##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 
 FORM 10-K
 (Mark One)
 þ
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended: June 30, 2005
 OR
 o
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to
 Commission file number: 001-12115
 CONTINUCARE CORPORATION
  Florida
(State or other jurisdiction of
incorporation or organization)
    
    59-2716023
(I.R.S. Employer
Identification No.)
 7200 Corporate Center Drive,
Suite 600
Miami, Florida 33126
 (305) 500-2000
  Title of each class
    
    Name of each exchange on which registeredCOMMON STOCK
    
    AMERICAN STOCK EXCHANGE$.0001 PAR VALUE
 None
 þ o
 þ
 o þ
 o þ




---



CONTINUCARE CORPORATION
ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED JUNE 30, 2005
 TABLE OF CONTENTS
 PAGEGeneral
    
    
    3PART IItem 1.
    
    Business
    
    
    9Item 2.
    
    Properties
    
    
    16Item 3.
    
    Legal Proceedings
    
    
    16Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    17PART IIItem 5.
    
    Market for Registrants Common Equity and Related Stockholder Matters
    
    
    17Item 6.
    
    Selected Financial Data
    
    
    18Item 7.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    20Item 7A.
    
    Quantitative and Qualitative Disclosures about Market Risk
    
    
    28Item 8.
    
    Financial Statements and Supplementary Data
    
    
    28Item 9.
    
    Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
    
    
    28Item 9A.
    
    Controls and Procedures
    
    
    28Item 9B.
    
    Other Information
    
    
    29PART IIIItem 10.
    
    Directors and Executive Officers of the Registrant
    
    
    29Item 11.
    
    Executive Compensation and Other Information
    
    
    29Item 12.
    
    Security Ownership of Certain Beneficial Owners and Management
    
    
    29Item 13.
    
    Certain Relationships and Related Transactions
    
    
    29Item 14.
    
    Principal Accountant Fees and Services
    
    
    29PART IVItem 15.
    
    Exhibits, Financial Statement Schedules, and Reports on Form 8-K
    
    
    29Signatures
    
    
    32Consent of Ernst & Young LLPSection 302 Certification of CEOSection 302 Certification of CFOSection 906 Certification of CEOSection 906 Certification of CFO
  2




---



##### Table of Contents



GENERAL
  CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
  
    
    Our ability to make capital expenditures and respond to capital needs;
    
    Our ability to enhance the services we provide to our patients;
    
    Our ability to strengthen our medical management capabilities;
    
    Our ability to improve our physician network;
    
    Our ability to enter into or renew our managed care agreements and negotiate terms
which are favorable to us and affiliated physicians;
    
    Our ability to respond to future changes in Medicare reimbursement levels and
reimbursement rates from other third parties;
    
    Our compliance with applicable laws and regulations;
    
    Our ability to establish relationships and expand into new geographic markets;
    
    Our ability to expand our network through additional medical centers or other facilities;
    
    The potential impact on our claims loss ratio as a result of the Medicare Risk
Adjustments (MRA) and the Medicare Prescription Drug, Improvement and Modernization
Act of 2003 (the Medicare Modernization Act); and
    
    Our ability to utilize our net operating losses for Federal income tax purposes.
  
    
    Our ability to respond to capital needs;
    
    Our ability to achieve expected levels of patient volumes and control the costs of providing services;
    
    Pricing pressures exerted on us by managed care organizations;
    
    The level of payments we receive from governmental programs and other third party payors;
    
    Our ability to successfully recruit and retain qualified medical professionals;
    
    Future legislative changes in governmental regulations, including possible changes in
Medicare programs that may impact reimbursements to health care providers and insurers;
    
    Our ability to comply with applicable laws and regulations;
    
    The impact of the Medicare Modernization Act and MRA on payments we receive for our managed care operations;
    
    Technological and pharmaceutical improvements that increase the cost of providing, or
reduce the demand for, health care;
    
    Changes in our revenue mix and claims loss ratio;
    
    Changes in the range of medical services we provide or for
which our HMO affiliates offer coverage;
    
    Our ability to enter into and renew managed care provider agreements on acceptable terms;
    
    Loss of significant contracts, including the PGP Agreement;
    
    The ability of our compliance program to detect and prevent regulatory compliance problems;
 3




---



##### Table of Contents




    
    Delays in receiving payments;
    
    Increases in the cost of insurance coverage, including our stop-loss coverage, or the loss of insurance coverage;
    
    The collectibility of our uninsured accounts and deductible and co-pay amounts;
    
    Federal and state investigations;
    
    Lawsuits for medical malpractice and the outcome of any such litigation;
    
    Changes in estimates and judgments associated with our critical accounting policies;
    
    Our dependence on our information processing systems and the management information
systems of our HMO affiliates;
    
    Impairment charges that could be required in future periods;
    
    General economic conditions; and
    
    Uncertainties generally associated with the health care business.
  RISK FACTORS
 Our operations are dependent on two health maintenance organizations.
  Under our most important contracts we are responsible for the cost of medical services to our
patients in return for a fixed fee.
  If we are unable to manage medical benefits expense effectively, our profitability will likely be
reduced.
  A failure to estimate incurred but not reported medical benefits expense accurately will affect our
profitability.
  4




---



##### Table of Contents



Many factors that increase health care costs are largely beyond our ability to control.
  
    
    increased use of medical facilities and services, including prescription drugs and doctors office visits;
    
    increased cost of such services;
    
    new benefits to patients added by the HMOs to their covered services, whether as
a result of the Medicare Modernization Act or otherwise;
    
    changes or reductions of our utilization management functions such as
preauthorization of services, concurrent review or requirements for physician
referrals;
    
    catastrophes (including hurricanes), epidemics or terrorist attacks;
    
    the introduction of new or costly treatments, including new technologies;
    
    new government mandated benefits or other regulatory changes; and
    
    increases in the cost of stop loss or other insurance.
  Health care reform initiatives, particularly changes to the Medicare system, could adversely effect
our operations.
  Medicare premiums have generally risen more slowly than the cost of providing health care services.
  Our revenues will be affected by the Medicare Risk Adjustment program.
  Risk
    
    DemographicYear
    
    Percentage
    
    Percentage2006
    
    
    75
    %
    
    
    25
    %2007
    
    
    100
    %
    
    
    0
    %
  5




---



##### Table of Contents



Intangible assets represent a substantial portion of our total assets
  
    
    a significant adverse change in legal factors or the business climate;
    
    the loss of a key HMO contract;
    
    an adverse action by a regulator;
    
    unanticipated competition;
    
    loss of key personnel; or
    
    allocation of goodwill to a portion of business that is to be sold.
  We are subject to government regulation.
  
    
    forfeiture of amounts we have been paid;
    
    imposition of civil or criminal penalties, fines or other sanctions on us;
    
    loss of our right to participate in government-sponsored programs, including Medicare;
    
    damage to our reputation in various markets;
    
    increased difficulty in hiring or retaining qualified medical personnel or marketing our products and services; and
    
    loss of one or more of our licenses to provide health care services.
  The health care industry is subject to continued scrutiny.
  We compete with many health care providers for patients and HMO affiliations.
  6




---



##### Table of Contents



The agreement relating to most of our IPA relationships may be modified or terminated.
  We may not be able to successfully recruit or retain existing relationships with qualified
physicians and medical professionals.
  Our business exposes us to the risk of medical malpractice lawsuits.
  Our insurance coverage may not be adequate, and rising insurance premiums could negatively affect
our profitability.
  Deficit spending and economic downturns could negatively impact our results of operations.
  We presently operate only in Florida.
  7




---



##### Table of Contents



A significant portion of our voting power is concentrated in one shareholder.
  We are dependent on our executive officers and other key employees.
  We depend on the management information systems of our affiliated HMOs.
  We depend on our information processing systems.
  
    
    we fail to adequately identify or are unsuccessful in implementing all of our information and processing needs;
    
    our processing or information systems fail; or
    
    we fail to upgrade systems when required.
  8




---



##### Table of Contents



Volatility of our stock price could adversely affect you.
  
    
    state and federal budget decreases;
    
    adverse publicity regarding HMOs and other managed care organizations;
    
    government action regarding eligibility;
    
    changes in government payment levels;
    
    changes in state mandatory programs;
    
    changes in expectations of our future financial performance or changes in financial
estimates, if any, of public market analysts;
    
    announcements relating to our business or the business of our competitors;
    
    conditions generally affecting the managed care industry or our provider networks;
    
    the success of our operating strategy;
    
    the operating and stock price performance of other comparable companies;
    
    the termination of any of our contracts;
    
    regulatory or legislative changes;
    
    acts of war or terrorism or an increase in hostilities in the world; and
    
    general economic conditions, including inflation and unemployment rates.
 
 PART I
 
 ITEM 1. BUSINESS
 General
    Industry Overview
   9




---



##### Table of Contents



Our Market and Business Strategy
  10




---



##### Table of Contents




    
    increase patient volume at our existing medical centers through enhanced marketing efforts;
    
    consider adding new HMO affiliations;
    
    selectively expand our network to include additional medical centers or other medical
facilities and to penetrate new geographic markets; and
    
    further develop our IPA management activities.
 Increasing Patient Volume
  Consider Adding New HMO Affiliations
  Selectively Expanding Our Network
  
    
    a history of profitable operations or a predictable synergy such as opportunities for
economies of scale through a consolidation of management functions;
    
    a competitive environment with respect to a high concentration of hospitals and physicians; and
    
    a geographic proximity to our current operations.
 Developing Our IPA Management Activities
  11




---



##### Table of Contents



Our Medical Centers
  Our IPAs
  Our HMO Affiliates
  Humana
   12




---



##### Table of Contents



Vista
   Wellcare
  13




---



##### Table of Contents



Compliance Program
  Competition
  Government Regulation
 General.
  Present and Prospective Federal and State Reimbursement Regulation
 Federal Fraud and Abuse Laws and Regulations.
 State Fraud and Abuse Regulations
 14




---



##### Table of Contents



Restrictions on Physician Referrals
  Privacy Laws.
 Corporate Practice of Medicine Doctrine.
 Clinic Licensure.
 Limitations on Contractual Joint Ventures.
 Occupational Safety and Health Administration (OSHA)
 Medicare Marketing Restrictions.
 Sanctioned Parties
 Healthcare Reform.
 15




---



##### Table of Contents



Employees
  Insurance
   Available Information
   
 ITEM 2. PROPERTIES
   
 ITEM 3. LEGAL PROCEEDINGS
 JOAN LINDAHL v. HUMANA MEDICAL PLAN, INC., COLUMBIA HOSPITAL
CORPORATION OF SOUTH BROWARD d/b/a WESTSIDE REGIONAL MEDICAL CENTER, INPHYNET CONTRACTING SERVICES,
INC., CONTINUCARE MEDICAL MANAGEMENT, INC., LUIS GUERRERO AND JARSLAW PARKOLAP th
 MAUREEN MCCANN, AS PERSONAL REPRESENTATIVE OF THE ESTATE OF
 16




---



##### Table of Contents



WALTER MCCANN v. AJAIB MANN, M.D. AND CONTINUCARE CORPORATION
   
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  
 PART II
 
 ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
  HIGH
    
    
    LOWFiscal Year 2005Quarter Ended 9/30/04
    
    $
    1.98
    
    
    $
    1.29Quarter Ended 12/31/04
    
    
    2.54
    
    
    
    1.45Quarter Ended 3/31/05
    
    
    2.80
    
    
    
    1.80Quarter Ended 6/30/05
    
    
    3.55
    
    
    
    2.21Fiscal Year 2004:Quarter Ended 9/30/03
    
    $
    0.82
    
    
    $
    0.39Quarter Ended 12/31/03
    
    
    1.95
    
    
    
    0.66Quarter Ended 3/31/04
    
    
    3.18
    
    
    
    1.30Quarter Ended 6/30/04
    
    
    3.00
    
    
    
    1.59
  17




---



##### Table of Contents



Securities Authorized for Issuance Under Equity Compensation Plans
  Number of securities to
    
    
    Weighted averagebe issued upon exercise
    
    
    exercise price of
    
    
    Number of securitiesof outstanding options,
    
    
    outstanding options,
    
    
    remaining availablePlan Category
    
    warrants and rights
    
    
    warrants and rights
    
    
    for future issuancePlans approved by stockholders
    
    
    3,814,000
    
    
    
    $1.22
    
    
    
    4,883,334Plans not approved by
stockholders
    
    
    
    
    
    
    
    
    
    
    3,814,000
    
    
    
    
    
    
    
    4,883,334
 Purchases of Equity Securities by the Issuer and Affiliated Purchasers
  Total Number of
    
    
    Maximum Number ofShares Purchased as
    
    
    Shares that May Yet BeTotal Number of
    
    
    Average Price Paid
    
    
    Part of Publicly
    
    
    Purchased Under thePeriod
    
    Shares Purchased
    
    
    per Share
    
    
    Announced Plan
    
    
    PlanApril 1 to April 30, 2005
    
    
    153,700
    
    
    
    $2.47
    
    
    
    153,700
    
    
    
    2,196,500May 1 to May 31, 2005
    
    
    422,500
    
    
    
    $2.58
    
    
    
    422,500
    
    
    
    1,774,000June 1 to June 30, 2005
    
    
    149,700
    
    
    
    $2.72
    
    
    
    149,700
    
    
    
    1,624,300Totals
    
    
    725,900
    
    
    
    $2.60
    
    
    
    725,900
 
 ITEM 6. SELECTED FINANCIAL DATA
  18




---



##### Table of Contents



CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
 For the Year Ended June 30,2005
    
    2004 (1)
    
    2003 (1)
    
    2002 (1)
    
    2001 (1)Revenue:Medical services revenue, net
    
    $
    111,316,174
    
    
    $
    101,123,346
    
    
    $
    97,164,834
    
    
    $
    90,978,930
    
    
    $
    85,824,012Management fee revenue and other income
    
    
    914,939
    
    
    
    700,756
    
    
    
    
    
    
    
    
    
    
    
    Total revenue
    
    
    112,231,113
    
    
    
    101,824,102
    
    
    
    97,164,834
    
    
    
    90,978,930
    
    
    
    85,824,012Operating expenses:Medical services:Medical claims
    
    
    81,104,665
    
    
    
    76,333,580
    
    
    
    74,046,265
    
    
    
    69,340,067
    
    
    
    68,620,251Other direct costs
    
    
    12,648,297
    
    
    
    11,665,894
    
    
    
    10,696,997
    
    
    
    10,395,210
    
    
    
    10,610,660Total medical services
    
    
    93,752,962
    
    
    
    87,999,474
    
    
    
    84,743,262
    
    
    
    79,735,277
    
    
    
    79,230,911Administrative payroll and employee benefits
    
    
    5,107,672
    
    
    
    3,822,949
    
    
    
    3,681,446
    
    
    
    2,689,562
    
    
    
    3,137,722General and administrative
    
    
    7,059,602
    
    
    
    5,821,871
    
    
    
    6,252,347
    
    
    
    6,446,444
    
    
    
    8,118,992Gain on extinguishment of debt
    
    
    (3,000,000
    )
    
    
    (850,000
    )
    
    
    
    
    
    
    
    
    
    
    (3,503,188
    )Total operating expenses
    
    
    102,920,236
    
    
    
    96,794,294
    
    
    
    94,677,055
    
    
    
    88,871,283
    
    
    
    86,984,437Income (loss) from operations
    
    
    9,310,877
    
    
    
    5,029,808
    
    
    
    2,487,779
    
    
    
    2,107,647
    
    
    
    (1,160,425
    )Other income (expense):Interest income
    
    
    108,000
    
    
    
    4,793
    
    
    
    6,568
    
    
    
    36,124
    
    
    
    32,342Interest expense
    
    
    (702,946
    )
    
    
    (1,006,082
    )
    
    
    (956,327
    )
    
    
    (1,567,479
    )
    
    
    (1,624,116
    )Medicare settlement related to terminated
operations
    
    
    
    
    
    
    2,218,278
    
    
    
    
    
    
    
    (2,440,971
    )
    
    
    Income (loss) from continuing operations before
income tax benefit
    
    
    8,715,931
    
    
    
    6,246,797
    
    
    
    1,538,020
    
    
    
    (1,864,679
    )
    
    
    (2,752,199
    )Income tax benefit
    
    
    7,175,561
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Income (loss) from continuing operations
    
    
    15,891,492
    
    
    
    6,246,797
    
    
    
    1,538,020
    
    
    
    (1,864,679
    )
    
    
    (2,752,199
    )Income (loss) from discontinued operations:Home health operations
    
    
    
    
    
    
    (1,666,934
    )
    
    
    (1,830,118
    )
    
    
    (1,295,310
    )
    
    
    (541,251
    )Terminated IPAs
    
    
    
    
    
    
    73,091
    
    
    
    350,696
    
    
    
    (486,399
    )
    
    
    (1,482,657
    )Contractual revision of previously recorded
medical claims and other liabilities from
discontinued operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,638,205Total income (loss) from discontinued operations
    
    
    
    
    
    
    (1,593,843
    )
    
    
    (1,479,422
    )
    
    
    (1,781,709
    )
    
    
    2,614,297Net income (loss)
    
    $
    15,891,492
    
    
    $
    4,652,954
    
    
    $
    58,598
    
    
    $
    (3,646,388
    )
    
    $
    (137,902
    )Basic net income (loss) per common share:Income from continuing operations
    
    $
    .32
    
    
    $
    .14
    
    
    $
    .04
    
    
    $
    (.05
    )
    
    $
    (.08
    )Loss from discontinued operations
    
    
    
    
    
    
    (.03
    )
    
    
    (.04
    )
    
    
    (.04
    )
    
    
    .08Net income (loss) per common share
    
    $
    .32
    
    
    $
    .11
    
    
    $
    
    
    
    $
    (.09
    )
    
    
    Diluted net income (loss) per common share:Income from continuing operations
    
    $
    .31
    
    
    $
    .12
    
    
    $
    .04
    
    
    $
    (.05
    )
    
    $
    (.08
    )Loss from discontinued operations
    
    
    
    
    
    
    (.03
    )
    
    
    (.04
    )
    
    
    (.04
    )
    
    
    .08Net income (loss) per common share
    
    $
    .31
    
    
    $
    .09
    
    
    $
    
    
    
    $
    (.09
    )
    
    $
    Cash dividends declared
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
 CONSOLIDATED BALANCE SHEET DATA:
 As of June 30,2005
    
    
    2004
    
    
    2003 (1)
    
    
    2002 (1)
    
    
    2001 (1)Total assets
    
    $
    34,137,935
    
    
    $
    21,908,181
    
    
    $
    20,999,976
    
    
    $
    21,546,985
    
    
    $
    22,343,279Long-term obligations, including current portion
    
    $
    107,710
    
    
    $
    337,186
    
    
    $
    9,597,063
    
    
    $
    13,877,505
    
    
    $
    11,806,623
 
 (1)
    
    These amounts have been adjusted to reflect the termination of certain lines of business, discussed in Note 3 in the
accompanying Consolidated Financial Statements, as discontinued operations. 19




---



##### Table of Contents



ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 General
   Restatement
  Medicare Considerations
  Critical Accounting Policies and Estimates
  20




---



##### Table of Contents



Revenue Recognition
    Medical Claims Expense Recognition
    Consideration of Impairment Related to Goodwill and Other Intangible Assets
   21




---



##### Table of Contents



Realization of Deferred Tax Assets
    Results of Operations
  Year ended June 30,2005
    
    2004
    
    2003Revenue:Medical services revenue, net
    
    
    99.2
    %
    
    
    99.3
    %
    
    
    100.0
    %Management fee revenue and other income
    
    
    0.8
    
    
    
    0.7
    
    
    
    Total revenue
    
    
    100.0
    
    
    
    100.0
    
    
    
    100.0Operating
expenses:Medical services:Medical claims
    
    
    72.3
    
    
    
    75.0
    
    
    
    76.2Other direct costs
    
    
    11.2
    
    
    
    11.4
    
    
    
    11.0Total medical services
    
    
    83.5
    
    
    
    86.4
    
    
    
    87.2Administrative payroll and employee benefits
    
    
    4.6
    
    
    
    3.8
    
    
    
    3.8General and administrative
    
    
    6.3
    
    
    
    5.7
    
    
    
    6.4Gain on extinguishment of debt
    
    
    (2.7
    )
    
    
    (0.8
    )
    
    
    Total operating expenses
    
    
    91.7
    
    
    
    95.1
    
    
    
    97.4Income from operations
    
    
    8.3
    
    
    
    4.9
    
    
    
    2.6Other income (expense):Interest income
    
    
    0.1
    
    
    
    
    
    
    
    Interest expense
    
    
    (0.6
    )
    
    
    (1.0
    )
    
    
    (1.0
    )Medicare settlement related to terminated operations
    
    
    
    
    
    
    2.2
    
    
    
    Income from continuing operations before income tax
benefit
    
    
    7.8
    
    
    
    6.1
    
    
    
    1.6Income tax benefit
    
    
    6.4
    
    
    
    
    
    
    
    Income from continuing operations
    
    
    14.2
    
    
    
    6.1
    
    
    
    1.6Income (loss) from discontinued operations:Home health operations
    
    
    
    
    
    
    (1.6
    )
    
    
    (1.9
    )Terminated IPAs
    
    
    
    
    
    
    0.1
    
    
    
    0.4Total loss from discontinued operations
    
    
    
    
    
    
    (1.5
    )
    
    
    (1.5
    )Net income
    
    
    14.2
    %
    
    
    4.6
    %
    
    
    0.1
    %
 22




---



##### Table of Contents



COMPARISON OF FISCAL YEAR ENDED JUNE 30, 2005 TO FISCAL YEAR ENDED JUNE 30, 2004
 Revenue from Continuing Operations
     Expenses from Continuing Operations
     23




---



##### Table of Contents



Income from Operations
  Medicare Settlement Related to Terminated Operations
  Loss from Discontinued Operations-Home Health Operations
  Income from Discontinued Operations-Terminated IPAs
  Taxes
  24




---



##### Table of Contents



Net Income
  COMPARISON OF FISCAL YEAR ENDED JUNE 30, 2004 TO FISCAL YEAR ENDED JUNE 30, 2003
 Revenue from Continuing Operations
    Expenses from Continuing Operations
       Income from Operations
  25




---



##### Table of Contents



Medicare Settlement Related to Terminated Operations
  Loss from Discontinued Operations-Home Health Operations
  Income from Discontinued Operations-Terminated IPAs
  Taxes
  Net Income
  Liquidity and Capital Resources
     26




---



##### Table of Contents



Off-Balance Sheet Arrangements
  27




---



##### Table of Contents



Contractual Obligations
  Payment due by PeriodTotal
    
    Less than 1 Year
    
    1-2 Years
    
    3-5 YearsLong-Term Debt Obligations
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Related Party Notes Payable,
including capitalized interest
(1)
    
    
    103,338
    
    
    
    103,338
    
    
    
    
    
    
    
    Capital Lease Obligations (2)
    
    
    118,425
    
    
    
    76,404
    
    
    
    42,021
    
    
    
    Operating Lease Obligations (2)
    
    
    5,539,398
    
    
    
    1,722,924
    
    
    
    3,221,600
    
    
    
    594,874Total
    
    $
    5,761,161
    
    
    $
    1,902,666
    
    
    $
    3,263,621
    
    
    $
    594,874
 
 (1)
    
    The payments shown above for our Related Party Notes Payable include
interest that was capitalized in accordance with Statement of Financial
Accounting Standards No. 15, Accounting by Debtors and Creditors for Troubled
Debt Restructurings. See Note 8 to our Consolidated Financial Statements.(2)
    
    The payments shown above for Capital Lease Obligations and Operating
Lease Obligations reflect all payments due under the terms of the respective
leases. See Note 4 to our Consolidated Financial Statements to reconcile the
payments shown above to the capital lease obligation recorded in our
Consolidated Balance Sheet.  
 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  
 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
  
 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
  
 ITEM 9A. CONTROLS AND PROCEDURES
  28




---



##### Table of Contents



ITEM 9B. OTHER INFORMATION
  
 PART III
 
 ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
  
 ITEM 11. EXECUTIVE COMPENSATION AND OTHER INFORMATION
  
 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
  
 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
  
 ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
  
 PART IV
 
 ITEM
15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
    29




---



##### Table of Contents



3.1
    
    Restated Articles of Incorporation, as amended (1)3.2
    
    Restated Bylaws (2)4.1
    
    Form of certificate evidencing shares of Common Stock (1)4.2
    
    Registration Rights Agreement, dated as of October 30, 1997, by and
between Continucare Corporation and Loewenbaum & Company
Incorporated (3)4.3
    
    Continucare Corporation Amended and
Restated 1995 Stock Option Plan** (4)4.4
    
    Amended and Restated 2000 Stock
Option Plan ** (5)4.5
    
    Convertible Subordinated Promissory
Note (6)4.6
    
    Form of Convertible Promissory
Note, dated June 30, 2001 (7)4.7
    
    Amendment to Convertible Promissory Note, dated March 31, 2003, between
Continucare Corporation and Frost Nevada Limited Partnership (7)4.8
    
    Form of Amendment to Convertible
Promissory Note, dated March 31, 2003 (7)10.1
    
    Form of Stock Option Agreement** (8)10.2
    
    Physician Practice Management Participation Agreement between Continucare
Medical Management, Inc., and Humana Medical Plan, Inc. entered into as of
the 1st
day of August, 1998 (9)10.3
    
    Amended and Restated Primary Care Provider Services dated November 12,
2004, by and between Vista Healthplan of South Florida, Inc., Vista
Insurance Plan, Inc. and Continucare Medical Management, Inc. (10)10.4
    
    Airport Corporate Center office lease dated June 3, 2004, by and between
Miami RPFIV Airport Corporate Center Associates Limited Liability Company
and Continucare Corporation(11)10.5
    
    Amendment No. 1 to Primary Care Provider Services Agreement dated as of
July 1, 2004 by and among Vista Healthplan of South Florida,
Inc. (10)10.6
    
    Agreement, dated March 31, 2003, between the Company and Pecks Management
Partners, Ltd. (7)10.7
    
    Agreement, dated March 31, 2003, between Continucare Corporation and
Carret & Company (7)10.8
    
    WCMA Loan and Security Agreement dated March 9, 2000 between Merrill Lynch
Business Financial Services, Inc. and Continucare Corporation (12)10.9
    
    Letter Agreement dated March 18, 2005 between Merrill Lynch Business
Financial Services, Inc. and Continucare Corporation (13)10.10
    
    Consulting Agreement dated May 4, 2005 between Patrick Healy and
Continucare Corporation (13)10.11
    
    Form of Promissory Note dated
December 29, 2004 (14)21.1
    
    Subsidiaries of the Company (11)23.1
    
    Consent of Independent Registered Public Accounting Firm *31.1
    
    Section 302 Certification of Chief Executive Officer *31.2
    
    Section 302 Certification of Chief Financial Officer *32.1
    
    Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 *32.2
    
    Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 *
  30




---



##### Table of Contents



(1
    )
    
    Post Effective Amendment No. 1 to the Registration Statement on SB-2
on Form S-3 Registration Statement filed on October 29, 1996.(2
    )
    
    Registration Statement on Form SB-2
filed on January 17, 1995.(3
    )
    
    Form 8-K dated October 30, 1997 and filed with the Commission on
November 13, 1997.(4
    )
    
    Schedule 14A dated December 26, 1997 and filed with the Commission on
December 30, 1997.(5
    )
    
    Schedule 14A dated July 28, 2004, filed July 28, 2004.(6
    )
    
    Form 8-K dated August 3, 2001, filed August 15, 2001.(7
    )
    
    Form 10-Q for the quarterly period ended March 31, 2003.(8
    )
    
    Form 10-Q for the quarterly
period ended September 30, 2004.(9
    )
    
    Form 10-K for the fiscal year ended June 30, 2000.(10
    )
    
    Form 10-Q for the quarterly
period ended December 31, 2004.(11
    )
    
    Form 10-K for the fiscal year ended June 30, 2004.(12
    )
    
    Form 10-Q for the quarterly
period ended March 31, 2000.(13
    )
    
    Form 10-Q for the quarterly period ended March 31, 2005.(14
    )
    
    Form 8-K dated
December 30, 2004, filed January 5, 2005.
 *
    
    Filed herewith**
    
    Management contract or compensatory plan or arrangement 31




---



##### Table of Contents



SIGNATURES
  CONTINUCARE CORPORATIONBy:
    
    /s/ Richard C. Pfenniger, Jr.RICHARD C. PFENNIGER, JR.Chairman of the Board, Chief Executive Officer and President
   SIGNATURE
    
    TITLE
    
    DATE/s/ Richard C. Pfenniger, Jr.

Richard C. Pfenniger, Jr.
    
    Chairman of the Board, Chief Executive
Officer, President and Director
(Principal Executive Officer)
    
    September 19, 2005/s/ Fernando L. Fernandez

Fernando L. Fernandez
    
    Senior Vice President  Finance, Chief
Financial Officer, Treasurer and Secretary
(Principal Financial and Accounting Officer)
    
    September 19, 2005/s/ Robert J. Cresci

Robert J. Cresci
    
    Director
    
    September 19, 2005/s/ Phillip Frost, M.D.

Phillip Frost, M.D.
    
    Director
    
    September 19, 2005/s/ Neil Flanzraich

Neil Flanzraich
    
    Director
    
    September 19, 2005/s/ Jacob Nudel, M.D.

Jacob Nudel, M.D.
    
    Director
    
    September 19, 2005/s/ A. Marvin Strait

A. Marvin Strait
    
    Director
    
    September 19, 2005
 32




---



##### Table of Contents



INDEX TO FINANCIAL STATEMENTS
 PAGEReport of Independent Registered Public Accounting Firm
    
    
    F-2Consolidated Balance Sheets as of June 30, 2005 and 2004
    
    
    F-3Consolidated Statements of Income for the years ended June 30, 2005, 2004
and 2003
    
    
    F-4Consolidated Statements of Shareholders Equity for the years ended
June 30, 2005, 2004 and 2003
    
    
    F-5Consolidated Statements of Cash Flows for the years ended June 30, 2005, 2004
and 2003
    
    
    F-6Notes to Consolidated Financial Statements
    
    
    F-8
 F-1




---



##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
    /s/ ERNST & YOUNG LLPCERTIFIED PUBLIC ACCOUNTANTSWest Palm Beach, FloridaSeptember
14, 2005
 F-2




---



##### Table of Contents



CONTINUCARE CORPORATION
 
 CONSOLIDATED BALANCE SHEETS
 June 30,2005
    
    

2004ASSETSCurrent assets:Cash and cash equivalents
    
    $
    5,780,544
    
    
    $
    720,360Other receivables, net
    
    
    144,973
    
    
    
    423,215Due from HMOs, net of a liability for incurred but not reported medical claims
expense of approximately $11,700,000 and $11,450,000 at June 30, 2005 and 2004,
respectively
    
    
    3,485,530
    
    
    
    2,701,878Prepaid expenses and other current assets
    
    
    719,577
    
    
    
    992,321Deferred tax assets, net
    
    
    585,571
    
    
    
    Total current assets
    
    
    10,716,195
    
    
    
    4,837,774Certificates of deposit, restricted
    
    
    530,350
    
    
    
    30,000Equipment, furniture and leasehold improvements, net
    
    
    670,665
    
    
    
    492,054Goodwill, net of accumulated amortization of approximately $7,608,000
    
    
    14,342,510
    
    
    
    14,342,510Managed care contracts, net of accumulated amortization of approximately $2,422,000
and $2,069,000 at June 30, 2005 and 2004, respectively
    
    
    1,090,046
    
    
    
    1,442,858Deferred financing costs, net of accumulated amortization of $222,500 at June 30, 2004
    
    
    
    
    
    
    662,502Deferred tax assets, net
    
    
    6,721,353
    
    
    
    Other assets, net
    
    
    66,816
    
    
    
    100,483Total assets
    
    $
    34,137,935
    
    
    $
    21,908,181LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    660,139
    
    
    $
    504,151Accrued expenses and other current liabilities
    
    
    2,620,802
    
    
    
    1,794,019Note payable
    
    
    520,000
    
    
    
    Deferred revenue
    
    
    
    
    
    
    3,000,000Total current liabilities
    
    
    3,800,941
    
    
    
    5,298,170Capital lease obligations, less current portion
    
    
    38,361
    
    
    
    101,177Related party notes payable, less current portion
    
    
    
    
    
    
    117,717Total liabilities
    
    
    3,839,302
    
    
    
    5,517,064Commitments and contingenciesShareholders equity:Common stock, $0.0001 par value: 100,000,000 shares authorized; 52,591,895 shares
issued and 49,595,702 shares outstanding at June 30, 2005 and 53,296,379 shares
issued and 50,300,186 shares outstanding at June 30, 2004
    
    
    4,960
    
    
    
    5,031Additional paid-in capital
    
    
    67,924,068
    
    
    
    69,907,973Accumulated deficit
    
    
    (32,205,694
    )
    
    
    (48,097,186
    )Treasury stock, 2,996,193 shares at June 30, 2005 and 2004
    
    
    (5,424,701
    )
    
    
    (5,424,701
    )Total shareholders equity
    
    
    30,298,633
    
    
    
    16,391,117Total liabilities and shareholders equity
    
    $
    34,137,935
    
    
    $
    21,908,181
 The accompanying notes are an integral part of these consolidated financial statements.
 F-3




---



##### Table of Contents



CONTINUCARE CORPORATION
 
 CONSOLIDATED STATEMENTS OF INCOME
 For the Year Ended June 30,2005
    
    
    2004
    
    
    2003Revenue:Medical services revenue, net
    
    $
    111,316,174
    
    
    $
    101,123,346
    
    
    $
    97,164,834Management fee revenue and other income
    
    
    914,939
    
    
    
    700,756
    
    
    
    Total revenue
    
    
    112,231,113
    
    
    
    101,824,102
    
    
    
    97,164,834Operating expenses:Medical services:Medical claims
    
    
    81,104,665
    
    
    
    76,333,580
    
    
    
    74,046,265Other direct costs
    
    
    12,648,297
    
    
    
    11,665,894
    
    
    
    10,696,997Total medical services
    
    
    93,752,962
    
    
    
    87,999,474
    
    
    
    84,743,262Administrative payroll and employee benefits
    
    
    5,107,672
    
    
    
    3,822,949
    
    
    
    3,681,446General and administrative
    
    
    7,059,602
    
    
    
    5,821,871
    
    
    
    6,252,347Gain on extinguishment of debt
    
    
    (3,000,000
    )
    
    
    (850,000
    )
    
    
    Total operating expenses
    
    
    102,920,236
    
    
    
    96,794,294
    
    
    
    94,677,055Income from operations
    
    
    9,310,877
    
    
    
    5,029,808
    
    
    
    2,487,779Other income (expense):Interest income
    
    
    108,000
    
    
    
    4,793
    
    
    
    6,568Interest expense
    
    
    (702,946
    )
    
    
    (1,006,082
    )
    
    
    (956,327
    )Medicare settlement related to terminated operations
    
    
    
    
    
    
    2,218,278
    
    
    
    Income from continuing operations before income tax benefit
    
    
    8,715,931
    
    
    
    6,246,797
    
    
    
    1,538,020Income tax benefit
    
    
    7,175,561
    
    
    
    
    
    
    
    Income from continuing operations
    
    
    15,891,492
    
    
    
    6,246,797
    
    
    
    1,538,020Income (loss) from discontinued operations:Home health operations
    
    
    
    
    
    
    (1,666,934
    )
    
    
    (1,830,118
    )Terminated IPAs
    
    
    
    
    
    
    73,091
    
    
    
    350,696Loss from discontinued operations
    
    
    
    
    
    
    (1,593,843
    )
    
    
    (1,479,422
    )Net income
    
    $
    15,891,492
    
    
    $
    4,652,954
    
    
    $
    58,598Basic net income (loss) per common share:Income from continuing operations
    
    $
    .32
    
    
    $
    .14
    
    
    $
    .04Loss from discontinued operations
    
    
    
    
    
    
    (.03
    )
    
    
    (.04
    )Net income per common share
    
    $
    .32
    
    
    $
    .11
    
    
    $
    Diluted net income (loss) per common share:Income from continuing operations
    
    $
    .31
    
    
    $
    .12
    
    
    $
    .04Loss from discontinued operations
    
    
    
    
    
    
    (.03
    )
    
    
    (.04
    )Net income per common share
    
    $
    .31
    
    
    $
    .09
    
    
    $
    Weighted average common shares outstanding:Basic
    
    
    50,231,870
    
    
    
    43,763,835
    
    
    
    40,776,903Diluted
    
    
    52,006,064
    
    
    
    49,232,716
    
    
    
    40,776,903
 The accompanying notes are an integral part of these consolidated financial statements.
 F-4




---



##### Table of Contents



CONTINUCARE CORPORATION
 
 CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
 Additional
    
    
    
    
    
    
    
    
    
    
    TotalCommon Stock
    
    
    Paid-In
    
    
    Accumulated
    
    
    Treasury
    
    
    ShareholdersShares
    
    
    Amount
    
    
    Capital
    
    
    Deficit
    
    
    Stock
    
    
    EquityBalance at June 30,
2002
    
    
    39,634,601
    
    
    
    $3,964
    
    
    $
    59,511,614
    
    
    
    $(52,808,738
    )
    
    $
    (5,424,701
    )
    
    
    $1,282,139Issuance of stock
for director
compensation
    
    
    900,000
    
    
    
    90
    
    
    
    122,910
    
    
    
    
    
    
    
    
    
    
    
    123,000Issuance of stock
to guarantor of
credit facility
    
    
    1,500,000
    
    
    
    150
    
    
    
    524,850
    
    
    
    
    
    
    
    
    
    
    
    525,000Issuance of stock
as consideration
for extension of
note repayment
terms
    
    
    344,400
    
    
    
    35
    
    
    
    120,506
    
    
    
    
    
    
    
    
    
    
    
    120,541Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    58,598
    
    
    
    
    
    
    
    58,598Balance at June 30,
2003
    
    
    42,379,001
    
    
    
    4,239
    
    
    
    60,279,880
    
    
    
    (52,750,140
    )
    
    
    (5,424,701
    )
    
    
    2,109,278Issuance of stock
to guarantor of
credit facility
    
    
    300,000
    
    
    
    30
    
    
    
    869,970
    
    
    
    
    
    
    
    
    
    
    
    870,000Issuance of stock
in private
placement
transaction
    
    
    2,333,333
    
    
    
    233
    
    
    
    3,464,376
    
    
    
    
    
    
    
    
    
    
    
    3,464,609Issuance of stock
upon exercise of
stock options
    
    
    546,000
    
    
    
    55
    
    
    
    351,315
    
    
    
    
    
    
    
    
    
    
    
    351,370Issuance of stock
upon conversion of
related party note
payable
    
    
    819,313
    
    
    
    82
    
    
    
    899,383
    
    
    
    
    
    
    
    
    
    
    
    899,465Issuance of stock
upon conversion of
subordinated notes
payable
    
    
    3,922,539
    
    
    
    392
    
    
    
    4,043,049
    
    
    
    
    
    
    
    
    
    
    
    4,043,441Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,652,954
    
    
    
    
    
    
    
    4,652,954Balance at June 30,
2004
    
    
    50,300,186
    
    
    
    5,031
    
    
    
    69,907,973
    
    
    
    (48,097,186
    )
    
    
    (5,424,701
    )
    
    
    16,391,117Recognition of
compensation
expense related to
issuance of stock
options
    
    
    
    
    
    
    
    
    
    
    264,802
    
    
    
    
    
    
    
    
    
    
    
    264,802Issuance of stock
upon exercise of
stock options
    
    
    156,666
    
    
    
    16
    
    
    
    91,683
    
    
    
    
    
    
    
    
    
    
    
    91,699Fees related to
private placement
transactions
    
    
    
    
    
    
    
    
    
    
    (98,244
    )
    
    
    
    
    
    
    
    
    
    
    (98,244
    )Issuance of stock
upon conversion of
related party note
payable
    
    
    14,550
    
    
    
    1
    
    
    
    14,549
    
    
    
    
    
    
    
    
    
    
    
    14,550Repurchase of
common stock
    
    
    (875,700
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,256,783
    
    
    
    2,256,783Retirement of
treasury stock
    
    
    
    
    
    
    (88
    )
    
    
    (2,256,695
    )
    
    
    
    
    
    
    (2,256,783
    )
    
    
    (4,513,566
    )Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    15,891,492
    
    
    
    
    
    
    
    15,891,492Balance at June 30,
2005
    
    
    49,595,702
    
    
    
    $4,960
    
    
    $
    67,924,068
    
    
    $
    (32,205,694
    )
    
    $
    (5,424,701
    )
    
    
    $30,298,633
 The accompanying notes are an integral part of these consolidated financial statements.
 F-5




---



##### Table of Contents



CONTINUCARE CORPORATION
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 For the Year Ended June 30,2005
    
    
    2004
    
    
    2003CASH FLOWS FROM OPERATING ACTIVITIESNet income
    
    $
    15,891,492
    
    
    $
    4,652,954
    
    
    $
    58,598Loss from discontinued operations
    
    
    
    
    
    
    1,593,843
    
    
    
    1,479,422Income from continuing operations
    
    
    15,891,492
    
    
    
    6,246,797
    
    
    
    1,538,020Adjustments to reconcile net income to net cash provided by
operating activities:Depreciation and amortization, including amortization of
deferred
financing costs
    
    
    1,258,289
    
    
    
    1,201,675
    
    
    
    1,162,034Provision for bad debts
    
    
    15,787
    
    
    
    104,296
    
    
    
    44,333Recognition of compensation expense related to issuance
of stock options
    
    
    264,802
    
    
    
    
    
    
    
    Medicare settlement related to terminated operations
    
    
    
    
    
    
    (2,218,278
    )
    
    
    Loss on disposal of property and equipment and release
from asset related liabilities
    
    
    
    
    
    
    
    
    
    
    500Director compensation paid through the issuance of
restricted common stock
    
    
    
    
    
    
    
    
    
    
    123,000Gain on extinguishment of debt
    
    
    (3,000,000
    )
    
    
    (850,000
    )
    
    
    Deferred tax benefit
    
    
    (7,306,924
    )
    
    
    
    
    
    
    Changes in operating assets and liabilities,
excluding the effect of disposals:Other receivables
    
    
    262,455
    
    
    
    (12,450
    )
    
    
    423,462Due from HMOs, net
    
    
    (783,652
    )
    
    
    (1,287,409
    )
    
    
    384,182Prepaid expenses and other current assets
    
    
    171,230
    
    
    
    (105,724
    )
    
    
    (297,231
    )Other assets
    
    
    33,667
    
    
    
    3,763
    
    
    
    (29,629
    )Accounts payable
    
    
    155,988
    
    
    
    (179,337
    )
    
    
    3,045Accrued expenses and other current liabilities
    
    
    894,710
    
    
    
    (608,629
    )
    
    
    (214,011
    )Net cash provided by continuing operations
    
    
    7,857,844
    
    
    
    2,294,704
    
    
    
    3,137,705Net cash used in discontinued operations
    
    
    (151,399
    )
    
    
    (998,872
    )
    
    
    (1,933,360
    )Net cash provided by operating activities
    
    
    7,706,445
    
    
    
    1,295,832
    
    
    
    1,204,345CASH FLOWS FROM INVESTING ACTIVITIESProceeds from disposal of property and equipment
    
    
    
    
    
    
    
    
    
    
    500Purchase of certificate of deposit
    
    
    (500,000
    )
    
    
    (30,000
    )
    
    
    (70,000
    )Proceeds from maturity of certificates of deposit
    
    
    101,165
    
    
    
    29,743
    
    
    
    99,555Purchase of property and equipment
    
    
    (421,586
    )
    
    
    (144,585
    )
    
    
    (170,273
    )Net cash used in continuing operations
    
    
    (820,421
    )
    
    
    (144,842
    )
    
    
    (140,218
    )Net cash (used in) provided by discontinued operations
    
    
    
    
    
    
    (938
    )
    
    
    15,751Net cash used in investing activities
    
    
    (820,421
    )
    
    
    (145,780
    )
    
    
    (124,467
    )
 Continued on next page.
 F-6




---



##### Table of Contents



CONTINUCARE CORPORATION
 CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
 For the Year Ended June 30,2005
    
    
    2004
    
    
    2003CASH FLOWS FROM FINANCING ACTIVITIESProceeds from note payable
    
    
    1,040,000
    
    
    
    
    
    
    
    Payments on note payable
    
    
    (520,000
    )
    
    
    
    
    
    
    Proceeds from issuance of stock in
private placement transaction
    
    
    
    
    
    
    3,464,609
    
    
    
    Payment of fees related to private
placement transactions
    
    
    (98,244
    )
    
    
    
    
    
    
    Payments on convertible subordinated notes
    
    
    
    
    
    
    (233,716
    )
    
    
    (273,896
    )Payments on related party notes
    
    
    (7,882
    )
    
    
    (35,953
    )
    
    
    (63,853
    )Principal repayments under capital lease
obligations
    
    
    (74,630
    )
    
    
    (76,000
    )
    
    
    (112,256
    )Payment of deferred financing costs
    
    
    
    
    
    
    (15,000
    )
    
    
    (15,000
    )Proceeds from exercise of stock options
    
    
    91,699
    
    
    
    351,370
    
    
    
    Repurchase of common stock
    
    
    (2,256,783
    )
    
    
    
    
    
    
    Payments on credit facility
    
    
    
    
    
    
    (2,315,000
    )
    
    
    Advances from HMOs
    
    
    
    
    
    
    
    
    
    
    75,000Payments on advances from HMOs
    
    
    
    
    
    
    
    
    
    
    (75,000
    )Third party assumption of capital lease
obligation
    
    
    
    
    
    
    
    
    
    
    (1,789
    )Repayments to Medicare per agreement
    
    
    
    
    
    
    (1,730,745
    )
    
    
    (632,751
    )Net cash used in financing activities
    
    
    (1,825,840
    )
    
    
    (590,435
    )
    
    
    (1,099,545
    )Net increase (decrease) in cash and cash equivalents
    
    
    5,060,184
    
    
    
    559,617
    
    
    
    (19,667
    )Cash and cash equivalents at beginning of fiscal year
    
    
    720,360
    
    
    
    160,743
    
    
    
    180,410Cash and cash equivalents at end of fiscal year
    
    $
    5,780,544
    
    
    $
    720,360
    
    
    $
    160,743SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND
FINANCING TRANSACTIONS:Retirement of treasury stock
    
    $
    2,256,783
    
    
    $
    
    
    
    $
    Stock issued for deferred financing costs
    
    $
    
    
    
    $
    870,000
    
    
    $
    645,541Stock issued upon conversion of subordinated notes
payable
    
    $
    
    
    
    $
    4,043,441
    
    
    $
    Stock issued upon conversion of related party notes
payable
    
    $
    14,550
    
    
    $
    899,465
    
    
    $
    Note payable issued for refunds due to Medicare for
overpayments
    
    $
    
    
    
    $
    
    
    
    $
    694,800Note payable canceled due to settlement of cost
report reopening
    
    $
    
    
    
    $
    
    
    
    $
    222,574Purchase of furniture and fixtures with proceeds of
capital lease obligations
    
    $
    
    
    
    $
    61,820
    
    
    $
    167,258SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:Cash paid for interest
    
    $
    40,229
    
    
    $
    563,750
    
    
    $
    325,337
 The accompanying notes are an integral part of these consolidated financial statements.
 F-7




---



##### Table of Contents



CONTINUCARE CORPORATION
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 1
 General
  Business
   F-8




---



##### Table of Contents



NOTE 2
 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
  Principles of Consolidation
  Accounting Estimates
  Fair Value of Financial Instruments
  Cash and Cash Equivalents
  Certificates of Deposit
  F-9




---



##### Table of Contents



Due from HMOs
  Equipment, Furniture and Leasehold Improvements
  Goodwill and Other Intangible Assets
  st
  Deferred Financing Costs
  Deferred Revenue
  F-10




---



##### Table of Contents



Accounting for Stock-Based Compensation
   Year Ended June 30,2005
    
    
    2004
    
    
    2003Net income as reported
    
    $
    15,891,492
    
    
    $
    4,652,954
    
    
    $
    58,598Add:Total stock-based employee
compensation expense
included in reported net
income, net of related tax
effect
    
    
    254,000
    
    
    
    
    
    
    
    123,000Deduct:Total stock-based employee
compensation expense
determined under SFAS No.
123 for all awards
    
    
    (1,372,348
    )
    
    
    (375,327
    )
    
    
    (120,168
    )Pro forma
    
    $
    14,773,144
    
    
    $
    4,277,627
    
    
    $
    61,430Basic net income per share:As reported
    
    $
    .32
    
    
    $
    .11
    
    
    $
    Pro forma
    
    $
    .29
    
    
    $
    .10
    
    
    $
    Diluted net income per share:As reported
    
    $
    .31
    
    
    $
    .09
    
    
    $
    Pro forma
    
    $
    .28
    
    
    $
    .09
    
    
    $
    
 Earnings per Share
  F-11




---



##### Table of Contents



Revenue Recognition
     Medical Service Expense
   Reinsurance (stop-loss insurance)
  Recent Accounting Pronouncements
 Accounting Changes and Error Corrections, Accounting Changes, Reporting Accounting Changes in Interim Financial
Statements,
 F-12




---



##### Table of Contents



Accounting for Stock-Based Compensation . Accounting for Stock Issued to Employees, Statement of Cash Flows
  Other Comprehensive Income
  Reclassifications
  F-13




---



##### Table of Contents



NOTE 3
 DISCONTINUED OPERATIONS
  Accounting for the Impairment or Disposal of Long-Lived Assets,
 Goodwill
    
    $
    320,882Equipment, furniture and leasehold improvements
    
    
    111,640Other
    
    
    24,868$
    457,390
  Accounting for Costs
Associated with Exit or Disposal Activities
 NOTE 4  EQUIPMENT, FURNITURE AND LEASEHOLD IMPROVEMENTS
  Estimated UsefulJune 30,
    
    
    Lives2005
    
    
    2004
    
    
    (in years)Furniture, fixtures and equipment
    
    $
    2,437,852
    
    
    $
    2,138,529
    
    
    
    3-5Furniture and equipment under capital lease
    
    
    522,109
    
    
    
    406,128
    
    
    
    5Leasehold improvements
    
    
    157,225
    
    
    
    150,943
    
    
    
    53,117,186
    
    
    
    2,695,600Less accumulated depreciation
    
    
    (2,446,521
    )
    
    
    (2,203,546
    )$
    670,665
    
    
    $
    492,054
   F-14




---



##### Table of Contents



For the year ending June 30,2006
    
    $
    76,4042007
    
    
    37,6022008
    
    
    4,4192009
    
    
    2010
    
    
    118,425Less amount representing imputed interest
    
    
    (10,715
    )Present value of obligations under capital lease
    
    
    107,710Less current portion
    
    
    69,349Long-term capital lease obligations
    
    $
    38,361
  NOTE 5
 DEBT
     F-15




---



##### Table of Contents



NOTE 6
 INCOME/LOSS PER SHARE
  Year Ended June 30,2005
    
    2004
    
    2003Basic weighted average number of shares outstanding
    
    
    50,231,870
    
    
    
    43,763,835
    
    
    
    40,776,903Dilutive effect of stock options
    
    
    1,689,274
    
    
    
    1,144,918
    
    
    
    Dilutive effect of convertible debt
    
    
    84,920
    
    
    
    4,323,963
    
    
    
    Diluted weighted average number of shares outstanding
    
    
    52,006,064
    
    
    
    49,232,716
    
    
    
    40,776,903Not included in calculation of dilutive earnings per
share as impact is antidilutive:Stock options outstanding
    
    
    255,000
    
    
    
    300,000
    
    
    
    2,716,000Warrants
    
    
    760,000
    
    
    
    760,000
    
    
    
    760,000
 NOTE 7  RELATED PARTY TRANSACTIONS
    NOTE 8  RESTRICTED STOCK, STOCK OPTION PLAN AND WARRANTS
    F-16




---



##### Table of Contents



Year Ended June 30,2005
    
    
    2004
    
    
    2003Number
    
    
    Weighted Average
    
    
    Number
    
    
    Weighted Average
    
    
    Number
    
    
    Weighted Averageof Shares
    
    
    Exercise Price
    
    
    of Shares
    
    
    Exercise Price
    
    
    of Shares
    
    
    Exercise PriceOutstanding at beginning of the year
    
    
    3,295,000
    
    
    $
    1.32
    
    
    
    2,716,000
    
    
    $
    1.15
    
    
    
    2,316,000
    
    
    $
    1.29Granted
    
    
    1,225,000
    
    
    
    1.54
    
    
    
    2,425,000
    
    
    
    1.22
    
    
    
    400,000
    
    
    
    0.36Exercised
    
    
    (156,666
    )
    
    
    .59
    
    
    
    (546,000
    )
    
    
    0.64
    
    
    
    
    
    
    
    Forfeited
    
    
    (549,334
    )
    
    
    2.74
    
    
    
    (1,300,000
    )
    
    
    1.17
    
    
    
    
    
    
    
    Outstanding at end of the year
    
    
    3,814,000
    
    
    
    
    
    
    
    3,295,000
    
    
    
    
    
    
    
    2,716,000Exercisable at end of the year
    
    
    1,728,333
    
    
    
    
    
    
    
    945,000
    
    
    
    
    
    
    
    2,360,997Weighted average fair value per
share of options granted during the
year
    
    $
    1.61
    
    
    
    
    
    
    $
    1.20
    
    
    
    
    
    
    $
    0.12
  Options Outstanding
    
    Options ExercisableRange of
    
    
    
    
    
    Weighted AverageExercise
    
    Outstanding at
    
    Remaining
    
    Weighted Average
    
    Number
    
    Weighted AveragePrices
    
    June 30, 2005
    
    Contractual Life
    
    Exercise Price
    
    Exercisable
    
    Exercise Price$1.35-$2.86
    
    
    1,749,000
    
    
    
    9.36
    
    
    
    $1.91
    
    
    
    463,333
    
    
    
    $1.87$.35-$.69
    
    
    2,065,000
    
    
    
    7.39
    
    
    
    $  .63
    
    
    
    1,265,000
    
    
    
    $  .61
   Convertible related party note
    
    
    77,645Warrants
    
    
    760,000Stock options
    
    
    4,883,334Total
    
    
    5,720,979
 F-17




---



##### Table of Contents



NOTE 9  INCOME TAXES
   Year Ended June 30,2005
    
    
    2004
    
    
    2003Current:Federal
    
    $
    131,363
    
    
    $
    
    
    
    $
    State
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    131,363
    
    
    
    
    
    
    
    Deferred:Federal
    
    
    2,411,423
    
    
    
    
    
    
    
    State
    
    
    435,273
    
    
    
    
    
    
    
    Total
    
    
    2,846,696
    
    
    
    
    
    
    
    Change in valuation allowance
    
    
    (10,153,620
    )
    
    
    
    
    
    
    Total income tax benefit
    
    $
    (7,175,561
    )
    
    $
    
    
    
    $
    
  June 30,2005
    
    2004
    
    2003Deferred tax assets:Bad debt and notes receivable reserve
    
    $
    294,922
    
    
    $
    706,992
    
    
    $
    4,620,512Alternative minimum tax credit
    
    
    131,363
    
    
    
    
    
    
    
    Other
    
    
    160,296
    
    
    
    192,440
    
    
    
    379,628Impairment charge
    
    
    1,746,800
    
    
    
    1,975,228
    
    
    
    3,036,963Capital loss carryover
    
    
    
    
    
    
    
    
    
    
    200,261Net operating loss carryforward
    
    
    6,340,985
    
    
    
    7,925,846
    
    
    
    4,590,657Deferred tax assets
    
    
    8,674,366
    
    
    
    10,800,506
    
    
    
    12,828,021Deferred tax liabilities:Depreciable/amortizable assets
    
    
    (1,367,442
    )
    
    
    (646,886
    )
    
    
    (965,047
    )Valuation allowance
    
    
    
    
    
    
    (10,153,620
    )
    
    
    (11,862,974
    )Deferred tax liabilities
    
    
    (1,367,442
    )
    
    
    (10,800,506
    )
    
    
    (12,828,021
    )Net deferred tax asset
    
    $
    7,306,924
    
    
    $
    
    
    
    $
    
  F-18




---



##### Table of Contents



Year Ended June 30,2005
    
    2004
    
    2003Statutory federal rate
    
    
    34.0
    %
    
    
    34.0
    %
    
    
    34.0
    %State income taxes, net of federal income tax benefit
    
    
    3.63
    
    
    
    3.63
    
    
    
    3.63Goodwill and other non-deductible items
    
    
    (3.46
    )
    
    
    2.85
    
    
    
    356.26Change in valuation allowance
    
    
    (116.49
    )
    
    
    (40.48
    )
    
    
    (404.03
    )Other
    
    
    
    
    
    
    
    
    
    
    10.14Effective tax rate
    
    
    (82.32
    )%
    
    
    0
    %
    
    
    0
    %
 NOTE 10  SHARE REPURCHASE PROGRAM
  NOTE 11  EMPLOYEE BENEFIT PLAN
   NOTE 12  COMMITMENTS AND CONTINGENCIES
 Legal Proceedings
 JOAN LINDAHL v. HUMANA MEDICAL PLAN, INC., COLUMBIA
HOSPITAL CORPORATION OF SOUTH BROWARD d/b/a WESTSIDE REGIONAL MEDICAL CENTER, INPHYNET CONTRACTING
SERVICES, INC., CONTINUCARE MEDICAL MANAGEMENT, INC., LUIS GUERRERO AND JARSLAW PARKOLAP.
 MAUREEN MCCANN, AS PERSONAL REPRESENTATIVE OF THE ESTATE
OF WALTER MCCANN v. AJAIB MANN, M.D. AND CONTINUCARE CORPORATION
  F-19




---



##### Table of Contents



Leases
  For the fiscal year ending June 30,2006
    
    $
    1,722,9242007
    
    
    1,654,6342008
    
    
    1,566,9662009
    
    
    404,0142010
    
    
    190,860Total
    
    $
    5,539,398
 NOTE 13  VALUATION AND QUALIFYING ACCOUNTS
  Year ended June 30,2005
    
    
    2004
    
    
    2003Allowance for doubtful accounts related to
other receivables and accounts receivable:Balance at beginning of period
    
    $
    826,964
    
    
    $
    4,823,000
    
    
    $
    4,807,000Provision for doubtful accounts
    
    
    15,787
    
    
    
    104,296
    
    
    
    44,000Write-offs of uncollectible accounts receivable
    
    
    
    
    
    
    (4,100,332
    )
    
    
    (28,000
    )Balance at end of period
    
    $
    842,751
    
    
    $
    826,964
    
    
    $
    4,823,000Allowance for doubtful accounts related to notes receivable:Balance at beginning of period
    
    $
    
    
    
    $
    6,367,000
    
    
    $
    6,367,000Provision for doubtful accounts
    
    
    
    
    
    
    
    
    
    
    Write-offs of uncollectible notes receivable
    
    
    
    
    
    
    (6,367,000
    )
    
    
    Balance at end of period
    
    $
    
    
    
    $
    
    
    
    $
    6,367,000Valuation allowance for deferred tax assets:Balance at beginning of period
    
    $
    10,153,620
    
    
    $
    11,862,974
    
    
    $
    12,099,730Additions
    
    
    
    
    
    
    
    
    
    
    Deductions
    
    
    (10,153,620
    )
    
    
    (1,709,354
    )
    
    
    (236,756
    )Balance at end of period
    
    $
    
    
    
    $
    10,153,620
    
    
    $
    11,862,974
 F-20




---



##### Table of Contents



NOTE 14  QUARTERLY CONSOLIDATED FINANCIAL INFORMATION (UNAUDITED)
 For the Year Ended June 30, 2005 (a)First
    
    
    Second
    
    
    Third
    
    
    Fourth
    
    
    FullQuarter
    
    
    Quarter
    
    
    Quarter
    
    
    Quarter
    
    
    YearTotal revenue from continuing
operations
    
    $
    26,208,017
    
    
    $
    27,113,675
    
    
    $
    29,775,441
    
    
    $
    29,133,980
    
    
    $
    112,231,113Net income
    
    $
    1,109,029
    
    
    $
    2,138,397
    
    
    $
    1,471,455
    
    
    $
    11,172,611
    
    
    $
    15,891,492Basic net income per common share
    
    $
    .02
    
    
    $
    .04
    
    
    $
    .03
    
    
    $
    .22
    
    
    $
    .32Diluted net income per common share
    
    $
    .02
    
    
    $
    .04
    
    
    $
    .03
    
    
    $
    .21
    
    
    $
    .31
 For the Year Ended June 30, 2004 (a)First
    
    
    Second
    
    
    Third
    
    
    Fourth
    
    
    FullQuarter
    
    
    Quarter
    
    
    Quarter
    
    
    Quarter
    
    
    YearTotal revenue from
continuing
operations
    
    $
    25,063,399
    
    
    $
    24,368,236
    
    
    $
    25,900,705
    
    
    $
    26,491,762
    
    
    $
    101,824,102Net income (loss)
    
    $
    2,501,350
    
    
    $
    (354,808
    )
    
    $
    1,511,235
    
    
    $
    995,177
    
    
    $
    4,652,954Basic net income
(loss) per common
share
    
    $
    .06
    
    
    $
    (.01
    )
    
    $
    .04
    
    
    $
    .02
    
    
    $
    .11Diluted net income
(loss) per common
share
    
    $
    .05
    
    
    $
    (.01
    )
    
    $
    .03
    
    
    $
    .02
    
    
    $
    .09
 
 (a)
    
    As discussed in Note 3, effective January 1, 2003, the Company terminated the Medicare and
Medicaid lines of business for all of the physician contracts associated with one of its IPAs.
During Fiscal 2004, the Company disposed of its home health operations. These transactions are
shown as discontinued operations. Therefore, the above quarterly information has been
reclassified to agree with the current presentation. These reclassifications had no effect on
the previously reported net income (loss) or net income (loss) per share for any quarter
presented.
 F-21




---



##### Table of Contents



EXHIBIT INDEX
 Description
    
    Exhibit NumberConsent of Independent Registered Public Accounting Firm
    
    
    23.1Section 302 Certification of Chief Executive Officer
    
    
    31.1Section 302
Certification of Chief Financial Officer
    
    
    31.2Certification Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002
    
    
    32.1Certification Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002
    
    
    32.2