been higher than normal because of
the uncertainty of the Company's future.

         Occupancy rates have also impacted the Company's profitability this
fiscal year versus fiscal year 1996.  Occupancy rates have declined because of
the turnover of administrators, social workers, and nurses.  With both the
expansion of the number of facilities the Company operated during fiscal year
1997 and the higher than normal staff turnover, the Company's existing
management staff was spread very thin.

         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, continue in the future.  These fees represent .87%
and 2.82% of the total revenues of the Company for the years ended June 30,
1997 and 1996, respectively.

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 $81,082,972 for the year ended June 30, 1996,
represents 68% 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.





                                     -32-
<PAGE>   33


         The Company converted four managed properties to leased properties
during the fiscal year ended June 30, 1996, which resulted in an increase in
net revenues of $1 million during the fiscal year ended June 30, 1996 compared
to the fiscal year ended June 30, 1995.  The number of leased or owned
properties at year-end are presented in the table below (the table does not
included managed facilities):

<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 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.  Because the Company acquired Contour
on September 30, 1994, only nine months of activity were recorded for fiscal
year ended June 30, 1995.  Sales for those nine months of $3,617,439 have been
annualized and recorded for the year ended June 30, 1995 and comprise $1.2
million of the $6.2 million increase in medical supplies revenue for the fiscal
year ended June 30, 1995.  Sales for the nine month period following the
Contour acquisition have been annualized so as not to distort the net increase
in revenues from the fiscal year ended June 30, 1995 to the fiscal year ended
June 30, 1996.  Moreover, Contour acquired AmeriDyne on March 1, 1996, which
contributed $3.6 million of revenue for the fiscal year ended June 30, 1996
(see Contour 6/30/96 10-K, page 16).  While AmeriDyne contributed $3.6 million
of revenue for the fiscal year ended June 30, 1996 (as set forth correctly in
Contour's 6/30/96 10-K), Contour's $4.7 million in sales should not have been
labeled intercompany because this amount was not attributable to sales to RCA.
The remaining $1.4 million increase in sales increase is attributable to the
internal growth of the business.  The change in costs of goods sold as a
percentage of sales during fiscal year ended June 30, 1996 versus fiscal year
ended June 30, 1995 is not meaningful because the method of recording
intercompany elimination changed during the fiscal year ended June 30, 1996.
During the fiscal year ended June 30, 1995, intercompany sales of $4,995,346
were recorded as an elimination of medical supply revenue and an elimination of
routine and ancillary costs.  During the fiscal year ended June 30, 1996,
intercompany sales of $4,717,169 was recorded as an elimination of medical
supply revenue and an elimination of medical supply costs of goods sold.  If
fiscal year ended June 30, 1996 is treated identically to fiscal year ended
June 30, 1995, the costs of goods sold margin would be 107% of sales as
compared to 87% of sales during fiscal year ended June 30, 1995.  The increase
in costs of goods sold margin is primarily attributable to the fact that sales
to RCA comprised 32% of Contour's sales during fiscal year ended June 30, 1996
(representing costs without associated revenues), while sales to RCA comprised
only 22% of Contour's sales during fiscal year ended June 30, 1995.  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 $8,442,671 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.  There were ten new facilities leased during the
fiscal year ended June 30, 1996.





                                     -33-
<PAGE>   34

         General and administrative expenses for the year ended June 30, 1996,
were $23,192,250, representing 17% 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 $3,423,117
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.  The Company's consideration of several factors
related to the current accounts receivable balance for fiscal year 1996
resulted in the Company recording a $2.7 million bad debt reserve.  The Company
considered the overall increase in patient account balances (approximately 80%)
resulting from the Company's acquisitions during fiscal year 1996, the
deterioration in the aging categories due to untimely collection practices by
individual facilities which in several cases resulted in the expiration of
allowable time periods to bill accounts, the significant rise in accounts
receivable net days, the growth in self-pay balances and the lack of timely
write-off of uncollectible accounts throughout the fiscal year.

         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 $1,307,091, which represents an effective tax rate of 48%, 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-deductible tax penalty of
approximately $400,000 which was assessed during the year ended June 30, 1996.

         The net income of $1,746,808 for the year ended June 30, 1996, is less
than the net income of $5,058,503 for the year ended June 30, 1995, due to the
provision of an additional allowance for bad debts and increased interest
expense because of the larger number of facilities acquired 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, 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.





                                     -34-
<PAGE>   35

LIQUIDITY AND CAPITAL RESOURCES

         At June 30, 1997, the Company had a deficit of $10,489,285 in working
capital compared to a $1,280,270 deficit at June 30, 1996.

         During the year ended June 30, 1997, cash provided by or used in
operating activities was ($3,532,919) as compared to $5,279,626 for the year
ended June 30, 1996.  The $8,812,545 decrease was primarily due to the
increases in deferred income taxes of $11,111,558, and increases in accounts
receivable of $20,200,604.  Cash provided by operating activities was primarily
attributed to an increase in accounts payable and accrued expenses of
$29,187,587.

         Cash used in investing activities during the year ended June 30, 1997,
was $23,886,904.  The expenditures primarily related to acquisitions to
purchases of property and equipment of $12,734,389, and acquisitions of
facilities of $19,113,658.

         Cash provided by financing activities during the year ended June 30,
1997, totaled $31,012,336.  Sources of cash included  proceeds from the
issuance of preferred stock of $9,340,000, proceeds from stock options and
warrants exercised of $1,900,306, and proceeds from long-term debt and lines of
credit of $33,919,190.  Cash used in financing activities primarily consisted
of $13,329,520 in payments of long-term debt, $600,000 in redemption of
preferred stock, $841,318 in purchases of treasury stock, and $240,000 for
dividends on preferred stock.

         At June 30, 1996, the Company had $(1,496,160) in working capital
compared to $2,925,302 at June 30, 1995.

         During the year ended June 30, 1996, cash provided by operating
activities was $5,279,626 as compared to $4,208,048 for the year ended June 30,
1995.  The $1,071,578 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 and amortization from 1,128,183 for the year
ended June 30, 1995 to $3,406,986 for the year ended June 30, 1996.

         Cash used in investing activities during the year ended June 30, 1996,
was $44,711,326.  The expenditures primarily related to acquisitions to
purchases of property and equipment of $12,490,298, and advances to affiliates
and non-affiliates of $8,935,686 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 $34,769,880.  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 $559,595, 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
purchases of treasury stock, and $270,000 for dividends on preferred stock.

      During the year ended June 30, 1995, cash provided by operating activities





                                     -35-
<PAGE>   36

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.

         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, 1997, the
Company had approximately $4,115,000 in unused credit available under such
lines.

         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.





                                     -36-
<PAGE>   37


         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
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' Reports appear at pages F-1 and F-2, and the
Financial Statements and Notes to Financial Statements appear at pages F-3
through F-28 hereof.

         Effective July 1, 1996, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of" and SFAS No. 123
"Accounting for Stock Based Compensation."  These pronouncements had no effect
on the Company's financial position or operations for the year ended June 30,
1997.

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

        In August 1997, the accounting firm of Coopers & Lybrand, L.L.P.
resigned as the Company's independent accountants and notified the Company that
its report on its audit of the Company's financial statements for the fiscal
year ended June 30, 1996 should no longer be relied upon.





                                     -37-
<PAGE>   38

         The Company engaged the accounting firm of Cherry, Bekaert & Holland,
L.L.P. to reaudit the Company's financial statements for the fiscal year ended
June 30, 1996 and audit the Company's financial statements for the fiscal year
ended June 30, 1997.

         These changes in the Company's independent accountants were previously
reported in the Company's Current Report on Form 8-K dated August 14, 1997 (as
amended by an amendment to such Current Report on Form 8-K/A filed with the
Commission on September 9, 1997).






                                     -38-
<PAGE>   39


                                    PART III

ITEM 10.  DIRECTORS AND OFFICERS OF THE REGISTRANT.

         The Directors and Executive Officers of the Company are as follows:

<TABLE>
<CAPTION>
      NAME            AGE             POSITION AND OFFICES HELD
-----------------     ---        -------------------------------------------
<S>                   <C>        <C> 
Chris Brogdon         48         President and a Director since October 1991

Edward E. Lane        61         Secretary and a Director since October 1991

Darrell C. Tucker     39         Treasurer since November 1993, and a
                                 Director since November 1991

Julian S. Daley       70         Director since November 1993

Harlan Mathews        70         Director since July 1996
</TABLE>

         There is no family relationship between any Director or Executive
Officer of the Company.

         The Company has no Nominating Committee, but does have a Compensation
Committee and an Audit Committee.

         The Compensation Committee consists of Edward E. Lane, Julian S. Daley
and Harlan Mathews.  The Compensation Committee reviews the compensation
arrangements for each of the Company's Executive Officers and makes
recommendations to the Board of Directors.

         The Audit Committee consists of Julian S. Daley and Harlan Mathews.  
The Audit Committee reviews audit plans, reports on material changes in 
accounting principles and audit reports.

         Set forth below are the names of all Directors and Executive Officers
of the Company, all positions and offices with the Company held by each such
person, the period during which he has served as such, and the principal
occupations and employment of such persons during at least the last five years:

         CHRIS BROGDON - PRESIDENT AND A DIRECTOR.  Mr. Brogdon has served as
President and a Director of the Company since October 1991.  He also served as
Treasurer of the Company from October 1991, to November 1993.  He served as
Secretary of Capitol Care from October 1990, until it was merged into the
Company in November 1992, and now serves in these same capacities with Capitol
Care.  Mr. Brogdon has been involved in financing and operating nursing homes
and retirement communities since 1982.  From 1969 until 1982, Mr. Brogdon was
employed in the securities business as a retail salesman.  Mr. Brogdon
attended Georgia State University in Atlanta, Georgia.  Since March 1987, Mr.
Brogdon has been Secretary/Treasurer of Winter Haven Homes, Inc. ("WHH") and
since August 1990, he has been Secretary/Treasurer of National Assistance
Bureau, Inc. ("NAB"). Both WHH and NAB are engaged in the business of owning and
operating nursing homes and retirement communities. These two companies either
own or operate pursuant to long-term leases with options to purchase, or are the
sole or managing general partner of limited partnerships that own or lease, a
total of five properties. Mr. Brogdon also serves as a Director and Chairman of
the Board of Contour Medical, Inc., a publicly-held company, of which the
Company is a majority shareholder. He is also a Director of In-House Rehab
Corporation, a publicly-held company of which the Company is a minority
shareholder which 



                                     -39-
<PAGE>   40

provides physical, speech and occupational therapy services to nursing home and
other long-term care providers. Mr. Brogdon is also a Director and Chairman of
the Board of NewCare Health Corporation, a publicly-held company which provides
senior residential care services, primarily as an operator of long-term care
facilities.

         EDWARD E. LANE - SECRETARY AND A DIRECTOR. Mr. Lane has served as
Secretary and a Director of the Company since October 1991. Mr. Lane attended
the University of Iowa from 1954 to 1958. From 1961 until 1968, he was self-
employed as Gene Lane & Associates where he was engaged in industrial financing
with municipal tax exempt bonds. From 1968 until 1971, he was employed by the
investment banking firm of Johnson, Lane, Space, Smith & Co. in Atlanta,
Georgia. From 1972 until 1984, he was self-employed as Gene Lane & Associates
where he was involved with private investment banking principally in the areas
of municipal and industrial finance. In 1984, he was involved in the creation of
the full service investment banking firm of Lane, McNally & Jackson where he was
a principal until the firm was sold and merged into Bay City Securities, Inc. in
1987. In 1988, Mr. Lane co-founded Winter Haven Homes, Inc. to acquire defaulted
retirement centers and nursing homes. Mr. Lane also serves as President and a
Director of Gordon Jensen Health Care Association, Inc., a nonprofit corporation
that owns eight nursing homes and personal care facilities and National
Assistance Bureau, Inc., a nonprofit corporation that owns two health care
facilities. Mr. Lane is also a Director of Contour Medical, Inc., a
publicly-held company, of which the Company is a majority shareholder.

         DARRELL C. TUCKER - TREASURER AND A DIRECTOR. Mr. Tucker has been a
Director of the Company since November 1991, and Treasurer since November 1993.
Mr. Tucker has also served as President of the Company's Capitol Care subsidiary
since November 1992. He also served as President of Capitol Care from October
1990, until it was merged into the Company in November 1992. From July 1990 to
October 1990, he was a consultant to Winter Haven Homes, Inc., an affiliate of
the Company. From September 1988, to July 1990, he was a risk manager for Pruitt
Corporation where he was involved in insurance management for 30 long-term
health care facilities. From April 1987 to August 1988, he was Chief Financial
Officer for Allgood Health Care, Inc. which managed 12 nursing home facilities.
Mr. Tucker received a Bachelors Degree in Accounting from the University of
Georgia in 1980. Mr. Tucker is also a Director of Contour Medical, Inc., a
publicly-held company, of which the Company is a majority shareholder.

         JULIAN S. DALEY - DIRECTOR. Mr. Daley has been a Director of the
Company since November 1993. Since 1975, he has been a real estate broker and
developer in Atlanta, Georgia. From 1969 to 1975, he was engaged in financial
analysis of companies in the Southeastern United States for Reynolds Securities,
Inc. (1969 to 1974) and Fundamental Service Corporation (1974 to 1975). From
1950 to 1969, he was a senior financial analyst with Courts & Co. in Atlanta,
Georgia. Mr. Daley received a B.B.A. Degree from the University of Georgia in
1950.

         HARLAN MATHEWS - DIRECTOR.  Mr. Mathews has been a Director of the
Company since July 1996.  Since 1994 he has been a partner in the law firm of
Farris, Mathews, Gilman, Branan & Hellen, P.L.C., in Nashville, Tennessee.
From 1993 to 1994, he served as a United States Senator from the State of
Tennessee.  From 1987 to 1993, he was Deputy to the Governor of Tennessee and
Cabinet Secretary.  From 1974 to 1987, Mr. Mathews was Treasurer of the State
of Tennessee.  He received a Bachelor's Degree in Business from Jacksonville
State University in Alabama in 1949 and a Master's Degree in Public
Administration from Vanderbilt University in 1950.  Mr. Mathews received a law
degree from the Nashville School of Law in 1962.  Mr. Mathews currently serves
as a Director of Murray Guard, Inc., and NewCare Health Corporation, which are
publicly-held companies.



                                     -40-
<PAGE>   41
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

         Based solely on a review of Forms 3 and 4 and amendments thereto
furnished to the Company during its most recent fiscal year, and Forms 5 and
amendments thereto furnished to the Company with respect to its most recent
fiscal year and certain written representations, the following persons who were
either a director, officer or beneficial owner of more than 10% of the Company's
Common Stock, failed to file on a timely basis reports required by Section 16(a)
of the Exchange Act during the most recent fiscal year: Chris Brogdon, Connie
Brogdon and Edward E. Lane each filed two Form 4 filings one day late which
reported a total of three transactions late each. Darrell C. Tucker filed one
Form 4 two weeks late reporting one transaction.

ITEM 11.  EXECUTIVE COMPENSATION.

         The following table sets forth information regarding the executive
compensation for the Company's President and each other executive officer who
received compensation in excess of $100,000 for the fiscal year ended June 30,
1997, 1996 and 1995:

<TABLE> 
<CAPTION>
                                     SUMMARY COMPENSATION TABLE

                                                                        LONG-TERM COMPENSATION
                           ANNUAL COMPENSATION             AWARDS                PAYOUTS
                                                                 SECURITIES
                                           OTHER                 UNDERLYING   
                                           ANNUAL     RESTRICTED OPTIONS/            ALL
NAME AND PRINCIPAL                         COMPEN-    STOCK      SARs       LTIP     OTHER
     POSITION       YEAR   SALARY   BONUS  SATION     AWARD(S)   (NUMBER)   PAYOUTS  COMPENSATION 
------------------  ----  --------  -----  ------     --------   --------   -------  ------------
<S>                 <C>   <C>      <C>     <C>        <C>        <C>        <C>      <C>    
Chris Brogdon,      1997  $240,000  -0-      -0-        -0-       -0-         -0-        -0-
 President          1996  $171,000  -0-      -0-        -0-      105,000      -0-        -0-
                    1995  $ 90,000  -0-      -0-        -0-        -0-        -0-        -0-

Darrell C. Tucker,  1997  $245,000 $30,000 $14,400(1)   -0-      100,000      -0-      $  765(2)
 Treasurer                                 
                    1996  $234,103  -0-    $14,400(1)   -0-       52,500      -0-      $2,000(2)
                    1995  $160,000  -0-    $ 6,000(1)   -0-        -0-        -0-      $  665(2)

Edward E. Lane,     1997  $240,000  -0-      -0-        -0-        -0-        -0-        -0-
 Secretary          1996  $180,000  -0-      -0-        -0-      105,000      -0-        -0-
</TABLE>

---------------------

(1)      Represents an automobile allowance paid to Mr. Tucker.
(2)      Represents amounts paid for a term life insurance policy for Mr.
         Tucker.



                                     -41-

<PAGE>   42
2







                       OPTION GRANTS IN LAST FISCAL YEAR

         The following table sets forth certain information concerning
individual grants of stock options made to each of the Executive Officers named
above during the fiscal year ended June 30, 1997: 
<TABLE> 
<CAPTION>
                                                                           POTENTIAL
                                                                          REALIZABLE
                                                                      VALUE AT ASSUMED
                                                                        ANNUAL RATES
                                                                       OF STOCK PRICE
                                                                      APPRECIATION FOR
                                 INDIVIDUAL GRANTS                      OPTION TERM(1)
                   ----------------------------------------------   ---------------------
                   NUMBER OF
                   SECURITIES   % OF TOTAL
                   UNDERLYING  OPTIONS/SARs
                    OPTIONS/    GRANTED TO    EXERCISE      EXPIR-
                     SARs      EMPLOYEES IN    OR BASE      ATION
      NAME         GRANTED(#)  FISCAL YEAR   PRICE($/SH)    DATE      5%($)      10%($)
      ----         ----------  ------------  -----------   -------   --------   -------
<S>                <C>         <C>           <C>           <C>       <C>        <C>
Chris Brogdon           -0-         0.0%           --           --         --          --
Darrell C. Tucker   100,000        29.2%        $8.50      7/16/01   $234,800    $394,500
Edward E. Lane          -0-         0.0%           --           --         --          --
</TABLE>

--------------

(1)      Gains are reported net of the option exercise price, but before taxes
         associated with exercise. These amounts represent assumed rates of
         appreciation only. Actual gains, if any, on stock option exercise are
         dependent on the future performance of the Company's Common Stock as
         well as the option holder's continued employment. The amounts reflected
         in this table may not necessarily be achieved.




                                     -42-
<PAGE>   43


               AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
                          AND FY-END OPTION/SAR VALUES

         The following table sets forth information as to the value of stock
options held by the Executive Officers named above as of June 30, 1997. None of
these Executive Officers exercised any options during the year ended June 30,
1997.

<TABLE>
<CAPTION>
                                  SECURITIES             VALUE OF
                                  UNDERLYING           UNEXERCISED
                                  UNEXERCISED          IN-THE-MONEY
                                    OPTIONS            OPTIONS/SARs
                                 SARs AT FY-END         AT FY-END
                                  EXERCISABLE/         EXERCISABLE/
           NAME                  UNEXERCISABLE         UNEXERCISABLE
     -----------------           --------------        -------------
     <S>                         <C>                   <C>        
     Chris Brogdon                 394,406/0            $2,510,894/0
     Darrell C. Tucker             268,264/0            $1,419,307/0
     Edward E. Lane                394,406/0            $2,510,894/0
</TABLE>

         Effective July 1, 1995, Mr. Tucker entered into a two year employment
agreement which will continue on a year-to-year basis thereafter unless either
party decides to terminate prior to an annual renewal. Pursuant to the agreement
he will receive an annual salary of $220,000 during the first year, $245,000
during the second year, and his salary will increase by 10% per year thereafter.
Effective July 1, 1997, Mr. Tucker receives an annual salary of $269,500. He
also receives a $1,200 per month automobile allowance, a $1,000,000 term life
insurance policy paid for by the Company, and full family health insurance paid
for by the Company. He is also entitled to receive options to purchase 50,000
shares of common stock under the Company's stock option plan each year. However,
such options will only be granted in years in which the Company increases its
profits over the previous year's profit. Mr. Tucker has agreed that during the
term of his employment, and for a period of two years thereafter he will not
engage in the business of, or be employed by a business entity engaged in, the
management of health care facilities in the areas in which the Company does
business. Mr. Tucker has also agreed not to disclose any confidential
information or trade secrets of the Company which he may acquire during the
course of his employment.





                                     -43-
<PAGE>   44

         Until January 1, 1994, Edward E. Lane and Chris Brogdon received no
salaries for their services as Officers of the Company and they received no
other compensation, directly or indirectly, from the Company. Messrs. Lane and
Brogdon have received compensation from Winter Haven Homes, Inc., which owns or
controls three of the facilities which are currently managed by the Company.
Some of this compensation is in the form of financial advisory fees which are
earned by Messrs. Lane and Brogdon in connection with the financing related to
the ownership of these facilities and the rest of the compensation is related to
the fees derived by Winter Haven from its ownership and operation of the
facilities.

         Effective January 1, 1994, Edward E. Lane and Chris Brogdon each
received a salary of $60,000 per year for their services as Officers of the
Corporation. Effective January 1, 1995, their salaries were each increased to
$120,000 per year. Effective January 1, 1996, their salaries were each increased
to $240,000 per year.

COMPENSATION OF DIRECTORS

         Commencing in the year ended June 30, 1994, outside Directors of the
Company received $1,000 for each Board meeting attended. Effective July 1, 1996,
outside Directors receive $500 per month. In addition, Directors are entitled to
receive reimbursement for reasonable out-of-pocket expenses incurred by them in
attending meetings of the Board of Directors.

STOCK OPTION PLAN

         In December, 1993, the Company's Board of Directors adopted the
Company's 1993 Stock Option Plan (the "1993 Plan"). The 1993 Plan allows the
Board to grant stock options from time to time to employees, officers and
directors of the Company and consultants to the Company. The Board has the power
to determine at the time the option is granted whether the option will be an
Incentive Stock Option (an option which qualifies under Section 422 of the
Internal Revenue Code of 1986) or an option which is not an Incentive Stock
Option. However, Incentive Stock Options will only be granted to persons who are
key employees of the Company. Vesting provisions are determined by the Board at
the time options are granted. The option price must be satisfied by the payment
of cash. The total number of shares of Common Stock subject to options under the
1993 Plan currently may not exceed 2,182,625, subject to adjustment in the event
of certain recapitalizations, reorganizations and similar transactions.

         The Board of Directors may amend the 1993 Plan at any time, provided
that the Board may not amend the 1993 Plan to materially increase the number of
shares available under the 1993 Plan, materially increase the benefits accruing
to Participants under the 1993 Plan, or materially change the eligible class of
employees without shareholder approval.

         As of June 30, 1997, options to purchase 1,584,610 shares of Common
Stock were outstanding under the 1993 Plan exercisable at prices ranging from
$4.647 to $15.95 per share. The exercise prices of all of the options granted
under the 1993 Plan are at least equal to the market value of the Company's
Common Stock on the date of grant.

         Included in options granted on December 14, 1993, are non-qualified
stock options granted to Chris Brogdon and Edward E. Lane, Officers and
Directors of the Company, to purchase 289,406 shares each; an incentive stock
option granted to Darrell C. Tucker, an Officer and Director of the Company, to
purchase 115,764 shares; and non-qualified stock options granted to Michael P.
Traba, a former Director, and Julian S. Daley, a Director of the Company, to
purchase 11,576 




                                     -44-
<PAGE>   45

shares each. These options are exercisable at $4.647 per share. Included in
options granted on November 3, 1995, are non-qualified stock options granted to
Chris Brogdon and Edward E. Lane to purchase 105,000 shares each; to Darrell C.
Tucker to purchase 52,500 shares; and to Michael P. Traba and Julian S. Daley to
purchase 10,500 shares each. These options are exercisable at $9.762 per share.

         In July 1996, the Company granted non-qualified stock options to Julian
S. Daley and Harlan Mathews each to purchase 10,000 shares of common stock at
$8.875 per share. In addition, the Company granted non-qualified stock options
to Darrell C. Tucker to purchase 100,000 shares, and to two employees to
purchase an aggregate of 125,000 shares, at an exercise price of $8.50 per
share.

EMPLOYEE RETIREMENT PLAN

         During the year ended June 30, 1996, the 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, 1997, the Company did not make any contributions to the plan.

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

         The following table sets forth as of September 18, 1997, as to the
shares of the Common Stock beneficially owned by each person who is the
beneficial owner of more than five percent (5%) of the Company's shares, each of
the Company's Directors and by all of the Company's Directors and Executive
Officers as a group. Each person has sole voting and investment power with
respect to the shares shown, except as noted.

<TABLE>
<CAPTION>
   NAME AND ADDRESS              AMOUNT OF BENEFICIAL          PERCENTAGE
  OF BENEFICIAL OWNER                 OWNERSHIP                 OF CLASS
------------------------         --------------------          ----------
<S>                              <C>                           <C>
Chris Brogdon                      2,733,404 (1)                  18.0%
Suite 200
6000 Lake Forrest Drive
Atlanta, GA  30328

Edward E. Lane                     2,673,941 (2)                  17.7%
Suite 200
6000 Lake Forrest Drive
Atlanta, GA  30328

Darrell C. Tucker                    655,664 (3)                   4.4%
Suite 200
6000 Lake Forrest Drive
Atlanta, GA  30328

Julian S. Daley                       46,243 (4)                   0.3%
805 Edgewater Trail
Atlanta, GA  30328
</TABLE>



                                     -45-
<PAGE>   46

<TABLE>
<S>                               <C>                             <C> 
Harlan Mathews                        10,000 (5)                   0.1%
420 Hunt Club Road
Nashville, TN  37221

Connie Brogdon                     2,733,404 (6)                  18.0%
Suite 200
6000 Lake Forrest Drive
Atlanta, GA  30328

All Officers and Directors         6,119,252                      38.6%
as a Group (5 Persons)
</TABLE>

-------------------------

(1)      Includes 927,948 shares of Common Stock owned by Mr. Brogdon; 1,164,160
         shares of Common Stock owned by Mr. Brogdon's wife, Connie Brogdon;
         1,159 shares of Common Stock held by Mr. Brogdon's daughter; 245,731
         shares of Common Stock which represents 50% of the shares held by
         Winter Haven Homes, Inc. of which Mr. Brogdon's wife, Connie Brogdon,
         is a 50% owner; and 394,406 shares underlying stock options held by Mr.
         Brogdon.
(2)      Includes 2,033,804 shares of Common Stock owned by Mr. Lane; 245,731
         shares of Common Stock which represents 50% of the shares held by
         Winter Haven Homes, Inc. of which Mr. Lane is a 50% owner; and 394,406
         shares underlying stock options held by Mr. Lane.
(3)      Includes 370,128 shares of Common Stock owned by Mr. Tucker, 12,268
         shares held by Mr. Tucker's wife, and 268,268 shares underlying stock
         options held by Mr. Tucker.
(4)      Includes 1,603 shares held directly by Mr. Daley, 12,497 shares held by
         Mr. Daley's wife, 67 shares held by a partnership, and 32,076 shares
         underlying stock options held by Mr. Daley.
(5)      Represents 10,000 shares underlying stock options held by Mr. Mathews.
(6)      Includes 1,164,160 shares of Common Stock owned by Connie Brogdon;
         927,948 shares of Common Stock owned by Mrs. Brogdon's husband, Chris
         Brogdon; 1,159 shares of Common Stock held by Mrs. Brogdon's daughter;
         245,731 shares of Common Stock which represents 50% of the shares held
         by Winter Haven Homes, Inc., of which Connie Brogdon is a 50% owner;
         and 394,406 shares underlying stock options held by her husband. 

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

         The Company has agreements to provide management and accounting 
services for nursing homes and personal care facilities which are owned or
controlled by entities which are owned or controlled by Officers, Directors and
principal shareholders of the Company.  As of October 1, 1997, the Company had
agreements to manage two facilities owned or controlled by Winter Haven Homes,
Inc. ("Winter Haven"); one facility owned or controlled by Gordon Jensen Health
Care Associates, Inc. ("Gordon Jensen"); two facilities owned or controlled by
National Assistance Bureau, Inc. ("NAB"); one facility owned by Southeastern
Cottages, Inc. ("SCI"); and two facilities owned by Chamber Health Care
Society, Inc. ("Chamber").  The Company previously managed a facility owned by
Senior Care, Inc. ("Senior Care").  Winter Haven is owned by a corporation
which is owned 50% by Edward E. Lane, an Officer and Director of the Company,
and 50% by 




                                     -46-
<PAGE>   47

Connie Brogdon, the wife of an Officer and Director of the Company. Gordon
Jensen is a non-profit corporation of which Edward E. Lane is President. NAB is
also a non-profit corporation of which Edward E. Lane is President and Chris
Brogdon is Secretary/Treasurer. Chamber and Senior Care are non-profit
corporations. Edward E. Lane is President and a director of Chamber. SCI is a
corporation owned 50% by Chris Brogdon and 50% by Edward E. Lane.

         The agreements to provide management and accounting services to the
affiliated entities are for periods of five years but are cancelable upon 60
days' notice by either party. The agreements provide for monthly fees ranging
from $1,000 to $24,000 per facility and expire in 1998. During the fiscal year
ended June 30, 1997, these agreements resulted in revenue to the Company of
$2,212,500.

         The Company currently manages eight facilities owned or controlled by
affiliates of the Company, and as part of its duties, the Company also manages
the cash and pays the bills for the facilities. In doing so, the Company
maintains a cash management system where the deposits of all properties are
swept into an investment account daily. The Company also advances working
capital to these properties when needed. At June 30, 1996, aggregate amounts
were due from the following entities: Winter Haven - $8,887,833; Gordon Jensen -
$2,982,975; SCI - $679,144; NAB - $1,326,391; Chamber - $336,857; Senior Care -
$84,095; and other affiliates - $19,366. Subsequent to June 30, 1996, entities
controlled by Winter Haven assumed the liabilities of NAB, SCI, Chamber and
Senior Care.

         On October 14, 1996, Winter Haven sold two retirement facilities to the
Company for their fair value, based on an independent appraisal, for a total
purchase price of $19,200,000. These include the Jackson Oaks retirement
facility in Jackson, Tennessee, which the Company previously leased, and the
Cumberland Green retirement facility which the Company previously managed. The
purchase prices for these facilities were $12,400,000 and $6,800,000,
respectively. These facilities were acquired subject to total bond debt of
$7,670,000, resulting in $11,530,000 due to Winter Haven, which was applied to
eliminate the $11,214,320 owed to the Company by Winter Haven.

         On September 27, 1996, Gordon Jensen transferred 399,426 shares of the
Company's Common Stock to the Company with a fair market value of $3,000,000 in
exchange for the cancellation of its debt totaling $2,982,000. These shares were
loaned to Gordon Jensen by Edward E. Lane, Chris Brogdon and Connie Brogdon.

         In February 1996, the Company purchased a 36-unit retirement facility
known as Summers Landing-Cordele, from Gordon Jensen for $2,000,000.

         In May 1996, the Company leased the 60-bed Lake Forest Health Care
Center from a partnership controlled by Winter Haven. The lease is for a period
of 10 years at $25,000 per month.

         On June 30, 1996, the Company leased the 158-unit Jackson Oaks
retirement facility from Winter Haven for a period of 15 years. The Company paid
Winter Haven $50,000 per month under this lease. As noted above, Winter Haven
subsequently sold this facility to the Company in October 1996 to retire a
portion of its debt to the Company.

         On September 1, 1996, the Company leased the 58-unit Summer's Landing-
Douglas facility from Gordon Jensen. The Company paid $300,000 to Gordon Jensen
on execution of the lease and is paying the debt service on an existing mortgage



                                     -47-
<PAGE>   48

each month during the first year. During year two, there will be an additional
payment of $500 per month; in year three - $750 per month; in year four - $1,000
per month; and in year five (and any extension of the lease) - $1,250 per month.
The lease is for an initial term of five years, but the Company may extend the
lease for additional terms of five years each.

         The Company has guaranteed the debts of two facilities owned by Winter
Haven totaling approximately $6,000,000.

         On September 30, 1996, the Company leased the 101-unit (with 28
additional units under construction) retirement facility known as The
Renaissance - Titusville in Titusville, Florida from a partnership controlled by
Winter Haven for a period of 10 years. The Company has the right to extend the
lease for an additional five year term. The Company paid Winter Haven $1,500,000
on execution of the lease, and will pay monthly rent equal to 1.1 times the debt
service requirements on the facility. For the purposes of this calculation, the
principal debt will not exceed $6,000,000.

         During the year ended June 30, 1997, the Company entered into leases on
eight facilities with Retirement Group, L.L.C., the owner of these facilities.
Retirement Group, L.L.C. is owned 41.1% by an entity controlled by Edward E.
Lane; 41.8% by Chris Brogdon and his wife, Connie Brogdon; 10.0% by Winter Haven
Homes; 3.5% by Darrell C. Tucker; and 3.6% by James J. Andrews, an officer of a
subsidiary of the Company. Each of these leases are for an initial term of ten
(10) years, with the Company having the right to extend each lease for an
initial five (5) year term. The amount of the rent payment under each lease is
equal to 110% of the principal and interest that Retirement Group, L.L.C. is
required to pay to the lenders of the respective properties. During the fiscal
year ended June 30, 1997, $1,355,217 was paid to Retirement Group, L.L.C. under
these leases.











                                     -48-
<PAGE>   49
                                 PART IV

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

    (a)  1.  FINANCIAL STATEMENTS.  The following financial statements are
filed as part of this report:

<TABLE>
<CAPTION>
                                                                    Page(s)

<S>                                                               <C>    <C>
  Independent Auditors' Report...................................     F-1
                     
  Report of Independent Certified Public Accountants.............     F-2

  Consolidated Balance Sheets as of June 30, 1997 and 1996.......  F-3 - F-4

  Consolidated Statements of Income for the years ended
    June 30, 1997, 1996 and 1995.................................     F-5

  Consolidated Statements of Shareholders' Equity for the
    years ended June 30, 1997, 1996 and 1995.....................  F-6 - F-7

  Consolidated Statements of Cash Flows for the years ended
    June 30, 1997, 1996 and 1995.................................  F-8 - F-9

  Notes to Financial Statements.................................. F-10 - F-28
</TABLE>

    (a)  2.  FINANCIAL STATEMENT SCHEDULES.  All schedules have been omitted,
as the required information is inapplicable or the information is presented in
the financial statements or the notes thereto.

    (a)  3.  Exhibits:
             [TO BE UPDATED]
<TABLE>
<CAPTION>
EXHIBIT
  NO.       DESCRIPTION                     LOCATION

<S>         <C>                             <C>    
 2.1        Agreement and Plan of           Incorporated by reference 
            Merger and Reorganization       to Exhibit 2.1 to the Company's 
            dated February 17, 1997,        Current Repot on Form 8-K 
            among Sun Healthcare Group,     dated February 17, 1997 
            Peach Acquisition Corporation

 2.2        Amendment No. 1 to the Agree-   Incorporated by reference
            ment and Plan of Merger and     to Exhibit 2.1 to the Company's
            Reorganization dated as of      Current Report on Form 8-K
            February 17, 1997, among Sun    dated May 23, 1997
            Healthcare Group, Inc.,
            Peach Acquisition Corporation
            and Retirement Care Associates,
            Inc.

 2.3        Amendment No. 2 to the Agree-   Incorporated by reference
            ment and Plan of Merger and     to Exhibit 2.1 to the Company's
            Reorganization dated as of      Current Report on Form 8-K 
            February 17, 1997, among Sun    dated August 21, 1997 
            Healthcare Group, Inc., Peach
            Acquisition Corporation 
            and Retirement Care Associates, 
            Inc.
</TABLE>




                                     -49-
<PAGE>   50



<TABLE>
<S>         <C>                             <C>
3.1         Articles of Incor-              Incorporated by reference
            poration, as amended            to Exhibit No. 3.1 to the
                                            Company's Form S-18 Regis-
                                            tration Statement No. 33-7666-D

 3.2        Bylaws, as amended              Incorporation by reference
                                            to Exhibit No. 3.2 to the
                                            Company's Form S-18 Regis-
                                            tration Statement No. 33-7666-D

 3.3        Articles of Amendment           Incorporated by reference
            to Articles of Incor-           to Exhibit 3.3 to the
            poration                        Company's Annual Report on
                                            Form 10-K for the fiscal year
                                            ended June 30, 1993

 3.4        Statements Establish-           Incorporated by reference
            ing Series A and Series         to Exhibit 3.4 to the
            D Convertible Preferred         Company's Annual Report on
            Stock                           Form 10-K for the fiscal year
                                            ended June 30, 1994

 3.5        Articles of Amendment to        Incorporated by reference
            Articles of Incorporation       to Exhibit 3.5 to the
            (Series AA Convertible          Company's Annual Report on
            Preferred Stock)                Form 10-K for the fiscal year
                                            ended June 30, 1994

 3.6        Articles of Amendment to        Incorporated by reference
            Incorporation (Series E         to Exhibit 3.6 to the
            Convertible Preferred           Company's Annual Report on
            Stock)                          Form 10-K for the fiscal
                                            year ended June 30, 1996

 3.7        Articles of Amendment to        Incorporated by reference
            Articles of Incorporation       to Exhibit 3.7 to the
            (Series F Convertible Pre-      Company's Annual Report on
            ferred Stock) and Certif-       Form 10-K for the fiscal
            icate of Correction to          year ended June 30, 1996
            same

10.1        Employment Agreement            Incorporated by reference
            with Darrell C. Tucker          to Exhibit 10.1 to the
                                            Company's Annual Report on
                                            Form 10-K for the fiscal
                                            year ended June 30, 1996

10.2        Management and Marketing        Filed herewith electronically
            Agreement with Affiliates       

10.3        Nursing Home Management         Filed herewith electronically
            Agreements with Affiliates      

10.4        Lease Agreements with           Filed herewith electronically
            Affiliates                      
</TABLE>



                                     -50-
<PAGE>   51


<TABLE>
<S>         <C>                             <C>
10.5        Loan Agreement between          Incorporated by reference
            Residential Care Facilities     to Exhibit 10.1 to the
            for the Elderly Authority of    Company's Current Report
            the City of Dublin and the      on Form 8-K dated February 3,
            Company                         1994

10.6        Deed to Secured Debt and        Incorporated by reference
            Security between Residen-       to Exhibit 10.2 to the
            tial Care Facilities for        Company's Current Report
            the Elderly Authority of        on Form 8-K dated February 3,
            the City of Dublin and          1994
            the Company

10.7        Trust Indenture between         Incorporated by reference
            Residential Care Facili-        to Exhibit 10.3 to the
            ties for the Elderly            Company's Current Report
            Authority of the City of        on Form 8-K dated February 3,
            Dublin and the Sentinel         1994
            Trust Company

10.8        Loan Agreement between          Incorporated by reference
            Highlands County (Florida)      to Exhibit 10.2 to the
            Industrial Development          Company's Current Report
            Authority and the Company       on Form 8-K dated March 3,
                                            1994

10.9        Trust Indenture between         Incorporated by reference
            Highlands County (Florida)      to Exhibit 10.3 to the
            Industrial Development          Company's Current Report
            Authority and the Company       on Form 8-K dated March 3,
                                            1994

10.10       Asset Purchase Agreement        Incorporated by reference
            between the Company and         to Exhibit 10.1 to the
            Springdale Convalescent         Company's Current Report
            Center of Atlanta, Ltd., et     on Form 8-K dated April 29,
            al., and Springdale Conva-      1994
            lescent Center Purchase
            Agreement between the
            Company and Bartow
            River L.L.C.

10.11       Promissory Note from the        Incorporated by reference
            Company to Winter Haven         to Exhibit 10.46 to the
            Homes                           Company's Annual Report
                                            on Form 10-K for the fiscal
                                            year ended June 30, 1994

10.12       Promissory Note from the        Incorporated by reference
            Company to Tiffany Indus-       to Exhibit 10.3 to the
            tries, Inc.                     Company's Current Report
                                            on Form 8-K dated April 29,
                                            1994
</TABLE>




                                     -51-
<PAGE>   52



<TABLE>
<S>         <C>                             <C>
10.13       Loan Agreement with Cave        Incorporated by reference
            Spring Housing Develop-         to Exhibit 10.57 to the
            ment Corporation                Company's Annual Report
                                            on Form 10-K for the fiscal
                                            year ended June 30, 1994

10.14       Trust Indenture between         Incorporated by reference
            Cave Spring Housing             to Exhibit 10.58 to the
            Development Corporation         Company's Annual Report
            and Sentinel Trust Company      on Form 10-K for the fiscal
                                            year ended June 30, 1994

10.15       Transfer and Assignment of      Incorporated by reference to
            Loan Asset and Forbearance      to Exhibit 10.67 to the
            Agreement with R. Wayne         Company's Annual Report
            Lowe, et al.                    on Form 10-K for the fiscal
                                            year ended June 30, 1994

10.16       Promissory Note from South-     Incorporated by reference
            eastern Cottages, Inc. and      to Exhibit 10.67 to the
            related Mortgage and            Company's Registration
            Security Agreement              Statement on Form S-1
                                            File No. 33-85886

10.17       Promissory Note from Gordon     Incorporated by reference
            Jensen Health Care, Inc.        to Exhibit 10.68 to the
            and related Deed to Secure      Company's Registration
            Debt                            Statement on Form S-1
                                            File No. 33-85886

10.18       Promissory Note from            Incorporated by reference
            Renaissance Retirement,         to Exhibit 10.69 to the
            Ltd. and related Mortgage       Company's Registration
            and Security Agreement          Statement on Form S-1
                                            File No. 33-85886

10.19       Promissory Note from            Incorporated by reference
            Retirement Village of           to Exhibit 10.70 to the
            Jackson, Ltd. and related       Company's Registration
            Deed of Trust                   Statement on Form S-1
                                            File No. 33-85886

10.20       Promissory Note from            Incorporated by reference
            Hendersonville Retirement       to Exhibit 10.71 to the
            Village, Ltd. and related       Company's Registration
            Deed of Trust                   Statement on Form S-1
                                            File No. 33-85886

10.21       Agreement and Amendment         Incorporated by reference
            to Agreement with The           to Exhibit 10.77 to the
            Atrium of Jacksonville,         Company's Annual Report
            Ltd. and Assignment to          on Form 10-K for the fiscal
            the Company                     year ended June 30, 1994

10.22       Guaranties and Stock Pledge     Incorporated by reference
            and Maintenance Agreements      to Exhibit 10.80 to the
            with Edward E. Lane and         Company's Registration
            Connie B. Brogdon               Statement on Form S-1
                                            File No. 33-85886
</TABLE>



                                     -52-
<PAGE>   53


<TABLE>
<S>         <C>                             <C>
10.23       Dearfield Nursing Home          Incorporated by reference
            Purchase Agreement              to Exhibit 10.1 to the Com-
                                            pany's Report on Form 8-K
                                            dated April 28, 1995

10.24       Loan Agreement                  Incorporated by reference
                                            to Exhibit 10.2 to the Com-
                                            pany's Report on Form 8-K
                                            dated April 28, 1995

10.25       Promissory Note Secured by      Incorporated by reference
            Security Deed                   to Exhibit 10.3 to the Com-
                                            pany's Report on Form 8-K
                                            dated April 28, 1995

10.26       Security Agreement              Incorporated by reference
                                            to Exhibit 10.4 to the Com-
                                            pany's Report on Form 8-K
                                            dated April 28, 1995

10.27       Deed to Secure Debt,            Incorporated by reference
            Security Agreement,             to Exhibit 10.5 to the Com-
            Assignment of Rents and         pany's Report on Form 8-K
            Filing for Dearfield            dated April 28, 1995
            Nursing Home

10.28       Edwinola Retirement             Incorporated by reference
            Community Purchase Agree-       to Exhibit 10.93 to the
            ment                            Company's Annual Report on
                                            Form 10-K for the fiscal
                                            year ended June 30, 1995

10.29       Loan Agreement between          Incorporated by reference
            Dade City, Florida and          to Exhibit 10.94 to the
            the Company                     Company's Annual Report on
                                            Form 10-K for the fiscal
                                            year ended June 30, 1995

10.30       Promissory Note from The        Incorporated by reference
            Atrium Nursing Home, Inc.       to Exhibit 10.95 to the
                                            Company's Annual Report on
                                            Form 10-K for the fiscal
                                            year ended June 30, 1995

10.31       Promissory Note from            Incorporated by reference
            Hendersonville Retirement       to Exhibit 10.96 to the
            Village, Ltd.                   Company's Annual Report on
                                            Form 10-K for the fiscal
                                            year ended June 30, 1995

10.32       Second Amendment to             Incorporated by reference
            Agreement with The Atrium       to Exhibit 10.97 to the
            of Jacksonville, Ltd.           Company's Annual Report on
                                            Form 10-K for the fiscal
                                            year ended June 30, 1995
</TABLE>



                                     -53-
<PAGE>   54


<TABLE>
<S>         <C>                             <C>
10.33       Promissory Note from            Incorporated by reference
            National Assistance             to Exhibit 10.98 to the
            Bureau                          Company's Annual Report on
                                            Form 10-K for the fiscal
                                            year ended June 30, 1995

10.34       Letter Agreement with           Incorporated by reference
            R. Wayne Lowe, et al.,          to Exhibit 10.99 to the
            Amending Forebearance           Company's Annual Report on
            Agreement                       Form 10-K for the fiscal
                                            year ended June 30, 1995

10.35       Hillview Nursing Home           Incorporated by reference
            Purchase Agreement              to Exhibit 10.100 to the
                                            Company's Annual Report on
                                            Form 10-K for the fiscal
                                            year ended June 30, 1995

10.36       Crestwood Nursing Home          Incorporated by reference
            Purchase Agreement and          to Exhibit 10.101 to the
            Lease Assignment Agree-         Company's Annual Report on
            ment                            Form 10-K for the fiscal
                                            year ended June 30, 1995

10.37       Florida Retirement Villa        Incorporated by reference
            Purchase Agreement              to Exhibit 10.102 to the
                                            Company's Annual Report on
                                            Form 10-K for the fiscal
                                            year ended June 30, 1995

10.38       Loan Agreement dated            Incorporated by reference
            September 29, 1995, with        to Exhibit 10.103 to the
            LTC Properties, Inc.            Company's Annual Report on
                                            Form 10-K for the fiscal
                                            year ended June 30, 1995

16          Letter re Change in             Incorporated by reference
            Certifying Accountant           to Exhibit 16.1 to the
                                            Company's Current Report on
                                            Form 8-K/A dated as of
                                            August 14, 1997

21          Subsidiaries of the             Filed herewith electronically
            Registrant

23.1        Consent of Cherry, Bekaert &    Filed herewith electronically
            Holland, L.L.P.                 (See Item 14(a)1. hereof)

23.2        Consent of BDO Seidman, LLP     Filed herewith electronically
                                            (See Item 14(a)1. hereof)

27          Financial Data Schedule         Filed herewith electronically
</TABLE>

         (b)  REPORTS ON FORM 8-K. The Company filed one Report on Form 8-K
during the last quarter of the period covered by this Report as follows: The
Company filed a Report on Form 8-K dated May 27, 1997, reporting information
under Item 5 - Other Events and Item 7 - Financial Statements, Pro Forma
Financial Information and Exhibits, reporting an amendment to the Company's
Agreement and Plan of Merger with Sun Healthcare Group, Inc.



                                     -54-
<PAGE>   55
REPORT OF CHERRY, BEKEART & HOLLAND


                          INDEPENDENT AUDITORS' REPORT


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

We have audited the accompanying consolidated balance sheets of Retirement Care
Associates, Inc. and subsidiaries as of June 30, 1997 and 1996 and the related
consolidated statements of income, shareholders' equity and cash flows for the
years then ended.  These consolidated financial statements are the
responsibility of the Company's management.  Our responsiblity is to express an
opinion on these financial statements based on our audits.

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, 1997 and 1996 and the results
of their operations and their cash flows for the years 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/ Cherry, Bekaert & Holland, L.L.P.
                                CHERRY, BEKAERT & HOLLAND, L.L.P.

Greensboro, North Carolina
October 10, 1997














                                     F-1
<PAGE>   56





               REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS


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


We have audited the accompanying consolidated statements of income,
shareholders' equity and cash flows of Retirement Care Associates, Inc. and
Subsidiaries for the year 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 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 results of operations and cash flows of
Retirement Care Associates, Inc. and Subsidiaries for the year 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>   57



FINANCIAL STATEMENTS


                Retirement Care Associates, Inc. & Subsidiaries
                          Consolidated Balance Sheets
                             June 30, 1997 and 1996


<TABLE>
<CAPTION>
                                                       1997           1996
<S>                                               <C>            <C>
Assets:
     Current Assets
         Cash and cash equivalents                $  3,637,878   $     45,365
         Accounts receivable, net                   40,391,377     18,845,780
         Inventories                                 7,255,289      3,998,991
         Note and accrued interest receivable           75,000        613,750
         Deferred tax asset                          4,408,733      2,008,430
         Income tax receivable                       4,065,431           --
         Restricted bond funds                       3,068,276      2,342,565
         Prepaid expenses and other assets           2,009,467      1,623,679

                      Total current assets          64,911,451     29,478,560

     Property and equipment, net of
       accumulated depreciation                    150,492,221    111,420,486

     Marketable equity securities                         --           33,645
     Investment in unconsolidated affiliates           734,514        496,800
     Deferred lease and loan costs                  13,065,759      7,665,891
     Goodwill, net of accumulated amortization      16,357,532      6,636,675
     Notes and advances due from non-affiliates      1,421,405      1,372,247
     Notes and advances due from affiliates          1,411,379     14,316,661
     Restricted bond funds                           3,689,969      3,514,969
     Other assets                                    3,286,736      2,556,353

                      Total assets                $255,370,966   $177,492,287

</TABLE>


The accompanying notes are an integral part of the consolidated financial
statements

                                      F-3


<PAGE>   58




                Retirement Care Associates, Inc. & Subsidiaries
                          Consolidated Balance Sheets
                             June 30, 1997 and 1996

<TABLE>
<CAPTION>
                                                         1997              1996
<S>                                                 <C>              <C>
Liabilities and Shareholders' Equity
     Current liabilities:
         Lines of credit                            $   9,935,036    $   3,556,535
         Current maturities of long-term debt          11,454,059        2,220,491
         Loans Payable to Affiliates                    1,478,368             --
         Accounts payable                              34,076,015       10,115,347
         Accrued expenses                              18,417,258       11,316,030
         Income taxes payable                                --          3,726,317
         Deferred gain                                     40,000           40,000
                  Total current liabilities            75,400,736       30,974,720

     Deferred gain                                        181,370          371,370
     Deferred income taxes                              1,098,929          277,000
     Long-term debt, less current                     141,674,131      108,481,040

     Minority interest                                  4,520,953        4,122,039

     Commitments and contingencies

     Redeemable convertible preferred stock             1,800,000        2,400,000

     Shareholders' equity
         Common stock, $.0001; 300,000,000 shares
         authorized; 14,489,888 and 12,145,875
         shares issued, respectively                        1,450            1,214

     Preferred stock                                    3,250,000        7,408,279
     Additional paid-in capital                        43,799,617       28,329,625
     Retained earnings (deficit)                      (16,356,220)      (4,752,880)
     Treasury stock, at cost                                 --           (120,120)
                                                       30,694,847       30,866,118
                                                    $ 255,370,966    $ 177,492,287
</TABLE>

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



                                      F-4
<PAGE>   59



                Retirement Care Associates, Inc. & Subsidiaries
                       Consolidated Statements of Income
                For the years ended June 30, 1997, 1996 and 1995


<TABLE>
<CAPTION>

                                                              1997            1996             1995
<S>                                                       <C>            <C>              <C>   
Revenues:
     Net patient service revenue                          202,603,841    $ 119,499,849    $ 69,949,822
     Medical supply revenue                                45,500,712        9,825,252       3,617,439
     Management fee revenue:
         From affiliates                                    2,212,500        3,472,900       3,517,500
         From others                                          446,829          308,533         652,194
     Other revenue                                          2,463,979          904,835       1,879,098
                  Total revenues                          253,227,861      134,011,369      79,616,053

Expenses:
     Cost of patient services                             148,520,849       80,815,511      47,778,410
     Cost of medical supplies sold                         31,045,671        5,350,817       3,153,430
     Lease expense                                         14,117,392        8,442,671       5,769,232
     General and administrative                            46,346,051       23,192,250      12,769,582
     Depreciation and amortization                          6,514,713        3,406,986       1,128,183
     Provision for bad debts                                2,982,063        3,423,117            --
                  Total expenses                          249,526,739      124,631,352      70,598,837

                  Operating income                          3,701,122        9,380,017       9,017,216

Other income (expense):
     Interest income                                          673,655        1,847,868         658,215
     Interest expense                                     (14,111,843)      (7,948,091)     (1)179,052

Income before minority interest, income taxes,
  extraordinary item and cumulative effect of
  change in accounting principle                           (9,737,066)       3,279,794       8,496,379

Minority interest                                             348,000         (597,895)        (18,784)
                                                              
Income before income taxes, extraordinary item
  item and cumulative effect of change in
  accounting principle                                     (9,389,066)       2,681,899       8,477,595

Income taxes                                               (2,343,256)       1,307,091       3,419,092

Income before extraordinary item and cumulative
  effect of change in accounting principle                 (7,045,810)       1,374,808       5,058,503

Extraordinary Charge - loss on extinguishment
     of debt, net of tax benefit of $300,000                  490,000             --              --

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

Net income (loss)                                          (7,535,810)   $   1,746,808    $  5,058,503

Preferred stock dividends                                   2,236,777        2,266,777         225,000

Income (loss) applicable to common stock                $  (9,772,587)   $    (519,969)   $  4,833,503

Income (loss) per common and common equivalent share:

   Income (loss) before extraordinary item
     and cumulative effect of change in
     accounting principle                               $       (0.68)   $        (.08)   $       0.38

   Extraordinary Charge-loss on
     extinguishment of debt                                      (.03)            --              --

   Cumulative effect of change in
     accounting principle                                        --               0.03            --

   Net income (loss)                                             (.71)            (.05)           0.38

   Weighted average shares outstanding                     13,709,590       11,324,755      12,616,835
</TABLE>

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

                                      F-4
<PAGE>   60

                Retirement Care Associates, Inc. & Subsidiaries
                Consolidated Statements of Shareholders' Equity
                For the Years Ended June 30, 1997, 1996 and 1995

<TABLE>
<CAPTION>
                                                       Preferred Stock                      Common Stock
                                             Series A     Series E      Series F          Shares      Amount
<S>                                         <C>          <C>            <C>             <C>           <C>    
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                  --             --             --          125,000         12
     Issuance of common stock upon
       Contour Medical, Inc. acquisition         --             --             --          105,000         11
     Stock dividend, 5%                          --             --             --          491,409         49

Balance June 30, 1995                       $    --      $      --      $      --       10,317,083    $ 1,031
     Issuance of Series E preferred stock        --        9,300,000           --             --         --
     Issuance of common stock upon
       conversion of
       Series E preferred stock                  --         (534,750)          --           54,516          5
     Unamortized balance on imputed
       Series E Preferred stock dividend         --       (1,356,971)          --             --         --
     Treasury stock purchased                    --             --             --             --         --
     Retirement of treasury stock                --             --             --          (15,500)        (2)
     Stock issued in exchange for
       cancellation of warrants and
       stock warrants exercised                  --             --             --        1,198,894        120
     Stock options exercised                     --             --             --           22,076          2
     Preferred stock, 10% dividend               --             --             --             --         --
     Stock dividend, 5%                          --             --             --          568,806         58

Balance June 30, 1996                       $    --      $ 7,408,279    $      --       12,145,875    $ 1,214

     Issuance of Series F preferred stock        --             --        9,340,000           --         --
     Amortization of imputed Series E
       preferred stock dividend                  --        1,356,971           --             --         --
     Issuance of common stock upon
       conversion of
       Series E preferred stock                  --       (8,765,250)          --        1,318,533        132
     Issuance of common stock upon
       conversion of
       Series F preferred stock                  --             --       (6,090,000)     1,148,698        115
     Treasury stock purchased
     Retirement of treasury stock                --             --             --         (520,272)       (52)
     Stock issued in exchange for
       Cancellation of warrants and
       new stock warrants exercised              --             --             --          144,872         15
     Stock options exercised                     --             --             --          252,182         26
     Preferred stock, 10% dividend               --             --             --             --         --

Balance June 30, 1997                       $    --      $      --      $ 3,250,000     14,489,888    $ 1,450
</TABLE>

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

                                      F-5
<PAGE>   61

                Retirement Care Associates, Inc. & Subsidiaries
                Consolidated Statements of Shareholders' Equity
                For the Years Ended June 30, 1997, 1996 and 1995

<TABLE>
<CAPTION>
                                                                     Retained
                                                     Paid-In         Earnings     Treasury
                                                     Capital         (Deficit)      Stock
<S>                                               <C>             <C>             <C>  
Balance June 30, 1994                             $ 12,391,673    $    643,043    $      --
     Issuance of common stock upon conversion
       of Series A preferred stock                     364,076            --             --
     Issuance of common stock upon conversion
       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 conversion
     of Series E preferred stock                       534,743            --             --
     Unamortized balance on imputed Series E
     preferred stock dividend                        1,356,971            --             --
     Treasury stock purchased                             --              --         (274,040)
Retirement of treasury stock                              --          (153,918)       153,920
     Stock issued in exchange for cancellation
     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                                           --         1,746,808           --

Balance June 30, 1996                             $ 28,329,625    $ (4,752,880)   $  (120,120)

     Issuance of Series F preferred stock                 --              --             --
     Amortization of imputed Series E
     Preferred stock dividend                       (1,356,971)           --             --
     Issuance of common stock upon conversion
     of Series E preferred stock                     8,768,297            --             --
     Issuance of common stock upon conversion
     of Series F preferred stock                     6,086,446            --
     Treasury stock purchased                             --              --       (3,707,410)
     Retirement of treasury stock                         --        (3,827,530)     3,827,530
     Stock issued in exchange for
     Cancellation of warrants and
     new stock warrants exercised                       70,966            --             --
     Stock options exercised                         1,901,254            --             --
     Preferred stock, 10% dividend                        --          (240,000)          --
     Net income                                           --        (7,535,810)          --

Balance June 30, 1997                             $ 43,799,617    $(16,356,220)   $      --
</TABLE>

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

                                      F-6
<PAGE>   62

                Retirement Care Associates, Inc. & Subsidiaries
                     Consolidated Statements of Cash Flows
                For the Years Ended June 30, 1997, 1996 and 1995
<TABLE>
<CAPTION>

                                                                  1997           1996             1995
<S>                                                          <C>             <C>             <C> 
Cash flows from operating activities
     Net income (loss)                                       $ (7,535,810)   $  1,746,808    $  5,058,503
     Adjustments to reconcile net income (loss) to net
       cash provided by operating activities:
           Gain on sale of assets                                (608,423)           --              --
           Depreciation and amortization                        6,514,713       3,406,986       1,128,183
           Loss on sale of marketable securities                     --            29,085            --
           Cumulative effect of change in accounting
              principles                                             --          (372,000)           --
           Amortization of deferred gain                          (40,000)        (40,000)        (40,000)
           Provision for bad debt                               2,982,063       3,423,117            --
           Equity in income from investees                           --           146,800            --
           Minority interest                                     (348,000)        597,895          18,784
           Deferred income taxes                              (11,111,558)     (1,297,613)        261,092
           Changes in assets and liabilities net of
              effects of acquisitions
                  Accounts receivable                         (20,987,667)    (10,672,485)     (6,012,900)
                  Inventories                                    (960,447)     (2,245,194)       (996,139)
                  Prepaid expenses and other assets              (970,008)        703,690        (642,013)
                  Accrued interest receivable                      38,750         157,917        (196,667)
                  Accounts payable and accrued expenses        29,187,587       9,964,620       6,608,148
                  Deferred lease and loan costs                      --              --          (978,943)

                    Net cash provided by (used in)
                       operating activities                    (3,838,800)      5,549,626       4,208,048

Cash flows from investing activities:
     Purchases of property and equipment                      (12,734,389)    (12,490,298)     (6,079,610)
     Proceeds from sale leaseback transaction                        --              --         4,500,000
     Proceed from repayment of notes receivable                13,500,000       2,200,000            --
     Issuance of notes receivable and advances
       to affiliates and non-affiliates                          (143,876)     (8,935,677)     (1,742,147)
     Purchase of bonds receivable                                    --              --        (4,487,936)
     Investments in unconsolidated affiliates                    (237,714)      3,787,635      (3,335,833)
     Restricted bond funds                                       (900,711)     (4,720,047)        (17,317)
     Proceed from sale of fixed assets                          3,350,000            --              --
     Cash acquired in acquisition of Contour Medical, Inc.           --              --            73,254
     Decrease in marketable equity securities                        --              --           444,863
     Proceed from sale of marketable equity securities             33,645          36,780            --
     Goodwill paid in acquisitions                             (2,109,852)     (2,327,736)           --
     Acquisitions, net of cash required                       (18,807,777)    (21,938,513)           --
     Payment of deferred lease costs                           (5,530,349)       (593,470)           --

                    Net cash used in investing activities    $(23,581,023)   $(44,981,326)   $(10,644,726)

</TABLE>

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

                                      F-7
<PAGE>   63

                Retirement Care Associates, Inc. & Subsidiaries
               Consolidated Statements of Cash Flows (continued)
                For the Years Ended June 30, 1997, 1996 and 1995

<TABLE>
<CAPTION>
                                                              1997             1996            1995
<S>                                                       <C>             <C>             <C>
Cash flows from financing activities
     Capital investment by minority shareholders
       of subsidiary                                      $       --      $  2,088,492    $  1,729,469
     Redemption of preferred stock                            (600,000)       (600,000)           --
     Purchase of treasury stock                               (841,318)       (274,040)           --
     Dividends on preferred stock                             (240,000)       (270,000)       (225,000)
     Proceeds from issuance of preferred stock               9,340,000       9,300,000            --
     Proceeds from stock options and warrants exercised      1,900,306         559,593            --
     Proceeds from long-term debt and net borrowings
       under line of credit                                 33,919,190      35,329,244      11,309,986
     Payments on long-term debt                            (13,329,520)     (9,443,626)     (2,130,654)
     Payments on deferred loan costs                          (614,690)     (2,419,783)           --
     Proceeds from L/P to affiliates                         1,478,368            --              --

                      Net cash provided by financing
                        activities                          31,012,336      34,269,880      10,683,801

Net increase (decrease) in cash and cash equivalents         3,592,513      (5,161,820)      4,247,123

Cash and cash equivalents, beginning of year                    45,365       5,207,185         960,062

Cash and cash equivalents, end of year                    $  3,637,878    $     45,365    $  5,207,185
</TABLE>

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


                                      F-8
<PAGE>   64
               RETIREMENT CARE ASSOCIATES, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             June 30, 1997 and 1996

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

NATURE OF BUSINESS AND BASIS OF PRESENTATION

Retirement Care Associates, Inc. ("RCA" or the "Company") operates 101 leased
and owned nursing and retirement facilities in the Southeast United States and
manages, for both related and unaffiliated third parties, an additional 9
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 maturities 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.

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


                                      F-9
<PAGE>   65

Company accounts for its investment in In-House on the equity method. The
Company's share of In-House's net income was $327,714 and $146,800 for the
years ended June 30, 1997 and 1996, respectively.

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 interest 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. Any permanent impairment would
be recognized by a charge against earnings. Accumulated amortization of
goodwill approximated $719,000 and $233,000 as of June 30, 1997 and 1996,
respectively.

ASSESSMENT OF LONG-LIVED ASSETS

Effective July 1, 1996, the Company adopted FAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of.

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 suggests 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 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, 1997, 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 January 1995 and April 1996, the Company declared 5% stock dividends
which were payable on February 15, 1995 and May 15, 1996, respectively, to
shareholders of record on February 15, 1995 and May 1, 1996, respectively. All
common stock information presented has been retroactively restated to reflect
these stock 


                                     F-10
<PAGE>   66


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 has 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.

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 consist 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.

Common stock equivalents for the years ended June 30, 1997 and 1996 have not
been included since the effect would be antidilutive. 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.

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.

The Financial Accounting Standards Board released SFAS No. 123, "Accounting for


                                     F-11
<PAGE>   67

Stock Based Compensation." SFAS No. 123 encourages, but does not require,
companies to recognize compensation expense based on the fair value of grants
of stock, stock options, and other equity investments to employees. Although
expense recognition for employee stock-based compensation is not mandatory,
SFAS No. 123 requires that companies not adopting must disclose pro forma net
income and earnings per share. The Company will continue to apply the prior
accounting rules and make pro forma disclosures.

RECLASSIFICATIONS

Certain 1995 amounts have been reclassified to conform with the 1997 and 1996
presentations.

2. BUSINESS ACQUISITIONS:

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. The consolidated financial statements include the results
of operations since the date of acquisition.

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. Through June 30, 1996, 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.

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.

ATLANTIC MEDICAL

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 accounted for as a
purchase and 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



                                     F-12
<PAGE>   68
Atlantic Medical. The purchase price exceeded fair value of the net assets
acquired by approximately $1.3 million. The resulting goodwill is being
amortized on the straight-line method over forty years. The consolidated
financial statements include the results of operation of Atlantic Medical
subsequent to June 30, 1996.

The promissory notes bore interest at 7% per annum and were due in full on
January 10, 1997. In the event of a default in the payment of the promissory
notes, they were convertible into shares of common stock of RCA. On January 10,
1997, Contour retired all outstanding notes due to sellers of Atlantic Medical
in the aggregate principal amount of $10,850,000, along with accrued interest.
The retirement of these notes was funded by a loan of $9,750,000 from the
Company, with the balance funded from Contour's existing line of credit with
Barnett Bank. The loan from the Company was evidenced by a convertible
promissory note bearing interest at 9% per annum and payable upon demand. This
note was convertible into 1,950,000 shares of Contour's Common Stock, and on
January 10, 1997, the Company exercised this conversion right.

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
         <S>                                                                          <C>
         Number of Facilities Purchased:
         Nursing                                                                                7
         Retirement                                                                             3
         Total                                                                                 10

         Cost of acquired facilities:
         Cash paid                                                                    $   223,000
         Debt incurred                                                                 19,811,000
         Total                                                                        $20,034,000

</TABLE>

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, 1995. The pro forma
amounts are provided for information purposes only. It is based on historic
information and does not necessarily reflect the actual results that would have
occurred, nor is it necessarily indicative of future results of operations of
the combined enterprise.

<TABLE>
<CAPTION>
                                                             For the year ended June 30,
                                                                      (Unaudited)
                                                           1997                          1996
                  <S>                                   <C>                          <C> 
                  Revenues                              $254,410,713                 $158,534,082
                  Net income                              (7,537,686)                   1,798,053
                  Net income (loss) per share                   (.71)                        (.04)

</TABLE>


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



                                     F-13
<PAGE>   69

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 eight
facilities in addition to leasing eleven facilities, all owned by affiliates.
These affiliates are owned and controlled by two individuals who are officers
and directors of the Company.

The management and administrative services to affiliate facilities are provided
pursuant to agreements which have five- to ten-year terms and are cancelable
with sixty days written notice by either party. The agreements provided for
monthly fees ranging from $4,000 to $28,000 per facility and expire through
2007. Revenue from these management services totaled $1,993,000, $3,472,900 and
$3,517,500 for the years ended June 30, 1997, 1996 and 1995, respectively.

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 (to) affiliates consist of advances to facilities, net of
advances from facilities, owned by the following affiliated entities:

<TABLE>
<CAPTION>

                                                                                          June 30,
                                                                                 1997                  1996
<S>                                                                          <C>                    <C> 
Gordon Jensen Health Care Association, Inc.                                  $(1,019,474)           $2,982,975
Winter Haven Homes, Inc.                                                        (458,894)            8,887,833
Southeastern Cottages, Inc.                                                      295,642               679,144
National Assistance Bureau, Inc.                                                 149,815             1,326,391
Chamber Health Care Society, Inc.                                                964,240               336,857
Senior Care, Inc.                                                                  1,682                84,095
Other Affiliates                                                                       -                19,366
                                                                                 (66,989)          $14,316,661
Less current portion (payable)                                                (1,478,368)                    -
Noncurrent receivable                                                        $ 1,411,379           $14,316,661
</TABLE>

The above amounts receivable from affiliates as of June 10, 1996 were satisfied
during the acquisition by the Company of two facilities from related parties
and the return of approximately 400,000 shares of Company stock held by Gordon
Jensen to the Company treasury, discussed in following paragraphs. These notes
required quarterly interest payments at 8% per annum. The notes were
collateralized by second mortgages on facilities owned by affiliates, and
certain notes were guaranteed by the principals of Winter Haven, who are
shareholders of the Company.

The amounts receivable from and payable to affiliates as of June 30, 1997 were
unsecured.  The amounts receivable of $1,411,379 are noncurrent.  The amounts
payable of $1,478,368 are current and payable upon demand.

The Company's exposure to credit loss in the event of nonperformance by its
related parties totaled $1,411,379 and $14,316,661 as of June 30, 1997 and
1996, respectively.

FACILITY ACQUISITIONS FROM AFFILIATES

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. The total lease payments in 1996 were
$25,000.


                                     F-14
<PAGE>   70

On October 14, 1996, the Company acquired two retirement facilities from
related parties, individuals who control the Company and its affiliates, for
their fair value, based on independent appraisals, totaling $19,200,000. The
facilities were subject to bond debt of $7,670,000. The remaining balance due
from the Company was $11,530,000. For the purpose of this transaction, Winter
Haven had assumed the amounts due to the Company in the amount of $2,426,487,
from Southeastern Cottages, Inc., National Assistance Bureau, Inc., Chamber
Health Care Society, Inc. and Senior Care, Inc. which, in combination with the
amount of $8,887,833 previously due from Winter Haven to the Company, totaled
$11,314,320. As part of the exchange agreement, the Company and Winter Haven
agreed to offset the Company's debt incurred of $11,530,000 with the Company's
receivable of $11,314,320.

FACILITIES LEASED FROM AFFILIATES

During the years ended June 30, 1997 and 1996, the Company leased nursing
homes and retirement homes from affiliates.  In 1996, one facility was leased
with an annual rental of $300,000, expiring in 2006 with one ten-year renewal.
In 1997, a total of eleven facilities were leased with annual rentals ranging
from approximately $290,000 to $850,000, expiration dates through 2007, and
renewal periods of five to ten years.  The annual rentals of the ten leases
acquired in 1997 are based upon 110% of the outstanding debt balance, so the
future annual rentals are expected to decline during the lease terms.

ADDITIONAL TRANSACTIONS

On September 27, 1996, Gordon Jensen Health Care Association, Inc. (Gordon
Jensen) returned approximately 400,000 shares of stock in the Company which had
a fair market value of $3,000,000 in payment of Gordon Jensen's debt of
$2,982,000 due to the Company. The retirement of these shares reduced
stockholders' equity of the Company by $3,000,000.

In 1997, the Company received a guarantee fee of $500,000 for guarantee of
Contour's $10,500,000 note payable which arose in connection with its
acquisition of Atlantic Medical. As payment, the Company received 100,000
shares of Contour common stock. Contour's note payable was paid off in January,
1997 and the guarantee was released.

As of June 30, 1997 the Company had guaranteed debt in the amount of
approximately $30,000,000 related to eight facilities of affiliates which the
Company leases or manages. The debt is collateralized by the facilities, bears
interest ranging from approximately 10% to 11.5% with due dates through 2007.

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

The Company has service and consulting agreements whereby In-House provides to
facilities therapy and case management for a fixed monthly fee plus a charge
per treatment unit provided. In 1997, the Company purchased approximately
$5,129,000 or 77% of the total sales of In-House, and the Company's account
payable to In-House of $1,528,000 was 49% of the total accounts receivable of
In-House. For 1996, total sales and accounts receivable of In-House related to
the Company.

4. 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 72% and 68% of net patient service revenue during
1997 and 1996, 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,
                                                                                 1997                  1996
         <S>                                                                 <C>                   <C>
         Medicaid                                                            $17,452,025           $10,644,368
         Medicare                                                              9,728,258             4,304,368
         Other third-party payors                                              1,084,008             1,598,816
         Patients                                                             12,315,451             3,113,145
         Trade receivables - Contour                                           7,811,635             2,595,083
                                                                              48,391,377            22,255,780
         Allowance for doubtful accounts                                       8,000,000             3,410,000
                                                                             $40,391,377           $18,845,780

</TABLE>


                                     F-15
<PAGE>   71

In the opinion of management, any differences between the net revenue recorded
and final determination will not materially affect the consolidated financial
statements.

The activity in the allowance for doubtful accounts is as follows:

<TABLE>
<CAPTION>
                                                    June 30,
                                      1997            1996            1995
<S>                                <C>             <C>             <C>
Beginning of Period                $3,410,000      $       --      $      --
Provision                           2,982,063       3,423,117             --
Other Additions-Contour             1,995,386              --             -- 
Write Offs                           (387,449)        (13,117)            --
End of Period                      $8,000,000      $3,410,000             --
</TABLE>

5. NOTE RECEIVABLE:

On February 7, 1996, the Company loaned $500,000 to an unaffiliated company.
The note, plus interest at 9% per annum, was due on February 7, 1997 and was
collateralized by a first lien on a 38-bed nursing home in Atlanta, Georgia.
This note was paid in full with interest on May 15, 1997.

6. CHANGE IN ACCOUNTING FOR SUPPLIES INVENTORY:

During the year ended June 30, 1996, the Company changed its method 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 $1.0
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:
<TABLE>
<CAPTION>

                                                           Estimated
                                                             Useful
                                                             Lives            1997                    1996
<S>                                                        <C>             <C>                     <C> 
Land                                                          -            $ 8,330,565             $ 7,184,001
Buildings                                                    30            107,901,652              83,281,050
Equipment                                                  5-10             16,115,893              12,179,912
Leasehold improvements                                     5-10              3,373,755               2,193,228
Buildings and equipment under
 capital leases                                            5-30             18,642,560               8,111,801

                                                                           154,364,425             112,949,992
Less accumulated depreciation                                               13,897,697               8,518,084

                                                                           140,466,728             104,431,908
Construction in progress                                                    10,025,493               6,988,578
Net property and equipment                                                $150,492,221             111,420,486
</TABLE>

Construction in progress, consisting of the development of four facilities,
includes approximately $607,000 and $605,000 of capitalized interest costs as
of June 30, 1997 and 1996, respectively. The total contract price of
construction in progress was approximately $13,500,000 for the year ended June
30, 1997.

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



                                     F-16
<PAGE>   72

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,
                                                                                    1997                         1996
<S>                                                                             <C>                           <C>       
Lease cost:                                                                                   
     Affiliated                                                                 $ 2,000,000                   $  500,000
     Non-affiliated                                                               5,831,968                    1,801,619
Loan cost:
     Affiliated                                                                     410,000                      410,000
     Non-affiliated                                                               6,414,978                    5,800,288
                                                                                 14,656,946                    8,511,907
Less accumulated amortization                                                     1,591,187                      846,016
Net deferred lease and loan cost                                                 13,065,759                   $7,665,891

</TABLE>

9. SHAREHOLDERS' EQUITY:

STOCK PURCHASE WARRANTS

During the year ended June 30, 1997, the Company issued warrants to an
investment banker and consultants to purchase 250,000 shares of its common
stock at prices ranging from $6.96875 to $9.25 per share. The warrants were
exercisable at varying dates through June 1999. None of the warrants were
exercised during the year ended June 30, 1997.

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 Class C warrants are
exercisable at $1.00 per share of common stock, the Class B warrants are
exercisable at $6.00 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, 1997, Class A Warrants were exercised to
purchase approximately 136,180 shares of common stock and Class C Warrants were
exercised to purchase approximately 8,692 shares of common stock. As of June
30, 1997, there were Class A warrants outstanding which entitle the holders to
purchase 101,581 shares of common stock, Class B warrants outstanding which
entitle the holders to purchase 426,432 shares of common stock and Class C
Warrants outstanding which entitle the holders to purchase 186,956 shares of
common stock.

STOCK OPTIONS

Stock option plans

In October 1995 the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based
Compensation." This new standard defines a fair value based method of
accounting for an employee stock option or similar equity instrument. This
statement gives entities a choice of recognizing related compensation expense
by adopting the new fair value method or to continue to measure compensation
using the intrinsic value approach under Accounting Principals Board (APB)
Opinion No. 25, the former standard. If the former standard for measurement is
elected SFAS No. 123 requires supplemental disclosure to show the effects of
using the new measurement criteria. This statement is effective for the
Company's 1997 fiscal year. The Company intends to continue using the
measurement practices prescribed by APB Opinion No. 25, and accordingly, this
pronouncement will not affect the Company's financial position or results
of operations.

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 


                                     F-17
<PAGE>   73

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.

The following is a summary of stock option activity and related information for
the years ended June 30:
<TABLE>
<CAPTION>

                                         1997                           1996                       1995
                                       Weighted Avg.               Weighted Avg.                 Weighted Avg.
                           Options    Exercise Price    Options   Exercise Price       Options  Exercise Price
<S>                        <C>                <C>      <C>               <C>           <C>               <C>
Outstanding:
     Beginning             1,498,368          $6.77    1,066,818         $5.24         882,110           $4.74
     Granted                 364,025          $7.44      489,300         $9.90         239,138           $7.42
     Exercised              (246,973)         $4.59      (22,076)        $4.65               -               -
     Canceled                (30,810)         $4.65      (35,674)        $5.36         (54,430)          $6.67

     End of year           1,584,610          $5.40    1,498,368         $6.77       1,066,818           $5.24

Exercisable:
     End of year           1,584,610          $5.40    1,498,368         $6.77       1,066,818           $5.24

Weighted average fair
 value of options
 granted during the
 year:                         $6.72                       $7.56                         $5.82
</TABLE>

Exercise prices for options outstanding as of June 30, 1997 ranged from $4.65
to $10.24. The weighted average remaining contractual life of those options is
7.35 years.

Because the Company has adopted the disclosure-only provisions of SFAS No. 123,
no compensation cost has been recognized for the stock option plans. Had
compensation cost for the Company's stock option plan been determined based on
the fair value at the grant date of the awards consistent with the provisions
of SFAS No. 123, the Company's net earnings and earnings per share would have
been reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>

                                                                             1997                    1996
     <S>                                                                   <C>                   <C>
     Net income (loss) as reported                                         $(7,535,810)          1,746,808
     Net loss - pro forma net                                               (8,908,810)           (513,192)
     Loss per share - as reported                                                 (.71)               (.05)
     Loss per share - pro forma                                                   (.81)               (.25)
</TABLE>

The fair value of each option grant is estimated on the date of grant using
Black-Scholes option-pricing model with the following weighted average
assumptions used for grants in 1996 and 1995; dividend yield of 0%, expected
volatility of 66%, risk-free interest rates of 6.0% for 1997 and 5.4% for 1996
and expected lives of four years for 1996 options and five years for 1995
options.

PREFERRED STOCK

As of June 30, 1997, 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


                                     F-18
<PAGE>   74

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.

- 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 a 1992 acquisition transaction
between the Company and Capitol Care Management Company, Inc. The preferred
shares were 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 $11.55 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, 1997, the remaining 942,500 shares of Series E
Convertible Preferred Stock were converted into 1,318,533 shares of common
stock.

- SERIES F CONVERTIBLE PREFERRED STOCK

1,000,000 SHARES of Series F Convertible Preferred Stock are authorized. These
shares were sold in an offering to foreign investors in September, 1996 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 


                                     F-19
<PAGE>   75

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 $7.425 or
85% of the average closing bid price for the five trading days prior to the
date of conversion, whichever is lower.

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. During the year ended June 30, 1997, the 651,666 shares of Series F
Convertible Preferred Stock were converted into 1,148,698 shares of common
stock.

TREASURY STOCK

During the year ended June 30, 1997, the Company purchased and retired 520,326
shares of its common stock at an aggregate cost of $3,923,222.

10. LONG-TERM DEBT:

Long-term debt at June 30, 1997 and 1996 is summarized as follows:
<TABLE>
<CAPTION>
                                                                                  1997               1996
<S>                                                                           <C>                 <C> 
Non-affiliates:
     Notes payable to a real estate
     investment trust ("REIT")                                                $ 40,700,380        $ 39,623,938
Industrial development revenue bonds                                            22,615,000          20,060,000
Municipal revenue bonds                                                         26,265,000          18,170,000
Housing development mortgage revenue bonds                                      25,795,000          21,750,000
Notes payable to banks (8.5% or prime plus
 1% to 10% due through 2003)                                                    15,780,008           3,049,012
Capitalized lease obligations                                                   21,972,802           8,048,581

                                                                               153,128,190         110,701,531
Less current maturities                                                         11,454,059           2,220,491
                                                                              $141,674,131        $108,481,040

</TABLE>
Future maturities of debt and capital lease obligations are as follows:

<TABLE>
<CAPTION>
                                                               Capital
         Year                                                   Lease              Debt               Total
         <S>                                               <C>                <C>                 <C>
         1998                                              $  2,408,701       $ 11,980,406        $ 14,389,107
         1999                                                 2,416,138          2,538,317           4,954,455
         2000                                                 2,423,272          2,963,682           5,386,954
         2001                                                 2,430,508          3,455,739           5,886,247
         2002                                                 2,437,846          3,552,304           5,990,150
         Thereafter                                          36,798,942        106,664,940         143,463,882
         Total                                               48,915,407        131,155,388         180,070,795
         Less amount representing imputed
          interest at 11% to 12%                             26,942,605               -             26,942,605
         Total obligations                                 $ 21,972,802       $131,155,388        $153,128,190
</TABLE>

The notes payable to the REIT consist of mortgage notes on sixteen facilities.
Principal amounts are amortized over a 25-year period with monthly installments
payable through 2006. Interest ranges on these notes from 9.75% to 11.28% and
increases annually at rates ranging from 0.1% to 0.25%. The notes are
collateralized by property and equipment of the sixteen facilities.

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 $11,925,000 of bonds payable to the Walton County
Industrial Development Authority. Principal payments range from $150,000 to
$1,300,000 annually through 2019 and interest accrues at 10.5%. The Atrium
facility serves as collateral for three City of Jacksonville Industrial
Development Revenue Refunding bonds totaling $10,690,000. Principal payments


                                     F-20
<PAGE>   76

range from $65,000 to $375,000 annually through 2024, $6,060,000 due in 2011,
and interest accrues at rates ranging from 6.5% 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 five facilities, includes Okaloosa County, Florida Retirement
Rental Housing Revenue Series A bonds totaling $7,925,000 with semi-annual
interest payments at 10.75% due in 2003 and Ohio Rental Housing Revenue Series
A bonds totaling $9,800,000 with semi-annual interest at 10.38% due in 2009.
The remainder of the housing development mortgage revenue bonds consist of
bonds totaling $8,070,000 collateralized by three facilities with interest
ranging from 7% to 11.0% with maturities through 2026. The housing development
mortgage revenue bonds require annual principal payments ranging from $150,000
to $2,000,000.

The municipal revenue bonds, which are collateralized by property and equipment
of seven facilities and require annual principal payments ranging from $370,000
to $1,635,000, consist of the following:

Dade City, Florida Series A and B bonds totaling $6,395,000, with principal
payments due through 2025 and interest ranging from 6.75% to 8%.

Highland County Series A and B bonds totaling $4,230,000, with principal
payments due through 2024 and interest ranging from 6.5% to 8.5%.

City of Dublin Series A and B bonds totaling $2,740,000, 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
$2,655,000, with principal payments due through 2011 and interest rates ranging
from 7.5% to 10%.

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%.

Houston County Series A and B bonds totaling $5,650,000 with principal payments
due through 2026 and interest rates ranging from 7% to 8.4%.

Sumner, TN Series A and B bonds totaling $2,695,000 with principal payments due
through 2010 and interest rates ranging from 10.5% to 12.5%.

The Company recorded an extraordinary charge of $490,000, net of income tax
benefit of $300,000, associated with the early extinguishment of approximately
$9.2 million of long-term debt on the Company's retirement facility located in
Destin, Florida.

In connection with the bond indentures, the Company is required to meet certain
covenants, including monthly sinking fund deposits, adequate balances in debt
service reserve funds, timely payment of tax obligations and adequate insurance
coverage.  At June 30, 1997 and 1996, the Company was in violation of several of
these covenants including the failure to make monthly payments to the bond
sinking funds for certain of these facilities and inadequate debt service
reserves for certain of the facilities.  The Company is also delinquent with
regard to the payment of property taxes at several facilities.  The trustees
have not called the bonds in the past for these violations and management does
not foresee the bonds being called at this time.  All semi-annual interest and
principal payments have been made in a timely fashion.

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 $14,050,000 and $5,075,000 for the years ended June 30, 1997 and
1996, respectively. Total borrowings against the lines of credit were
$9,935,036 and $3,556,535 at June 30, 1997 and 1996, respectively.

12. COMMITMENTS AND CONTINGENCIES:

OPERATING LEASES

The Company leases nursing homes and retirement care facilities from
unaffiliated entities (in addition to leasing eleven nursing and retirement
facilities from affiliated entities. (see Note 3). 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 October 2008.

Included in the above agreements are seven leases whereby a sale to the lessor


                                     F-21
<PAGE>   77

preceded the lease agreement ("sale/leaseback transaction"). The Company has
accounted for six 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, 1997:
<TABLE>
<CAPTION>

                                    Year                                         Amount
                                <S>                                         <C>
                                    1998                                    $ 19,484,267
                                    1999                                      19,264,153
                                    2000                                      19,243,829
                                    2001                                      19,159,033
                                    2002                                      18,710,901
                                Future years                                 119,850,928
                                   Total                                    $215,713,111
</TABLE>

The Company's rental expense under operating leases for nursing homes and
retirement care facilities amounted to approximately $13,200,000, $6,040,000
and $5,750,000 for the years ended June 30, 1997, 1996 and 1995, respectively.

The Company leases office space under a noncancelable operating lease which
expires in October 2000. At June 30, 1997, minimum future rental payments under
the noncancelable lease were as follows:
<TABLE>
<CAPTION>

                                    Year                                          Amount
                                    <S>                                         <C>
                                    1998                                        $325,455
                                    1999                                         341,683
                                    2000                                         358,673
                                    2001                                         120,509
</TABLE>

Total amounts paid for rental of office facilities totaled approximately
$306,000, $317,000, and $60,000 for the years ended June 30, 1997, 1996 and
1995, respectively.

OTHER

The Company has guaranteed 20% to 100%, or approximately $9,000,000, of debt on
six facilities owned by unaffiliated entities 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 underpayment. 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.

                                     F-22

<PAGE>   78
13. INCOME TAXES:

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

<TABLE>
<CAPTION>
                                                                                        Year ended June 30,
                                                              1997                 1996                1995
<S>                                                       <C>                   <C>                 <C>
Current:                                                  
                  Federal                                 $(1,097,110)          $2,671,891          $2,659,000
                  State                                      (240,648)             501,600             499,000
                                                           (1,337,758)           3,173,491           3,158,000
Deferred (benefit):
                  Federal                                    (846,568)          (1,571,500)            221,928
                  State                                      (158,930)            (294,900)             39,164
                                                          $(1,005,498)          (1,866,400)            261,092
Total income tax provision                                $(2,343,256)          $1,307,091          $3,419,092

</TABLE>

The income tax provisions (benefit) included in the consolidated statements of
income are as follows:

<TABLE>
<CAPTION>
                                                              1997                 1996                1995
<S>                                                       <C>                    <C>                 <C>
Income before extraordinary item and
 cumulative effect of change in
 accounting principle                                     $(2,343,256)           $1,307,091          $3,419,092
Cumulative effect of change
 in accounting principle                                            -               228,000                   -
Extraordinary Item                                           (300,000)                    -                   -
                                                           (2,643,256)           $1,535,091          $3,419,092


</TABLE>

Deferred income taxes are provided to reflect temporary differences between
financial and income tax bases of assets and liabilities. The sources of the
temporary differences and their effect on the net deferred taxes at June 30,
1997 and 1996 are as follows:

<TABLE>
<CAPTION>
                                                                                   1997               1996
<S>                                                                             <C>                 <C>
Current deferred taxes:
      Deferred tax assets:
         Workers' compensation accrual                                          $1,936,000          $1,062,900
         Provision for losses on accounts
           receivable                                                            2,039,200             811,300
         Health insurance accrual                                                  227,800             227,800
         Net operating loss                                                        444,500             355,100
         Total current deferred tax asset                                        4,647,500           2,457,100
         Less valuation allowance                                                 (444,500)           (355,100)
                                                                                 4,203,000           2,102,000
         Deferred tax liability - other                                           (137,569)            (93,570)
         Net current deferred tax asset                                          4,065,431          $2,008,430


Noncurrent deferred taxes:
      Deferred tax asset - deferred gain                                           276,700          $  276,700
      Deferred tax liabilities:
         Property and equipment                                                    673,900             352,600
         Deferred lease cost                                                       568,200             201,100
         Other                                                                     133,529                   -
         Net noncurrent deferred tax
           liability                                                            $1,098,929          $  277,000
</TABLE>

The provision for income taxes for the year ended June 30, 1996 and 1995 varies
from the amount determined by applying the Federal statutory rate to pretax
income as a result of the following:

<TABLE>
<CAPTION>

                                                                                    1997               1996
<S>                                                                            <C>                  <C>
Income tax expense (benefit)
   at federal statutory rate                                                    (3,310,600)         $1,115,130
Nondeductible tax penalties                                                        305,800             417,700
State income taxes, net of
   federal tax benefit                                                            (192,000)            331,100
Other, net                                                                         668,801            (556,839)
                                                                               $(2,527,999)         $1,307,091
</TABLE>

The primary difference between the actual income tax rate of approximately 40%
for the year ended June 30, 1995 and the Federal income tax rate of 34% is the


                                     F-23
<PAGE>   79

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.

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, 1997
                                                                                        Carrying              Fair
                                                                                        Amount                Value
<S>                                                                                     <C>                   <C> 
Financial assets:
     Cash and cash equivalents                                                          $  3,637,878          $  3,637,878

Financial liabilities:
     Short-term debt                                                                      21,389,095            21,389,095
     Long-term debt                                                                      141,674,131           128,718,000

</TABLE>


<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                                                                       5,777,026             5,777,026
     Long-term debt                                                                      108,481,040           112,338,000
</TABLE>

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

                                     F-24
<PAGE>   80

15. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:

As described in Note 2, the Company acquired certain businesses during 1997.
The fair value of the assets acquired was $30,411,391 and the fair value of the
liabilities assumed was $11,603,614, which resulted in net cash payments of
$18,807,777.

As described in Note 2, the Company acquired certain businesses during 1996.
The fair value of assets acquired was $69,826,951 and the fair value of
liabilities assumed was $47,888,438, which resulted in net cash payments of
$21,938,513.

During 1997, the Company entered into approximately $14,000,000 of capital
lease agreements.

Contour acquired Atlantic Medical Supply Company, Inc. and sold CFI with
noncash transactions of $16,073,970 and $624,252, respectively.

Cash paid for interest during the years ended June 30, 1997, 1996 and 1995 was
$13,851,484, $6,561,954, and $1,172,883, respectively.

Cash paid for income taxes during the years ended June 30, 1997, 1996 and 1995
was $3,265,632, $3,561,089, and $829,292, respectively.

Dividends on preferred stock of $15,000 and $1,996,777 were accrued but not
paid at June 30, 1996.

Dividends on preferred stock of $1,966,777 were accrued but not paid at June
30, 1997.

During 1997 and 1996, approximately $13,730,000 and $8,112,000, respectively,
of lease assets and obligations were capitalized.

16. ACCRUED EXPENSES:

Accrued expenses consisted of the following as of June 30:
<TABLE>
<CAPTION>

                                                                                 1997                  1996
<S>                                                                          <C>                   <C>
Payroll and payroll taxes                                                    $ 5,808,124           $ 3,587,217
Interest                                                                       2,129,164             1,868,805
Workers Compensation                                                           5,275,000             2,975,000
Other                                                                          5,204,970             2,885,008
Total                                                                        $18,417,258           $11,316,030
</TABLE>

17. EMPLOYEE RETIREMENT PLAN:

During the year ended June 30, 1996, the 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
years ended June 30, 1997 and 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, 1997, approximately 11,100 beds were
owned or operated by this entity.

The Contour entity manufacturers a full line of orthopedic care and

                                     F-25
<PAGE>   81

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, 1997,
1996 and 1995.

<TABLE>
<CAPTION>

                                                           1997                  1996                  1995
<S>                                                   <C>                   <C>                    <C>
Operating revenues:
Retirement Care Associates                            $204,612,388          $124,951,954           $76,656,829
Contour Medical                                         48,615,473             9,059,415             2,959,224
                                                       253,227,861          $134,011,369           $79,616,053
Depreciation and amortization
   expense:
Retirement Care Associates                            $  5,653,472          $  2,806,637           $ 1,051,842
Contour Medical                                            861,241               600,349                76,341
                                                      $  6,514,713          $  3,406,986           $ 1,128,183
Identifiable assets:
Retirement Care Associates                            $227,984,979          $165,094,536           $72,644,179
Contour Medical                                         27,385,987            12,397,751             7,613,367
                                                      $255,370,966          $177,492,287           $80,257,546
Capital expenditures:
Retirement Care Associates                            $ 11,764,903          $ 11,741,135           $ 5,763,553
Contour Medical                                            969,486               749,163               316,057
                                                      $ 12,734,389          $ 12,490,298           $ 6,079,610

Operating Income
Retirement Care Associates                            $  3,006,819          $  8,540,815           $ 8,865,388
Contour Medical                                            694,303               839,202               151,820
                                                      $  3,701,122          $  9,380,017           $ 9,017,208
</TABLE>

19. SUBSEQUENT EVENTS

The board of directors of RCA has unanimously approved and adopted the
Agreement and Plan of Merger and reorganization, dated as of February 17, 1997,
as amended by Amendment No. 1 thereto dated as of May 27, 1997, and also
amended by Amendment No. 2 thereto dated as of August 21, 1997, with Sun
Healthcare Group, Inc. ("Sun"). The proposed RCA merger is contingent upon,
among other things, the approval of the holders of the requisite number of
shares of Sun Common Stock and RCA Capital Stock, which is described in a Joint
Proxy Statement/Prospectus/Information Statement. The proposed RCA Merger will
be consummated as soon as practicable after such approvals are obtained and the
other conditions to the RCA Merger are satisfied or waived.

The Company renewed debt of $9,750,000 and obtained $5,000,000 of additional
debt with Sun Healthcare Group, Inc. on July 10, 1997. Interest accrues at
rates ranging from 11% to 12% and would increase from 15% to 16% during any
period of default. Principal is due 120 days following the termination of the
agreement or merger with Sun.

Subsequent to June 30, 1997, the Company became obligated on approximately
$2,500,000 bonds to construct a twenty-five unit addition to its Jackson,
Tennessee facility.

20.  ADJUSTMENTS TO 1996 FINANCIAL STATEMENTS

As discussed in Note 19, on February 17, 1997, following a series of  meetings
and negotiations, the company agreed to be acquired by Sun Healthcare Group,
Inc. (Sun) through an exchange of shares of Sun for shares of the Company.
During due diligence procedures associated with the transaction, certain
adjustments to previously issued financial statements were discovered to be
required. Those adjustments, together with additional amounts, have been
applied to the financial statements for the year ended June 30, 1996 as
restatements and corrections as follows:



                                     F-26
<PAGE>   82

<TABLE>
<CAPTION>
<S>                                                                                                 <C>
Additional provision for uncollectible accounts                                                     $1,705,000
Additional accrual for claims incurred, but not
 reported for self-insured worker's compen-
 sation and health care                                                                              3,400,000
Accrual for compensated absences                                                                       300,000
Adjustment of previously recorded inventory                                                            809,219
Adjustment to lease expense                                                                            530,000
                                                                                                     6,744,219
Less:
Adjustment to income taxes                                                                          (2,921,219)

Decrease in net income before extraordinary
 item                                                                                               $3,823,000

Decrease in net income per share                                                                    $      .34

</TABLE>

21.  LIQUIDITY

During the period ending June 30, 1997, the Company experienced a significant
net operating loss and at the same time a decline in liquidity, resulting from
the operating loss and a heightened level of investment in new facilities.
Management believes that the operating loss is the result of a decline in the
overall census of residents and patients in the Company's facilities, together
with losses at Contour Medical, Inc. resulting from costs of consolidation of
subsidiaries acquired during the period. Closing of the merger of the Company
with Sun as discussed in Note 19 will provide access to additional sources of
liquidity as the Company's facility proceed through a combination of new
admissions to nursing facilities and set-up of retirement facilities. In the
event the merger does not take place, management's plans include a complete
reorganization of operations of the nursing home segment, assisted living
segment and Contour Medical, Inc. This reorganization plan would include new
personnel to implement increased census, develop and implement ancillary
business (i.e., pharmacy, therapy, etc.) which would be beneficial from an
operations point of view as well as increase profits for the Company. A
comprehensive plan is being developed to implement these changes if necessary.
The personnel for this plan have been identified and could be brought on board
quickly. The funds to implement this plan would be provided from a new line of
credit, sale and lease-back transactions for certain identified properties of
the Company as well as refinancing of other Company targeted facilities.

                                     F-27


<PAGE>   83


                                  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: October 14, 1997             By:  /s/ Christopher F. Brogdon
                                         ---------------------------------
                                         Chris Brogdon, President

         Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed by the following persons on behalf of the Registrant
and in the capacities and on the dates indicated.

            Signature                      Title                   Date


/s/ Christopher F. Brogdon      President and Director      October 14, 1997
--------------------------
Chris Brogdon


/s/ Edward E. Lane              Secretary and Director      October 14, 1997
--------------------------
Edward E. Lane


/s/ Darrell C. Tucker           Treasurer (Chief Financial  October 14, 1997
--------------------------      Officer and Principal
Darrell C. Tucker               Accounting Officer) Director


/s/ Julian S. Daley             Director                    October 14, 1997
--------------------------
Julian S. Daley


                                Director
--------------------------
Harlan Mathews