KUALA HEALTHCARE INC, 10-K, 1998-10-21

KUALA HEALTHCARE INC
10-K, 1998-10-21
SKILLED NURSING CARE FACILITIES

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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934

For the fiscal year ended June 30, 1998.

Commission file number: 0-11895

KUALA HEALTHCARE, INC.

Formerly named Continental Health Affiliates, Inc.

(Exact name of registrant as specified in its charter)

Delaware 22-2362097
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

910 Sylvan Avenue
Englewood Cliffs, N.J. 07632
(Address of principal executive offices) (Zip Code)

Registrant's telephone number, including area code: (201) 567-4600

Securities registered pursuant to Section 12(b) of the Act: NONE

Securities registered pursuant to Section 12(g) of the Act: Common Stock, par
value $.06

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 NO X
--- ---

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. [X]

As of September 23, 1998 the aggregate market value of the voting stock held
by non-affiliates of the registrant was $17,598,098.

As of September 23, 1998, 3,409,732 shares of the registrant's common stock
were outstanding.

DOCUMENTS INCORPORATED BY REFERENCE:
Portions of definitive proxy statement to be filed not later than
October 29, 1998

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TABLE OF CONTENTS

Part I

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<S> <C> <C> <C>
Page

Item 1. Business................................................ 3 - 12
Item 2. Properties.............................................. 12
Item 3. Legal Proceedings....................................... 12
Item 4. Submission of Matters to a Vote of Security Holders..... 12

Part II

Item 5. Market Information...................................... 13
Item 6. Selected Consolidated Financial Data.................... 14
Item 7. Management's Discussion and Analysis of Consolidated
Financial Condition and Results of Operations........... 15 - 19
Item 8. Consolidated Financial Statements and Supplementary Data 20
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosures.................... 20

Part III .............................................................. 21

Part IV

Item 14. Exhibits, Consolidated Financial Statements, Financial
Statement Schedules, and Reports on Form 8-K............ 22

Signatures ................................................................. Last Page
</TABLE>

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PART I

Item 1. Business.

General

Kuala Healthcare, Inc. ("KUAL") and, together with its subsidiaries,
the ("Company") provides a variety of non-hospital based health care services
to patients. These alternate-site health care services include long term care
and residential health care facilities, home infusion therapy (including
enteral and parenteral nutrition and intravenous therapies) and provision of
medical products and services, including infusion therapy, to patients in long
term care facilities. The Company has also commenced development of three
assisted living projects in New Jersey totaling 320 units. It is focused on
developing, acquiring and operating assisted living facilities and other forms
of senior housing primarily in the northeastern United States, and possibly in
some mid-Atlantic and southeastern states. The Company is in the process of
disposing of at least some of the assets it has been using in its historical
businesses, including some or all of its skilled nursing facilities and,
possibly some or all of its stock of Infu-Tech, Inc., a 58% owned publicly
traded company through which the Company conducts its home infusion therapy
and related businesses. It will use the net proceeds of these asset sales
(after payment of related debt) to develop and acquire assisted living
facilities.

On January 27, 1998, the Company effected a one-for-three reverse
split of its common stock. In conjunction with the reverse split, the Company
(formerly known as Continental Health Affiliates, Inc.) changed its name to
Kuala Healthcare, Inc. Its common stock is listed on the Nasdaq Small Cap
Market under the symbol "KUAL". Effective August 10, 1998 the Board of
Governors of the Federal Reserve System has included KUAL common stock as
qualifying for margin status.

Common share and per share amounts in the financial statements
reflect the impact of the reverse stock split in all periods.

In November 1995, the Company changed its fiscal year to end on June
30 of each year from December 31. Therefore, unless otherwise noted,
references to a year are to the fiscal year ending June 30.

New Developments

In December 1997, the Company acquired a 75% interest in a limited
liability company (L.L.C.) to provide institutional pharmacy services. The
minority interest is held by Bach's Drug Store, a New Jersey Corporation
("Bach's"), based in Hackettstown, which contributed its existing business to
the L.L.C.. The Company paid $210,000 in common stock to a principal of Bach's
in consideration for (a) the 75% interest in the L.L.C., (b) a four-year
employment agreement (at $120,000/year) with the pharmacist of Bach's (the
manager of the L.L.C.) and (c) a four-year lease with the shareholders of
Bach's to lease the premises (at $18,000/year) where the L.L.C. operates.
The Company has guaranteed the employment and lease agreements.

In September 1998, the Company signed a non-binding letter of intent
with Care One, L.L.C., a privately held New Jersey based long term care
company, to sell Care One a 49% stake in its five nursing homes (with an
option to purchase the other 51%) and a 100% interest in the Company's
institutional pharmacy business. Furthermore an assisted living joint venture
will be formed with the Company initially contributing its 120 unit project
based in Norwood, New Jersey. The Company would receive approximately $15
million in cash for its 49% stake in its nursing homes and the

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Company's institutional pharmacy business. The Company would also receive $2
million for the 49% stake in the assisted living venture with Care One L.L.C..

Nursing Homes

As of June 30, 1998, the Company was operating or managing five
nursing homes with approximately 800 beds. Typically, the Company provides
lodging, meals and nursing assistance to residents of its nursing homes for a
per diem charge and provides limited additional treatment for additional
charges.

The following table provides information about the nursing homes the
Company was operating (as owner or as lessee) or managing as of July 1, 1998.

Average Occupancy Percentage
Years Ended June 30,
Number --------------------------
Location of Beds 1996 1997 1998
-------- ------- ---- ---- ----
Nursing Homes Being Operated:
Cedar Grove, NJ ................... 180 95% 91% 90%
Cape May Courthouse, NJ ........... 116 97% 96% 97%
Philadelphia, PA .................. 135 95% 93% 92%
West Orange, NJ ................... 131 94% 93% 92%
Nursing Homes Being Managed:
Norwood, NJ (Heritage)
Skilled ........................ 180 98% 94% 94%
Residential Care ............... 66 100% 93% 100%

As of June 30, 1998, the Company owned the nursing homes in
Philadelphia, Cedar Grove, West Orange and the real property of the long term
and residential care facility located in Norwood, New Jersey (the "Heritage
Facility"). The Company leases the nursing home in Cape May Courthouse.

The Company leases the Heritage Facility to Senior Care Foundation,
Inc. ("SCF"), a not for profit corporation, for twenty-five years at a rental
of $2.4 million per year. The Company manages the Heritage Facility and
receives a management fee of 5% of the gross revenues of the Heritage Facility
(after the payment of rent to the Company). The operations of Heritage are
included in the consolidated financial statements from October 31, 1995, which
was when the Company purchased the real property of the Heritage facility.

Infusion Therapy and Other Medical Services

The Company through Infu-Tech, provides infusion therapy (i.e.,
administration of nutrients, antibiotics and other medications either
intravenously or through feeding tubes) and other medical products to patients
in their homes, in Infu-Tech's ambulatory suites and in nursing homes. The
Company was one of the early marketers of equipment and nutrients for infusion
therapy and was one of the first to market equipment and formulations for
intravenous infusion of nutrients and medication outside hospitals.

Infu-Tech is organized into three units. The Intravenous Infusion
Unit provides a broad range of home, ambulatory and subacute infusion therapy
services, including intravenous total parenteral nutrition therapy, antibiotic
therapy, enteral nutrition therapy, chemotherapy, chronic pain management
therapy, hydration therapy and a variety of other therapies. The Contract
Services Unit provides medical products and services, including enteral
nutrition therapy, intravenous infusion therapy,

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urological products and wound care products, to residents in long term care
facilities. Infu-Tech's Disease Management Unit continues to focus on
developing comprehensive preventive treatment programs for patients with
chronic conditions, such as asthma, diabetes, congestive heart failure and
sickle cell.

Infu-Tech's sales and marketing efforts are primarily directed
towards Managed Care. Infu- Tech has over 65 agreements with Managed Care
companies covering over 19 million members to provide infusion therapy and
other home health services. The agreements with Managed Care companies vary
from preferred provider relationships to being one of several providers.
Reimbursement is generally on a per diem basis.

Infu-Tech's continued marketing efforts directed at managed care
companies bring significant opportunity to drive new programs like Disease
Management through existing relationships.

In 1998, Infu-Tech renewed its non-exclusive distribution agreement
with Genzyme Corporation for Ceredase(R) enzyme and Cerezyme(TM), which are
the only products approved by the FDA as therapy for patients with Gaucher's
disease. Genzyme estimates that there are between 2,000 and 2,500 Gaucher
patients in the United States who require treatment with those drugs. Cost of
the therapy normally ranges from approximately $150,000 to $250,000 per year
per patient.

The following table sets forth the percentages of Infu-Tech's
revenues, by service unit, from the various therapies, products and services.

<TABLE>
<CAPTION>
Year ended Year ended Year ended
June 30, 1996 June 30, 1997 June 30, 1998
--------------------------------- ---------------------------------- ----------------------------------
Intravenous Contract Total Intravenous Contract Total Intravenous Contract Total
Infusion Services Revenues Infusion Services Revenues Infusion Services Revenues
-------- -------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Enteral Nutrition 3% 72% 20% 3% 71% 20% 4% 77% 19%
Antibiotic 30% -- 23% 27% -- 20% 19% -- 15%
TPN 7% -- 5% 5% -- 4% 6% -- 4%
Orthotics -- 1% -- -- -- -- -- -- --
Immune Globulin 8% -- 6% 10% -- 7% 9% -- 7%
Ceredase/Cerezyme 27% -- 20% 32% -- 24% 41% -- 33%
Wound Care -- 2% 1% -- 1% -- -- -- --
Other 25% 25% 25% 23% 28% 25% 21% 23% 22%
-------- -------- -------- -------- -------- -------- -------- -------- --------
100% 100% 100% 100% 100% 100% 100% 100% 100%
======== ======== ======== ======== ======== ======== ======== ======== ========
</TABLE>

Overview of the Home Health Care Industry

One of the major factors contributing to the rapid growth of home
health care has been the use of alternate site health care to contain the
rising costs of health care. Consumers of all types, including governmental
bodies, managed care organizations, insurance companies and private payors are
recognizing the savings that can be realized by offering care in the home as
opposed to institutional settings. In addition, an aging population and
patients' preferences for receiving health care in the comfort of the home,
combined with advances in medical technology making the delivery of
sophisticated treatments in the home a reality, are all contributing to the
continued growth of the home health care industry.

Managed care organizations are becoming important players in the home
health market and have exerted pricing pressure on the providers of home
health care services. Such pressure has negatively impacted the profit margins
of home health care producers. In addition, as the managed

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care organizations continue to grow, they may show a preference to deal only
with those home health care service providers who can offer a comprehensive
range of services throughout such managed care organizations' area of
operations. In response, what once was a very fragmented industry is
undergoing a wave of consolidation.

With the development of additional oral medications to replace
medications that are administered intravenously, there has been a decrease in
the demand for home infusion therapies. Providers of oral pharmaceuticals are
servicing an increasing number of patients who previously required infusion
therapies.

Intravenous Infusion Therapy

Intravenous infusion therapy principally involves the intravenous
administration of nutrients, antibiotics or other medications to patients in
their homes, in Infu-Tech ambulatory suites, or in Infu-Tech credentialed
subacute facilities, often as a continuation of treatment initiated in the
hospital. The national non-hospital infusion therapy market has grown to over
$4 billion since its inception approximately 17 years ago. The Company
believes the primary factors contributing to the rapid growth of the
non-hospital infusion therapy market have been health care cost containment
pressures, incentives by third party payors to use home care, rapid growth of
the elderly population and increased acceptance of home infusion therapy by
the medical community and patients. Additionally, the number of therapies that
can be administered safely outside the hospital has increased significantly in
recent years because of technological innovations such as more sophisticated
portable infusion control devices, implantable injection ports, new vascular
access devices and advances in drug therapy. Consequently, more infections and
diseases that would otherwise have required patients to be hospitalized are
now considered treatable without hospitalization.

Before accepting a patient for infusion therapy, Infu-Tech consults
with the physician or clinician and hospital personnel in assessing the
patient's specific medical needs and suitability for home infusion therapy.
This assessment process includes an analysis of the patient's physical
condition as well as social factors such as the stability of the patient's
home life and the availability of family members or others who can assist in
the administration of the patient's infusion therapy. Once the patient is
accepted for therapy, Infu-Tech provides training and education to the patient
and his family or others relating to proper infusion techniques, care and use
of equipment, care of infusion sites, and other aspects of the patient's
infusion therapy. Infusion therapy equipment, consisting primarily of poles
and pumps, is owned or leased by Infu-Tech and provided to patients along with
other services.

Throughout the course of treatment, all prescribed drugs and
solutions are delivered directly to the patient's home or to an Infu-Tech
credentialed subacute care facility. In approximately 90% of the cases,
Infu-Tech's own pharmacies provide the prescribed drugs, solutions and
supplies. Due to geography, patients who cannot be adequately serviced through
an Infu-Tech owned pharmacy are covered by one of six satellite pharmacies.
Infu-Tech maintains contact with the patient and the patient's physician in
order to monitor and, when directed by the physician, refine the patient's
plan of care. Infu-Tech's nursing and pharmacy services are available on-call
24 hours a day for consultation, home visits and special prescription needs.

A registered nurse clinical-coordinator follows each case and
monitors the therapy with the patient, the nurses assigned to the case and the
patient's physician. Billing information is coordinated at a central billing
department which bills the appropriate payor and tracks payments.

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During 1994, Infu-Tech began also to provide infusion therapy
services in ambulatory infusion suites attached to its pharmacies, where
patients receive infusion therapy on an out-patient basis. In addition,
Infu-Tech began arranging with nursing homes and other subacute facilities to
have patients admitted on a short term basis to receive infusion and other
subacute therapies.

Contract Services

Infu-Tech's contract services involve the distribution of products
and services to residents in long term care facilities. Products and services
are provided through arrangements with the long term care facilities for
specific residents' use. Generally, Infu-Tech bills a third party payor,
principally Medicare, on behalf of the individual resident.

Until late 1990, a large majority of the products and services the
Company provided to residents of long term care facilities involved enteral
nutrition therapy. Beginning in late 1990, the Company began marketing other
products to residents of long term care facilities in circumstances in which
these products are eligible for reimbursement under Medicare and other
programs. These include, in addition to enteral feeding, parenteral feeding,
medical/surgical products, wound care products, urological products and other
supplies.

Since late 1990, the Contract Services unit has expanded the number
of products it offers to nursing homes and other health care institutions, and
it expects to offer additional products, embodying advances in health care
technology, in the future. On the other hand, changes in reimbursement
regulations or interpretations have led the Contract Services unit to reduce
sales of products in the past and may do so in the future.

As part of providing its products and services to residents in long
term care facilities, Infu-Tech handles the procedures for obtaining
reimbursement from Medicare and other third party payors for these products
and services.

Infu-Tech's sales representatives call upon long term care facilities
within their respective geographical territories to review the medical status
of the facilities' residents in order to determine the needs of individuals
for the products and services provided by Infu-Tech. Since most of the
residents participate in the Medicare program, the representatives review
insurance coverage and the appropriateness of the products and services under
Medicare reimbursement regulations. The sales representatives are responsible
for processing the paperwork for billing by the central billing department.

Orders for products and services are processed through the customer
service department at Infu-Tech's corporate offices in Englewood Cliffs and
shipped from its Moonachie, New Jersey warehouse. Infu-Tech primarily uses its
own trucks for local (New York-New Jersey) deliveries and common carriers for
deliveries outside the local area.

Other Activities

A wholly owned subsidiary of the Company has a non-exclusive
distribution agreement with Eli Lilly Export S.A. to market, sell and
distribute Lilly's pharmaceuticals in Russia. During 1998 the Company's total
sales approximated $660,000 under its arrangement with Lilly.

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Reimbursement For Services

Approximately 70% of the revenues of the five nursing homes the
Company operates were third-party reimbursements from Medicare and Medicaid.
Governmental reimbursement for nursing home care is at cost-based per diem
rates.

Infu-Tech is reimbursed for its products and services by Medicare,
Medicaid, private payors (private insurance companies, self-insured employers,
health maintenance organizations, other managed care systems and patients) and
other third party sources. Prior to accepting a patient, Infu-Tech's
reimbursement specialists determine the availability and amount of third party
coverage and, thereafter, Infu-Tech processes all payment claims on behalf of
the patient.

Most of Infu-Tech's contract services revenues result from Medicare
reimbursement. Infu- Tech has more than thirteen years' experience in billing
Medicare. Medicare provides reimbursement for 80% of the amounts shown on fee
schedules it has developed. The remaining 20% co-insurance portion is not paid
by Medicare, although in most cases, Medicaid reimburses the remaining 20% for
"medically indigent" patients. In other cases, Infu-Tech bills other third
party payors or patients responsible for co-insurance reimbursement. Infu-Tech
often has difficulty collecting the 20% co-insurance portion of charges for
Medicare-eligible items, particularly when there is no third party
reimbursement and these sums must be collected directly from patients.
Inability to collect the 20% co-insurance portion of bills is the principal
reason for Infu-Tech's provision for uncollectible accounts.

Infu-Tech also bills private payors (primarily private insurance
companies, self-insured employers, health maintenance organizations and
managed care systems), which generally pay for services and products based
upon contracted rates or "reasonable and customary" charges. Infu-Tech's
billing specialists work closely with these payors to maximize reimbursement
in the shortest possible time. Private payors have been increasingly concerned
about cost containment and often seek to negotiate lower rates directly with
providers, including Infu-Tech. While these efforts tend to reduce profit
margins, Infu-Tech has for several years been able to operate in this
environment.

The following table details the sources of payments to Infu-Tech
during the twelve months ended June 30, 1998:

Home Contract Total
Infusion Services Revenues
-------- -------- --------

Medicare................. 3% 88% 20%
Private Pay.............. 91% 12% 75%
Medicaid................. 6% - 5%
--------- -------- -----
100% 100% 100%
========= ==== ====
Sales and Marketing

The Company's nursing homes have historically been marketed to
doctors, hospitals and social services agencies in the areas in which they are
located, and directly to patients' families. Recently, they have increasingly
been marketed to health maintenance organizations, preferred provider
organizations and managed care systems. Each nursing home has an admissions
staff which interviews the family, makes financial arrangements and
coordinates the admission of the new resident.

Infu-Tech's principal sources of patient referrals are health
maintenance organizations, physicians, hospital discharge planners, other
hospital officials, nursing homes, insurance companies

<PAGE>

and other managed care systems. Infu-Tech's products and services are marketed
through its sales force and clinicians. Infu-Tech's sales force is responsible
for establishing and maintaining referral sources. At June 30, 1998, the sales
force included 3 full time sales employees and approximately 6 sales and
service representatives, who report to their respective regional managers.
Sales employees receive a base salary plus commissions based on revenues.
Infu-Tech conducts regular sales training programs, intended to enable its
sales force to generate more revenue from current and new sources of patient
referrals and to assist them in targeting and developing new revenue sources.

The "Infu-Tech" trademark is registered and is established in the
areas in which Infu-Tech does business.

Suppliers

The Company purchases supplies, drugs and other materials and leases
equipment from many suppliers. The Company has generally not experienced
difficulty in purchasing supplies or leasing equipment. The Company believes
there are alternative sources for virtually all the supplies and equipment it
requires, other than Ceredase(Registered) enzyme and Cerezyme(Trademark),
which are available only from one supplier, Genzyme Corp. The Company has a
distribution agreement with Genzyme which automatically renews for one year
terms unless cancelled at the end of a term on 90 days prior notice.
The agreement may also be terminated at any time on 60 days' notice.

Potential Liability and Insurance

Participants in the health care market are subject to lawsuits based
upon alleged negligence or similar legal theories, many of which involve large
claims and significant defense costs. The Company could be subject to such
suits. The Company maintains general liability insurance, including insurance
against professional and products liability, with coverage limits of $10
million. The Company's insurance policy provides coverage on an "occurrence"
basis and is subject to annual renewal. A successful claim against the Company
in excess of the applicable insurance coverage could have a material adverse
effect upon the Company's business and results of operations. Claims against
the Company, regardless of their merit or eventual outcome, also may have a
material adverse effect upon the Company's reputation. There can be no
assurance that the coverage limits of the Company's insurance policies will be
adequate. While the Company has been able to obtain liability insurance in the
past, such insurance varies in cost, is difficult to obtain and may not be
available in the future on acceptable terms or at all.

Competition

The Company's long-term care and prospective assisted living
facilities compete or will compete with other facilities in the areas in which
they are located, as well as, to a limited extent, hospitals and home health
care providers. Competition is based primarily on location and quality of the
facilities and price.

The segments of the health care market in which Infu-Tech operates
are highly competitive. In each of its lines of business there are relatively
few barriers to entry, a limited number of national providers, as many of the
large national providers have recently merged, and numerous regional and local
providers. The principal competitors for sales to patients in long term care
facilities are local providers of health care products and the operators of
the facilities themselves.

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The competitive factors most important in Infu-Tech's lines of
business are quality of care and service, on-time delivery, reputation with
referring health care professionals, ease of doing business with the provider,
ability to develop and maintain the confidence of potential sources of patient
referrals and price of service. Some competitors in Infu-Tech's lines of
business have also attempted to enhance sales by entering into joint ventures
or other financial relationships with potential referral sources. Increasingly
stringent, and increasingly enforced, laws prohibiting remuneration between
health care providers has reduced these arrangements as a competitive factor.
Infu-Tech believes that it competes effectively in each of its service areas
with respect to all of the above factors. Some of Infu-Tech's current and
potential competitors have or may obtain significantly greater financial and
marketing resources than Infu-Tech. It is likely that Infu-Tech will encounter
increased competition in the future, which could limit Infu-Tech's ability to
maintain or increase its market share and could adversely affect Infu-Tech's
operating results. Other types of health care providers, including hospitals,
physician groups and home health agencies, have entered, and may continue to
enter, Infu-Tech's lines of business.

Government Regulation

Most states require that a certificate of need be obtained prior to
establishing or expanding, a nursing home. However, only a minority of states,
inclusive of New Jersey, require obtaining a certificate of need for
establishing an assisted living facility. Some states also require
governmental approval prior to the acquisition of a nursing home or assisted
living facility by a new owner. While the need for certificates of need and
approval to acquire facilities could affect the Company in specific instances,
the Company does not believe they would significantly impede any efforts the
Company might make to expand its overall long term care and assisted living
activities. A few states, most notably New York, make it very difficult for
nursing homes to be owned by corporations. This could prevent the Company from
acquiring or building nursing homes in those states.

A New Jersey statute requires that any nursing home in that state
which participates in the Medicaid program may not discriminate in admission
policy against Medicaid patients until the number of Medicaid patients is a
specified percentage (currently 45%) of the beds in the nursing home.
Generally, non-Medicaid patient reimbursement is at higher rates than Medicaid
patient reimbursement.

Health care is an industry subject to extensive regulation and
frequent regulatory change. Changes in the law or new interpretations of
existing law can have a dramatic effect on permissible activities, the
relative cost associated with doing business and the amount of reimbursement
by government and third party payors, such as Medicare and Medicaid. Charges
under government programs are also subject to audit. A reduction in coverage
or payment rates by third party payors, or significant audit adjustments, can
have a material adverse effect on the Company's business and results of
operations.

The Federal government and each of the states in which Infu-Tech
currently operates regulate some aspects of Infu-Tech's business. In
particular, the operations of Infu-Tech's branch locations are subject to
Federal and state laws. Infu-Tech's operations also are subject to state laws
governing pharmacies, nursing services and certain types of home health agency
activities. Certain of Infu-Tech's employees are subject to state laws and
regulations governing the ethics and professional practice of people providing
various therapies, pharmacy and nursing. Certificates of need, permits or
licenses may be required for certain business activities and may be restricted
or otherwise difficult to obtain. Infu-Tech believes it and its employees have
all certificates of need, permits and licenses which are required for the
business currently being conducted by Infu-Tech. The failure to obtain, renew
or

<PAGE>

maintain any of the required regulatory approvals or licenses could adversely
affect Infu-Tech's business and could prevent the location involved from
offering products and services to patients.

There are Federal laws which generally prohibit any remuneration in
return for the referral of Medicare or Medicaid patients, and prohibit the
referral of any Medicare or Medicaid patient by a health care practitioner to
a provider in which the practitioner has an ownership or financial interest.
In addition, the Federal government and several states in which Infu-Tech
operates have laws that prohibit financial arrangements, certain direct or
indirect payments or fee-splitting arrangements between health care providers.
Infu-Tech maintains an internal regulatory compliance review program and uses
in house counsel to monitor compliance with all such laws and regulations.
Increased attention has been paid recently to enforcement of these laws and
regulations. Possible sanctions for failure to comply with these laws and
regulations include exclusion from the government programs, loss of license
and civil and criminal penalties.

Executive Officers of the Company

The following is a list of the executive officers of the Company as
of June 30, 1998, together with a brief description of the business experience
of the last five years of the officers who are not directors. A brief
description of the business experience of officers who are directors is
included in Item 10, "Directors."

Name Office Age
---- ------ ---
Jack Rosen Chairman, President and Director 52
Joseph Rosen Vice President, Assistant Secretary and 47
Director
Roy Smolarz Executive Vice President and General 47
Counsel
Israel Ingberman Secretary, Treasurer and Director 52

Roy Smolarz became Executive Vice President and General Counsel of
the Company and of Infu-Tech in March 1998. From December 1992 until March
1998, he was affiliated with Coopers & Lybrand, a public accounting and
financial services firm and was a managing director of Coopers & Lybrand
Securities LLC. For more than seven years prior to that, he was a corporate
vice president and corporate counsel of Paine Webber Incorporated, an
investment banking firm. He is a member of the New York and New Jersey Bars
and is a Certified Public Accountant.

Employees

At June 30, 1998, the Company had approximately 950 employees. These
employees include 142 full-time management, marketing, technical-professional
and clerical personnel. Additionally, the Company's five nursing homes were
staffed by approximately 131 full-time management, marketing,
technical-professional and clerical personnel, approximately 194 registered or
practical nurses and 458 other employees, for a total of approximately 800
people. All of the Company's nursing homes have collective bargaining
agreements. The Company believes its relations with its employees are
generally satisfactory. As of June 30, 1998, Infu-Tech had approximately 128
employees. Of these employees, two were in executive capacities (in addition
to executives of Kuala who rendered services to Infu- Tech), approximately 9
were in sales or service capacities, approximately 57 were in clinical or
pharmaceutical capacities and the remainder were administrative or
distribution personnel. Infu-Tech's employees are not currently represented by
a labor union or other labor organization. Infu-Tech believes that its
employee relations are good.

<PAGE>

Item 2. Description of Properties.

As of June 30, 1998, the Company owned a nursing home in
Philadelphia, Pennsylvania. It also owned the nursing homes in Cedar Grove and
West Orange, New Jersey and the real property of the long term and residential
care facility located in Norwood, New Jersey (The "Heritage Facility"). (See
Item 1, "Business -- Nursing Homes.") The Company leases the nursing home in
Cape May Courthouse, New Jersey.

The Company maintains corporate offices in Englewood Cliffs, New
Jersey and it leases five branch offices for Infu-Tech's branch operations.
Offices provide a home base for sales personnel, clinicians and administrative
and technical personnel, as well as storage for excess equipment and supplies.
In addition, Infu-Tech maintains a central pharmacy and a warehouse in
Moonachie, New Jersey and pharmacies and ambulatory infusion suites in
Memphis, Tennessee, Boston, Massachusetts, Philadelphia, Pennsylvania and Fort
Lauderdale, Florida. The lease payments for the five branch offices, the
central pharmacy, the Memphis, Boston, Philadelphia and Fort Lauderdale
pharmacies, the infusion suites and the warehouse total $35,874 per month,
payable to unrelated parties. The Company pays rent of $27,720 per month for
corporate office space. In communities which cannot be serviced from an
Infu-Tech office, staffing and administration is handled by a representative
residing in the area. The Company believes its facilities are adequate for its
current needs.

Item 3. Legal Proceedings.

The Company and its subsidiaries are subject to legal proceedings and
claims which arise in the ordinary course of its business. The Company does
not believe any litigation to which it is a party is likely to have a material
adverse effect upon its financial condition or results of operations.

Item 4. Submission of Matters to a Vote of Security Holders.

One matter was submitted to a vote of security holders during the
year ended June 30, 1998. At the Annual Meeting of Stockholders on January 26,
1998, the security holders voted upon an amendment to the Company's to the
Certificate of Incorporation which changed (i) the name of the Company to
"Kuala Healthcare, Inc." (ii) changed the par value of the common stock from
$.02 per share to $.06 per share, (iii) combined the shares of common stock so
that each three shares became one share.

<PAGE>

PART II

Item 5. Market for the Registrant's Common
Stock and Related Security Holder Matters.

The Company's shares are listed on the Nasdaq Small Cap Market. The
Company's shares became marginable as of August 10, 1998, pursuant to the
Board of Governors of the Federal Reserve System Listing.

According to the National Quotation Bureau, Inc. the high bid and low
bid prices of the common stock during each calendar quarter during 1996, 1997
and June 30, 1998 were as follows:
(All prices reflect the one-for-three reverse split)

High Low
Bid Bid
--- ---

1996:
First Quarter 4 1/8 3 3/16
Second Quarter 6 3/16 3
Third Quarter 7 1/2 3 9/16
Fourth Quarter 6 3/8 4 7/8

1997:
First Quarter 11 7/16 7 1/2
Second Quarter 9 3/16 7 1/2
Third Quarter 9 3/8 6
Fourth Quarter 9 3/16 5 5/8

1998:
First Quarter 8 7/16 4 5/8
Second Quarter 9 1/8 6 1/4

The Company has not declared any cash dividends on its Common Stock
since the Common Stock was initially sold to the public in 1983, and the
Company has no current plans to declare any dividends on its Common Stock.

Dividends on the Company's 5% Exchangeable Preferred Stock are
cumulative and are payable semi-annually on January 27 and July 27 at the rate
of $5 per share per year, when and as declared by the Company's Board of
Directors. The dividends on the 13,884 outstanding shares of 5% Exchangeable
Preferred Stock total less than $70,000 per year. Under Delaware law, the
Company is only permitted to pay dividends out of accumulated surplus or the
current or prior year's net profits. At June 30, 1998, the Company had a
surplus of $2,716,000 and during the twelve months ended June 30, 1998, it had
a net loss of ($3,080,000).

At September 23, 1998 there were 254 holders of record of the
Company's Common Stock.

<PAGE>

set r m 132
Item 6. Selected Financial Data.

The following table sets forth selected financial data of the Company
and should be read in conjunction with the audited consolidated financial
statements for the years ended June 30, 1998, 1997, 1996, the six months ended
June 30, 1995 and for the year ended December 31, 1994, and the related notes
included elsewhere in this Report:

<TABLE>
<CAPTION>
Six Months Years Ended
Years Ended June 30, Ended June 30, December 31,
-------------------------------- -------------- ----------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
(In thousands, except per share amounts)

<S> <C> <C> <C> <C> <C>
Revenues ....................................... $ 63,926 $ 70,694 $ 69,880 $ 28,724 $ 54,378
-------- -------- -------- -------- --------
Income (loss) from operations .................. 1,262 3,007 4,116 (924) (917)
Interest and dividend income ................... 225 104 221 183 98
Interest and other financing costs ............. 4,904 (6,343) (4,044) (632) (1,481)
Other income, net .............................. 746 541 550 458 877
Minority interest .............................. (154) (395) (494) 353 375
-------- -------- -------- -------- --------
Income (loss) before income taxes .............. (2,825) $ (3,086) 349 562 (1,048)
Provision (benefit) for income taxes ........... 149 662 270 -- (341)
-------- -------- -------- -------- --------
Income (loss)before extraordinary items ........ (2,974) (3,748) 79 (562) (707)
Extraordinary items (a) ........................ (106) 5,191 777 -- 1,058
-------- -------- -------- -------- --------
Net income (loss) .............................. (3,080) 1,443 856 (562) 351
Preferred Dividends ............................ (114) (130) (70) (35) (69)
-------- -------- -------- -------- --------
Net income (loss) available to common
shareholders .............................. $ (3,194) $ 1,313 $ 786 $ (597) $ (282)
======== ======== ======== ======== ========
Earnings (loss) per share:
Basic:

Earnings (loss) before extraordinary items .. $ (.92) $ (1.15) $ -- $ (.08) $ (.09)
Extraordinary items ......................... $ (.03) $ 1.54 $ .28 $ -- $ .13
-------- -------- -------- -------- --------
Basic Earnings (loss) per share(1).............. $ (.95) $ .39 $ .28 $ (.08) $ .04
======== ======== ======== ======== ========
Diluted:
Earnings (loss) before extraordinary items... $ (.92) $ (1.15) $ -- $ (.08) $ (.09)
-------- -------- -------- -------- --------
Extraordinary items.......................... $ (.03) $ 1.54 $ .28 $ -- $ .13
-------- -------- -------- -------- --------
Diluted Earnings (loss) per share(2)............ $ (.95) $ .39 $ .28 $ (.08) $ .04
-------- -------- -------- -------- --------

</TABLE>

<TABLE>
<CAPTION>
Six Months Years Ended
Years Ended June 30, Ended June 30, December 31,
------------------------------ -------------- ------------
BALANCE SHEET DATA 1998 1997 1996 1995 1994
---------------------------------------------------------------
(In thousands)
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Working capital (deficit) ........... $ (1,300) $ 512 $ 45 $ (6,060) $ (4,392)
Total assets ........................ 66,517 71,350 75,572 29,675 30,485
Total liabilities and deferred income 61,223 61,313 67,847 28,119 27,980
Minority interest ................... 2,578 2,424 2,029 1,524 1,877
Mandatorily redeemable preferred
stock .............................. 1,114 1,989 3,500 -- --
Stockholders' equity ................ 2,716 5,624 2,196 32 628
</TABLE>

(a)In 1998 includes net gains on extinguishment of debt and loss on sale of a
medical facility in West Orange, NJ. In 1997 includes net gains on sale of
land, two nursing homes and an exchange of the Company's common stock at a
lesser amount than the recorded liability.

(1)Based on 3,375,661, 3,381,068 and 2,806,119 shares outstanding in June 30,
1998, 1997 and 1996. Share amounts for 1997 and 1996 are restated.

(2)Based on 3,375,661, 3,385,746 and 2,816,400 shares outstanding in June 30,
1998, 1997 and 1996. Share amounts for 1997 and 1996 are restated.

<PAGE>

Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations.

Results of Operations

Twelve Months Ended June 30, 1998 Compared with Twelve Months Ended June 30,
1997

Total revenues of $63,926,000 were $6,768,000 or 9% lower in the 1998
period compared to the same period of the prior year. The reduction in revenue
from the prior period was primarily attributable to the sale of two
facilities, Oceanside Convalescent Center, Atlantic City, New Jersey as well
as King David Center in West Palm Beach, Florida. It also reflected a
reduction of $500,000 in anticipated medicare receipts in order to more
reasonably estimate the balance in consideration of the current reimbursement
environment.

Infusion therapy and other medical services revenues increased by
$2,271,000 or 8%, from $26,661,000 in 1997 to $28,932,000 in 1998, primarily
due to a $1,410,000, or 7% increase in home infusion division revenues and
revenues from the Company's majority interest in Bach's institutional
pharmacy, acquired in December, 1997. This increase in revenues is offset by
decreased therapy days and lower pricing on sales through managed care
organizations.

Personnel costs decreased by $6,344,000 or 12% for the current twelve
months. This decrease is primarily attributed to the sale of the two nursing
facilities previously mentioned, partially offset by a bonus payable of
$642,000 and $108,000 by Infu-Tech to the Company's Chairman of the Board and
President (who also is the Chairman of the Board and President of Infu-Tech,
Inc.), under bonus arrangements tied to increases in the price of the
Company's and Infu-Tech's stock. This decrease also reflected normal cost of
living increases.

Costs of medical and nutritional products sold to patients and other
customers increased by $2,808,000 or 21%, from $13,224,000 in 1997 to
$16,032,000 in 1998. As a percentage of infusion therapy and other medical
services revenues, medical and nutritional product costs increased from 51% in
1997 to 56% in 1998. This increase in product costs as a percentage of sales
is partially attributable to increased pricing pressures from certain vendors
and the Company's need to secure immunoglobulin products which due to a
national shortage are only available at a premium price. These products were
needed to provide continued treatment for existing patients.

Health care and lodging expenses, which are incurred in connection
with nursing home services decreased by $1,984,000 or 20%. This decrease is
attributed to the sale of the two nursing facilities previously mentioned.

Selling, general and administrative costs in 1998 increased by
$578,000, or 9% from $6,683,000 in 1997 to $7,261,000 in 1998, due primarily
to the Company's majority interest in Bach's Pharmacy, acquired in December
1997.

The Company increased the provision for uncollectible accounts from
$447,000 in 1997 to $625,000 in 1998. The increase in the provision includes
the effect of unresolved prior claims regarding previously owned facilities,
as well as a comprehensive evaluation of days outstanding of its accounts
receivable.

Other income, net of $746,000 in 1998 primarily consisted of write
offs of accounts payable the Company does not believe it will be required to
pay and unrealized foreign currency translation gain. Other income, net of
$541,000 in 1997 primarily consisted of $308,000 of income resulting from

<PAGE>

the re-evaluation of accruals, an unrealized foreign currency translation gain
of $161,000 and $72,000 of deferred income.

Minority interest in earnings of subsidiaries of $154,000 in 1998 and
$395,000 in 1997 represents the portion of the net income of Infu-Tech
allocable to minority stockholders. For 1998, this amount also includes
$75,000 attributable to the minority interest in Bach's Pharmacy.

The provision for income taxes of $149,000 in 1998 reflects a full
charge for Infu-Tech, a 58% owned subsidiary which files its own federal tax
return.

Fiscal year 1998 includes an extraordinary loss of $106,000 as
follows:

During the second quarter of fiscal 1998, the Company prepaid debt of
approximately $300,000 and received a $150,000 credit which was recorded as an
extraordinary gain. During the fourth quarter of fiscal 1998, the Company sold
a medical facility in West Orange, New Jersey, reflecting an extraordinary
loss of $256,000.

The preferred stock dividend does not include dividends on
mandatorily redeemable preferred stock issued as part of an October 31, 1995
refinancing which is accounted for as interest and financing costs.

The net loss realized by common shareholders in 1998 was $3,194,000
or 95 cents per share (basic) compared to a net income available to common
shareholders in 1997 of $1,313,000 or 39 cents per share (basic).

Twelve Months Ended June 30, 1997 Compared with Twelve Months Ended June 30,
1996

Total revenues of $70,694,000 were $814,000 or 1% higher in the 1997
period compared to the same period of the prior year. This is due to an
improved patient mix yielding higher reimbursement, the inclusion of the
Heritage Facility, for twelve months compared to eight months in the prior
period while being partially offset by lower occupancy at the West Palm Beach,
Cedar Grove and the Heritage facilities and the exclusion of the Hilltop
facility (sold in May 1996) for the current twelve months.

Infusion therapy and other medical services revenues increased by
$1,365,000 or 6% to $26,000,000 in 1997, primarily due to a $913,000, or 4%
increase in home infusion division revenues. This increase is primarily
attributed to a 3% increase in the number of patients serviced, although these
patients experienced shorter terms of therapy and pricing negotiated with
managed care companies was discounted.

Costs of medical and nutritional products sold to patients and other
customers increased by $1,594,000 or 13%, from $11,920,000 in 1996 to
$13,514,000 in 1997. As a percentage of total revenues, medical and
nutritional product costs increased from 48% in 1996 to 52% in 1997. The
increase in the nutritional product costs as a percentage of sales is
partially attributable to the increased pricing pressures from certain
vendors.

Health care and lodging expenses, which are incurred in connection
with nursing home services decreased by $960,000 or 9%. A review of old
accounts payable and outstanding checks resulted in the company writing back
to income an aggregate of $565,000 of which $417,000 was reflected in the
fourth quarter. The prior year included four months of rent expense incurred
prior to the October 1995 Nomura refinancing. The rent expenses have been
replaced by interest and depreciation charges. The Hilltop facility was sold
in May 1996 and thus no health care and lodging expenses have been incurred in
fiscal

<PAGE>

1997. During the year, the Company settled litigation with a vendor which
enabled $460,000 to be released from payables into income. The Heritage
facility is included for twelve months compared to eight months in the prior
year.

Selling, general and administrative costs decreased by $175,000, or
3%. A review of old accounts payables and outstanding checks resulted in the
Company writing back to income an aggregate of $415,000.

Due to an October 31, 1995 refinancing for the acquisition of four
facilities, depreciation and amortization expenses increased by $269,000 and
interest and other financing costs increased by $2,299,000.

Other income, net of $541,000 in 1997 primarily consisted of $308,000
of income resulting from the re-evaluation of accruals, an unrealized foreign
currency translation gain of $161,000 and $72,000 of deferred income. Other
income of $550,000 in 1996 consisted of deferred income of $543,000, an
unrealized foreign translation gain of $130,000, which were offset by
miscellaneous expense.

Minority interest in earnings of subsidiary of $395,000 in 1997 and
$494,000 in 1996 represents the portion of the net income of Infu-Tech
allocable to minority stockholders.

The provision for income taxes of $662,000 in 1997 reflects a full
tax charge for Infu-Tech, a 58% owned subsidiary which files its own federal
tax return.

Fiscal year 1997 includes extraordinary gains of $5,191,000 as
follows:

In December 1996 the Company sold 8 acres of land which secured a
five year $1.5 million loan and utilized the proceeds to pay-down that
borrowing recording a gain of $875,000. In March 1997, the Company agreed to
convert certain liabilities into Common Stock of the Company. The transaction
resulted in an increase to shareholders equity of $2,542,000 of which
$1,192,000 is reflected as an extraordinary gain in the results of operations.
In June 1997, the Company sold Oceanside Convalescent Center, Atlantic City,
N.J. as well as King David Center in West Palm Beach, FL. The sale of these
facilities yielded $2,124,000 of an extraordinary gain. In addition, the
Company sold a 15% interest in a limited partnership for $700,000 which in
1987, purchased a property in Teaneck, New Jersey from the Company and
constructed a 224-bed congregate care facility. A forfeited deposit by a
potential nursing home buyer resulted in a gain of $300,000. The extraordinary
gain of $777,000 in fiscal year 1996 resulted primarily from the sale of
assets relating to the Hilltop facility.

The preferred stock dividend does not include dividends on
mandatorily redeemable preferred stock issued as part of as October 31, 1995
refinancing, which is accounted for as interest and financing costs.

The net income available to common shareholders in 1997 was
$1,313,000 or 39 cents per share (restated) (basic) compared to a net income
available to common shareholders in 1996 of $786,000 or 28 cents per share
(restated) (basic).

Liquidity and Capital Resources

At June 30, 1998, the Company had stockholders' equity of $2,716,000
and total liabilities of $61,223,000. At June 30, 1998, debt amounted to
$45,947,000, the majority of which arose from a refinancing of four facilities
in October of 1995. Other debt included SFr 662,215 (approximately $370,000)
principal amount of 6% Swiss franc denominated bonds which remain unpaid
although they

<PAGE>

matured on June 27, 1995 (the "Bonds"); SFr 619,500 (approximately $410,000)
principal amount of 8% Swiss franc denominated bonds originally due June 27,
1998 (amended repayment schedule requires payment of four equal quarterly
installments ending June 1999); $1,213,000 principal amount of 8% notes due
1999; and $3,400,000 principal amount of 6% notes due 2003.

On October 31, 1995, the Company obtained a 15 year borrowing of
$41.0 million secured by mortgages on four of the company's nursing homes and
a five year borrowing of $1.5 million secured by 8 acres of land in West
Orange, New Jersey. In addition, four subsidiaries of the Company sold
preferred stock for a total of $3.5 million. The $46.0 million borrowing
allowed the Company to purchase 4 nursing homes (three of which previously had
been operated by the Company under leases and the fourth of which the Company
had sold in 1990 and managed under a management contract since then) and to
repay $301,000, and extend the balance of a $601,000 secured note which would
have matured in December 1995. At the same time, the company converted
$1,476,000 of trade payables into a three year note. In September 1996 the
Company converted an additional $904,467 of trade payables into one to three
year notes.

In December 1996, The Company sold the 8 acres of land which secured
a five year $1.5 million loan and utilized the proceeds to pay-down that
borrowing, leaving a balance of $454,000. The Company exercised its right to
prepay that loan in full by December 31, 1997 and recognized a $150,000
credit.

In June 1997 the Company sold one of the nursing homes which had
secured the October 31, 1995 borrowing and issuance of preferred stock. The
proceeds of the sale were used, in part, to pay down the 15 year borrowing and
redeem the preferred stock. The balance of the 15 year borrowing is
$36,483,000 and the balance of the preferred stock outstanding is $1,114,000
at June 30, 1998.

The Company's cash and cash equivalents balance decreased from
$3,796,000 at June 30, 1997 to $395,000 at June 30, 1998. Included in the June
30, 1998 balance is $163,000 held by Infu-Tech. In connection with the initial
public offering of Infu-Tech common stock, the Company entered into a
management and non-competition agreement with Infu-Tech, extended to July
2000, which prohibits Infu- Tech from lending money to (or borrowing money
from) the remainder of the Company.

Operating activities used $987,000 of cash primarily due to a net
loss of $3,080,000, partially offset by an increase in payables and other
current liabilities of $1,113,000 and an increase in accounts receivable of
$1,042,000.

At June 30, 1998, the balance in net accounts receivable for
Infu-Tech was $6.9 million compared to $6.4 million at June 30, 1997,
resulting from increased sales and slower collections, partially offset by
write-offs of old balances. This reclassification reduced the Company's
accounts receivable from 102 days sales outstanding ("DSO") at June 30, 1997
to 96 DSO at year end. The 96 DSO compares favorably to an industry average of
125 days. The 96 DSO is a result of continuing delays in claims processing
experienced by managed care companies and Medicare.

The Company has limited arrangements under which it can make
borrowings. At June 30, 1998, the Company had a working capital deficit of
$1,300,000. Excluding Infu-Tech, which had working capital of $3,502,000, the
Company had a working capital deficit of $4,802,000. Further, at June 30,
1998, Infu-Tech's cash and cash equivalents of $163,000 were $349,000 less
than the balance of $512,000 at June 30, 1997 and its accounts payable of
$5,057,000 were $769,000 higher than the $4,288,000 at June 30, 1997.

During the twelve months ended June 30, 1998, the Company repaid
$1,828,000 of debt, $875,000 of mandatorily redeemable preferred stock and
paid preferred dividends of $114,000.

<PAGE>

At June 30, 1998, the Company has approximately $3.9 million of debt
due the upcoming year. The Company is required to make mandatory principal
redemption payments with regard to its subsidiaries' Preferred Stock of
$73,000 per month.

While the Company continues to experience tight cash flow
constraints, it expects to meet ongoing obligations. It is focused on
generating sufficient funds through operating cash flow or the realization of
assets into cash to meet those obligations.

Impact of Year 2000

The Company is in the process of conducting a review of its business
systems, including its computer systems, and has sent written inquiries to its
customers, distributors and vendors as to their progress in identifying and
addressing problems that their systems may face in correctly interpreting and
processing date information as the year 2000 approaches and is reached. This
review is expected to be completed by March 1999. Based on this review, the
Company will implement a plan to achieve year 2000 compliance. The Company
believes that it will achieve year 2000 compliance in a manner which will be
non-disruptive to its operations. In addition, the Company has commenced work
on various types of contingency planning to address potential problem areas
with internal systems, suppliers and other third parties. Year 2000 compliance
should not have a material adverse effect on the Company, including the
Company's financial condition, results of operations or cash flow. The Company
has incurred no costs to date to year 2000 problems. The Company estimates the
cost of its year 2000 efforts to be approximately $650,000. The total cost
estimate is based on management's current assessment and is subject to change.

However, the Company may encounter problems with supplier and or
revenue sources which could adversely affect the Company's financial
condition, results of operations or cash flow. The Company cannot accurately
predict the occurrence and or outcome of any such problems, nor can the dollar
amount of such problem be estimated. In addition, there can be no assurance
that the failure of third parties to achieve year 2000 compliance would not
have a material adverse effect on the Company.

Item 6. Financial Statements and Supplementary Data.

The consolidated financial statements and supplementary data required
by this item appear beginning at page F-1.

Item 7. Disagreements on Accounting and Financial Disclosure.

Not Applicable.

<PAGE>

PART III

Part III Items 10 through 13 to be filed by October 29, 1998 as part of
definitive proxy statement.

<PAGE>

PART IV

Item 14. Exhibits, Financial Statements
Schedule, and Reports on Form 8-K

(a) Documents filed as part of this Report.

1. Financial Statements

Listed on Index to Consolidated Financial Statements and
Financial Statement Schedule.

2. Financial Statement Schedule

Listed on Index to Consolidated Financial Statements and
Financial Statement Schedule.

3. The following exhibits are filed with this Report or
incorporated by reference:

3(a) Certificate of Incorporation, as amended. (1)(6)

3(b) By-Laws, as amended. (1)

4(a) Specimen of Common Stock Certificate. (1)

4(b) Public Bond Issue Agreement dated as of May 31,
1985 with Banque Gutzwiller, Kurz, Bungener S.A. as
representative of a consortium of Swiss financial
institutions. (2)

4(c) Indenture dated as of September 4, 1986 relating to
14-1/8% Subordinated Debentures due 1996. (3)

4(d) Supplemental Indenture No. 1 dated as of September
27, 1991. (10)

10(a) Agreement dated July 20, 1987 among Continental
Teaneck Realty, Inc., Forest City Residential
Development, Inc. and the Company. (4)

10(b) Certificate and Articles of Limited Partnership of
CR Teaneck Limited Partnership . (4)

10(c) Lease dated November 28, 1988 between Midlantic
National bank, Trustee, and Jayber, Inc. (5)

10(d) Lease dated November 28, 1988 between Midlantic
National Bank, Trustee, and Jayber, Inc. (5)

10(e) Lease dated December 28, 1998 between Midlantic
National Bank & Trust Company/Florida, Trustee, and
P.V.M. Associates, Inc. (5)

<PAGE>

10(f) Management Agreement dated as of January 1, 1994
between Senior Care Foundation and Continental
Norwood, Inc. (8)

10(g) Distribution Agreement between Infu-Tech, Inc. and
Genzyme Corporation dated November 11, 1994.

10(h) 1996 Key Employees and Key Personnel Stock Option
Plan. (9)

10(i) Employment Agreement dated November 1, 1996 between
Continental Health Affiliates, Inc. and Jack Rosen.

11 Calculation of Earnings Per Share.

13 1998 Annual Report to Stockholders - to be
furnished by amendment - that report, except for
any portions which are expressly incorporated by
reference this filing, is not to be deemed "filed"
as part of this filing.

21 List of Subsidiaries

(b) Reports on Form 8-K filed during the quarter ended
December 31, 1994.

None

(d) The financial statement schedule required by
Regulation S-X which is excluded from the annual
Report to Stockholders by Rule 14a-3(b)(1) is
listed in Item 14(a)(2).

FOOTNOTES

(1) Incorporated by reference to Registration Statement No.
2-81823.
(2) Incorporated by reference to Registration Statement No. 33-611
(3) Incorporated by reference to Registration Statement No.
33-6341
(4) Incorporated by reference to Report on Form 10-K for the year
ended December 31, 1987.
(5) Incorporated by reference to Report on Form 10-K for the year
ended December 31, 1988.
(6) Incorporated by reference to definitive proxy statement dated
July 13, 1989.
(7) Incorporated by reference to Registration Statements Nos.
33-74474 and 33-7476.
(8) Incorporated by reference to Report on Form 10-K for the year
ended December 31,
1993.
(9) Incorporated by reference to definitive proxy statement
approved at the 1996 Annual Meeting of Shareholders.

<PAGE>

KUALA HEALTHCARE, INC.

CONSOLIDATED FINANCIAL STATEMENTS

June 30, 1998, 1997 and 1996
(With Independent Auditors' Report Thereon)

<PAGE>

KUALA HEALTHCARE, INC.

Index to Consolidated Financial Statements and
Financial Statement Schedule

Page
----

1. Consolidated Financial Statements:

Independent Auditors' Report.........................................F-3

Balance Sheets

June 30, 1998 and 1997..........................................F-4

Statements of Operations:

Years Ended June 30, 1998, 1997 and 1996........................F-5

Statements of Stockholders' Equity:

Years Ended June 30, 1998, 1997 and 1996........................F-6

Statements of Cash Flows:

Years Ended June 30, 1998, 1997 and 1996.................F-7 - F-8

Notes to Consolidated Financial Statements.....................F-9 - F-30

2. Financial Statement Schedule:

Valuation and Qualifying Accounts...................................S - 1

Other schedules are omitted because of the absence of conditions under which
they are required or because the required information is given the
consolidated financial statements or notes thereto.

<PAGE>

Independent Auditors' Report

The Board of Directors and Stockholders
Kuala Healthcare, Inc.

We have audited the consolidated financial statements of Kuala Healthcare,
Inc. and subsidiaries as listed in the accompanying index. In connection with
our audits of the consolidated financial statements, we also have audited the
financial statement schedule as listed in the accompanying index. These
consolidated financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements and financial statement
schedule based on our audits.

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

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Kuala
Healthcare, Inc. and subsidiaries as of June 30, 1998 and 1997 and the results
of their operations and their cash flows for each of the years in the
three-year period ended June 30, 1998, in conformity with generally accepted
accounting principles. Also, in our opinion, the related financial statement
schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly, in all material respects, the
information set forth therein.

KPMG Peat Marwick LLP

October 8, 1998
New York, New York

F-3

<PAGE>

KUALA HEALTHCARE, INC.
Consolidated Balance Sheets
(Dollars in thousands, except per share amounts)

June 30,
-------------------------
ASSETS 1998 1997
---- ----
<S> <C> <C>
Current Assets:

Cash and cash equivalents..........................................$ 395 $ 3,796
Patients' funds.................................................... 204 188
Accounts receivable, net of allowances for uncollectible
accounts of $3,681 and $4,252................................... 13,763 13,346
Inventories........................................................ 1,987 1,861
Deferred income taxes.............................................. 551 702
Prepaid expenses and other current assets.......................... 993 803
------------- -------------
Total current assets.......................................... 17,893 20,696

Property and equipment, at cost, net of accumulated
depreciation of $5,937 and $4,916.................................. 44,724 46,991
Goodwill, net of accumulated amortization ............................... 125 139
Other assets............................................................. 3,775 3,524
------------- -------------
Total assets..................................................$ 66,517 $ 71,350
============= =============

LIABILITIES AND STOCKHOLDERS' EQUITY

Current Liabilities:

Short-term borrowings..............................................$ 28 $ 105
Current portion of long-term debt.................................. 3,916 5,686
Income taxes payable............................................... 180 437
Accounts payable................................................... 10,389 9,696
Other current liabilities.......................................... 4,680 4,260
------------- -------------
Total current liabilities..................................... 19,193 20,184

Long-term debt, net of current portion................................... 40,916 41,129
Mandatorily redeemable preferred stock (includes $875 and
$1,166 current portion)............................................ 1,114 1,989
------------- -------------

Total liabilities............................................. 61,223 63,302

Minority interest in subsidiaries........................................ 2,578 2,424

Commitments and contingencies

Stockholders' equity:

Preferred stock, $.02 par value; $100 liquidation preference
per share..................................................... 1 1
Series A 11% convertible preferred stock $.02 par value,
1,200 shares authorized, $1,000 liquidation preference,
per share, 34 shares outstanding.............................. 34 34
Common stock, $.06 par value; 5,000,000 shares authorized;
3,409,299 and 3,373,034 shares outstanding 208 206
Additional paid- capital........................................... 23,571 23,401
Accumulated deficit................................................ (21,098) (18,018)
-------------- -------------
Total stockholders' equity.................................... 2,716 5,624
------------- -------------
Total liabilities and stockholders' equity $ 66,517 $ 71,350
============= =============
</TABLE>

See accompanying notes to consolidated financial statements.

F-4
<PAGE>

KUALA HEALTHCARE, INC.
Consolidated Statements of Operations
(Dollars in thousands, except per share amounts)

Years Ended June 30,
------------------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Revenues:

Nursing home services.......................................$ 34,994 $ 44,033 $ 44,440
Infusion therapy and other medical services 28,932 26,661 25,440
-------------- ------------- ------------

Total revenues...................................... 63,926 70,694 69,880
-------------- ------------- -------------

Operating expenses:

Personnel................................................... 28,902 35,284 32,955
Medical and nutritional product............................. 16,032 13,224 12,001
Health care and lodging..................................... 8,146 10,130 11,090
Selling, general and administrative......................... 7,261 6,683 6,858
Provision for uncollectible accounts........................ 625 447 1,210
Depreciation and amortization............................... 1,698 1,919 1,650
-------------- ------------- -------------

Total operating expenses............................ 62,664 67,687 65,764
-------------- ------------- -------------

Income from operations.............................. 1,262 3,007 4,116
Interest and dividend income...................................... 225 104 221
Interest and other financing costs................................ ( 4,904) (6,343) (4,044)
Other income, net................................................. 746 541 550
Less: Minority interest in earnings of subsidiary (154) (395) (494)
-------------- ------------- -------------

Income (loss) before income taxes and
extraordinary items............................... (2,825) (3,086) 349
Provision for income taxes........................................ 149 662 270
-------------- ------------- -------------
Income (loss) before extraordinary gains (2,974) (3,748) 79
Extraordinary gains (losses) ..................................... (106) 5,191 777
--------------- ------------- -------------

Net income (loss)................................... (3,080) 1,443 856

Preferred dividends............................................... (114) (130) (70)
--------------- ------------- -------------

Net income (loss) applicable to common
shareholders......................................$ (3,194) $ 1,313 $ 786
=============== ============= =============

Income (loss) per share:

Income (loss) before extraordinary gains (losses) $ (0.92) $ (1.15) $ 0.00
Extraordinary gains (losses)................................ (0.03) 1.54 0.28
--------------- --------------- ---------------

Net income (loss) per share

Basic ...........................................$ (0.95) $ 0.39 $ 0.28
============== ============== ===============
Diluted .........................................$ (0.95) $ 0.39 $ 0.28
============== ============== ===============

Basic weighted average number of common and
common shares .............................................. 3,375,661 3,381,068 2,806,119
Diluted weighted average number of common and
common shares .............................................. 3,375,661 3,385,746 2,816,400
</TABLE>

See accompanying notes to consolidated financial statements.

F-5
<PAGE>

KUALA HEALTHCARE, INC.
Consolidated Statements of Stockholders' Equity
Years Ended June 30, 1998, 1997 and 1996
(Dollars in thousands, except per share amounts)

Additional Total
Preferred Stock Common Stock Paid- Accumulated Stockholder's
Shares Amount Shares Amount Capital Deficit Equity(Deficit)
------ ------ ------ ------ ------- ------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance,
June 30, 1995........... 13,884 $ 1 7,830,059 $ 156 $ 20,192 $ (20,317) $ 32
Exercise stock options....... -- -- 21,000 -- 21 -- 21
Debt to equity conversion -- -- 1,435,157 30 1,327 -- 1,357
Preferred dividends.......... -- -- -- -- (70) -- (70)
Net income................... -- -- -- -- -- 856 856
------ ---------------------- ------- ----------- ---------- ------------

Balance,
June 30, 1996........... 13,884 $ 1 9,286,216 $ 186 $ 21,470 $ (19,461) $ 2,196
New stock issued............. -- -- -- -- 100 -- 100
Exercise stock options....... -- -- 12,150 1 11 -- 12
Warrants ............. -- -- -- -- 98 -- 98
Debt to equity conversions -- -- 820,735 19 1,852 -- 2,005
Preferred Series A 11% -- 34 -- -- -- -- 34
Preferred dividends.......... -- -- -- -- (130) -- (130)
Net income................... -- -- -- -- -- 1,443 1,443
------ ----- --------- -------- ----------- ---------- -------------

Balance,
June 30, 1997 (a)....... 13,884 $ 35 10,119,101 $ 206 $ 23,401 $ (18,018) $ 5,624
Restated balance
June 30, 1997 .......... 13,884 $ 35 3,373,034 $ 206 $ 23,401 $ (18,018) $ 5,624
New stock issued............. -- -- -- -- -- -- --
Exercise stock options....... -- -- 7,784 -- 76 -- 76
Warrants ............. -- -- -- -- -- -- --
Bach's Investment............ -- -- 28,481 2 208 -- 210
Debt to equity conversions -- -- -- -- -- -- --
Preferred Series A 11% -- -- -- -- -- -- --
Preferred dividends.......... -- -- -- -- (114) -- (114)
Net income (loss)............ -- -- -- -- -- (3,080) (3,080)
------- ----- ---------- -------- ----------- ----------- -------------

Balance,
June 30, 1998........... 13,884 $35 3.409,299 $ 208 $ 23,571 $ (21,098) $ 2,716
=========== ===== ========== ======== ============ ============= =============
</TABLE>

(a) common stock share amounts at June 30, 1997 and prior are before the
reverse stock split which was effective on January 27, 1998.

See accompanying notes to consolidated financial statements.

F-6
<PAGE>

KUALA HEALTHCARE, INC.
Consolidated Statement of Cash Flows
(Dollars in thousands, except per share amounts)

Years Ended June 30,
--------------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Operating activities:
Net income (loss)....................................$ (3,080) $ 1,443 $ 856

Adjustments to reconcile net income (loss) to
net cash provided by (used ) operating
activities:
Depreciation and amortization expense................ 1,698 1,919 1,537
Warrants issued ..................................... -- 98 --
Amortization of deferred financing cost.............. 143 517 266
Provision for uncollectible accounts................. 625 447 1,210
Amortization of deferred income...................... -- (72) (543)
Provision for deferred income taxes.................. 151 172 195
(Gain) loss on foreign currency debt................. (82) (161) (130)
Extraordinary losses (gains)......................... 106 (3,316) (693)
Minority interest.................................... 154 395 494
Net gains on extinguishment of debt.................. -- -- (84)
Increase (decrease) in cash due to changes in:
Patients funds....................................... (16) (4) --
Accounts receivable.................................. (1,042) (3,517) (5,349)
Inventories.......................................... (126) 135 (310)
Prepaid expenses and other current assets............ (190) 348 (35)
Other assets......................................... (184) (228) (2,755)
Taxes payable........................................ (257) 437 --
Accounts payable..................................... 693 2,687 (2,174)
Other current liabilities............................ 420 1,014 1,717
Other liabilities.................................... -- (16) (227)
------------- ------------- -------------
Net cash (used in) provided by
operating activities.................................. (987) 2,298 (6,025)
-------------- ------------- -------------

Investing activities:

Expenditures for property and equipment.............. (814) (374) (39,848)
Acquisition of Universal Home Infusion............... -- (190) 2,390
Cash received on sale of facilities.................. -- 8,116 --
Proceeds from sale of building....................... 1,141 -- --
-------------- ------------- -------------

Net cash (used in) provided by
investing activities........................... 327 7,552 (37,458)
-------------- ------------- -------------
</TABLE>

(Continued on next page)

F-7
<PAGE>

KUALA HEALTHCARE, INC.

Consolidated Statement of Cash Flows
(Dollars in thousands, except per share amounts)

Years Ended June 30,
--------------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Financing activities:
Net proceeds from not-for-profit borrowings........$ -- $ -- $ --
Net proceeds from long-term borrowings............. -- -- 47,592
Payments on debt................................... (1,828) (7,406) (1,706)
Payment of preferred dividends..................... (114) (83) (70)
Payments on mandatorily redeemable
preferred stock................................ (875) (1,511) --
Cost of debt exchange offers........................ -- -- --
Net proceeds from exercise of common
stock options.................................. 76 46 21
------------- ------------- -------------

Net cash (used in) provided by financing
activities..................................... (2,741) (8,954) 45,837
------------- ------------- -------------

Net (decrease) increase cash and
cash equivalents............................ (3,401) 896 2,354

Cash and cash equivalents, beginning of
the period..................................... 3,796 2,900 546
------------- ------------- -------------

Cash and cash equivalents, end of
the period.....................................$ 395 $ 3,796 $ 2,900
------------- ------------- -------------

Supplemental disclosure of cash flow data:
Interest paid..................................$ 4,647 $ 5,600 $ 4,292
============= ============= =============
Income taxes paid..............................$ 154 $ 110 $ 26
============= ============= =============

Non cash investing and financing activity:

Property and equipment obtained under
capital lease obligation....................$ -- $ -- $ 223
Acquisition of property and equipment for
forgiveness of receivable...................$ -- $ -- $ 7,399
Conversion of trade payable into notes $ -- 904 --
Conversion of convertible notes $ -- $ -- $ 1,357
Debt to equity conversions.........................$ -- $ 1,824 $ --
Dividend conversion to common stock................$ -- $ 47 $ --
Stock issued in connection
with acquisition............................$ 210 $ 100 $ --
</TABLE>

See accompanying notes to consolidated financial statements.

F-8
<PAGE>

KUALA HEALTHCARE, INC.
Notes to Consolidated Financial Statements
June 30, 1998, 1997 and 1996
(Dollars in thousands, except per share amounts)

1. The Company

Kuala Healthcare, Inc. ("The Company" or "KUAL") present operations
consist primarily of nursing home services and infusion therapy and
other medical services. Nursing home services include the ownership,
leasing, operation and management of nursing homes. Infusion therapy
and other medical services include enteral and other medical services,
primarily for patients in nursing homes, and intravenous and other
infusion therapies for patients at home and in nursing homes. However,
the Company has commenced development of three assisted living projects
in New Jersey, totaling 320 beds, and is seeking to focus on
developing, acquiring and operating assisted living facilities and
other forms of senior housing, primarily, in the northeastern United
States and possibly in some mid- Atlantic and southeastern states.

The Company is subject to certain risks and uncertainties as a result
of changes that could occur in the health care industry, including
changes in Medicare and Medicaid reimbursement rates.

2. Significant Accounting Policies

Basis of Consolidation
The consolidated financial statements include the accounts of KUAL and
its subsidiaries (the "Company"). All significant intercompany accounts
and transactions have been eliminated in consolidation.

KUAL owns 58% of the common stock of Infu-Tech, Inc. ("Infu-Tech"); the
other 42% is publicly traded. The minority interest in the consolidated
financial statements represents the minority stockholders'
proportionate share of equity in Infu-Tech.

Accounting Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that effect 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 revenues
and expenses during the reported period. Actual results could differ
from those estimates.

Reverse Stock Split
In January 1998, the Company effected a one-for-three reverse split of
its common stock. All per share amounts of common stock reflect this
split.

Cash and Cash Equivalents
Cash and cash equivalents at June 30, 1998 and 1997 includes $163 and
$512, respectively, held by Infu-Tech. In connection with Infu-Tech's
initial public offering (see note 3), a management and non-competition
agreement between KUAL and Infu-Tech, which was extended to July 2000,
prohibits Infu-Tech from lending money to (or borrowing money from)
KUAL and its other subsidiaries subsequent to December 31, 1992.

The Company classifies all highly liquid investments with maturities of
three months or less when purchased as cash equivalents.

Reclassifications
Certain items have been reclassified in the 1997 consolidated balance
sheet to conform to the 1998 balance sheet.

F-9
<PAGE>

KUALA HEALTHCARE, INC.
Notes to Consolidated Financial Statements
June 30, 1998, 1997 and 1996
(Dollars in thousands, except per share amounts)

Patients' Funds
Patients' funds represent cash balances which have been deposited by
the Company into separate bank accounts and are restricted for the use
of patients. The related liability is included in other current
liabilities.

Revenue Recognition
Revenue is reported at the net amounts estimated to be realized from
patients, third-party payors and others for services rendered. The
Company receives payments for services to eligible patients under
Medicare and various state Medicaid programs. Approximately 55% (1998),
54% (1997) and 60% (1996) of total revenues were derived from such
medical assistance programs. Revenues under these programs are based
upon government approved rates which are subject to audit. In the
opinion of management, retroactive adjustments, if any, would not be
material to the Company's financial position or results of operations.

Inventories
Inventories, which consist of medical and nutritional products and
supplies, are valued at the lower of cost (first-in, first-out method)
or market.

Long-Lived Assets
Depreciation of property and equipment is computed using the
straight-line method at rates that charge the cost of various classes
of assets over the periods of expected use. The range of useful lives
estimated for buildings and improvements is generally 7 to 40 years,
and the range for furniture and equipment is three to ten years.
Leasehold improvements are amortized over the lesser of the term of the
lease or the estimated life of the asset. Goodwill is being amortized
over periods ranging from 7 to 40 years.

Deferred Financing Costs
Deferred financing costs (included in other assets) incurred in
connection with the issuance of long-term debt are being amortized on a
straight-line basis over the term of the related debt agreements. In
the event of an early retirement of debt, these costs would be written
off in an amount relative to the amount of principal retired.

Income Taxes
Income taxes are provided for on a liability method whereby deferred
tax assets are recognized for deductible temporary differences and
operating loss carryforwards and deferred tax liabilities are
recognized for taxable temporary differences. Temporary differences are
the differences between the reported amounts of assets and liabilities
and their tax bases. Deferred tax assets are reduced by a valuation
allowance when, in the opinion of management, it is more likely than
not that some portion or all of the deferred tax assets will not be
realized. Deferred tax assets and liabilities are adjusted for the
effects of changes in tax laws and rates on the date of enactment.

Employee Stock Options
The Company accounts for its stock option plans and its employee stock
purchase plan in accordance with the provisions of the Accounting
Principles Board's Opinion No. 25 (APB 25), "Accounting for Stock
Issued to Employees." Effective July 1, 1996 the Company adopted the
Financial Accounting Standards Board" Statement of Financial Accounting
Standard No. 123 "Accounting for Stock Based Compensation."
Accordingly, the Company has elected to provide pro forma disclosures
as required by SFAS 123.

Earnings Per Share
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, Earning Per Share
("EPS"), which is effective for both interim and annual periods ending
after December 15, 1997. This standard changes the way companies
compute

F-10

<PAGE>

KUALA HEALTHCARE, INC.
Notes to Consolidated Financial Statements
June 30, 1998, 1997 and 1996
(Dollars in thousands, except per share amounts)

EPS to require all companies to show "basic" and "dilutive" EPS and is
to be retroactively applied, including each 1997 interim quarter.

Basic earnings per share is based on the net income for the relevant
period divided by the weighted average number of shares issued and
outstanding during the period. For purposes of the diluted earning per
share calculation, the exercise or conversion of all dilutive potential
common shares is included, for the years ended June 30, 1998, 1997 and
1996. As of June 30, 1998, the Company had basic and dilutive 3,375,661
common shares outstanding. During 1998, no potentially dilutive shares
were considered due to the loss for the year.

3. Extraordinary Gains (Losses)

Extraordinary gains (losses) reflected in the financial statements
result from the following:

June 30,

1998 1997 1996
---- ---- ----

<S> <C> <C> <C>
Net gain on extinguishment of debt.........................$ 150 $ -- $ 84
Gain on conversion of liabilities to equity................ -- 1,192 --
Forfeited deposit.......................................... -- 300 --
Disposal of assets......................................... (256) 3,699 693
----------- ---------- ---------
$ (106) $ 5,191 $ 777
=========== ========== =========
</TABLE>

4. Acquisitions and Dispositions

Sale of Assets

Fiscal 1998
-----------
In June 1998, a Company subsidiary sold a medical building located in
West Orange, New Jersey for an extraordinary loss of $256.

Fiscal 1997
-----------
In December 1996, the Company sold 8 acres of land contiguous to the
West Orange Facility for an extraordinary gain of $875.

In June 1997, facilities in West Palm Beach, Florida and Atlantic City,
New Jersey were sold. The Company recorded an extraordinary gain of
$2.1 million.

In June 1997, the Company sold its 15% interest in a limited
partnership which owned and operated a congregate care facility in
Teaneck, New Jersey for an extraordinary gain of $700,000.

Fiscal 1996
-----------
In May 1996, the Company closed its nursing home in Pine Brook, New
Jersey and sold the assets of that nursing home, other than the land
and buildings and certain current assets, to another health care
provider for $2,390. The Company recorded an extraordinary gain of
$693.

Nursing Home Group
On October 31, 1995, the Company obtained $41,000 in mortgage loans
secured by four nursing home facilities located in West Orange, Cedar
Grove and Norwood, New Jersey and West Palm Beach, Florida, and
proceeds from the issuance of subsidiary Floating Rate Series A
Cumulative Preferred Stock totaling $3,500. In addition, the Company
obtained a $1,500 loan secured by a mortgage on approximately 8 acres
of land located in West Orange, New Jersey.

F-11
<PAGE>

KUALA HEALTHCARE, INC.
Notes to Consolidated Financial Statements
June 30, 1998, 1997 and 1996
(Dollars in thousands, except per share amounts)

The combined proceeds, totaling $46,000 were used to purchase the West
Orange, Cedar Grove and West Palm Beach facilities which were
previously operated under operating leases and to purchase the real
property of the long term and residential care facility located in
Norwood, New Jersey (the "Heritage Facility"), which the Company has
been managing since 1988 on behalf of a not for profit corporation
("SCF").

Proceeds of the sale of the West Palm Beach property were used to pay
down the mortgage loans and redeem $1,000 of preferred stock. At June
30, 1998 the balance of the mortgage loan is $35,368 and $1,114 of
preferred stock is outstanding.

As a result of the previously noted purchase of the Heritage Facility
by the Company, the Company now owns the facility and manages the
operations of SCF. Since October 31, 1995, SCF has been included in the
consolidated financial statements of the Company.

5. Property and Equipment

Property and equipment, at cost, is comprised as follows:

June 30,
--------

1998 1997
---- ----
<S> <C> <C>
Land and improvements...........................................$ 6,049 $ 6,232
Buildings and improvements...................................... 38,908 41,458
Furniture and equipment......................................... 4,614 3,285
Leasehold improvements.......................................... 915 751
Construction progress.......................................... 175 181
----------- -----------
50,661 51,907
Less: accumulated depreciation and amortization................. 5,937 4,916
----------- -----------
$ 44,724 $ 46,991
=========== ===========
</TABLE>

6. Long-Term Debt

Long-term debt is comprised as follows:

June 30,
--------

1998 1997
---- ----

<S> <C> <C>
6% notes due 2003 .................................................$ 3,400 $ 3,400
6% convertible bonds in the face amount of 662,215
Swiss francs, due June 27, 1995(a)................................. 370 453
8% face amount of Swiss francs 619,500 due June 27, 1998(a) 407 424
8% notes due 1999 (b).............................................. 1,213 1,213
Nomura financing (c) (excludes preferred stock) (d)................ 36,483 37,295
8 1/2% to 11% mortgage notes (e)................................... 2,400 2,963
Other (f).......................................................... 559 1,067
----------- ----------
44,832 46,815
Less: current portion 3,916 5,686
----------- -----------
$ 40,916 $ 41,129
=========== ===========
</TABLE>

F-12
<PAGE>

KUALA HEALTHCARE, INC.

Notes to Consolidated Financial Statements
June 30, 1998, 1997 and 1996
(Dollars in thousands, except per share amounts)

(a) The principal balance of SFr 2,900,000 (approximately
$2,525,000) and accrued interest of SFr 174,000
(approximately $152,000) pertaining to the Company's 6%
Swiss franc denominated convertible bonds (the "Bonds") was
due on June 27, 1995. The Company did not make these
payments to redeem the Bonds. Non-payment did not result in
a default under any other financing agreements. Between June
30, 1995 and June 30, 1996, the Company acquired SFr
2,164,000 principal amount of Bonds, including accrued
interest on those Bonds, for a total of SFr 1,122,375 and
$315,000 plus a SFr 619,500 note originally maturing in June
1998 (this note is scheduled to be repaid in four equal
installments ending June 1999). During the year ended June
30, 1998 the Company acquired an additional SFr 85,000
principal amount of bonds (with interest) for $78,000.

(b) In September 1993, the Company acquired SFr 4,005,000
(approximately $2,647) principal amount of Bonds in exchange
for 10,579 shares of 5% exchangeable preferred stock
("Preferred Stock") and $965 principal amount (which
included accrued interest on those Bonds) of 8% notes due
1999 ("8% Notes"). In October 1993, the Company acquired an
additional SFr 1,250,000 (approximately $826) principal
amount of Bonds in exchange for 3,305 shares of Preferred
Stock and $248 principal amount of 8% Notes. Interest on the
8% Notes is payable on January 27 and July 27. The Company
has the option to redeem in part or in full the 8% Notes at
any time for par.

(c) On October 31, 1995, the Company obtained mortgage loans of
$41.0 million and $1.5 million and subsidiaries issued $3.5
million of preferred stock (see (f)). The proceeds of this
financing were used to purchase three nursing homes which
had been sold and leased back in 1988, to reacquire the
Heritage Facility, which the Company had sold in 1990 to a
non-profit corporation and had been operating under a
management agreement, and to retire debt. The $41.0 million
mortgage loan bears interest at 9.86% per annum and requires
payments of principal and interest totaling $4.28 million
per year for 15 years. If the Company is unable to pay the
balance of $28.19 million which will remain due at the end
of 15 years, the interest rate on the mortgage loan will
increase, and all cash flow from the mortgaged facilities
will have to be used to amortize the balance of the mortgage
loan. The mortgage has been paid down by $3,484 with the
proceeds of the sale of the West Palm Beach facility. The
$1.5 million mortgage loan was paid down and the mortgaged
property released. The remaining balance of that loan is
$387.

(d) The $3.5 million of subsidiary preferred stock requires
cumulative dividends which have been charged to interest
expense, equal to interest at LIBOR plus 13% on the
liquidation preference of the preferred stock. The preferred
stock is mandatorily redeemable in monthly installments at
the rate of $876,000 per year in 1998 through 2000. $1,000
of preferred stock was redeemed using the proceeds of the
sale of the West Palm Beach facility. The payments during
the period from October 31, 1995 to June 30, 1996 with
regard to the $42.5 million of mortgage loans and the $3.5
million subsidiary preferred stock totaled approximately
$3.6 million and $1,511 for the period July 1, 1996 to June
30, 1997. Under the terms of the $41 million loan and $3.5
million subsidiary preferred stock, use of the cash receipts
of the four facilities is restricted to: mortgage payments,
real estate taxes, insurance

F-13

<PAGE>

KUALA HEALTHCARE, INC.
Notes to Consolidated Financial Statements
June 30, 1998, 1997 and 1996
(Dollars in thousands, except per share amounts)

and carrying charges, operating expenses, and payment of
preferred stock dividends, with any excess retained by the
facility.

(e) The 8 1/2 to 11% mortgages include debt consisting of an
Economic Development Authority mortgage loan ("EDA. loan")
with a principal balance of $747 at June 30, 1998 payable
monthly installments, including interest at 11%, through
2009. The EDA. loan is secured by property with a net book
value of approximately $1,464 at June 30, 1998. The
remaining mortgage notes are payable in monthly
installments, including interest at notes ranging from 10%
to 12% with final payments due between 1997 and 2009. These
are secured by properties with an aggregate net book value
of approximately $2,623 at June 30, 1998.

(f) On October 31, 1995, the Company negotiated, and subsequent
to June 30, 1998 amended, terms to convert $1,464 in trade
accounts payable into notes with interest at a rate of 10%.
This agreement was amended to allow for the payment of the
balance due on the notes, along with additional accounts
payable, over 24 months, commencing September 1998. The
monthly payment of principal and interest of $62 will fully
amortize the loan at the end of the term. Current principal
payments due under the terms of the note total $744. On
October 2, 1996, the Company also negotiated terms to
convert $143 in trade accounts payable into a note with
interest at 10%. Subsequent to June 30, 1998, the agreement
was amended to allow for the payment of the balance due on
the notes over 13 months, commencing October 1998. To fully
amortize the note, two payments of approximately $7,
followed by ten payments of approximately $5 with a final
payment of approximately $4 will be due.

The Company has aggregate maturities of debt in each of the five year periods
ending on June 30 subsequent to June 30, 1998 as follows: 1999-$ 3,916; 2000-$
562; 2001-$ 611; 2002-$ 661; and 2003-$ 4,112.

F-14

<PAGE>

KUALA HEALTHCARE, INC.
Notes to Consolidated Financial Statements
June 30, 1998, 1997 and 1996
(Dollars in thousands, except per share amounts)

7. Other Current Liabilities

Other current liabilities are comprised as follows:

June 30,
--------

1998 1997
---- ----

Accrued interest.......................$ 265 $ 293
Accrued payroll and related expenses... 3,955 3,063
Other accrued liabilities.............. 460 904
----------- -----------
$ 4,680 $ 4,260
=========== ===========

Effective May 1, 1997, the nursing home group is covered under a third
party health insurance plan. Under the previous self-insured health
insurance program, the Company's estimate of its liability for both
outstanding as well as incurred but not reported claims is based upon
its historical loss experience and is included as a component of
accrued payroll and related expenses.

8. Stockholders' Equity

During 1997, 41,666 warrants (adjusted for the one-for-three reverse
split of Company common stock) were issued to financial consultants of
the Company. The costs of the warrants had been calculated at $54 and
charged to expense. 33,333 of the warrants are two year warrants, with
11,111 shares at an exercise price of $6.00, 11,111 shares at an
exercise price of $7.50, and 11,111 shares with an exercise price of
$9.00. The remaining 8,333 warrants expired prior to June 30, 1998.

Preferred Stock
In 1993, the Company issued 13,884 shares of Preferred Stock as part of
an exchange offer to holders of its Bonds. Each share of Preferred
Stock has a liquidation preference of $100. Dividends on the Preferred
Stock are cumulative and are payable on January 27 and July 27 at the
annual rate of $5 per share, when and as declared by the Company's
Board of Directors.

The Preferred Stock is exchangeable for Infu-Tech common stock at an
exchange price of $6.20 liquidation preference of Preferred Stock per
share of Infu-Tech common stock, subject to adjustment to prevent
dilution. The shares of Infu-Tech common stock issuable upon the
exchange of Preferred Stock are shares owned by KUAL.

All (but not less than all) of the Preferred Stock is redeemable at the
Company's option at any time when the current market price of Infu-Tech
common stock has for at least 20 consecutive trading days been at least
120% of the exchange price, upon at least 45 days' notice at a
redemption price equal to the liquidation preference of the shares
being redeemed plus accumulated unpaid dividends on those shares.
Shares may be exchanged for Infu-Tech common stock during the 45-day
period.

The Company may not pay any dividends or make any other distributions
on, or repurchase, its common stock or any other of its stock which
ranks junior to the Preferred Stock if the Company is not at the time
current in its dividend payments on the Preferred Stock.

F-15

<PAGE>

KUALA HEALTHCARE, INC.
Notes to Consolidated Financial Statements
June 30, 1998, 1997 and 1996
(Dollars in thousands, except per share amounts)

On October 4, 1996, the Company completed an exchange offer to holders
of its 14 1/8% Subordinated Debentures that were due on September 1,
1996. The Company offered for each $1 principal amount of subordinated
debentures a share of a new 11% convertible Preferred Stock with a
liquidation preference of $1. Of the total of $1,200 subordinated
debentures outstanding, $474 principal elected to exchange into Series
A 11% Convertible Preferred Stock.

After the three years, the Preferred Stock will be convertible into
common stock which has a market value totaling 100% of the liquidation
preference of the Preferred Stock or for cash if the Company elects to.
During the period ended June 30, 1997, $440 face amount of the Series A
Convertible Preferred Stock converted into common stock of the Company,
leaving $34 face amount of the Series A Convertible Preferred Stock
outstanding at June 30, 1998 and 1997.

Stock Option Plans

The 1989 Key Employees and Key Personnel Stock Option Plan (the "1989
Plan") authorized the Company to grant stock purchase options relating
to a maximum of 400,000 shares of common stock. Options may not be
granted at a price that is less than 100% of fair market value on the
date of the grant (110% of fair market value for persons owning 10% or
more of the Company's common stock). Options become exercisable six
months after the date of the grant and after the employee has been
employed for 12 months, and are exercisable for a term of up to ten
years.

In January 1997, the Company adopted the 1996 Key Employees and Key
Personnel Stock Option Plan, which replaced the 1989 Plan. The 1996
Plan authorized 500,000 additional shares and the conditions are
essentially the same as the 1989 Plan.

F-16
<PAGE>

KUALA HEALTHCARE, INC.
Notes to Consolidated Financial Statements
June 30, 1998, 1997 and 1996
(Dollars in thousands, except per share amounts)

Stock option transactions for the years ended June 30, 1998, 1997 and
1996 are summarized as follows:

Weighted Average
Number Option Price
of Shares Per Share

<S> <C> <C>
Outstanding, June 30, 1995................................... 112,017 $2.88
Granted (1989 Plan).......................................... 174,917 $3.03
Exercised (1989 Plan) ....................................... (7,000) $1.96
Cancelled (1989 Plan)........................................ (1,350) $1.20
----------

Outstanding, June 30, 1996................................... 278,584 $3.00
Granted (1989 Plan).......................................... 90,667 $8.46
Exercised (1989 Plan)........................................ (333) $2.82
Cancelled (1989 Plan)........................................ (7,517) $3.18
----------

Outstanding, June 30, 1997................................... 361,401 $1.46
Granted (1996 Plan).......................................... 225,481 $7.22
Exercised (1996 Plan)........................................ (23,983) $6.83
Cancelled (1996 Plan)........................................ (7,983) $3.38
---------- -----

Outstanding June 30, 1998.................................... 554,916 $5.44
========== =====
</TABLE>

Options to purchase 819,818 shares were available for grant at June
30, 1998 under the 1996 Plan.

The following table summarizes information about stock options outstanding
at June 30, 1998:

Number Weighted Weighted Number Weighted
Range of Outstanding Average Remaining Average Exercisable at Average
Exercise Prices at 6/30/98 Contractual Life Years Exercise Price 6/30/98 Exercise Price
--------------- ---------- ---------------------- -------------- ------- --------------

<PAGE>

KUALA HEALTHCARE, INC.
Notes to Consolidated Financial Statements
June 30, 1998, 1997 and 1996
(Dollars in thousands, except per share amounts)

The Company has computed, for pro forma disclosure purposes for the
weighted average fair value per option granted under the stock option plan
to be $5.93, $2.19 and $.93 for 1998,1997 and 1996, respectively. The
computations were made using the Black-Scholes model, as prescribed by SFAS
123, with the following weighted average assumptions for grants 1998, 1997
and 1996:

Years Ended June 30,
--------------------
1998 1997 1996
------------------------
Risk-free interest rate............... 4.9% 4.9% 5.1%
Expected dividend yield............... 0% 0% 0%
Expected term until exercise (years) 8.8 6.9 4.00
Expected volatility................... 68.66% 66.67% 75.72%

Other Stock Options

In January 1994, the Company's Chairman of the Board was granted a seven-year
option to purchase 500,000 shares of the Company's common stock for $1 per
share.

Infu-Tech Stock Option Plans

In July 1992, Infu-Tech adopted a stock option plan (the "Infu-Tech Plan") under
which it is authorized to grant stock options to designated employees, officers
and directors of the Company. The Plan authorized grant of stock options up to a
maximum of 150,000 shares of common stock. In 1994, the maximum number of shares
which may be granted under the Plan was increased to 300,000 shares of common
stock. Options may not be granted at a price that is less than 100% of fair
market value on the date of the grant (110% of fair market value for persons
owning 10% or more of Infu-Tech common stock). Options become exercisable 12
months after the date of the grant and are exercisable until ten years from the
date of grant.

In January 1997, Infu-Tech adopted the 1996 Key Employees and Key Personnel
Stock Option Plan which replaced the 1992 Plan. The Plan authorized 500,000
shares and the conditions are essentially the same as the 1992 Plan.

F-18
<PAGE>

KUALA HEALTHCARE, INC.
Notes to Consolidated Financial Statements
June 30, 1998, 1997 and 1996
(Dollars in thousands, except per share amounts)

Stock option transactions related to the Infu-Tech plan for the years ended June
30, 1998, 1997 and 1996 are summarized as follows:

Weighted average
Number Option Price
of shares Per Share
--------- ----------------
Outstanding, June 30, 1995............. 178,250 $4.57

Granted ..................... 60,100 $2.60
Cancelled ..................... (17,300) $2.64
Exercised ..................... (12,750) $1.21
------- -----
Outstanding, June 30, 1996............. 208,300 $4.37

Granted ..................... 461,744 $4.16
Cancelled ..................... (41,400) $4.71
Exercised ..................... (10,750) $2.46
------- -----
Outstanding, June 30, 1997............. 617,894 $4.24
======= =====
Granted ..................... 213,500 $5.23
Cancelled ..................... (77,800) $3.92
Exercised ..................... (8,900) $3.27
------- -----
Outstanding, June 30, 1998............. 744,694 $4.59
======= =====

Options to purchase 136,562 shares were available for grant at June 30, 1998
under Infu-Tech's 1996 Plan.

The following table summaries information about Infu-Tech stock options
outstanding at June 30, 1998:

<TABLE>
<CAPTION>
Number Weighted Weighted Number Weighted
Range of Outstanding Average Remaining Average Exercisable at Average
Exercise Prices at 6/30/98 Contractual Life Exercise Price 6/30/98 Exercise Price
--------------- ----------- ----------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
$1.00 - $3.13 56,450 7.2 $2.38 56,450 $2.38
$3.38 - $4.13 138,576 8.8 $3.69 113,076 $4.51
$4.25 200,000 8.6 $4.25 200,000 $4.25
$4.50 - $5.88 193,668 9.5 $5.10 178,668 $5.53
$6.00 - $7.00 156,000 7.0 $6.25 110,000 $8.86
-------- ------- --------- --------- ---------
744,694 8.5 $4.65 658,194 $5.25
======== ======= ========= ========= =========

</TABLE>

F-19
<PAGE>

KUALA HEALTHCARE, INC.
Notes to Consolidated Financial Statements
June 30, 1998, 1997 and 1996
(Dollars in thousands, except per share amounts)

Infu-Tech computed, the pro forma weighted average fair value per option granted
under the stock option plan to be $5.92, $3.41 and $2.10 for 1998, 1997 and
1996. The computations were made using the Black-Scholes model, as prescribed by
SFAS 123, with the following weighted average assumptions for grants in 1998,
1997 and 1996:

Years Ended June 30,
--------------------
1998 1997 1996
----------------------

Risk-free interest rate................... 4.2% 4.9% 5.1%
Expected dividend yield................... 0% 0% 0%
Expected term until exercise (years)...... 8.2 8.5 5.4
Expected volatility....................... 60.79% 68.61% 84.68%

If the Company had accounted for its plans and the Infu-Tech plans in accordance
with SFAS 123, the Company's net income (loss) and net income (loss) per share
applicable to common shareholders would have decrease as reflected in the
following pro forma amounts:

Years Ended June 30,
--------------------
1998 1997 1996
----------------------

Net Income: (Loss)........................

As reported............................$ (3,194) $ 1,313 $ 786
Pro forma.............................. (3,880) 730 730

Net Income (loss) per share:

Basic as reported......................$ (.95) $ .39 $ .28
Basic pro forma........................ (1.15) .00 .35

Net Income (loss) per share:

Diluted as reported...................$ ( .95) $ .39 $ .28
Diluted pro forma..................... (1.15) .00 .35

The pro forma effects on net income may not be representative of the
effects in future years since compensation costs are primarily attributed
to the year of grant as vesting is within one year.

F-20
<PAGE>

KUALA HEALTHCARE, INC.
Notes to Consolidated Financial Statements
June 30, 1998, 1997 and 1996
(Dollars in thousands, except per share amounts)

9. Related Party Transactions

At December 31, 1989, the three nursing homes controlled and partially
owned by the Principal Stockholders (including the Chairman of the
Board of the Company) owed the Company $2,804 which included amounts
for supplies, services and management fees. The Chairman of the Board
of the company no longer has an ownership interest in two of the
nursing homes described below. However, the Principal Stockholders
asserted on behalf of the three nursing homes that management fees for
all years should have been limited to amounts eligible for
reimbursement from Medicare and Medicaid. Early in 1990, this dispute
was resolved, with the three nursing homes agreeing to pay a total of
$1,940 in satisfaction of all their obligations to the Company at
December 31, 1989. During 1992, the settlement agreement between the
company and the three nursing homes was modified, whereby the February
1992 balance of $1,046 would be paid in sixteen equal quarterly
payments of $76 (including interest at 7 1/2%) beginning June 15, 1992
and continuing through March 15, 1996. In January 1995, the settlement
agreement was further modified to provide for a $227 principal and
interest payment to be made on or before March 30, 1995 (which payment
was received) and the remaining principal balance of $626 to be paid
in twelve equal quarterly payments of $60 (including interest at 8
1/2%) beginning July 1, 1995 and continuing through March 31, 1998.
The $227 payment included all previously unpaid principal under the
prior agreement through December 31, 1993 and all accrued interest
under that agreement through March 30, 1995. In June 1997, a credit of
$300 was applied against the balance then due. The credit arose
because the purchase price obtained by the Company for the sale of a
property in Atlantic City was enhanced by $300 due to the
contemporaneous sale of a property owned by the principal shareholders
to the same buyer. There was no balance remaining on the modified
settlement agreement at June 30, 1998. Interest income includes $0,
$30 and $44 of interest on this receivable for 1998, 1997 and 1996,
respectively.

One of the Company's nursing homes was on several occasions forced to
temporarily evacuate its residents due to weather-related emergencies.
The residents were evacuated to a nursing home controlled and
partially owned by the Principal Stockholders. Management believes
this course of action was preferable to the alternatives. The Company
paid the nursing home to which the residents were evacuated at that
nursing home's daily Medicaid rate. Amounts charged to health care and
lodging expenses as a result of this were $0, $0 and $31 in 1998, 1997
and 1996, respectively.

In 1998, 1997 and 1996, the Company was charged $31, $46 and $73,
respectively, by a corporation owned by the Company's Chairman of the
Board for use of an airplane owned by that corporation. The Company
believes the rates it was charged for use of that airplane were lower
than those which would have been available from an independent charter
company for use of a similar airplane.

Included in selling, general and administrative expenses in 1996 is
rent expense of $326, for office space leased from an entity owned by
the Principal Stockholders. Space is no longer owned by the Principal
Stockholders.

The Company administered a self-funded health plan on behalf of three
nursing homes controlled and partially owned by the Company's
Principal Stockholders (the "Principal Stockholders' Nursing Homes").
Included in accounts receivable at June 30, 1998 and 1997 are amounts
due from the Principal Stockholders' Nursing Homes of $15 and $15,
respectively.

Included in the balance sheet were additional amounts due from
entities owned by the Principal Stockholders totaling $246 at June
1998 and $246 at June 30, 1997.

F-21
<PAGE>

KUALA HEALTHCARE, INC.
Notes to Consolidated Financial Statements
June 30, 1998, 1997 and 1996
(Dollars in thousands, except per share amounts)

John A. Schepisi is the president of Senior Care Foundation, Inc., the
owner of the Heritage Facility, which is included in the consolidated
financial statements. He is also a partner a law firm which provides
legal services to the Company.

10. Income Taxes

The provision (benefit) for income taxes on income (loss) from
operations is presented below:

Years Ended June 30,
--------------------
1998 1997 1996
---- ---- ----
Current:

Federal..................... $ -- $ 425 $ 70
State .................. -- 90 5
------ ----- ------
-- 515 75
------ ----- ------
Deferred:

Federal..................... 124 143 165
State .................. 25 29 30
Other .................. -- --
------ ----- ------
149 172 195
------ ----- ------
$ 149 $ 662 $ 270
====== ===== ======

Infu-Tech had recorded a Federal and state income tax payable of $194
which is included in other current liabilities in the accompanying June
30, 1998 balance sheet.

F-22
<PAGE>

KUALA HEALTHCARE, INC.
Notes to Consolidated Financial Statements
June 30, 1998, 1997 and 1996
(Dollars in thousands, except per share amounts)

The following table reconciles the Federal income tax provision (benefit)
computed at statutory Federal income tax rates applied to income (loss)
from continuing operations to the provision (benefit) for income taxes.

<TABLE>
<CAPTION>
Years Ended June 30,
--------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Federal income tax provision (benefit) at
statutory rate applied to income (loss)
from continuing operations..................$ (961) $ (1,049) $ 119
State income tax provision, (benefit), net
of Federal income tax benefit (194) (216) 24
Extraordinary gains (loss)...................... (36) 2,128 319
Change in valuation allowance................... 1,292 -- (203)
Allowance for temporary differences -- (162) --
Permanent difference arising from
acquisitions and dispositions -- -- --
Refunds of prior years' Federal income taxes -- --
Other ......................................... 48 (39) 11
-------- --------- ---------
$ 149 $ 662 $ 270
======== ========= =========
</TABLE>

The Company has approximately $11,947 of net operating tax loss
carryforwards for federal income tax purposes which will expire in the
years 2005 through 2011.

F-23
<PAGE>

KUALA HEALTHCARE, INC.
Notes to Consolidated Financial Statements
June 30, 1998, 1997 and 1996
(Dollars in thousands, except per share amounts)

The tax effects of temporary differences that give rise to significant
portions of the deferred income tax assets are as follows:

<TABLE>
<CAPTION>
June 30,
------------------------
1998 1997
---- ----
<S> <C> <C>
Net deferred income tax assets:

Allowances for uncollectible accounts receivable.....................$ 1,509 $ 1,743
Net operating tax loss carryforwards................................. 4,551 3,225
Cumulative unrealized losses on translation of foreign
currency debt...................................................... 34 (66)
Compensated absences, principally due to accrual for
financial reporting purposes....................................... 335 328
Difference between book and tax bases of investment in
subsidiary......................................................... (686) (662)
Difference between book and tax bases of property and
equipment.......................................................... 74 89
Other ....................................................... 103 122
----------- ----------
Sub-total........................................................ 5,920 4,779
Valuation allowance...................................................... (5,369) (4,077)
----------- ----------
Net deferred income tax assets.....................................$ 551 $ 702
=========== ==========
</TABLE>

A valuation allowance is provided when it is more likely than not that
some portion of the deferred tax assets will not be realized. Based upon
the Company's historical losses from operations before extraordinary
gains, the Company has recorded a valuation allowance of $5,369. This
represents a 100% valuation allowance for all net deferred income tax
assets, except for part of those pertaining to its 58% owned subsidiary,
Infu-Tech. Infu-Tech has historically been profitable and anticipates
taxable income in future years. In the opinion of management, Infu-Tech
will realize the net deferred income tax assets.

F-24
<PAGE>

KUALA HEALTHCARE, INC.
Notes to Consolidated Financial Statements
June 30, 1998, 1997 and 1996
(Dollars in thousands, except per share amounts)

11. Other Income, Net

Other income (expense) is comprised as follows:

<TABLE>
<CAPTION>
Years Ended June 30,
--------------------
1998 1997 1996
---- ---- ----

<S> <C> <C> <C>
Gains on sales and leasebacks of property
and equipment ...............................$ -- $ -- $ 417
Gains (losses) on translation of foreign
currency debt................................ 82 161 130
Amortization of deferred income related to
non-compete agreement ....................... -- 72 126
Other, net ...................................... 664(a) 308 (123)
------ --------- ----------
$ 746 $ 541 $ 550
====== ========= ==========
</TABLE>

(a) Of this amount, $543 relates to the review and writeoff of
accounts payable, partially related to the previous sale of two
nursing homes.

12. Commitments and Contingencies

Lease Commitments

The Company is obligated under various operating leases for nursing
homes, office space and equipment with initial terms expiring at
various dates through 2002. The leases generally require the Company
to pay all costs of maintaining the leased properties. The Company has
options to renew certain of these leases for periods ranging from 7 to
80 years.

The following is a schedule of future minimum annual rental payments
required under operating leases as of June 30, 1998:

<TABLE>
<CAPTION>
Year ending Nursing
June 30, Homes Office Equipment Total
----------- ------- ------ --------- -----
<S> <C> <C> <C> <C>
1999............................. 318 370 3 691
2000............................. 321 325 --- 646
2001............................. 286 49 --- 335
2002............................. 266 25 --- 291
2003 and thereafter.............. 200 4 --- 204
------ ------ ---- ------
$1,705 $1,259 $ 3 $2,967
====== ====== ==== ======
</TABLE>

Rent expense was $901, $668 and $2,764 in 1998, 1997 and 1996, respectively.

F-25
<PAGE>

KUALA HEALTHCARE, INC.
Notes to Consolidated Financial Statements
June 30, 1998, 1997 and 1996
(Dollars in thousands, except per share amounts)

Employment Commitments

The Company has an employment agreement with its Chairman of the Board
and President, who is also Chairman of the Board of Infu-Tech, Inc.,
through July 2000. He renders services to Kuala for a salary of $250 per
year. Pursuant to this employment agreement, he is entitled to a bonus
based upon an increase in the market capitalization of the Company (based
on a fixed number of shares as defined in the agreement), above the 1995
base year. As of June 30, 1998, a bonus payable of $642 has been
reflected which is net of $108 payable by Infu-Tech. No amount was earned
in the prior period, prior to the 1:3 reverse stock split of the Company,
that was effected in January 1998.

Contingencies

The Company is obligated to issue 33,333 shares of common stock, should
the holders of warrants of the Company's common stock, which expire in
December 1998, elect to exercise their warrants, at an average of $7.50
per share.

The Company recorded as a receivable an amount of $591 based on a
settlement of Medicaid audits. The Company has received a payment of
$175, with the balance being held by a State agency to offset purported
claims. The Company has filed a legal action to enforce the settlement to
receive the balance of the settlement amount.

Participants in the health care market are subject to lawsuits based upon
alleged negligence or similar legal theories. The Company currently has
in force general liability insurance, including professional and product
liability, with coverage limits of $10 million, per occurance, which is
subject to annual renewal. The Company has not recorded any related loss
liabilities as of June 30, 1998.

In March 1997, the Company exchanged 600,000 shares of common stock to
extinguish liabilities of $2,542, based on the fair value of shares. Of
this, $1,192 was reflected as an extraordinary gain in the results of
operations in 1997.

In the opinion of management, the ultimate liability with respect to
these activities will not materially affect the financial position or
results of operations of the Company.

13. Distribution Agreement

In November 1994, the Company entered into a distribution agreement with
a drug manufacturer under which the company provides a specific home
infusion therapy utilizing the manufacturer's drug. This agreement was
renewed in January 1998 for another year. Under this agreement, accounts
payable to the drug manufacturer ($1,210 at June 30, 1998) are secured by
the Company's inventories of the drug ($118 at June 30, 1998) and related
accounts receivable ($1,121 at June 30, 1998).

14. Business and Credit Concentrations

The Company generally does not require collateral or other security in
extending credit to patients; however, the Company routinely obtains
assignment of (or is otherwise entitled to receive) patients' benefits
payable under health insurance programs, plans or policies (e.g.,
Medicare, Medicaid, Blue Cross, health maintenance organizations, and
commercial insurance policies). At June 30, 1998, the Company had gross
receivables from the Federal Government (Medicare) of approximately
$3,600 and from various state Medicaid programs of approximately $3,500
at June 30,1998 and $5,243 and $4,982, respectively, at June 30, 1997.

F-26
<PAGE>

KUALA HEALTHCARE, INC.
Notes to Consolidated Financial Statements
June 30, 1998, 1997 and 1996
(Dollars in thousands, except per share amounts)

15. Business Segment Data

The Company's operations are conducted primarily through two business
segments: nursing home services and Infu-Tech, which provides infusion
therapy and other medical services to the non-hospital based health care
market.

Information about the Company's operations is presented below. Operating
income is comprised of total revenues less operating expenses, excluding
expenses incurred at the corporate headquarters. The elimination of
inter-segment revenues is included in other services and eliminations.

<TABLE>
<CAPTION>
Years Ended
June 30,
-----------------------------------------
1998 1997 1996
---- ---- ----

<S> <C> <C> <C>
Revenues:

Nursing home services...........................$ 34,994 $ 44,033 $ 44,440
Infu-Tech . . . . .............................. 26,029 26,003 24,114
Other services and eliminations................. 2,903 658 1,326
----------- ----------- -----------
Consolidated................................$ 63,926 $ 70,694 $ 69,880
=========== =========== ===========
Operating income (loss):

Nursing home services...........................$ 3,393 $ 3,660 $ 4,329
Infu-Tech . . . . ............................... 617 1,793 1,745
Other services . . ............................. 43 -- --
Expenses incurred at corporate headquarters (2,791) (2,446) (1,958)
Interest and dividend income.................... 225 104 221
Interest and other financing costs.............. (4,904) (6,343) (4,044)
Other income, net............................... 746 541 550
Less: Minority interest in earnings of
subsidiaries .............................. (154) (395) (494)
----------- ----------- -----------
Consolidated................................$ (2,825) $ (3,086) $ 349
=========== =========== ===========

Assets:
Nursing home services...........................$ 50,506 $ 54,855 $ 61,592
Infu-Tech ................................... 12,122 11,618 9,484
Corporate ................................... 3,889 4,877 7,366
----------- ----------- -----------
Consolidated................................$ 66,517 $ 71,350 $ 75,572
=========== =========== ===========

Depreciation and amortization of property
and equipment
Nursing home services...........................$ 1,435 $ 1,655 $ 1,331
Infu-Tech ................................... 152 139 108
Corporate ................................... 111 125 98
----------- ----------- -----------
Consolidated................................$ 1,698 $ 1,919 $ 1,537
=========== =========== ===========
Capital expenditures:
Nursing home services...........................$ 571 $ 298 $ 47,472
Infu-Tech ................................... 243 62 19
Corporate ................................... -- 14 101
----------- ----------- -----------
Consolidated ..............................$ 814 $ 374 $ 47,592
=========== =========== ===========
</TABLE>

F-27
<PAGE>

KUALA HEALTHCARE, INC.
Notes to Consolidated Financial Statements
June 30, 1998, 1997 and 1996
(Dollars in thousands, except per share amounts)

16. Estimated Fair Value of Financial Instruments

The estimated fair value of financial instruments has been determined
based upon available market information and appropriate valuation
methodologies. However, considerable judgement is necessarily required in
interpreting market data to develop the estimates of fair value.
Accordingly, the estimates presented herein are not necessarily
indicative of the amounts that the Company might realize in a current
market exchange. The use of different market assumptions and or
estimation methodologies may have a material effect on the estimated fair
value.

The carrying amounts of short term financial instruments are reasonable
estimates of their fair values. The carrying value of long term debt
approximates its fair value. While interest rates have generally
declined, the cost of borrowing to the Company has not changed
significantly.

17. Fourth Quarter Adjustments and Changes in Estimates
Changes in Estimates

During the fourth quarter of 1998, the Company conducted a review of
annually submitted Medicare cost reports and reflected a reduction of
$500 in anticipated Medicare receipts in order to more reasonably
estimate the balance in consideration of the current reimbursement
environment..

During 1997, the Company evaluated various liabilities and accruals in
the nursing home operation. The result of this review enabled the Company
to write back to income $1,252 from various liabilities and payables not
expected to be paid. Further, a settlement with a vendor enabled the
Company to reduce a liability by $460 of which $190 was reflected in the
fourth quarter.

Fourth Quarter Adjustments.

Personnel Expenses

As described in note 12 regarding Employment Commitments, the Company
reflected a bonus payable of $642 to its Chairman and President during
the fourth quarter of fiscal 1998. A bonus payable of $108 by Infu-Tech,
Inc. to its and the Company's Chairman of the Board and President was
also reflected during the fourth quarter. No such bonus was earned in the
prior fiscal year.

Extraordinary Losses

A Company subsidiary sold a medical building located in West Orange, New
Jersey for $1,200, resulting in an extraordinary loss of $256 during the
fourth quarter of fiscal 1998.

Provision for Uncollectible Accounts

The Company conducted a comprehensive review of days outstanding of its
accounts receivable. As a result, it increased the provision for
uncollectible accounts by approximately $500 during the fourth quarter of
1998 to better estimate their net realizable value.

F-28
<PAGE>

KUALA HEALTHCARE, INC.
Notes to Consolidated Financial Statements
June 30, 1998, 1997 and 1996
(Dollars in thousands, except per share amounts)

Miscellaneous Accrued Expenses

During the fourth quarter of 1998, miscellaneous accrued expenses of
approximately $200 were reflected by the Company, primarily attributed to
recognition of various legal expenses.

The Company's 58% owned subsidiary Infu-Tech recorded the following
adjustments in the fourth quarter of fiscal year 1997. No such
adjustments were necessary for the fourth quarter of fiscal 1998.

Inventory

Infu-Tech recorded an inventory adjustment during the fourth quarter of
fiscal 1997. A gross amount of $450 before taxes was recorded as a
decrease to inventory with a corresponding increase to medical and
nutritional product costs. The adjustment arose as a result of a physical
inventory conducted on June 30, 1997. Infu-Tech conducted quarterly
physical inventory counts during the year. No significant differences
arose during these quarterly physical counts.

Reserve for Uncollectible Accounts

Beginning in the quarter ending March 31, 1997, Infu-Tech reviewed its
allowance for uncollectible accounts in light of its changed payor mix.
Infu-Tech's business focus is on managed care relationships which now
accounts for 73% of its payor mix. The managed care relationships are
generally governed by contracts which provide for payment within defined
terms. Infu-Tech's collection experience for these contracts has been
good and greatly improved from the historical collection experience upon
which the allowance for uncollectible accounts had been established. As a
result of this review, the allowance for uncollectible accounts was
reduced by a total of $1,366 before taxes ($348 in the quarter ending
March 31, 1997, and a further $1,018 in the fourth quarter of fiscal
1997) resulting in a credit to the provision for the year of $196
compared to a charge of $1,269 in the prior year.

18. Liquidity

During fiscal 1998, the Company experienced a decrease in working capital
resulting in a negative current ratio. Although the Company continues to
experience cash flow constraints, it anticipates being able to meet its
financial obligations from fiscal 1999 operations. In addition, the
Company has signed a non-binding letter of intent with a purchaser of
nursing homes to sell a 49% interest in five of the Company's nursing
homes. Furthermore, cash realized from the sale of certain other assets
could assist the Company, where necessary, in meeting its obligations.

19. Subsequent Event

In September, 1998, the Company signed a non-binding letter of intent
with Care One, LLC, a privately held New Jersey based long term care
company, for the acquisition by Care One of a 49% interest in its five
nursing homes and a 100% interest in the Company's institutional pharmacy
business. Care One would have the option to purchase the remaining 51%
interest in the nursing homes in the future. Furthermore, an assisted
living joint venture will be formed with the Company initially
contributing its 120 unit project based in Norwood, New Jersey. The
Company would receive approximately $15 million in cash for its 49%
interest in its nursing homes and its institutional pharmacy business.
The Company would also receive $2 million for a 49% interest in the
assisted living venture.

F-29
<PAGE>

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.

KUALA HEALTHCARE, INC.

Date: October , 1998 By: /S/ JACK ROSEN
---------------- ---------------------
Chairman of the Board

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

/S/ JACK ROSEN Chairman of the Board, Director
--------------------------- (Principal Executive Officer)
Jack Rosen

/S/ ROY SMOLARZ Executive Vice President
--------------------------- (Principal Financial Officer)
Roy Smolarz

/S/ KATHLEEN GAGE Principal Accounting Officer
---------------------------
Kathleen Gage

/S/ JOSEPH ROSEN Director
---------------------------
Joseph Rosen

/S/ ISRAEL INGBERMAN Director
---------------------------
Israel Ingberman

/S/ JOSEPH M. GIGLIO Director
---------------------------
Joseph M. Giglio

/s/ Carl D. Glickman Director
---------------------------
Carl D. Glickman

/s/ Bruce Slovin Director
---------------------------
Bruce Slovin

<PAGE>

Schedule II

KUALA HEALTHCARE, INC.
Valuation and Qualifying Accounts
(Dollars in thousands)
Years Ended June 30, 1998, 1997 and 1996

<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E
Additions
---------
Balance at Charged to Balance
beginning cost and at end
Description of period expenses Other Deductions (a) of period
----------- ---------- ---------- ----- -------------- ---------
Allowance for
uncollectible
accounts:
<S> <C> <C> <C> <C> <C>
1998 $4,252 $ 625 $ -- $1,196 $3,681
====== ====== ======== ====== ======
1997 $4,193 $ (66) $ 513 $ 388 $4,252
====== ====== ======== ====== ======
1996 $3,712 $1,210 $ -- $ 729 $4,193
====== ====== ======== ====== ======

</TABLE>

(a) Uncollectible accounts charged-off during the year, net of recoveries.

S - 1

<PAGE>

Exhibit 11

KUALA HEALTHCARE, INC.
Calculation of Earnings Per Share
Year ended June 30, 1998
(Dollars in thousands, except per share amounts)

Earnings Per Share: (restated for 1:3 common stock split)

Net income (loss) available to common shareholders..............$ (3,194)
===========
Weighted average shares...................................... 3,375,661
Plus: Incremented shares from assumed conversions warrants .. --

Dilutive potential common shares............................. --
Adjusted weighted average shares............................. 3,375,661

Basic EPS

Income (loss) before extraordinary item......................$ (0.92)
Extraordinary item........................................... (0.03)
-----------
Net income (loss) ...........................................$ (0.95)
===========
Diluted EPS

Income (loss) before extraordinary item......................$ (0.92)
Extraordinary item........................................... (0.03)
-----------
Net income .................................................$ (0.95)
===========

<PAGE>

Exhibit 11.1
KUALA HEALTHCARE, INC.
Calculation of Earnings Per Share
Year ended June 30, 1997
(Dollars in thousands, except per share amounts)

Earnings Per Share: (restated for 1:3 common stock split)

Net income available to common shareholders....................$ 1,313
==========
Adjustment of shares outstanding:

Weighted average number of shares outstanding........... 3,199,886
Average net additional equivalent shares issuable....... 181,182
----------
Weighted average number of common and common
equivalent shares....................................... 3,381,068
==========
Earnings per share.............................................$ 0.39
==========

<PAGE>

Exhibit 11.2
KUALA HEALTHCARE, INC.
Calculation of Earnings Per Share
Year ended June 30, 1996
(Dollars in thousands except per share amounts)

<TABLE>
<S> <C>
Earnings Per Share: (restated for 1:3 common stock split)

Net income available to common shareholders................................$ 786
===========
Adjustment of shares outstanding:
Weighted average number of shares outstanding....................... 2,673,879
Average net additional equivalent shares issuable................... 132,240
-----------
Weighted average number of common and common equivalent shares...... 2,806,119
===========
Earnings per share.........................................................$ .28
===========
The above does not give effect to the assumed conversion of the 6%
SFr convertible bonds since the effect is antidilutive as shown below:

Net income available to common shareholders.........................$ 786
Add after tax effect of eliminating interest expense
applicable to 6% SFr convertible bonds........................... 55
-----------
Net income as adjusted..............................................$ 841
===========
Weighted average number of common and common
equivalent shares................................................. 2,814,768
Additional weighted average shares from assuming
conversion of 6% SFr convertible bonds............................ 6,253
-----------
Weighted average number of common and common
equivalent shares, as adjusted.................................... 2,821,021
===========
Earnings per share.........................................................$ .30
===========

</TABLE>

<PAGE>

Exhibit 21

KUALA HEALTHCARE, INC.
AND SUBSIDIARIES

The following are the subsidiaries of Kuala Healthcare, Inc..

A) Alternative Care, Inc. (a Massachusetts corporation).

B) TNS Nur-Temps, Inc. (a New York corporation).

C) Temporary Nursing Services of California, Inc. (a California
corporation).

D) Temporary Nursing Services of Florida, Inc. (a Florida corporation).

E) Temporary Nursing Services of Philadelphia, Inc. (a Pennsylvania
corporation).

F) Temporary Nursing Services of Kansas, Inc. (a Kansas corporation).

G) Temporary Nursing Services of Texas, Inc. (a Texas corporation).

H) Infu-Tech, Inc. (a Delaware corporation).

1) Infu-Tech, Inc. (a New Jersey corporation) (formerly Temporary
Nursing Services, Inc.).

2) Infu-Tech of Florida, Inc. (a Florida corporation).

3) Infu-Tech of Illinois, Inc. (a Illinois corporation).

4) Infu-Tech of Massachusetts, Inc. (a Massachusetts
corporation).

5) Infu-Tech of New York, Inc. (a New York corporation).

6) Infu-Tech of Tennessee, Inc. (a Tennessee corporation).

7) Intrx Medical, Inc. (a New Jersey corporation).

I) TNS Nursing Homes, Inc. (a Delaware corporation).

1) Jayber, Inc. (a New Jersey corporation).

2) Pompton Avenue Associates, Inc. (a New Jersey corporation).

3) Cape May Care Center, Inc. (a New Jersey corporation).

4) Hilltop Care Center, Inc. (a New Jersey corporation).

5) P.V.M. Associates, Inc. (a Florida corporation).

6) Continental Beachview, Inc. (a New Jersey corporation).

<PAGE>

7) Continental Beachview Realty, Inc. (a New Jersey corporation).

8) Continental Norwood, Inc. (a New Jersey corporation).

9) Continental Norwood Holdings, Inc. (a New Jersey corporation).

10) TNS Nursing Homes of Pennsylvania, Inc. (a Pennsylvania
corporation).

11) Continental Teaneck Realty, Inc. (a New Jersey corporation).

12) Continental Riverview Realty, Inc. (a New Jersey corporation).

J) Continental Media, Inc. (a Delaware corporation).

K) Continental Home Care, Inc. (a New Jersey corporation).

1) Marketech, Inc. (a Delaware corporation).

L) TNS Certified Home Health Care Corp. (a New York corporation).

M) Mid-South Comprehensive Home Health and Hospice, Inc. (a Tennessee
corporation).

N) Mid-South Staffing Services, Inc. (a Tennessee corporation).

O) Continental Florida Management, Inc. (a Delaware corporation).

P) TNS Home Life Support System, Inc. (a New Jersey corporation).

Q) CH Acquisition, Inc. (a Delaware corporation).

R) CompreMedx Corporation (a Delaware corporation) (formerly CompreMedx
Cancer Centers Corporation).

1) Medparc Development Corp. (a New Jersey corporation).

2) CompreMedx Medical Management, Inc. (a New Jersey
corporation).

3) Continental Property Management Corp. (a New Jersey
corporation).

4) Continental Nutrition Corp. (a Ohio corporation).

5) CompreMedx Case Management, Inc. (a Delaware corporation)
(formerly CompreMedx, Inc.).

6) CompreMedx Rehabilitation Services, Inc. (a New Jersey
corporation).

7) CompreMedx Pharmaceuticals, Inc. (a New Jersey corporation).

<PAGE>

S) First American Norwood, Inc. (a New Jersey corporation).

T) Cambridge Home Health Care, Inc. (a Delaware corporation).

U) Continental Pharmaceuticals International, Inc. (a Delaware
corporation) (formerly Continental Sana International, Inc.).

V) Continental Pharmaceuticals, Inc. (a Delaware corporation).

<PAGE>

EMPLOYMENT AGREEMENT

This is an agreement dated as of November 1, 1996 setting forth the terms
on which Continental Health Affiliates, Inc. (the "Company"), a Delaware
corporation, will employ Jack Rosen (the "Employee") during the Employment
Period described below, which terms are as follows:
1. EMPLOYMENT OF EMPLOYEE. The Company will employ the Employee during
the Employment Period described in Paragraph 2 to serve as the Chief Executive
Office of the Company and of any of its subsidiaries (including Infu-Tech,
Inc.) which are specified by the Board of Directors of the Company. Except as
provided in Paragraph 13, the Employee will devote the substantial portion of
his working time during the Employment Period to his duties in that capacity or
those capacities. The Employee also will, if elected to do so, serve on the
Board of Directors of the Company and on the Boards of Directors of some or all
of its subsidiaries.
2. EMPLOYMENT PERIOD. The period during which the Employee will be
employed under this Agreement (the "Employment Period") will, except as
provided in Paragraph 8, be the period which begins on November 1, 1996 and
ends on and includes July 31, 2000.
3. SALARY. During the Employment Period, the Employee will receive a
salary at the rate of $400,000 per full year (including any sums paid by
subsidiaries of the Company). This salary will be paid in equal installments at
least as frequently as the Company pays salary installments at least as
frequently as the Company pays

<PAGE>

salary installments to its senior executives generally, and in any event not
less frequently than once each month. Nothing herein shall be construed to
prevent the Board of Directors from reconsidering the rate of salary (but not
less than the current salary) in light of future circumstances.
4. BONUSES.
(a) Promptly after the Company completes its consolidated
financial statements for each fiscal year which ends during the Employment
Period, the Company will pay the Employee a bonus equal to 2% of the
consolidated net income before provision for income taxes of the Company and
its subsidiaries during that fiscal year as shown on its consolidated financial
statements.
(b) On or before each June 30 during the Employment Period,
the Company will pay the Employee a bonus equal to (i) 2% of the amount, if
any, by which the market value of the Company's Common Stock on the last
trading day in the immediately preceding May is greater than the higher of (A)
300% of the market value of the Company's Common Stock on May 31, 1995 or (B)
the highest market value of the Company's Common Stock on any prior last
trading day in May during the Employment Period, minus (ii) any bonus the
Employee receives from a subsidiary of the Company based upon the market price
of that subsidiary's stock on a date within 12 months prior to the date the
bonus is paid under this Paragraph. For the purposes of this Agreement, the
"market value of the Company's Common Stock" on any day will be (x) the average
of the last reported sale price of the Common Stock in the principal

<PAGE>

market on which the Common Stock is traded on each of the preceding 20 days on
which there is trading in that market, or if actual sale prices are not
reported for transactions in that market, the mean of the high bid and low
asked prices of the Common Stock on each of those 20 days, times (y) the number
of shares of Common Stock which are outstanding on May 31, 1995.
5. ADDITIONAL BENEFITS. The Employee will be entitled to participate
in all insurance, health, retirement and other benefit plans which are
available generally to senior executives of the Company. The Board of Directors
of the Company may, in addition, award stock options or other incentives to the
Employee under incentive plans adopted by the Company for its senior executives
or key employees.
6. VACATIONS. The Employee will be entitled to vacations in accordance
with the Company's vacation policy in effect from time to time with respect to
senior executive officers generally.
7. AUTOMOBILE. The Company will provide the Employee with the use of
an automobile, commensurate with the Employee's position with the Company, in
connection with the Employee's activities on behalf of the Company.
8. TERMINATION OF AGREEMENT. The Company will have the option to
terminate the term of this Agreement, and the Employment Period, by giving a
Notice of Termination to the Employee after any of the following occurs:
(1) The Employee fails in any material respect to
perform his duties under this Agreement, or to fulfill in a

<PAGE>

material respect any other of his obligations under this Agreement,
and that failure continues for more than 60 days after notice from the
Company or its Board of Directors.
(2) The Employee dies.
(3) The Employee is unable to perform his duties under this
Agreement because of physical or mental disability for a period of
more than 120 consecutive days or for a period of more than 200 days
during a period of 12 months.
(4) The Employee is convicted of a felony related to the
Employee's activities as an employee of the Company, related to the
Employee's relationship with the Company or otherwise involving the
Company.
If the Company delivers Notice of Termination to the Employee, the term of this
Agreement, and the Employment Period, will terminate on a date specified in the
Notice of Termination, which may be the day the Notice of Termination is given.
After the date on which the term of this Agreement is terminated under this
Paragraph, neither the Company nor the Employee will have any further rights or
obligations under this Agreement, except that (i) the Company will be required
to pay, to the extent it has not already done so, the Employee's salary and
bonuses specified in Paragraphs 3 and 4 through the date this Agreement
terminates, and (ii) the Employee will continue to be bound by the provisions
of Paragraphs 9, 10 and 11.

<PAGE>

9. AGREEMENT NOT TO COMPETE. The Employee will not at any time prior
to July 31, 2000 (even if the term of this Agreement terminates before that
date) engage on behalf of anyone other than the Company and its subsidiaries,
whether as an employee, a shareholder, a partner, a consultant or otherwise, in
any business which provides or offers services substantially similar to those
which the Company or any of its subsidiaries is at the time providing or
offering, or actively preparing to provide or offer, in any state in which the
Company is, or is actively preparing to become, engaged in that business,
except that (i) nothing in this Paragraph will prevent the Employee from
engaging after the term of this Agreement terminates in any business in which
the Company is not engaged, or actively preparing to engage, on the date the
term of this Agreement terminates, and (ii) nothing in this Paragraph will
prevent the Employee from owning less than 1% of the outstanding stock of any
publicly traded corporation, which competes with, or whose business(es)
primarily compete with, or provide or offer services substantially similar to
those provided or offered by the Company.
10. CONFIDENTIAL INFORMATION. The Employee agrees to keep
confidential, during the term of this Agreement and for at least two years
after the term of this Agreement terminates, all information about the Company
or its subsidiaries which the Company or any of its subsidiaries treat as
confidential, including, but not limited to, information about customers,
marketing plans,

<PAGE>

marketing techniques and possible new products or services, except that the
Employee will not be required to keep particular items of information
confidential after those items of information become generally available to the
public without a breach by the Employee of the Employee's obligations under
this Paragraph.
11. RIGHT TO INJUNCTIVE RELIEF. The Employee acknowledges that the
Company will suffer irreparable harm, which cannot readily be measured in
monetary terms, if the Employee breaches his obligations under Paragraph 9 or
Paragraph 10. Therefore, the Employee agrees that the Company will be entitled
to obtain injunctive relief against any breach or threatened breach by the
Employee of his obligations under either of those Paragraphs. That injunctive
relief will be in addition to any other relief to which the Company or any of
its subsidiaries may be entitled.
12. CHANGE OF FUNCTION. Because the Employee's bonus under Paragraph 4
is dependent on the performance of the Company and its subsidiaries and the
Employee's ability to influence that performance would be substantially
affected by the Employee's ceasing to function as the Chief Executive Officer
of the Company, if at any time during the term of this Agreement the Employee
ceases due to action (including a request for the Employee's resignation) by
the Board of Directors of the Company or by a holder of a majority of the
outstanding Common Stock of the Corporation (other than a person to whom the
Employee sold stock of the Company) to hold the title and to perform the
functions of the

<PAGE>

Chief Executive Officer of the Company, the Employee will have the right (a) to
elect to receive, in lieu of any damages or other relief to which the Employee
might be entitled, immediate payment of (i) the entire salary to which the
Employee would become entitled under Paragraph 3 if the Employee continued to
be employed under this Agreement through July 31, 2000, plus (ii) the bonuses
the Employee would receive under Paragraph 4(a) if the consolidated net income
before provision for income taxes of the Company and its subsidiaries during
each remaining calendar year which ends prior to July 31, 2000 (including the
calendar year during which the Employee ceases to be the Chief Executive
Officer of the Company) exceeded the consolidated net income before provision
for income taxes of those companies during the next preceding calendar year by
the greater of (x) 50% or (y) $500,000, plus (iii) the bonuses the Employee
would receive under Paragraph 4(b) if the market price of the Common Stock on
each remaining last trading day in May which occurs prior to July 31, 2000 were
100% higher than it was on the next preceding last trading day in May, and (b)
to terminate his employment with the Company without adversely affecting his
right to the payment described in clause (a).
13. PERMITTED OTHER ACTIVITIES. Nothing in Paragraph 1, Paragraph 9 or
elsewhere in this Agreement will prevent the Employee from (a) making and
overseeing investments in real estate and other personal investments in
companies not engaged in the healthcare business or in any other business in
which neither the

<PAGE>

Company nor any of its subsidiaries is engaged, or actively preparing to
engage, at the date the Employee makes the investment, (b) continuing to own
and oversee interests in nursing homes which the Employee owns at the date of
this Agreement, (c) continuing to be an employee and shareholder of Infu-Tech,
Inc. even if it ceases to be a subsidiary of the Company, or (d) acting as a
member of governmental commissions or governmentally created advisory groups,
or otherwise rendering advice to governmental officials on healthcare or other
matters.
14. MISCELLANEOUS.
(a) Any notices or other communications to the Employee or to
the Company under or regarding this Agreement must be in writing and will be
deemed given when delivered in person or sent by facsimile transmission to the
Company or the Employee, as the case may be, at the Company's principal
offices, or on the third day after the day on which mailed to the Company or
the Employee, as the case may be, by first class mail addressed to the Company
or the Employee at the Company's principal offices, except that after the term
of this Agreement terminates, any notice or other communication to the Employee
will be deemed given when delivered in person or sent by facsimile
transmission, or on the third day after the day on which mailed by first class
mail, to the Employee at an address specified by the Employee to the Company in
the manner provided in this Paragraph (or, if the Employee does not specify an
address, at the Company's principal offices).

<PAGE>

(b) This Agreement is for the benefit of the Employee and the
Employee's heirs and legatees, and of the Company, its subsidiaries and their
respective successor and permitted assigns. Neither the Company nor the
Employee may assign any of its or his rights or obligations under this
Agreement without the written consent of the other of them, except that if the
Company's business is transferred substantially as an entirety to any other
firm (whether through a stock sales, an asset sale, a merger or in any other
manner), this Agreement, and the rights and obligations or the Company under
it, may be transferred to that other firm if, but only if (i) that other firm
delivers to the Employee a document in which the other firm agrees to be bound
by this Agreement in the same manner, and to the same extent, as the Company
and (ii) the Employee and the other firm agrees to replace the bonus described
in Paragraph 4(b) with a bonus which is a reasonable substitute for that bonus.
(c) This Agreement will be governed by, and construed under,
the laws of the State of New Jersey governing contracts made and to be
performed in that State.
(d) This document contains the entire agreement between the
Company and the Employee regarding the employment of the Employee by the
Company during the Employment Period.
(e) This Agreement may not be amended other than by a written
document signed by both the Company and the Employee.

<PAGE>

(f) This Agreement may be executed in more than one copy,
each of which will be an original, but all of which together will constitute
one and the same agreement.
To evidence their agreement, the Company and the Employee are
executing this Agreement on the date specified on the first page with the
intention of being legally bound by its provisions.

CONTINENTAL HEALTH AFFILIATES, INC.

By: ______________________________

__________________________________

JACK ROSEN

EMPLAGMT\CHAJR96