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UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549
   FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
  OR [  ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 
 Commission file number: 001-12115 CONTINUCARE CORPORATION  Florida
    
    59-2716023(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification No.)
 80 Southwest Eighth Street,
Suite 2350
Miami, Florida 33130
(Address of principal executive offices) (305) 350-7515
(Registrants telephone number, including area code:) Securities registered pursuant to Section 12(b) of the Act: Title of each class
    
    Name of each exchange on which registeredCOMMON STOCK
    
    AMERICAN STOCK EXCHANGE$.0001 PAR VALUE
 Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [  ] 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
amendments to this Form 10-K. [X] Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [  ] No [X] Aggregate market value of the voting and non-voting common equity held by
non-affiliates of the registrant at September 13, 2004 (computed by reference
to the last reported sale price of the registrants Common Stock on the
American Stock Exchange on such date): $37,905,022. Number of shares outstanding of each of the registrants classes of Common
Stock at September 13, 2004: 50,300,186 shares of Common Stock, $.0001 par
value per share.




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CONTINUCARE CORPORATION
ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED JUNE 30, 2004 TABLE OF CONTENTS PAGEPART IGeneral
    
    
    3Item 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
    
    
    28PART IIIItem 10.
    
    Directors and Executive Officers of the Registrant
    
    
    29Item 11.
    
    Executive Compensation and Other Information
    
    
    31Item 12.
    
    Security Ownership of Certain Beneficial Owners and Management
    
    
    34Item 13.
    
    Certain Relationships and Related Transactions
    
    
    36Item 14.
    
    Principal Accountant Fees and Services
    
    
    36PART IVItem 15.
    
    Exhibits, Financial Statement Schedules, and Reports on Form 8-K
    
    
    37Signatures
    
    
    39Managed Care AgreementAirport Corporate Office LeaseSubsidiaries of the CompanyConsent of Ernst & Young LLPSec 302 Chief Executive Officer CertificationSec 302 Chief Financial Officer CertificationSec 906 Chief Executive Officer CertificationSec 906 Chief Financial Officer Certification
 2




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GENERAL Unless otherwise indicated or the context otherwise requires, all
references in this Form 10-K to we, us, our, Continucare or the
Company refers to Continucare Corporation and its consolidated subsidiaries.
All references to a Fiscal year refer to our fiscal year which ends June 30.
As used herein, Fiscal 2005 refers to fiscal year ending June 30, 2005, Fiscal
2004 refers to fiscal year ending June 30, 2004, Fiscal 2003 refers to fiscal
year ending June 30, 2003, and Fiscal 2002 refers to fiscal year ending June
30, 2002. CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS All statements included in this Annual Report other than statements of
historical fact, are forward-looking statements within the meaning of Section
27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended, and we intend that such
forward-looking statements be subject to the safe harbors created thereby.
These forward-looking statements are based on our current expectations,
estimates and projections about our industry, managements beliefs, and certain
assumptions made by us, all of which are subject to change. Forward-looking
statements can often be identified by words such as anticipates, expects,
intends, plans, predicts, believes, seeks, estimates, may,
will, should, would, could, potential, continue, similar
expressions, and variations or negatives of these words. These forward-looking
statements are not guarantees of future results and are subject to risks,
uncertainties and assumptions that are difficult to predict. Therefore, our
actual results could differ materially and adversely from those expressed in
any forward-looking statement as a result of various factors. Forward-looking
statements may include statements about:  
    
    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;
    
    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. Forward-looking statements involve risks and uncertainties that cannot be
predicted or quantified and, consequently, actual results may differ materially
from those expressed or implied by such forward-looking statements.
Forward-looking statements, therefore, should be considered in light of all of
the information included or incorporated by reference in this Annual Report,
including the section entitled Risk Factors. Such risks and uncertainties
include, but are not limited to the following:  
    
    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;
    
    Our ability to enter into and renew managed care provider agreements on acceptable terms;
    
    Loss of significant contracts, including the PGP Agreement;
    
    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; 3




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
    
    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 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. We caution our investors not to place undue emphasis on these
forward-looking statements, which speak only as of the date of this Annual
Report and we undertake no obligation to update or revise these statements as a
result of new information, future events or otherwise. RISK FACTORS Our operations are dependent on two health maintenance organizations. We derive substantially all of our net medical services revenues under our
managed care agreements with two health maintenance organizations (HMOs),
Humana Medical Plans, Inc. (Humana) and Vista Healthplan of South Florida,
Inc. and its affiliated companies (Vista). In Fiscal 2004, we generated
approximately 75% of our revenues from contracts with Humana and 25% of our
revenues from contracts with Vista. Most of our business with Humana is
governed by one agreement (the Humana POP Agreement). The loss of the Humana
POP Agreement or our managed care agreement with Vista, or significant
reductions in payments to us under these contracts, could have a material
adverse effect on our business, financial condition and results of operations. Under our most important contracts we are responsible for the cost of medical
services to our patients in return for a fixed fee. Our most important contracts with Humana and Vista are full risk
agreements under which we receive for our services fixed monthly payments per
patient at a rate established by the contract, also called a capitated fee. In
return, we assume full financial responsibility for the provision of all
necessary medical care to our patients, even services we do not provide
directly. Accordingly, we will be unable to adjust the revenues we receive
under those contracts, and if medical claims expense exceeds our estimates our
profits may decline. Relatively small changes in the ratio of our health care
expenses to capitated revenues we receive can create significant changes in our
financial results. If we are unable to manage medical benefits expense effectively, our
profitability will likely be reduced or we could cease to be profitable. We cannot be profitable if our costs of providing the required medical
services exceed the revenues that we derive from those services. However, our
most important contracts with Humana and Vista require us to assume full
financial responsibility for the provision of all necessary medical care in
return for a capitated fee per patient at a rate established by the contract.
Accordingly, as the costs of providing medical services to our patients under
those contracts increases, the profits we receive with respect to those
patients decreases. If we cannot continue to improve our controls and
procedures for estimating and managing our costs, our business, results of
operations, financial condition and ability to satisfy our obligations could be
adversely affected. A failure to estimate incurred but not reported medical benefits expense
accurately will affect our profitability. Our medical benefits expense includes estimates of medical claims incurred
but not reported, or IBNR. We estimate our medical cost liabilities using
actuarial methods based on historical data adjusted for payment patterns, cost
trends, utilization of health care services and other relevant factors. Actual
conditions, however, could differ from those assumed in the estimation process.
Due to the inherent uncertainties associated with the factors used in these
assumptions, materially different amounts could be reported in our financial
statements for a particular period under different possible conditions or using
different, but still reasonable, assumptions. Adjustments, if necessary, are
made to medical benefits expense when the criteria used to determine IBNR
change and when actual claim costs are ultimately determined. Although our
past estimates of IBNR have been adequate, they may be inadequate in the
future, which would adversely affect our results of operations. Further, our
inability to estimate IBNR accurately may also affect our ability to take
timely corrective actions, further exacerbating the extent of any adverse
effect on our results. 4




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Many factors that increase health care costs are largely beyond our ability to
control. Increased utilization or unit cost, competition, government regulations
and many other factors may, and often do, cause actual health care costs to
increase. These factors may include, among other things:  
    
    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 , epidemics or terrorist attacks;
    
    the introduction of new or costly treatments, including new technologies;
    
    new government mandated benefits or other regulatory changes;
    
    increases in the cost of stop loss or other insurance. Many of these factors are beyond our ability to control or predict. Health care reform initiatives, particularly changes to the Medicare system,
could adversely effect our operations. Substantially all of our net medical services revenues from continuing
operations are based upon Medicare funded programs. The federal government from
time to time explores ways to reduce medical care costs through Medicare reform
and through health care reform generally. Any changes that would limit, reduce
or delay receipt of Medicare funding or any developments that would disqualify
us from receiving Medicare funding could have a material adverse effect on our
business, results of operations, prospects, financial results, financial
condition or cash flows. Due to the diverse range of proposals put forth and
the uncertainty of any proposals adoption, we cannot predict what impact any
Medicare reform proposal ultimately adopted may have on our business, financial
position or results of operations. Medicare premiums have generally risen more slowly than the cost of providing
health care services. Our revenues are largely determined by the premiums that the Centers for
Medicare and Medicaid Services (CMS) pay to the HMOs under their Medicare
Advantage (formerly known as Medicare+Choice) contracts. Although CMS has
generally increased the premiums paid to the HMOs for Medicare Advantage
patients each year, the rate of increase has generally been less than the rate
at which the cost of providing health care services, including prescription
drugs, has increased on a national average. As a result, we are under
increasing pressure to contain our costs, and the margin we realize on
providing health care services has generally decreased over time. There can be
no assurance that CMS will maintain its premiums at the current level or
continue to increase its premiums each year. Additionally there can be no
assurances that we will receive the total benefit of any premium increase the
HMOs may receive. Our revenues will be affected by the Medicare Risk Adjustment. The majority of patients to whom we provide care are Medicare-eligible and
participate in the Medicare Advantage program. CMS is now implementing its
Medicare Risk Adjustment project during which it is transitioning its
methodology to a new system that takes into account the health status of
Medicare Advantage participants in determining premiums paid for each
participant rather than merely demographic factors, as historically has been
the case. Beginning January 1, 2004, the new risk adjustment system requires
that ambulatory data be incorporated, starting from a blend consisting of a 30%
risk adjustment payment and the remaining 70% based on demographic factors.
Thereafter the blend percentages will be adjusted as follows: Risk
    
    DemographicYear
    
    Percentage
    
    Percentage2005
    
    
    50
    %
    
    
    50
    %2006
    
    
    75
    %
    
    
    25
    %2007
    
    
    100
    %
    
    
    0
    %
 For the first six months of Fiscal 2004, our payments from the HMOs were
substantially based on the demographic model. For the six-month period ended
June 30, 2004, we estimate that the new risk adjustment methodology increased
our revenues per patient by approximately 3%. We cannot assure what future
impact this new risk adjustment methodology will have on our business, 5




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results of operations, or financial condition, however, it is possible
that the new risk adjustment methodology may result in fluctuations in our
medical services revenues from year to year. Our intangible assets represent a substantial portion of our total assets. Our balance sheet includes intangible assets, including goodwill and other
separately identifiable intangible assets, which represented approximately 73%
of our total assets at June 30, 2004. We are required to review our intangible
assets for impairment on an annual basis or more frequently if certain
indicators of permanent impairment arise. Indicators of a permanent impairment
include, among other things:  
    
    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. Because we operate in a single segment of business, we perform our
impairment test on an enterprise level. In performing the impairment test, we
compare our fair value, as determined by the current market value of our common
stock, to the current value of the total net assets, including goodwill and
intangible assets. We completed our annual impairment test on May 1, 2004, and
determined that no impairment existed. Accordingly, no impairment charges were
required at June 30, 2004. Should we determine that an indicator of impairment
has occurred, such as those noted above, we would be required to perform an
additional impairment test. Depending on the market value of our common stock
at the time that an impairment test is required, there is a risk that a portion
of our intangible assets would be considered impaired and must be written-off
during that period. Such a write-off could have a material adverse effect on
our results of operations. We are subject to government regulation. Our business is regulated by the federal government and the State of
Florida. The laws and regulations governing our operations are generally
intended to benefit and protect health plan members and providers rather than
shareholders. The government agencies administering these laws and regulations
have broad latitude to enforce them. These laws and regulations, along with
the terms of our contracts, regulate how we do business, what services we
offer, and how we interact with our patients, other providers and the public.
We are subject to various governmental reviews, audits and investigations to
verify our compliance with our contracts and applicable laws and regulations.
Any adverse review, audit or investigation could result in:  
    
    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. Any of these events could reduce our revenues and profitability and
otherwise adversely affect our operating results. The health care industry is subject to continued scrutiny. The health care industry has been the subject of increased government and
public scrutiny in recent years, which has focused on the appropriateness of
the care provided, referral and marketing practices and other matters.
Increased media and public attention has focused on the outpatient services
industry in particular as a result of allegations of fraudulent practices
related to the nature and duration of patient treatments, illegal remuneration
and certain marketing, admission and billing practices by certain health care
providers. The alleged practices have been the subject of federal and state
investigations, as well as other legal proceedings. There can be no assurance
that we will not be subject to federal and state review or investigation from
time to time, and any such investigation could adversely impact our business or
results of operations, even if we are not ultimately found to have violated the
law. 6




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We compete with many health care providers for patients and HMO affiliations. The health care industry is highly competitive. We compete for patients
with many other health care providers, including local physicians and practice
groups as well as local, regional and national networks of physicians and
health care companies. We believe that competition for patients is generally
based upon the reputation of the physician treating the patient, the
physicians expertise, and the physicians demeanor and manner of engagement
with the patient, and the HMOs that the physician is affiliated with. We also
compete with other local, regional and national networks of physicians and
health care companies for the services of physicians and for HMO affiliations.
Some of our competitors have greater resources than we do, and we may not be
able to continue to compete effectively in this industry. Further, additional
competitors may enter our markets, and this increased competition may have an
adverse effect on our revenues. The agreement relating to most of our IPA relationships may soon expire. As of June 30, 2004, our independent physician affiliates (IPAs)
provided services to approximately 1,200 patients on a full risk basis and to
approximately 8,200 patients on a limited or non-risk basis. Most of our IPA
relationships, including most of our non-risk IPA relationships, are governed
under a single Physician Group Participation Agreement that we entered into
with Humana in April 2003 (the Humana PGP Agreement). The Humana PGP
Agreement expires in April 2005. We hope to maintain our relationship with
these IPAs through Humana and intend to seek an extension or renewal of the
Humana PGP Agreement, but we can not provide assurance that such an extension
or renewal will be available to us on commercially acceptable terms or at all. We may not be able to successfully recruit or retain existing relationships
with qualified physicians and medical professionals. We depend on our physicians and other medical professionals to provide
medical services to our managed care patients and independent physicians
contracting with us to participate in provider networks we develop or manage.
We compete with general acute care hospitals and other health care providers
for the services of medical professionals. Demand for physicians and other
medical professionals is high and such professionals often receive competing
offers. If we are unable to successfully recruit and retain medical
professionals our ability to successfully implement our business strategy could
suffer. No assurance can be given that we will be able to continue to recruit
and retain a sufficient number of qualified physicians and other medical
professionals. Our business exposes us to the risk of medical malpractice lawsuits. Our business entails an inherent risk of claims against physicians for
professional services rendered to patients, and we periodically become involved
as a defendant in medical malpractice lawsuits. Medical malpractice claims are
subject to the attendant risk of substantial damage awards. Although these
claims are generally covered by insurance, if liability results from any of our
pending or any future medical malpractice claims, there can be no assurance
that our medical malpractice insurance coverage will be adequate to cover
liability arising out of these proceedings. There can be no assurance that
pending or future litigation will not have a material adverse affect on us or
that liability resulting from litigation will not exceed our insurance
coverage. Our insurance coverage may not be adequate, and rising insurance premiums could
negatively affect our profitability. We rely on insurance to protect us from many business risks, including,
stop loss insurance. In most cases, as is the trend in the health care
industry, as insurance policies expire, we may be required to procure policies
with narrower coverage, more exclusions and higher premiums. In some cases,
coverage may not be available at any price. There can be no assurance that the
insurance that we maintain and intend to maintain will be adequate, or that the
cost of insurance and limitations in coverage will not adversely affect our
business, financial position or results of operations. Deficit spending and economic downturns could negatively impact our results of
operations. Adverse developments in the economy often result in decreases in the
federal budget and associated changes in the federal governments spending
priorities. We are presently in a period of deficit spending by the federal
government, and those deficits are presently expected to continue for at least
the next several years. Deficit spending by the federal government could lead
to increased pressure to reduce government expenditures, including
governmentally funded programs such as Medicare. If governmental funding of
the Medicare program was reduced without a counterbalancing adjustment in the
benefits offered to patients, our results of operations could be negatively
impacted. 7




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We presently operate only in Florida. All of our medical services revenues are presently derived from our
operations in Florida. Adverse economic, regulatory, or other developments in
Florida (including hurricanes) could have a material adverse effect on our
financial condition or results of operations. In the event that we expand our
operations into new geographic markets, we will need to establish new
relationships with physicians and other health care providers. In addition, we
will be required to comply with laws and regulations of states that differ from
the one in which we currently operate, and may face competitors with greater
knowledge of such local markets. There can be no assurance that we will be
able to establish relationships, realize management efficiencies or otherwise
establish a presence in new geographic markets. A significant portion of our voting power is concentrated in one shareholder. One of our directors, Dr. Phillip Frost, and entities affiliated with him,
beneficially owned approximately 44% of our outstanding common stock as of
September 13, 2004. Based on Dr. Frosts significant beneficial ownership of
our common stock, he has a substantial ability to influence most corporate
actions requiring shareholder approval, including the election of directors,
and will be able to effectively control any shareholder votes or actions with
respect to such matter. This influence by Dr. Frost may make us less
attractive as a target for a takeover proposal. It may also make it more
difficult to discourage a merger proposal that Dr. Frost favors or to wage a
proxy contest for the removal of incumbent directors. As a result, this may
deprive the holders of our common stock of an opportunity they might otherwise
have to sell their shares at a premium over the prevailing market price in
connection with a merger or acquisition of us or with or by another company. We are dependent on our executive officers and other key employees. Our operations are highly dependent on the efforts of our Chief Executive
Officer and our other key employees. Our executive officers and key employees
generally do not have employment agreements with us, but are instead employed
on an at will basis. While we believe that we could find replacements, the
loss of any of their leadership, knowledge and experience could negatively
impact our operations. Replacing any of our executive officers or key
employees might be difficult or take an extended period of time because a
limited number of individuals in the managed care industry have the breadth and
depth of skills and experience necessary to operate a business such as ours.
Our success is also dependent on our ability to hire and retain qualified
management, technical and medical personnel. We may be unsuccessful in
recruiting and retaining such personnel, which could negatively impact our
operations. We depend on the management information systems of our affiliated HMOs. Our operations are dependent on the management information systems of the
HMOs with which we contract. Our affiliated HMOs provide us with certain
financial and other information, including reports and calculations of costs of
services provided and payments to be received by us. Both the software and
hardware our HMO affiliates use to provide us with that information have been
subject to rapid technological change. Because we rely on this technology but
do not own it, we have limited ability to ensure that it is properly
maintained, serviced and updated. In addition, information systems such
as these may be vulnerable to failure, acts of sabotage such as hacking, and
obsolescence. If either of our principal HMO affiliates were to temporarily or
permanently lose the use of the information systems that provide us with the
information on which we depend or the underlying patient and physician data,
our business and results of operations could be materially and adversely
affected. Because our HMO affiliates generate certain of the information on
which we depend, we have less control over the manner in which that information
is generated than we would if we generated the information internally. Volatility of our stock price could adversely affect you. The market price of our common stock could fluctuate significantly as a
result of many factors, including factors that are beyond our ability to
control or foresee and which, in some cases, may be wholly unrelated to us or
our business. These factors include:  
    
    state and federal budget decreases;
    
    adverse publicity regarding health maintenance organizations 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; 8




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
    
    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 We are a mixed model provider of primary care physician services. Through
our network of 15 medical centers we provide primary health care services on an
outpatient basis. We also provide practice management services to 31 IPAs.
All of our medical centers and IPAs are located in Miami-Dade, Broward and
Hillsborough Counties, Florida. As of June 30, 2004, we provided services to
or for approximately 28,700 patients through our medical centers and IPAs. A
majority of these patients participate in the Medicare Advantage (formerly
known as Medicare+Choice) program. We were incorporated in Florida in 1996 as the successor to a Florida
corporation formed earlier in 1996. During Fiscal 2000 and 2001 we
restructured much of our indebtedness, including the convertible subordinated
notes we then had outstanding. During Fiscal 2004, the notes were converted
into shares of our common stock. In an effort to streamline operations and
stem operating losses, effective January 1, 2003, we terminated the Medicare
and Medicaid lines of business for all of our IPA relationships associated with
one HMO. Additionally, in February 2004, we completed the disposition of our
home health operations. As a result of these transactions, the operations of
the terminated IPAs and our home health operations are shown as discontinued
operations. Our
principal place of business is 80 S.W. 8th Street, Suite 2350, Miami,
Florida 33130. Our telephone number is 305-350-7515. Industry Overview The United States health care market is large and growing. According to
CMS, total outlays on health care in the United States were $1.6 trillion in
2002 and were projected to reach $3.4 trillion in 2013, representing an annual
rate of increase of approximately 7.3%. The rate of the overall
increase of health care outlays in the United States has been greater than the
growth of the economy as a whole (measured by gross domestic product, or GDP).
For example, in 2002 the rate of growth of total United States medical outlays
was 5.7 percentage points higher than the growth of GDP. The high growth rate
of health care outlays is expected to continue. In 2002, health care outlays
represented 14.9% of GDP. CMS projects that this amount will increase to 18.4%
of GDP by 2013. In addition, United States health care outlays have increased
at a faster rate than the consumer price index. In early 2004, CMS projected
that United States medical outlays grew by approximately 7.8% in 2003, as
compared to actual increases of 9.3% in 2002 and 8.5% in 2001. The Medicare sector of the United States health care market is also large
and growing. Medicare currently provides health care benefits to approximately
41 million elderly and disabled Americans, or approximately 14% of the
population of the United States. With the coming retirement of the Baby Boom
generation, a significant increase in the number of Medicare beneficiaries is
forecast, with the number of Medicare beneficiaries expected to rise to over 70
million, or greater than 20% of the projected population of the United States,
by 2030. Medicare outlays have also grown faster than both the GDP and the
consumer price index, which growth is forecast to continue. For example,
annual Medicare outlays exceeded $220 billion in 2003 and are expected to grow
to over $400 billion by 2012. Medicare was established in 1965 and traditionally provided
fee-for-service (indemnity) coverage for its members. Under fee-for-service
coverage, Medicare assumes responsibility for paying all or a portion of the
members covered medical fees, subject, in some cases, to a deductible or
coinsurance payment. The Medicare Advantage program represents private health
plans participation in Medicare. Through a contract with CMS, private
insurers, such as HMOs, may contract with CMS to provide health insurance
coverage in exchange for a fixed monthly payment per member per month for
Medicare-eligible individuals. Individuals who elect to 9




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participate in Medicare Advantage typically receive additional benefits
not covered by Medicares traditional fee-for-service coverage program and are
relieved of the obligation to pay some or all deductible or coinsurance amounts
due. Participation in private Medicare managed care programs (then called
Medicare+Choice) increased during the 1990s reaching a peak of 6.2 million
participants in 1998, or approximately 16% of the Medicare-eligible population.
As of November 2003, the number of participants had decreased to 4.6 million,
or approximately 11% of the Medicare-eligible population. The number of
participating private health plans also decreased during this period going from
346 plans in 1998 to 155 in November 2003. This decline in participation has
been attributed to unpredictable and insufficient payments resulting from the
alteration of payments to private plans associated with the Balanced Budget Act
of 1997. The Medicare Modernization Act, adopted in December 2003, was intended, in
part, to modernize and revitalize private plans under Medicare. The Medicare
Modernization Act made favorable changes to the premium rate calculation
methodology and generally provides for program rates that we believe will
better reflect the increased cost of medical services provided to Medicare
beneficiaries. As a result of the growing increases in health care outlays in the United
States, insurers, employers, state and federal governments and other health
insurance payors have sought to reduce or control the sustained increases in
health care costs. One response to these cost increases has been a shift away
from the traditional fee-for-service method of paying for health care to
managed health care models, such as HMOs. HMOs offer a comprehensive health care benefits package in exchange for a
fixed prepaid monthly fee or premium per enrollee that does not vary through
the contract period regardless of the quantity of medical services required or
used. HMOs enroll members by entering into contracts with employer groups or
directly with individuals to provide a broad range of health care services for
a prepaid charge, with minimal deductibles or co-payments required of the
members. HMOs contract directly with medical clinics, independent physician
associations, hospitals and other health care providers to administer medical
care to HMO enrollees. The affiliated physician organization contracts with
the HMOs provide for payment to the affiliated physician organizations. Often
the payment to the affiliated physician organization is in the form of a fixed
monthly fee per enrollee, which is called a capitation payment. Once
negotiated, the total payment is based on the number of enrollees covered,
regardless of the actual need for and utilization of covered services. Physicians, including those in small to mid-sized physician groups, find
themselves at a competitive disadvantage in the current managed care
environment. Physicians are generally not equipped by training or experience
to handle all of the functions of a modern medical practice, such as
negotiation of contracts with specialists and HMOs, claims administration,
financial services, provider relations, member services, medical management
including utilization management and quality assurance, data collection and
management information systems. Additionally, a proliferation of state and
federal regulations has increased the paper-work burden and hampered the
application of the traditional controls used by managed care organizations.
Physicians increasingly are responding to these pressures within the managed
care industry by affiliating with organizations such as us to assist them in
managing their practices. Our Market and Business Strategy The population of Florida was approximately 17 million as of April 2004,
and approximately 30% of those residents are located in Miami-Dade, Broward and
Hillsborough Counties. As of June 30, 2004, approximately 543,000 residents
of Florida were enrolled in Medicare Advantage plans out of a Medicare-eligible
population of approximately 2.8 million. The three HMOs with which we are
affiliated account for approximately 50% of Medicare Advantage patients in the
markets we serve. Our strategy is to:  
    
    increase patient volume at our existing medical centers through enhanced marketing efforts;
    
    consider adding new HMO affiliations, such as our new relationship with Wellcare, Inc. (Wellcare);
    
    selectively expand our network to include additional medical centers and to penetrate new geographic markets; and
    
    further develop our IPA management activities. 10




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Increasing Patient Volume Our core business is comprised of our established network of medical
centers from which we provide primary care services on an outpatient
basis. In addition, we provide services to a network of IPAs. As
of June 30, 2004, we provided services under agreements with
HMOs relating to both our medical centers and the IPAs to approximately 15,700 patients on a full risk basis and approximately
13,000 patients on a limited or non-risk basis. For our full risk patients we
assume full financial responsibility for the provision of substantially all
necessary medical care to those patients in return for a fixed fee per member
per month. For our limited or non-risk patients, we are responsible only for
the services we actually provide to those patients, and not the cost of
specialists, hospitalization or other services that we do not provide. In
addition, we provide primary care services on a fee-for-service basis. We seek
to increase the number of patients using our medical centers through the
general marketing efforts of our affiliated HMOs and on our own through
targeted marketing efforts with a particular focus on Medicare eligible
patients. Consider Adding New HMO Affiliations We are currently affiliated with three HMOs  Humana and Vista, with whom
we have long-standing relationships, and Wellcare, with whom we became
affiliated in September 2004. We work closely with our affiliated HMOs and
strive to attain a high level of HMO satisfaction with our services. We
believe that increasingly margin conscious HMOs value our operational strengths
and expertise at providing quality health care, retaining patients and
effectively managing medical utilization. As a result, we believe that we are
well positioned to establish additional HMO affiliations to enable us to serve
a larger number of the patients in our markets. There can be no assurances
that we will obtain additional HMO affiliations and, depending upon a number of
factors, including the level of support we are receiving from our current HMO
affiliates, we may elect not to pursue additional affiliates. Selectively Expanding Our Network We may seek to add additional medical centers to our network either
through acquisition or start up, although no assurance can be given of our
ability to establish or acquire any additional medical centers. To date, we
have focused on Miami-Dade, Broward and Hillsborough Counties, Florida. We
expect we will identify and select acquisition candidates based in large part
on the following broad criteria:  
    
    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 We also seek to add additional IPAs, although no assurance can be given of
our ability to establish any of those IPA relationships. We believe that HMOs
are increasingly reluctant to contract directly with small to mid-sized
physician groups who wish to accept HMO patients on a risk basis, preferring
instead to contract with management service organizations such as us. We
enhance the operations of our IPA physician practices by providing assistance
with medical utilization management, pharmacy management and specialist network
development. Additionally, we provide financial reports for our IPA practices
to further assist with their operations. We believe that we can leverage our
skill at providing practice management services to IPA practices to a larger
group of IPA practices and will seek to selectively add new IPA practices to
enhance our IPA management activities. We intend to continue affiliating with
physicians who are sole practitioners or who operate in small groups to staff
and expand our network. Our Medical Centers At our medical centers physicians who are our employees or independent
contractors act as primary care physicians practicing in the area of general,
family and internal medicine. A typical medical center is operated in an
office space that ranges from 5,000 to 8,000 square feet. A medical center is
typically staffed with approximately two to three physicians, and is open five
days a week. The physicians we employ or with whom we contract are generally
retained under written agreements that provide for a rolling one-year term,
subject to earlier termination in some circumstances. Under our standard
physician agreements we are responsible for providing our physicians with
malpractice insurance coverage. 11




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Our IPAs We provide practice management assistance to IPAs. Our services include
providing assistance with medical utilization management, pharmacy management and specialist network development.
Additionally, we provide financial reports for our IPAs to further assist with
their practices. These services currently relate only to those patients served
by the IPAs who are enrolled in Humana health plans. We currently have 31 IPA
relationships. Most of our IPA relationships, including most of our non-risk
IPA relationships, are governed under the Humana PGP Agreement, which expires
in April 2005 unless we obtain a renewal of that agreement. As of June 30,
2004, our IPA physicians provided services to approximately 1,200 patients on a
full risk basis and to approximately 8,200 patients on a limited or non-risk
basis. Our IPAs practice primary care medicine on an outpatient basis in
facilities similar to our medical centers. Our IPA physicians typically earn a
capitated fee for providing the services and may be entitled to obtain bonus
distributions if they operate their practice in accordance with their
negotiated contract. Our HMO Affiliates We currently have managed care agreements with Humana, Vista and Wellcare.
In Fiscal 2004, we generated approximately 75% of our net medical services
revenue from Humana and approximately 25% of our net medical services revenue
from Vista. We continually review and attempt to renegotiate the terms of our
managed care agreements in an effort to obtain more favorable terms. We may
selectively add new HMO affiliations, but we can provide no assurance that we
will be successful in doing so. The loss of significant HMO contracts and/or
the failure to regain or retain such HMOs patients or the related revenues
without entering into new HMO affiliations could have a material adverse effect
on our business results of operations and financial condition. Humana We currently have four agreements with Humana. However, the majority of
the revenue that we derive from our relationship with Humana is generated under
the Humana POP Agreement. Under the Humana POP Agreement we provide or arrange
for the provision of covered medical services to each Humana member who selects
one of our physicians as his or her primary care physician. We receive a
capitated fee with respect to the patients assigned to us. For most of our
Humana patients the capitated fee is a percentage of the premium that Humana
receives with respect to that patient. The Humana POP Agreement is subject to
Humanas changes to the covered benefits that it elects to provide to its
members and other terms and conditions. We must also comply with the terms of
Humanas policies and procedures, including Humanas policies regarding
referrals, approvals and utilization management and quality assessment. The initial term of the Humana POP Agreement extends through July 31,
2008, unless terminated earlier for cause, and, thereafter, the Humana POP
Agreement renews for subsequent one-year terms unless either party provides
180-days written notice of its intent not to renew. Humana may immediately
terminate the Humana POP Agreement, and/or any individual physician
credentialed under the Humana POP Agreement, upon written notice, if (i) we
and/or any of our physicians continued participation in the Humana POP
Agreement may affect adversely the health, safety or welfare of any Humana
member; (ii) we and/or any of our physicians continued participation in the
Humana POP Agreement may bring Humana or its health care networks into
disrepute; (iii) in the event of one of our doctors death or incompetence;
(iv) if any of our physicians fail to meet Humanas credentialing criteria; (v)
in accordance with Humanas policies and procedures, (vi) if we engage in or
acquiesce to any act of bankruptcy, receivership or reorganization; or (vii) if
Humana loses its authority to do business in total or as to any limited segment
or business (but only to that segment). We and Humana may also each terminate
the Humana POP Agreement upon 90 days prior written notice (with an
opportunity to cure, if possible) in the event of the others material breach
of the Humana POP Agreement. In some cases, Humana may provide 30 days notice as to an amendment or
modification of the Humana POP Agreement, including but not limited to,
renegotiation of rates, covered benefits and other terms and conditions. Such
amendments may include changes to the compensation rates. If Humana exercises
its right to amend the Humana POP Agreement upon 30 days written notice, we
may object to such amendment within the 30-day notice period. If we object to
such amendment within the requisite time frame, Humana may terminate the Humana
POP Agreement upon 90 days written notice. One of our other agreements with Humana is the Humana PGP Agreement.
Under the Humana PGP Agreement, we agreed to assume certain management
responsibilities on a non-risk basis for Humanas Medicare, Commercial and
Medicaid members assigned to selected primary care physicians in Miami-Dade and
Broward Counties, Florida, for a period of two years in return for a capitated
fee per patient. The Humana PGP Agreement relates to approximately 29
physicians that we service on a non-risk basis and expires in April 2005. We
intend to seek an extension or renewal of the Humana PGP Agreement, but we can
not provide assurance that such an extension or renewal will be available to us
on commercially acceptable terms or at all. Although the Humana PGP Agreement is not generally material to our
business, in connection with our entering into the 12




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Humana PGP Agreement we and
Humana simultaneously cancelled a $3.9 million contract modification note
payable to Humana, and, instead, the Humana PGP Agreement contains a provision
for liquidated damages in the amount of $4.0 million, which can be asserted by
Humana in certain circumstances. Under the terms of the Humana PGP Agreement,
if we remain in compliance with the terms of the agreement, Humana, at its option, may reduce the maximum amount of
liquidated damages at specified dates during the two-year term of the Humana
PGP Agreement. Because there were contingent circumstances under which future payments of
liquidated damages to Humana could have equaled the amount of debt forgiven, we
deferred the $3.9 million gain that we would otherwise have recognized from the
cancellation of the Humana note. To the extent that Humana reduces the maximum
amount of liquidated damages, we will recognize a portion of the deferred gain.
We were notified in November 2003 and again in May 2004, that the maximum
amount of liquidated damages had been reduced to $3.5 and $3.0 million,
respectively. Accordingly, we recognized $0.4 million and $0.5 million,
respectively, of the deferred gain on extinguishing the debt during the second
and fourth quarters of Fiscal 2004. At the expiration of the term of the
Humana PGP Agreement, the liquidated damage provision will lapse and we will
recognize any remaining portion of the deferred gain. Vista Under our agreement with Vista, we provide or arrange for the provision of
covered medical services to each Vista member who selects one of our physicians
as his or her primary care physician. We receive a capitated fee with respect
to the patients assigned to us. For most of our Vista patients the capitated
fee is a percentage of the premium that Vista receives with respect to that
patient. Our agreement with Vista is subject to Vistas changes to the covered
benefits that Vista elects to provide to its members and other terms and
conditions. We must also comply with the terms of Vistas policies and
procedures, including Vistas policies regarding referrals, approvals and
utilization management and quality assessment. Our agreement with Vista runs through June 30, 2008 (unless earlier
terminated in accordance with its terms). Vista may terminate the agreement
with us for cause upon 30 days written notice if, among other things, we (i)
fail to maintain certain reserve funding levels, (ii) fail to provide covered
medical services in accordance with the standard of quality established by the
medical community or Vista, (iii) are disqualified from participation in the
Medicare program, or (iv) material breach the Vista agreement; provided
however, that we are afforded an opportunity to cure such breach. Vista may
also immediately terminate its agreement with us upon Vistas determination
that the health, safety or welfare of any member may be in jeopardy if the
agreement is not terminated. Wellcare Effective September 1, 2004, we entered into a Physician Provider
Agreement with Wellcare under which we provide or arrange for the provision of
covered medical services to each Wellcare member who selects one of our
physicians as his or her primary care physician. To date we have not received meaningful revenue under our agreement
with Wellcare. Under our agreements with Humana, Vista and Wellcare, there exist
circumstances under which we could be obligated to continue to provide medical
services to patients in our care following a termination of the applicable
agreement. In certain cases, this obligation could require us to provide care
to patients following the bankruptcy or insolvency of our HMO affiliate.
Accordingly, our obligations to provide medical services to our patients (and
the associated costs we incur) may not terminate at the time that our agreement
with the HMO terminates, and we may not be able to recover our cost of
providing those services from the HMO. Compliance Program We have implemented a compliance program to provide ongoing monitoring and
reporting to detect and correct potential regulatory compliance problems. The
program establishes compliance standards and procedures for employees and
agents. The program includes, among other things: written policies, including
our Code of Conduct and Ethics; in-service training for each employee on topics
such as insider trading, anti-kickback laws, Federal False Claims Act and
Anti-Self Referral Act; and a hot line for employees to anonymously report
violations. Competition The health care industry is highly competitive. We compete for patients
with many other health care providers, including local physicians and practice
groups as well as local, regional and national networks of physicians and
health care companies. We believe that competition for patients is generally
based upon the reputation of the physician treating the patient, the
physicians expertise, the physicians demeanor and manner of engagement with
the patient, and the HMOs that the physician is affiliated with. 13




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We also
compete with other local, regional and national networks of physicians and
health care companies for the services of physicians and for HMO affiliations.
Some of our competitors have greater resources than we do, and we may not be
able to continue to compete effectively in this industry. Further, additional
competitors may enter our markets, and this increased competition may
have an adverse effect on our revenues. Government Regulation General.Our business is regulated by the federal government and the State
of Florida. The laws and regulations governing our operations are generally
intended to benefit and protect health plan members and providers rather than
shareholders. The government agencies administering these laws and regulations
have broad latitude to enforce them. These laws and regulations, along with
the terms of our contracts, regulate how we do business, what services we
offer, and how we interact with our members, other providers and the public.
We are subject, to various governmental reviews, audits and investigations to
verify our compliance with our contracts and applicable laws and regulations.
We believe we are in material compliance with all government regulations
applicable to our business, however, many of the regulatory requirements to
which we are subject contain narrow safe harbor provisions and, in some cares,
are subject to limited case law interpretations. Accordingly, there can be no
assurances that we will not be alleged to have violated any of the applicable
government regulations to which we are subject. A summary of the material aspects of the government regulations to which
we are subject are set forth below. However, there can be no assurance that
any such laws will not change or ultimately be interpreted in a manner
inconsistent with our practices, and an adverse interpretation could have a
material adverse effect on our results of operations, financial condition or
cash flows. Present and Prospective Federal and State Reimbursement Regulation. Our
operations are affected on a day-to-day basis by numerous legislative,
regulatory and industry-imposed operational and financial requirements, which
are administered by a variety of federal and state governmental agencies as
well as by self-regulatory associations and commercial medical insurance
reimbursement programs. We have filed for all our physicians the necessary
reassignments of billing rights applications with Medicare. Federal Fraud and Abuse Laws and Regulations.The Anti-Kickback Law
makes it a criminal felony offense to knowingly and willfully offer, pay,
solicit or receive remuneration in order to induce business for which
reimbursement is provided under federal health care programs, including without
limitation, the Medicare and Medicaid programs. Violations of these laws are
punishable by monetary fines, civil and criminal penalties, exclusion from care
programs and forfeiture of amounts collected in violation of such laws. The
scope of prohibited payments in the Anti-Kickback Law is broad and includes
economic arrangements involving hospitals, physicians and other health care
providers, including joint ventures, space and equipment rentals, purchases of
physician practices and management and personal services contracts. State Fraud and Abuse Regulations. Various states also have anti-kickback
laws applicable to licensed healthcare professionals and other providers and,
in some instances, applicable to any person engaged in the proscribed conduct.
For example, Florida enacted The Patient Brokering Act which imposes criminal
penalties, including jail terms and fines, for receiving or paying any
commission, bonus, rebate, kickback, or bribe, directly or indirectly in cash
or in kind, or engage in any split-fee arrangement, in any form whatsoever, to
induce the referral of patients or patronage from a healthcare provider or
healthcare facility. The Florida statutory provisions regulating the practice
of medicine include similar language as grounds for disciplinary action against
a physician. Restrictions on Physician Referrals. Federal regulations under the Social
Security Act that restrict physician referrals to health care entities with
which they have financial relationships (commonly referred to as the Stark
Law) prohibit certain patient referrals by physicians. Specifically, the
Stark Law prohibits a physician, or an immediate family member, who has a
financial relationship with a health care entity, from referring Medicare or
Medicaid patients with limited exceptions, to that entity for the following
designated health services: clinical laboratory services, physical therapy
services, occupational therapy services, radiology services, including magnetic
resonance imaging, computerized axial tomography scans and ultrasound
services, durable medical equipment and supplies, radiation therapy services
and supplies, parenteral and enteral nutrients, equipment and supplies,
prosthetics, orthotics and prosthetic devices, home health services, outpatient
prescription drugs, and inpatient and outpatient hospital services. A financial
relationship is defined to include an ownership or investment in, or a
compensation relationship with, a health care entity. The Stark Law also
prohibits a health care entity receiving a prohibited referral from billing the
Medicare or Medicaid programs for any services rendered to a patient as a
result of the prohibited referral. The Stark Law contains certain exceptions
that protect parties from liability if the parties comply with all of the
requirements of the applicable exception. The sanctions under the Stark Law
include denial and refund of payments, civil monetary penalties and exclusions
from participation in the Medicare and Medicaid programs. 14




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Privacy Laws.The privacy, security and transmission of health information
is subject to federal and state laws and regulations, including the Healthcare
Insurance Portability and Accountability Act of 1996 (HIPAA). Final
regulations with respect to the privacy of certain individually identifiable
health information (the Protected Health Information) became effective in
April 2003 (the Privacy Rule). The Privacy Rule specifies authorized or
required uses and disclosures of the Protected Health Information, as well as
the rights patients have with respect to their health information. In
addition, in October 2002, regulations under HIPAA became effective with
respect to the transmission of protected health information (Transactions and
Code Sets regulations). The Transactions and Code Sets regulations establish
uniform standards relating to data reporting, formatting, and coding that
certain health care providers must use when conducting certain transactions
involving health information. The Department of Health and Human Services issued final Regulations under
HIPAA in February 2003 setting standards for the security of electronic health
information (Security Standards). We are required to satisfy the Security
Standards by April 21, 2005, and are currently actively working to meet that
deadline. Corporate Practice of Medicine Doctrine.Many states prohibit business
corporations from providing, or holding themselves out as a provider of medical
care. Possible sanctions for violation of any of these restrictions or
prohibitions include loss of licensure or eligibility to participate in
reimbursement programs (including Medicare and Medicaid), asset forfeitures and
civil and criminal penalties. These laws vary from state to state, are often
vague and loosely interpreted by the courts and regulatory agencies.
Currently, we only operate in Florida, which does not have a corporate practice
of medicine doctrine with respect to the types of physicians employed with us. Clinic Licensure.The State of Florida Agency for Health Care
Administration requires us to license each of our medical centers individually
as health care clinics. Each medical center completed its application for
licensure by the March 1, 2004 deadline and has posted the license as required
in each center. Each medical center must renew its health care clinic
licensure bi-annually. Limitations on Contractual Joint Ventures.On April 23, 2003, the Office
of Inspector General (OIG) issued a Special Advisory Bulletin raising
concerns throughout the healthcare industry about the legality of a variety of
provider joint ventures. The suspect arrangements involve a healthcare
provider expanding into a related service line by contracting with an existing
provider of that service to serve the providers existing patient population.
In the OIGs view, the providers share of the profits of the new venture
constitutes remuneration for the referral of the providers Medicare/Medicaid
patients and thus may violate the federal Anti-kickback Statute. Occupational Safety and Health Administration (OSHA). In addition to
OSHA regulations applicable to businesses generally, we must comply with, among
other things, the OSHA directives on occupational exposure to blood borne
pathogens, the federal Needlestick Safety and Prevention Act, OSHA injury and
illness recording and reporting requirements, federal regulations relating to
proper handling of laboratory specimens, spill procedures and hazardous waste
disposal, and patient transport safety requirements. We conduct annual
compliance training and annual on-site internal inspection, audits and
evaluations with regard to these matters. Medicare Marketing RestrictionsAs a health care provider, we are subject
to federal marketing rules and regulations that limit, among other things,
offering any gift or other inducement to Medicare beneficiaries to encourage
them to come to us for their health care. We have implemented policies and
procedures in our marketing department to prevent any breach of applicable
marketing restrictions. Sanctioned Parties. The Balanced Budget Act of 1997 (BBA) includes
provisions that allow for the temporary or permanent exclusion from
participation in Medicare or any state health care program of any individual or
entity who or which has been convicted of a health care related crime as well
as specified. The BBA also provides for fines against any person that arranges
or contracts with an excluded person for the provision of items or services.
We currently do not employ or contract with any debarred individual or entity.
We conduct background checks for all employees, including checking the
sanctions and exclusions lists maintained by the Office of the Inspector
General and the General Services Administration and perform sanctions and
exclusions checks on all independent contractors that we retain, including
staffing agencies. Healthcare Reform.The federal government from time to time explores ways
to reduce medical care cost through Medicare reform and through healthcare
reform, generally. Any changes that would limit, reduce or delay receipt of
Medicare funding or any developments that would disqualify us from receiving
Medicare funding could have a material adverse effect on our business, results
of operations, prospects, financial results, financial condition or cash flows.
Due to the diverse range of proposals put forth and the uncertainty of any
proposals adoption, we cannot predict what impact any Medicare reform proposal
ultimately adopted may have on our business, financial position or results of
operations. 15




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Employees At
June 30, 2004, we employed or contracted with approximately 248
individuals of whom approximately 31 are physicians in our medical centers. Insurance We rely on insurance to protect us from many business risks, including
stop-loss insurance. In most cases, as is the trend in the health care
industry, as insurance policies expire, we may be required to procure policies
with narrower coverage, more exclusions and higher premiums. In some cases,
coverage may not be available at any price. There can be no assurance that the
insurance that we maintain and intend to maintain will be adequate, or that the
cost of insurance and limitations in coverage will not adversely affect our
business, financial position or results of operations. Available Information We file annual, quarterly and special reports, proxy statements and other
information with the SEC. You may read and copy any document we file at the
SECs public reference rooms in Washington, D.C., New York, New York, and
Chicago, Illinois. Please call the SEC at 1-800-SEC-0330 for further
information on the public reference rooms. Our SEC filings are also available
to the public from the SECs website at http://www.sec.gov. In addition, you
can inspect the reports, proxy statements and other information we file at the
offices of the American Stock Exchange, Inc., 86 Trinity Place, New York, New
York 10006. Our website address is www.continucare.com. We make available free of
charge on or through our internet website our Annual Report on Form 10-K,
Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to
those reports, filed or furnished pursuant to Section 13(a) or 15(d) of the
Securities Exchange Act of 1934 as soon as reasonably practicable after such
material has been filed with, or furnished to, the SEC. 
 ITEM 2. PROPERTIES We lease approximately 10,000 square feet of space for our corporate
offices in Miami, Florida under a lease expiring in September 2004 with average
annual base lease payments of approximately $200,000. In October 2004, we will
relocate our corporate offices to a new facility. We will lease approximately
9,800 square feet of space in Miami, Florida under a lease expiring in December
2009 with average annual base lease payments of approximately $161,000. Of the 15 medical centers that we operated as of June 30, 2004, five are
leased from independent landlords and the other 10 clinics are leased from
Humana. The leases with Humana are tied to our managed care arrangement. We
are negotiating a multiple year lease for one medical center that we currently
lease from an independent landlord on a month-to-month basis. However, until a
multiple year lease is executed with the landlord, that lease arrangement can
be cancelled at the option of the landlord, without cause, in a manner that
complies with local tenancy laws. 
 ITEM 3. LEGAL PROCEEDINGS We are a party to the case of 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. This case was filed on January 24,
2002 in the Circuit Court of the 17th Judicial Circuit in and for Broward
County, Florida and served on the companies and individuals in February 2003.
The complaint alleges vicarious liability for medical malpractice and seeks
damages in excess of $15,000. The stay on the case has recently been lifted.
We intend to defend ourselves against this case vigorously, but its outcome
cannot be predicted. Our ultimate liability, if any, with respect to the
lawsuit is presently not determinable. In addition, on August 17, 2004, we received a Notice of Intent to
Initiate Litigation for Medical Negligence from Carol Katz, as personal
representative of the estate of Charles K. Katz. Under Florida law, plaintiffs
in medical malpractice actions are required to provide such a notice at least
ninety days prior to commencing litigation. The plaintiffs notice alleges
negligence in the treatment of Mr. Katz that resulted in his death. The
plaintiffs notice does not allege any specific damages. We intend to
investigate this claim and defend it vigorously, but the outcome of this
matter, and our ultimate liability, if any, are not presently determinable. 16




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##### Table of Contents



We are also involved in other legal proceedings incidental to our business
that arise from time to time out of the ordinary course of business 
including, but not limited to, claims related to the alleged malpractice of
employed and contracted medical professionals, workers compensation claims and
other employee-related matters, and minor disputes with equipment lessors and
other vendors. We have recorded an accrual for medical malpractice claims,
which includes amounts for insurance deductibles and projected exposure, based
on our estimate of the ultimate outcome of such claims. 
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS At our Annual Meeting of Shareholders held on August 24, 2004, our
shareholders voted to re-elect each of the Directors named and to approve an
amendment to our Amended and Restated 2000 Stock Option Plan to increase the
shares available for grant under that plan from 4,000,000 to 7,000,000. The
number of votes cast for, against or withheld, with respect to each of the
nominees, were as follows: Nominee
    
    For
    
    Against
    
    WithheldRichard C. Pfenniger, Jr.
    
    
    42,840,953
    
    
    
    0
    
    
    
    13,435Patrick M. Healy
    
    
    42,841,288
    
    
    
    0
    
    
    
    13,100Robert J. Cresci
    
    
    42,834,453
    
    
    
    0
    
    
    
    19,935Phillip Frost, M.D.
    
    
    42,840,288
    
    
    
    0
    
    
    
    14,100Neil Flanzraich
    
    
    42,840,953
    
    
    
    0
    
    
    
    13,435Jack Nudel, M.D.
    
    
    42,834,453
    
    
    
    0
    
    
    
    19,935A. Marvin Strait
    
    
    42,833,788
    
    
    
    0
    
    
    
    20,600
 There were no other nominees for director. The number of votes cast for, against, abstain or broker unvoted with
respect to the amendment of our Amended and Restated 2000 Stock Option plan
were as follows: For
    
    Against
    
    Abstain
    
    Broker Unvoted29,643,403
    
    
    189,736
    
    
    
    15,065
    
    
    
    13,006,184
 
 PART II 
 ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Our common stock is traded on the American Stock Exchange (AMEX) under
the symbol CNU. The following table sets forth the high and low sale prices
of our common stock as reported by the composite tape of AMEX for each of the
quarters indicated. 17




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##### Table of Contents



HIGH
    
    LOWFiscal 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
    
    
    
    1.59Fiscal Year 2003:Quarter Ended 9/30/02
    
    $
    0.25
    
    
    $
    0.11Quarter Ended 12/31/02
    
    
    0.16
    
    
    
    0.10Quarter Ended 3/31/03
    
    
    0.36
    
    
    
    0.11Quarter Ended 6/30/03
    
    
    0.75
    
    
    
    0.30
 As of the close of business on September 13, 2004, there were
approximately 141 record holders of our common stock. We have not paid
dividends on our common stock and do not contemplate paying dividends in the
foreseeable future. Securities Authorized for Issuance Under Equity Compensation Plans The following table provides information as of June 30, 2004, with respect
to all of our compensation plans under which equity securities are authorized
for issuance: 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
    
    
    3,295,000
    
    
    $
    1.324
    
    
    
    2,694,000Plans not approved by
stockholders
    
    
    
    
    
    
    
    
    
    
    3,295,000
    
    
    
    
    
    
    
    2,694,000
 Issuance of Securities On April 22, 2004, we sold 2,333,333 shares of our common stock to twelve
accredited investors pursuant to Rule 506 under the Securities Act of 1933 for
$3.5 million. In connection with the transaction we paid one of the investors
$18,000 in fees, but we paid no underwriting discounts or commissions in
connection with the transaction. We used the proceeds of the transaction to
retire approximately $1.4 million of long-term debt bearing interest at rates
ranging from 12.625% to 13.875%, to reduce the balance outstanding under our
credit facility by approximately $1.7 million and for general corporate
purposes. 
 ITEM 6. SELECTED FINANCIAL DATA Set forth below is our selected historical consolidated financial data as
of and for the fiscal years ended June 30, 2004, 2003, 2002, 2001 and 2000 that
has been derived from our audited consolidated financial statements. The
selected historical consolidated financial data should be read in conjunction
with Managements Discussion and Analysis of Financial Condition and Results
of Operations and the consolidated financial statements and accompanying notes
included elsewhere herein. 18




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##### Table of Contents



CONSOLIDATED STATEMENTS OF OPERATIONS DATA: For the Year Ended June 30,2004
    
    2003 (1)
    
    2002 (1)
    
    2001 (1)
    
    2000(1)Revenue:Medical services revenue, net
    
    $
    101,758,761
    
    
    $
    97,164,834
    
    
    $
    90,828,930
    
    
    $
    85,824,012
    
    
    $
    82,886,768Management fee revenue
    
    
    677,927
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Other income
    
    
    22,829
    
    
    
    
    
    
    
    150,000
    
    
    
    
    
    
    
    Total revenue
    
    
    102,459,517
    
    
    
    97,164,834
    
    
    
    90,978,930
    
    
    
    85,824,012
    
    
    
    82,886,768Operating expenses:Medical services:Medical claims
    
    
    76,333,580
    
    
    
    74,046,265
    
    
    
    69,340,067
    
    
    
    68,620,251
    
    
    
    58,230,323Other direct costs
    
    
    11,665,894
    
    
    
    10,696,997
    
    
    
    10,395,210
    
    
    
    10,610,660
    
    
    
    10,731,095Total medical services
    
    
    87,999,474
    
    
    
    84,743,262
    
    
    
    79,735,277
    
    
    
    79,230,911
    
    
    
    68,961,418Administrative payroll and employee benefits
    
    
    3,822,949
    
    
    
    3,681,446
    
    
    
    2,689,562
    
    
    
    3,137,722
    
    
    
    3,373,521General and administrative
    
    
    5,821,871
    
    
    
    6,252,347
    
    
    
    6,446,444
    
    
    
    8,118,992
    
    
    
    8,779,783Gain on extinguishment of debt
    
    
    (850,000
    )
    
    
    
    
    
    
    
    
    
    
    (3,503,188
    )
    
    
    (13,247,907
    )Total operating expenses
    
    
    96,794,294
    
    
    
    94,677,055
    
    
    
    88,871,283
    
    
    
    86,984,437
    
    
    
    67,866,815Income (loss) from operations
    
    
    5,665,223
    
    
    
    2,487,779
    
    
    
    2,107,647
    
    
    
    (1,160,425
    )
    
    
    15,019,953Other income (expense):Interest income
    
    
    4,793
    
    
    
    6,568
    
    
    
    36,124
    
    
    
    32,342
    
    
    
    42,900Interest expense-convertible subordinated notes
    
    
    (1,006,082
    )
    
    
    (5,740
    )
    
    
    
    
    
    
    
    
    
    
    (2,054,710
    )Interest expense-other
    
    
    
    
    
    
    (950,587
    )
    
    
    (1,567,479
    )
    
    
    (1,624,116
    )
    
    
    (1,179,312
    )Medicare settlement related to terminated
operations
    
    
    2,218,278
    
    
    
    
    
    
    
    (2,440,971
    )
    
    
    
    
    
    
    Other
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    383,623Income (loss) from continuing operations
    
    
    6,882,212
    
    
    
    1,538,020
    
    
    
    (1,864,679
    )
    
    
    (2,752,199
    )
    
    
    12,212,454Income (loss) from discontinued operations:Home health operations
    
    
    (1,666,934
    )
    
    
    (1,830,118
    )
    
    
    (1,295,310
    )
    
    
    (541,251
    )
    
    
    (169,454
    )Terminated IPAs
    
    
    73,091
    
    
    
    350,696
    
    
    
    (486,399
    )
    
    
    (1,482,657
    )
    
    
    (978,884
    )Contractual revision of previously recorded
medical claims and other liabilities from
discontinued operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,638,205
    
    
    
    3,053,853Total income (loss) from discontinued operations
    
    
    (1,593,843
    )
    
    
    (1,479,422
    )
    
    
    (1,781,709
    )
    
    
    2,614,297
    
    
    
    1,905,515Net income (loss)
    
    $
    5,288,369
    
    
    $
    58,598
    
    
    $
    (3,646,388
    )
    
    $
    (137,902
    )
    
    $
    14,117,969Basic net income (loss) per common share:Income from continuing operations
    
    $
    .16
    
    
    $
    .04
    
    
    $
    (.05
    )
    
    $
    (.08
    )
    
    $
    .56Loss from discontinued operations
    
    
    (.04
    )
    
    
    (.04
    )
    
    
    (.04
    )
    
    
    .08
    
    
    
    .09Net income (loss) per common share
    
    
    .12
    
    
    $
    
    
    
    $
    (.09
    )
    
    
    
    
    
    $
    .65Diluted net income (loss) per common share:Income from continuing operations
    
    $
    .14
    
    
    $
    .04
    
    
    $
    (.05
    )
    
    $
    (.08
    )
    
    $
    .56Loss from discontinued operations
    
    
    (.03
    )
    
    
    (.04
    )
    
    
    (.04
    )
    
    
    .08
    
    
    
    .09Net income (loss) per common share
    
    $
    .11
    
    
    $
    
    
    
    $
    (.09
    )
    
    $
    
    
    
    $
    .65Cash dividends declared
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
 CONSOLIDATED BALANCE SHEET DATA: As of June 30,2004
    
    2003 (1)
    
    2002 (1)
    
    2001 (1)
    
    2000(1)Total assets
    
    $
    22,543,596
    
    
    $
    20,999,976
    
    
    $
    21,546,985
    
    
    $
    22,343,279
    
    
    $
    27,545,180Long-term obligations, including current portion
    
    $
    337,186
    
    
    $
    9,597,063
    
    
    $
    13,877,505
    
    
    $
    11,806,623
    
    
    $
    17,769,246
 (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




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##### Table of Contents



ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS General We are a mixed model provider of primary care physician services. Through
our network of 15 medical centers and 31 IPAs located in Miami-Dade, Broward
and Hillsborough Counties, Florida, we were responsible for providing primary
care medical services or overseeing the provision of primary care services by
affiliated physicians to approximately 15,700 patients on a full risk basis and
approximately 13,000 patients on a limited or non-risk basis as of June 30,
2004. In Fiscal 2004, approximately 93% of our revenue was generated by
providing services to Medicare-eligible members under full risk agreements that
require us to assume responsibility to provide and pay for all of our patients
medical needs in exchange for a capitated fee, typically a percentage of the
premium received by an HMO from various payor sources. Prior to their
disposition in January and February 2004, we provided home health care services
to recovering, disabled, chronically ill and terminally ill patients in their
homes. In an effort to streamline and stem operating losses, effective January 1,
2003, we terminated the Medicare and Medicaid lines of business for all of the
physician contracts associated with one of our IPAs, which consisted of 29
physicians at the time of termination. Additionally, in December 2003, we
implemented a plan to dispose of our home health operations. The home health
disposition occurred in three separate transactions and was concluded on
February 7, 2004. As a result of these transactions, the operations of the
terminated IPAs and our home health operations are shown as discontinued
operations. In addition to terminating and disposing of unprofitable operations, we
focused our attention on strengthening our financial position. During the
third and fourth quarters of Fiscal 2004, we obtained an extension of the
maturity date for our Credit Facility until March 31, 2005, caused the
conversion of all of the outstanding principal balance of our convertible
subordinated notes payable into 3.9 million shares of our common stock and sold
2.3 million shares of our common stock to twelve accredited investors in a
private transaction. The proceeds from the sale of shares of common stock were
used to retire approximately $1.4 million of long-term debt, reduce the balance
outstanding under the Credit Facility by approximately $1.7 million and for
general corporate purposes. In connection with the transaction, Frost Nevada
Investments Trust (Frost Nevada), an entity controlled by Dr. Phillip Frost,
a director and beneficial owner of approximately 44% of our outstanding common
stock as of September 13, 2004, converted a convertible promissory note having
an outstanding principal balance and unpaid accrued interest of approximately
$0.9 million into 819,333 shares of common stock in accordance with the terms
of that note. As a result of these efforts and an increase in profitability in Fiscal
2004, working capital increased to $0.2 million as of June 30, 2004, from a
working capital deficiency of $5.2 million as of June 30, 2003, and long-term
debt decreased to $0.3 million as of June 30, 2004, from
$9.6 million as of
June 30, 2003. 20




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##### Table of Contents



Critical Accounting Policies and Estimates The discussion and analysis of our financial condition and results of
operations is based upon our consolidated financial statements and accompanying
notes, which have been prepared in accordance with accounting principles
generally accepted in the United States of America. The preparation of these
financial statements and accompanying notes requires us to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Certain of the amounts recorded on our financial
statements could change materially under different, yet still reasonable,
estimates and assumptions. We base our estimates and assumptions on historical
experience, knowledge of current events and anticipated future events, and we
continuously evaluate and update our estimates and assumptions. However, our
estimates and assumptions may ultimately prove to be incorrect or incomplete
and our actual results may differ materially. We believe the following critical accounting policies involve the most
significant judgments and estimates used in the preparation of our consolidated
financial statements. Revenue Recognition Revenue is recorded in the period services are rendered as determined by
the respective contract.
Under our full risk contracts with HMOs, we receive a percentage of
premium or other capitated fee for each patient that chooses one of our
physicians as their primary care physician and we assume responsibility for the
cost of all medical services, even those we do not provide directly. To the
extent that patients require more frequent or expensive care, our revenue under
a contract may be insufficient to cover the costs of care provided. When it is
probable that expected future health care costs and maintenance costs under a
contract or group of existing contracts will exceed anticipated capitated
revenue on those contracts, we recognize losses on our prepaid health care
services with HMOs. No contracts were considered loss contracts at June 30,
2004, because we have the right to terminate unprofitable physicians and close
unprofitable centers under our managed care contracts. Under our limited risk and no-risk contracts with HMOs, we receive a
management fee based on the number of patients for which we are providing
services on a monthly basis. The management fee is recorded as revenue in the
period in which services are provided as determined by the respective contract. Medical Claims Expense Recognition The cost of health care services provided or contracted for is accrued in
the period in which the services are provided and includes an estimate of the
related liability for medical claims incurred but not yet reported, or IBNR.
Estimating IBNR involves a significant amount of judgment and represents a
material portion of our medical claims liability which is presented in the
balance sheet net of amounts due from HMOs. Changes in this estimate can
materially effect, either favorably or unfavorably, our results from operations
and overall financial position. We develop our estimate of IBNR primarily based on historical claims
incurred per member per month. We adjust our estimate if we have unusually
high or low inpatient utilization and if benefit changes provided under the HMO
plans are expected to significantly increase or reduce our claims exposure. We
also adjust our estimate for differences between the estimated claims expense
recorded in prior months to actual claims expense as claims are paid by the HMO
and reported to us. To further corroborate our estimate of medical claims, an independent
actuarial calculation is performed for us on a quarterly basis. This
independent actuarial calculation indicates that IBNR as of June 30, 2004 was
between approximately $10.9 million and $11.8 million. As of June 30, 2004, we
had recorded a liability of approximately $11.4 million for IBNR based on our
monthly calculation process. As the amount recorded was within the actuarial
range, no further analysis was performed. Consideration of Impairment Related to Goodwill and Other Intangible
Assets Our balance sheet includes intangible assets, including goodwill and other
separately identifiable intangible assets, which represented approximately 73%
of our total assets at June 30, 2004. Under Statement of Financial Accounting
Standards No. 142, Goodwill and Other Intangible Assets, goodwill and
intangible assets with indefinite useful lives are no longer amortized, but are
reviewed for impairment on an annual basis or more frequently if certain
indicators of permanent impairment arise. Intangible assets with definite
useful lives are amortized over their respective useful lives to their
estimated residual values and also reviewed for impairment annually, or more
frequently if certain indicators of permanent impairment arise. Indicators of
a permanent impairment include, among other things, a significant adverse
change in legal factors or the business climate, the loss of a key HMO
contract, an 21




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##### Table of Contents



adverse action by a regulator, unanticipated competition, the loss of key
personnel or allocation of goodwill to a portion of business that is to be
sold. Because we operate in a single segment of business, that of managing the
provision of outpatient health care and health care related services in the
State of Florida, management has determined that we have a single reporting
unit and we perform our impairment test for goodwill on an enterprise level.
In performing the impairment test, we compare our fair value, as determined by
the current market value of our common stock, to the current carrying value of
the total net assets, including goodwill and intangible assets. We completed
our annual impairment test on May 1, 2004, and determined that no impairment
existed. Accordingly, no impairment charges were required at June 30, 2004.
Should we determine that an indicator of impairment has occurred, such as those
noted above, we would be required to perform an additional impairment test.
Depending on the market value of our common stock at the time that an
impairment test is required, there is a risk that a portion of our intangible
assets would be considered impaired and must be written-off during that period. Results of Operations The following discussion and analysis should be read in conjunction with
the consolidated financial statements and notes thereto appearing elsewhere in
this annual report. The following tables set forth, for the periods indicated,
selected operating data as a percentage of total revenue. Year ended June 30,2004
    
    2003
    
    2002Revenue:Medical services revenue, net
    
    
    99.3
    %
    
    
    100.0
    %
    
    
    99.8
    %Management fee revenue
    
    
    0.7
    
    
    
    
    
    
    
    Other income
    
    
    
    
    
    
    
    
    
    
    0.2Total revenue
    
    
    100.0
    
    
    
    100.0
    
    
    
    100.0Operating expenses:Medical services:Medical claims
    
    
    74.5
    
    
    
    76.2
    
    
    
    76.2Other direct costs
    
    
    11.4
    
    
    
    11.0
    
    
    
    11.4Total medical services
    
    
    85.9
    
    
    
    87.2
    
    
    
    87.6Administrative payroll and employee benefits
    
    
    3.7
    
    
    
    3.8
    
    
    
    3.0General and administrative
    
    
    5.7
    
    
    
    6.4
    
    
    
    7.1Gain on extinguishment of debt
    
    
    (0.8
    )
    
    
    
    
    
    
    Total operating expenses
    
    
    94.5
    
    
    
    97.4
    
    
    
    97.7Income from operations
    
    
    5.5
    
    
    
    2.6
    
    
    
    2.3Other income (expense):Interest expense
    
    
    (1.0
    )
    
    
    (1.0
    )
    
    
    (1.7
    )Medicare settlement related to
terminated operations
    
    
    2.2
    
    
    
    
    
    
    
    (2.7
    )Income (loss) from continuing operations
    
    
    6.7
    
    
    
    1.6
    
    
    
    (2.1
    )Income (loss) from discontinued operations:Home health operations
    
    
    (1.6
    )
    
    
    (1.9
    )
    
    
    (1.4
    )Terminated IPAs
    
    
    0.1
    
    
    
    0.4
    
    
    
    (0.5
    )Total loss from discontinued operations
    
    
    (1.5
    )
    
    
    (1.5
    )
    
    
    (1.9
    )Net income (loss)
    
    
    5.2
    %
    
    
    0.1
    %
    
    
    (4.0
    )%
 COMPARISON OF FISCAL YEAR ENDED JUNE 30, 2004, TO FISCAL YEAR ENDED JUNE 30,
2003 Revenue from Continuing Operations Medical services revenue increased by $4.6 million, or 4.7%, to $101.8
million for Fiscal 2004 from $97.2 million for Fiscal 2003. The most
significant component of our medical services revenue is the revenue we
generated from Medicare patients under full risk contracts. In Fiscal 2004,
approximately 93% of our medical service revenue was generated by Medicare
eligible patients under full risk contracts. Revenue generated by our Medicare
full risk contracts increased approximately 8.8% on a per patient per month basis
which was partially offset by a decrease of approximately 2.2% in Medicare patients months.
The increase in Medicare revenue is primarily due to higher per patient per
month premiums resulting from the Medicare Modernization Act and the increased
phase-in of the Medicare risk 22




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##### Table of Contents



adjustment program, both of which became
effective in January 2004. As of June 30, 2004, patients under full risk
contracts decreased
to approximately 15,700 from approximately 16,700 as of June 30, 2003,
while patients under limited or non-risk contracts increased to approximately
13,000 as of June 30, 2004, from approximately 7,100 as of June 30, 2003. Management fee revenue of $0.7 million during Fiscal 2004 related to
revenue generated under our limited risk and non-risk contracts with HMOs. The
management fee revenue primarily relates to the Humana PGP Agreement that we
executed in April 2003. No revenue was generated under such agreements during
Fiscal 2003. Revenue from continuing operations generated by our managed care entities
under contracts with Humana accounted for 75% and 73% of our medical services
revenue for Fiscal 2004 and 2003, respectively. Revenue from continuing
operations generated by our managed care entities under contracts with Vista
accounted for 25% and 23% of our medical services revenue for Fiscal 2004 and
2003, respectively. Expenses from Continuing Operations Medical services expenses are comprised of medical claims expense and
other direct costs related to the provision of medical services to our
patients. Medical claims expense includes the costs of medical services
provided to our patients by providers other than us but for which we are
financially responsible under the terms of our full risk contracts with HMOs.
Other direct costs include the salaries, taxes and benefits of our health
professionals providing primary care services, medical malpractice insurance
costs, capitation payments to our IPA physicians and other costs related to the
provision of medical services to our patients. Medical services expenses for Fiscal 2004 increased by $3.3 million, or
3.8%, to $88.0 million from $84.7 million for Fiscal 2003. As a percentage of
total revenue, medical services expenses decreased to 85.9% for Fiscal 2004 as
compared to 87.2% for Fiscal 2003. The increase in medical services expenses
was primarily due to an increase in medical claims expense of $2.3 million, or
3.1%, to $76.3 million for Fiscal 2004 from $74.0 million for Fiscal 2003. The
increase in medical claims expense was primarily due to higher stop-loss
insurance costs and an increase in utilization of health care services.
However, the increase in medical services revenue attributable to the higher
per patient per month premiums resulting from the Medicare Modernization Act
and the increased phase-in of the Medicare risk adjustment more than offset the
increase in claims expense for Fiscal 2004. As a result, notwithstanding the
increase in our medical claims expense, our claims loss ratio (medical claims
expense as a percentage of medical services revenue) decreased to 75.0% in
Fiscal 2004 from 76.2% in Fiscal 2003. In response to the Medicare
Modernization Act, certain benefits offered to Medicare patients were enhanced
by the HMOs. We anticipate that these benefit changes will result in an
increase in our medical claims expense and may result in an increase in our
claims loss ratio in future periods. We cannot quantify what impact, if any,
these developments may have on our results of operations in future periods.
However, our claims loss ratio fluctuates from period to period based upon
variations in medical utilization, medical costs and premiums revenues. Other direct costs increased by $1.0 million, or 9.1%, to $11.7 million
for Fiscal 2004 from $10.7 million for Fiscal 2003. As a percentage of total
revenue, other direct costs increased to 11.4% for Fiscal 2004 from 11.0% for
Fiscal 2003. The increase in other direct costs was primarily due to an
increase in payroll expense for physicians and medical support personnel at our
medical centers and an increase in medical malpractice insurance costs. Administrative payroll and employee benefits for Fiscal 2004 and 2003
remained relatively constant at $3.8 million and $3.7 million, respectively, or
3.7% and 3.8%, respectively, of total revenue. General and administrative expenses decreased by $0.4 million, or 6.9%, to
$5.8 million for Fiscal 2004 from $6.2 million for Fiscal 2003. As a
percentage of total revenue, general and administrative expenses decreased to
5.7% for Fiscal 2004 as compared to 6.4% for Fiscal 2003. The decrease in
general and administrative expenses was primarily due to the settlement of two
lawsuits in Fiscal 2004 resulting in a reduction in the accrual for legal
claims of $0.8 million, which was partially offset by separation costs of $0.3
million incurred in Fiscal 2004 in connection with the resignation of our
former president. The $0.9 million gain on extinguishment of debt recognized during Fiscal
2004 related to the $3.9 million contract modification note with Humana that
was cancelled in April 2003. Simultaneously with the note cancellation, we
executed the Humana PGP Agreement and assumed management responsibilities on a
non-risk basis for certain of Humanas members. The Humana PGP Agreement
expires in April 2005 and contained a provision for liquidated damages in the
amount of $4.0 million, which can be asserted by Humana under certain
circumstances. Because there were contingent circumstances under which any
future payments of liquidated damages to Humana could equal the amount of debt
forgiven, the $3.9 million gain that we otherwise would have recognized from
the extinguishment of the debt in the fourth quarter of Fiscal 2003, was
deferred. To the extent that Humana reduces the maximum amount of liquidated
damages, we will recognize a portion of the deferred gain in a manner
consistent with the reduction in the maximum amount of liquidated damages. In
May 2004, Humana notified us that the maximum amount of liquidated damages 23




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had been reduced to $3.0 million. Accordingly, we recognized $0.9 million
of the deferred gain on extinguishment of debt during Fiscal 2004. No similar
transaction occurred during Fiscal 2003. Income from Operations Income from operations for Fiscal 2004 increased by $3.2 million to $5.7
million, or 5.5% of total revenue, from $2.5 million, or 2.6% of total revenue,
for Fiscal 2003. Medicare Settlement Related to Terminated Operations During Fiscal 2004, we recorded other income of $2.2 million relating to
the settlement of an alleged Medicare obligation. The alleged obligation
related to rehabilitation clinics that were previously operated by one of our
former subsidiaries and were sold in 1999. CMS had alleged that Medicare
overpayments were made relating to services rendered by these clinics and other
related clinics during a period in which the clinics were operated by entities
other than us. In an effort to resolve the matter with CMS and avoid
aggressive collection efforts that could have disrupted our business, in 2002
we entered into a memorandum of understanding under which we began making
payments to resolve the alleged liability while retaining the right to dispute
the alleged overpayments. We requested that CMS reconsider the alleged
liability, and in October 2003 we were notified that the liability had been
reduced from the originally asserted amount of $2.4 million to $0.2 million. Loss from Discontinued Operations-Home Health Operations Our home health operations contributed $3.1 million and $4.2 million in
revenue and generated an operating loss of $1.7 million (which included charges
in connection with the disposition of $0.5 million) and $1.8 million during
Fiscal 2004 and 2003, respectively. Income from Discontinued Operations-Terminated IPAs The IPAs we terminated effective January 1, 2003 contributed $4.5 million
in medical services revenue and generated operating income of $351,000 during
Fiscal 2003. The terminated IPAs did not contribute any revenue but generated
operating income of $73,000 during Fiscal 2004. Income generated by the
terminated IPAs during Fiscal 2004 resulted from a settlement with the HMO
which eliminated all amounts due to and amounts due from the HMO incurred prior
to the termination of the contracts on January 1, 2003. Taxes No provision for income taxes was recorded in Fiscal 2004 and 2003 due
primarily to the utilization of prior year net operating loss carryforwards.
We periodically perform an analysis of the realizability of our deferred tax
assets based on our assessment of current and expected operating results. As
of June 30, 2004, we determined that a valuation allowance for deferred tax
assets of $9.9 million was necessary resulting in a decrease in the valuation
allowance of $1.9 million in Fiscal 2004. The valuation allowance reduction
was due to the utilization of deferred tax assets during Fiscal 2004 to offset
income tax liabilities that were generated from current operations. Net Income Net income for Fiscal 2004 increased by $5.2 million to $5.3 million from
$0.1 million for Fiscal 2003. COMPARISON OF FISCAL YEAR ENDED JUNE 30, 2003 TO FISCAL YEAR ENDED JUNE 30,
2002 Revenue from Continuing Operations Medical services revenue increased 7.0% to $97.2 million for Fiscal 2003
from $91.0 million for Fiscal 2002. The increase was primarily the result of
increases in the number of Medicare patients from whom we received percentage
of premium revenue and increases in the premium revenue per patient.
Additionally, in September 2003, we were notified by our Medicare Fiscal
Intermediary that they had completed the reopening of a 1997 RMS cost report
which resulted in an alleged liability of approximately $402,000 being reduced
to approximately $40,000. As a result, in the fourth quarter of Fiscal 2003 we
recorded an adjustment of approximately $362,000 as a Medicare cost report
settlement, which was included in net medical services revenue. (See Note 6 of
our Consolidated Financial Statements.) 24




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Revenue from continuing operations generated by our managed care entities
under contracts with Humana accounted for 73% and 74% of our medical services
revenue during Fiscal 2003 and Fiscal 2002, respectively. Revenue from
continuing operations generated by our managed care entities under contracts
with Vista accounted for 23% and 21% of our medical services revenue for Fiscal
2003 and Fiscal 2002, respectively. Other income of $150,000 during Fiscal 2002 related to a settlement
payment received from a vendor regarding a dispute which arose during the year.
No settlement payments were received in Fiscal 2003. Expenses from Continuing Operations Medical services expenses for Fiscal 2003 were $84.7 million, or 87.2% of
total revenue, compared to $79.7 million, or 87.6% of total revenue, for Fiscal
2002. Medical claims expense was $74.0 million and $69.3 million for Fiscal 2003
and Fiscal 2002, respectively, or 76.2% of total revenue for both years. For
Fiscal 2003 and 2002, respectively, our claims loss ratio was 76.2% and 76.3%. Other direct costs remained relatively constant at $10.7 million and $10.4
million for Fiscal 2003 and Fiscal 2002, respectively, or 11.0% and 11.4% of
total revenue. Administrative payroll and employee benefits expense was $3.7 million, or
3.8% of total revenue, for Fiscal 2003 compared to $2.7 million, or 3.0% of
total revenue, for Fiscal 2002. The increase was primarily due to annual
salary increases and bonuses, an increase in administrative staff and an
increase in compensation expense to our Board of Directors. General and administrative expenses for Fiscal 2003 remained relatively
constant at $6.3 million, or 6.4% of total revenue, compared to $6.4 million,
or 7.1% of total revenue, for Fiscal 2002. Income from Operations Income from operations for Fiscal 2003 was $2.5 million, or 2.6% of total
revenue, compared to $2.1 million, or 2.3% of total revenue, for Fiscal 2002. Interest Expense Interest expense for Fiscal 2003 was $1.0 million, or 1.0% of total
revenue, compared to $1.6 million or 1.7% of total revenue for Fiscal 2002.
The decrease in interest expense primarily related to a reduction in the
amortization of deferred financing costs which was $0.6 million in Fiscal 2003
as compared to $1.3 million in Fiscal 2002. Medicare Settlement Related to Terminated Operations During Fiscal 2002, we recorded a provision of $2.4 million relating to
alleged Medicare overpayments received by rehabilitation clinics that were
later reduced as described above.
(See Note 6 of our Consolidated Financial Statements.) Loss from Discontinued Operations  Home Health Operations Our home health operations contributed $4.2 million and $4.5 million in
revenue and generated an operating loss of $1.8 million and $1.3 million during
Fiscal 2003 and 2002, respectively. Income (loss) from Discontinued Operations  Terminated IPAs The IPAs we terminated effective January 1, 2003 contributed $4.5 million
and $10.2 million in revenue and generated income of $351,000 and a loss of
$486,000 for Fiscal 2003 and Fiscal 2002, respectively. Taxes No provision or benefit for income taxes was recorded in Fiscal 2003 and
2002. As of June 30, 2003, we determined that our tax assets could not be
recognized as it is more likely than not that they will not be realized. As of
June 30, 2003, we determined that a valuation allowance of $11.9 million was
necessary resulting in a decrease in the valuation allowance of $0.2 million in
Fiscal 2003. 25




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The valuation allowance reduction was due to the utilization of deferred tax
assets during Fiscal 2004 to offset income tax liabilities that were generated
from current operations. Net Income (Loss) Net income for Fiscal 2003 was $59,000 compared to a net loss of $3.6
million for Fiscal 2002. Liquidity and Capital Resources At
June 30, 2004, working capital was $0.2 million, an
increase of $5.4
million from a working capital deficit of $5.2 million at June 30, 2003. The
increase in working capital for Fiscal 2004 was primarily due to an increase in
net income of $5.2 million. Cash and cash equivalents were
$0.7 million at June 30, 2004, compared to $0.2 million at June 30, 2003. Net
cash of $2.3 million was provided by operating activities from
continuing operations during Fiscal 2004 compared to $3.1 million in Fiscal
2003 and $1.6 million in Fiscal 2002. The decrease of $0.8 million in cash
provided by operating activities during Fiscal 2004 was primarily due to an
increase of $2.3 million in amounts due from HMOs, a decrease in accounts
payable and accrued expenses of $0.9 million, income recognized of $2.2 million
in connection with the Medicare settlement related to terminated operations,
and a gain of $0.9 million on the early extinguishment of debt, which taken
together, more than offset our $5.3 million increase in income from continuing
operations. The increase of $1.5 million in cash provided by operating
activities from continuing operations during Fiscal 2003 was primarily due to
an increase in income from continuing operations of $3.4 million, a decrease of
$1.5 million in amounts due from HMOs, a decrease of $0.5 million in other
receivables, a decrease of $1.2 million in depreciation and amortization
expense, and a decrease of $3.3 million in amounts due to Medicare. In April 2003, we executed the Humana PGP Agreement, as described above,
under which we assumed certain management responsibilities on a non-risk basis
for certain of Humanas Medicare, Commercial and Medicaid members assigned to
selected primary care physicians in Miami-Dade and Broward Counties. Revenue
from this contract consists of a monthly management fee intended to cover our
costs for providing these services. Simultaneously with the execution of the
Humana PGP Agreement, we restructured the terms of a $3.9 million contract
modification note with Humana. In November 2003 and again in May 2004, we were notified that Humana had
reduced the maximum amount of liquidated damages to $3.5 million and $3.0
million, respectively. Accordingly, we recognized $0.4 million and $0.5
million, respectively, of the deferred gain on extinguishment of debt in the
second and fourth quarters of Fiscal 2004. Effective January 1, 2003, we terminated all of our IPA relationships
associated with one HMO and in December 2003, we implemented a plan to dispose
of our home health operations as described above. As a result, the operations
of the terminated IPAs and home health operations are shown as discontinued
operations. The terminated IPAs contributed $0.0 million and $4.5 million of
medical services revenue and generated income of $73,000 and $0.4 million of
income in Fiscal 2004 and 2003, respectively. The home health operations
contributed $3.1 million and $4.2 million in revenue and generated losses of
$1.7 million (which includes charges in connection with the disposition of $0.5
million) and $1.8 million during Fiscal 2004 and 2003, respectively. In Fiscal 2004, our claims loss ratio improved due in part to an increase
in revenue resulting from the Medicare Modernization Act and the increased
phase-in of the Medicare risk adjustment. Effective March 1, 2004, certain
benefits offered to Medicare members were enhanced by the HMOs for whom we
treat patients in response to the Medicare Modernization Act. We anticipate
that these benefit changes will result in an increase in our medical claims
expense and may result in an increase in our claims loss ratio in future
periods, however, we cannot predict what future impact, if any, these
developments may have on our results of operations or cash flows from
operations. Net cash of $0.1 million was used for investing activities from continuing
operations in Fiscal 2004 compared to $0.1 million in Fiscal 2003 and $0.2
million in Fiscal 2002. Net cash used for investing activities primarily
related to the purchase of equipment. Net cash of $0.6 million was used in financing activities from continuing
operations compared to net cash used of $1.1 million in Fiscal 2003 and net
cash provided by financing activities of $0.1 million in Fiscal 2002. The
decrease in cash used in financing activities of $0.5 million in Fiscal 2004
was primarily due to an increase in proceeds of $3.5 million from the issuance
of stock and $0.4 million from the exercise of stock options that were
partially offset by an increase of $1.1 million in repayments to Medicare and
an increase of $2.3 million in payments of the Credit Facility. The increase
of $1.2 million in cash used in financing activities from continuing operations
in Fiscal 2003 was primarily due to a decrease of $1.8 million in borrowings
under the Credit 26




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Facility. Effective March 30, 2004, we obtained an extension of the maturity date
for our Credit Facility until March 31, 2005. Prior to the extension of the
maturity date, the Credit Facility was personally guaranteed by Dr. Frost. In
order to obtain the extension of the maturity date, Dr. Frost was required to
renew his personal guarantee. In consideration of Dr. Frosts renewal of his
personal guarantee, we issued 300,000 shares of common stock to an entity
controlled by Dr. Frost. The terms and conditions of the Credit Facility
remain substantially unchanged, except for the removal of a financial covenant
that previously required us to maintain a minimum fixed charge coverage ratio.
At June 30, 2004, we had no amounts outstanding under this Credit Facility. On April 12, 2004, we called our convertible subordinated notes payable
(the Notes) for redemption in accordance with their terms, subject to the
Noteholders right to convert the Notes prior to the redemption date into
shares. The outstanding principal balance of our Notes was approximately $3.9
million as of March 31, 2004. On May 12, 2004 all Noteholders converted the
Notes in accordance with these terms and received 3,922,538 shares of common
stock representing the conversion and cancellation of the entire outstanding
principal balance of the Notes and the unpaid accrued interest through the
conversion date. On April 22, 2004, we sold 2,333,333 shares of our common stock for $3.5
million to twelve accredited investors in a private transaction. The proceeds
were used to retire approximately $1.4 million of long-term debt bearing
interest at rates ranging from 12.625% to 13.875%, to reduce the balance
outstanding under the Credit Facility by approximately $1.7 million and for
general corporate purposes. In connection with the transaction, Frost Nevada
converted a convertible promissory note having an outstanding principal balance
and unpaid accrued interest of approximately $0.9 million into 819,313 shares
of common stock in accordance with the terms of that note. As a result of
the transactions that occurred in Fiscal 2004, our long-term debt obligations
were reduced to $0.3 million as of June 30, 2004. We believe that we will be
able to fund our capital commitments, our anticipated operating cash
requirements for the foreseeable future and satisfy any remaining obligations
from our working capital, anticipated cash flows from operations, and our
Credit Facility. In October 2003, Mr. Angel resigned as the our President and Chief
Executive Officer. In accordance with the terms of his severance agreement, he
will receive $250,000, payable through September 2004 in accordance with the
Companys normal payroll practices in addition to certain amounts that were
paid at the time of his resignation. We also paid Mr. Angel a lump-sum cash
severance payment of $17,500 and repurchased 800,000 stock options held by him
for $68,000. These two amounts were paid on Mr. Angels severance date. Off-Balance Sheet Arrangements We had no off-balance sheet arrangements as of June 30, 2004, and have not
entered into any transactions involving unconsolidated, limited purpose
entities or commodity contracts. Contractual Obligations The following is a summary of our long-term debt, capital lease obligations,
and contractual obligations as of June 30, 2004: Payment due by PeriodTotal
    
    Less than 1 Year
    
    1-2 Years
    
    3-5 YearsLong-Term Debt Obligations
    
    $
    29,077
    
    
    $
    
    
    
    $
    29,077
    
    
    $
    Related Party Notes Payable,
including capitalized interest
(1)
    
    
    125,769
    
    
    
    8,052
    
    
    
    117,717
    
    
    
    Capital Lease Obligations (2)
    
    
    216,201
    
    
    
    96,584
    
    
    
    115,198
    
    
    
    4,419Operating Lease Obligations (2)
    
    
    5,466,404
    
    
    
    1,834,708
    
    
    
    2,321,498
    
    
    
    1,310,198Total
    
    $
    5,837,451
    
    
    $
    1,939,344
    
    
    $
    2,583,490
    
    
    $
    1,314,617
   (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 9 to our Consolidated Financial
Statements. 27




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(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. Other factors that could affect our liquidity and cash flow are discussed
elsewhere in this Annual Report. 
 ITEM 7A. QUANTITATIVE AND QUALITAlTIVE DISCLOSURES ABOUT MARKET RISK At June 30, 2004, we had only cash equivalents, invested in high grade,
very short-term securities, which are not typically subject to material market
risk. We have loans outstanding at fixed rates. For loans with fixed interest
rates, a hypothetical 10% change in interest rates would have no impact on our
future earnings and cash flows related to these instruments and would have an
immaterial impact on the fair value of these instruments. Our Credit Facility
is interest rate sensitive, however, we had no amount outstanding under this
facility at June 30, 2004. We have no risk associated with foreign currency
exchange rates or commodity prices. 
 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Our consolidated financial statements and independent registered public
accountants reports thereon appear beginning on page F-2. See index to such
consolidated financial statements and reports on page F-1. 
  ITEM 9.
    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE None. 
 ITEM 9A. CONTROLS AND PROCEDURES Our management, with the participation of our Chief Executive Officer and
Chief Financial Officer, have evaluated the effectiveness of our disclosure
controls and procedures as of the end of the period covered by this report.
Based on that evaluation, the Chief Executive Officer and Chief Financial
Officer have concluded that the disclosure controls and procedures are
effective. However, that conclusion should be considered in light of the
various limitations described below on the effectiveness of those controls and
procedures, some of which pertain to most if not all business enterprises, and
some of which arise as a result of the nature of our business. Our management,
including our Chief Executive Officer and our Chief Financial Officer, does not
expect that our disclosure controls and procedures will prevent all error and
all improper conduct. A control system, no matter how well conceived and
operated, can provide only reasonable, not absolute, assurance that the
objectives of the control system are met. Further, the design of a control
system must reflect the fact that there are resource constraints, and the
benefits of controls must be considered relative to their costs. Because of
the inherent limitations in all control systems, no evaluation of controls can
provide absolute assurance that all control issues and instances of improper
conduct, if any, have been detected. These inherent limitations include the
realities that judgments in decision-making can be faulty, and that breakdowns
can occur because of simple error or mistake. Additionally, controls can be
circumvented by the individual acts of some persons, by collusion of two or
more people, or by management override of the control. Further, the design of
any system of controls also is based in part upon assumptions about the
likelihood of future events, and there can be no assurance that any design will
succeed in achieving its stated goals under all potential future conditions;
over time, controls may become inadequate because of changes in conditions, or
the degree of compliance with the policies or procedures may deteriorate.
Because of the inherent limitations in a cost-effective control system,
misstatements due to error or fraud may occur and not be detected. In
addition, we depend on our HMO affiliates for certain financial and other
information that we receive concerning the medical services revenue and
expenses that we earn and incur. Because our HMO affiliates
generate that information for us we have less control over the manner in which
that information is generated. There were no changes in our internal controls
or other factors during the fourth quarter of our fiscal year, nor were there
any corrective actions required with regard to significant deficiencies and
material weaknesses. Provided with this Annual Report are certifications of our Chief Executive
Officer and our Chief Financial Officer. We are required to provide those
certifications by Section 302 of the Sarbanes-Oxley Act of 2002 and the
Securities and Exchange Commissions implementing regulations. Item 9A of this
Annual Report is the information concerning the evaluation referred to in those
certifications, and you should read this information in conjunction with those
certifications for a more complete understanding of the topics presented. 
 ITEM 9B. OTHER INFORMATION We
did not file any reports on Form 8-K during our fourth quarter ended
June 30, 2004. There is no further information to report at this
time. 28




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PART III 
 ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Management The executive officers and directors of Continucare are as follows: Name
    
    Age
    
    PositionRichard C. Pfenniger, Jr.
    
    
    49
    
    
    Chairman of the Board, Chief
Executive Officer, and PresidentFernando L. Fernandez
    
    
    43
    
    
    Senior Vice President-Finance, Chief Financial Officer,
Treasurer and SecretaryJanet L. Holt
    
    
    57
    
    
    Controller and Assistant SecretaryPatrick M. Healy
    
    
    46
    
    
    Executive Vice President-Operations and DirectorLuis H. Izquierdo
    
    
    49
    
    
    Senior Vice President-Marketing and Business DevelopmentRobert J. Cresci
    
    
    60
    
    
    DirectorPhillip Frost, M.D.
    
    
    67
    
    
    DirectorNeil Flanzraich
    
    
    60
    
    
    DirectorJacob Nudel, M.D.
    
    
    56
    
    
    DirectorA. Marvin Strait
    
    
    70
    
    
    Director
 Richard C. Pfenniger, Jr.has served as one of our directors since March
2002. In September 2002, Mr. Pfenniger was appointed Chairman of our Board of
Directors.In October 2003, he was appointed as our Chief Executive Officer
and President. Mr. Pfenniger served as the Chief Executive Officer and Vice
Chairman of Whitman Education Group, Inc. (proprietary postsecondary education)
from 1997 through June 2003. From 1994 to 1997, Mr. Pfenniger served as the
Chief Operating Officer of IVAX Corporation, and from 1989 to 1994, he served
as the Senior Vice President-Legal Affairs and General Counsel of IVAX
Corporation. Mr. Pfenniger currently serves as a director of IVAX Corporation
(pharmaceuticals). Fernando L. Fernandezwas appointed our Senior Vice President-Finance,
Chief Financial Officer, Treasurer, and Secretary in June 2004. Mr. Fernandez,
a certified public accountant, served as Senior Vice President-Finance, Chief
Financial Officer, Treasurer, and Secretary of Whitman Education Group, Inc.
from 1996 until 2003. Prior to and since his service at Whitman Education
Group, Inc., Mr. Fernandez served as Chief Financial Officer of several private
investment entities owned by Phillip Frost, M.D. Prior to 1991, Mr. Fernandez
served as Audit Manager for PricewaterhouseCoopers LLP (formerly Coopers &
Lybrand) in Miami. Janet L. Holtwas appointed as our Controller in June 2004. She served as
our Chief Financial Officer from January 2000 until June 2004. From July 1999
when she joined Continucare until her appointment as our Chief Financial
Officer, Ms. Holt served as the Vice President of Finance  Managed Care
Division. Ms. Holt served as an audit Senior Manager at Ernst & Young, LLP
from November 1997 until joining Continucare. From June 1995 to November 1997,
Ms. Holt served as the Internal Auditor for InPhyNet Medical Management, Inc.,
and she served as an audit manager with Deloitte & Touche, LLP from 1992 to
June 1995. Patrick M. Healyhas served as one of our directors since February 2000
and has served as our Executive Vice President  Operations since February
2004. He has served as President and Chief Administrative Officer and as a
member of the Board of Directors for Mayo Health Plan, Inc. since its inception
in June 1996 to December 2001. Mr. Healy served as President and Chief
Administrative Officer and as a member of the Board of Directors for MHP Health
and Life, Inc, and MHP Holding, Inc. from June 1998 to December 2001.
Previously, Mr. Healy was President and Chief Executive Officer and member of
the Board of Directors for Cleveland Clinic Florida Health Plan from its
inception in 1992 through 1996. Mr. Healy also served as a Regional Director
of Operations-Southeast Region and Executive Director Florida/Caribbean for The
Travelers Insurance Company from 1990 through 1992. 29




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Luis H. Izquierdowas appointed as Continucares Senior Vice President 
Marketing and Business Development in January 2004. Mr. Izquierdo served as
Senior Vice President and as a member of the Board of Directors for
Neighborhood Health Partnership from 2002 to 2004. Mr. Izquierdo was Senior
Vice President of Marketing and Sales for Foundation Health, Florida from 1999
through 2001. From 1997 through 1999, Mr. Izquierdo served as Senior Vice
President and Chief Marketing Officer for Oral Health Services. From 1995 to
1997, Mr. Izquierdo served as the Vice President, Corporate Marketing and Sales
for Physicians Corporation of America, and from 1992 to 1995, he served as the
Senior Vice President, Marketing and Sales for CAC-Ramsay Health Plans. Robert J. Crescihas served as one of our directors since February 2000.
He has been a Managing Director of Pecks Management Partners Ltd., an
investment management firm, since 1990. Mr. Cresci currently serves on the
boards of Sepracor, Inc. (pharmaceuticals), Luminex Corporation
(biotechnology), j2 Global Communications Inc. (telecommunications), SeraCare
Life Sciences, Inc. (pharmaceuticals), and several private companies. Phillip Frost, M.D.has served as one of our directors since January 2004.
Dr. Frost formerly served on our Board of Directors as Vice Chairman from
September 1996 until April 2002. Dr. Frost has served as the Chairman of the
Board of Directors and Chief Executive Officer of IVAX Corporation since 1987.
He served as President of IVAX Corporation from July 1991 until January 1995.
He was the Chairman of the Department of Dermatology at Mt. Sinai Medical
Center of Greater Miami, Miami Beach, Florida from 1972 to 1990. Dr. Frost was
Chairman of the Board of Directors of Key Pharmaceuticals, Inc. from 1972 to
1986. He is Chairman of the Board of Directors of IVAX Diagnostics, Inc.
(diagnostic reagent kits). He is also a director of Northrop Grumman
Corporation (aerospace) and Ladenburg Thalmann Financial Services, Inc.
(securities brokerage). He is Chairman of the Board of Trustees of the
University of Miami and a member of the Board of Governors of the American
Stock Exchange. Neil Flanzraichhas served as one of our directors since March 2002. Mr.
Flanzraich has served as the Vice Chairman and President of IVAX Corporation
since May 1998. Mr. Flanzraich served as Chairman of the Life Sciences Legal
Practices Group of Heller Ehrman White & McAuliff, a law firm, from 1995 to
1998. From 1981 to 1994, Mr. Flanzraich served in various capacities at Syntex
Corporation and as a member of the Corporate Executive Committee. From 1994 to
1995, after Syntex Corporation was acquired by Roche Holding Ltd, Mr.
Flanzraich served as Senior Vice President and General Counsel of Syntex
(U.S.A.) Inc., a Roche subsidiary. Mr. Flanzraich was Chairman of the Board of
Directors of North American Vaccine, Inc from 1989 to 2000. Mr. Flanzraich
also currently serves on the boards of IVAX Corporation, IVAX Diagnostics, Inc.
and Rae Systems, Inc. (gas detection and security monitoring systems). Jacob Nudel, M.D.has served as one of our directors since October 2002.
As the founder of MEDWerks.com Corporation, Dr. Nudel has served as their Chief
Executive Officer since 2000. From 1995 to 2000, Dr. Nudel served as Chief
Executive Officer of Allied Health Group, Inc. From 1992 to 2000, Dr. Nudel
also served as Chief Executive Officer of Florida Specialty Network, Inc. A. Marvin Straithas served as one of our directors since March 2004. Mr.
Strait presently practices as a Certified Public Accountant under the name A.
Marvin Strait, CPA. He has practiced in the field of public accountancy in
Colorado for over 40 years. Mr. Strait has served on the Board of Directors of
Colorado Technical University since 1986. He also presently serves as a member
of the Board of Trustees of the Colorado Springs Fine Arts Center Foundation,
and the Sam S. Bloom Foundation. He also presently serves as a member of the
Board of Directors and Chairman of the Audit committee of Sturm Financial
Group, Inc. and on the Community Advisory Panel of American National Bank. Mr.
Strait previously served as the Chairman of the Board of Directors of the
American Institute of Certified Public Accounts (AICPA), as President of the
Colorado Society of Certified Public Accountants and the Colorado State Board
of Accountancy, and serves as a permanent member of the AICPA Governing
Council. Officers serve at the pleasure of the board of directors, subject to the
terms of any employment agreements. See Employment Agreements. The Audit Committee The Audit Committee currently consists of Mr. Cresci, Mr. Flanzraich, Dr.
Nudel and Mr. Strait (Chairman). During a portion of Fiscal 2004, Mr.
Pfenniger and Mr. Healy served on the Audit Committee, but each of them stepped
down from the Audit Committee in connection with their employment with us, and
neither of them now serves on the Audit Committee. Mr. Strait was appointed to
the Audit Committee in March 2004. The Board has determined that all current
members of the Audit Committee are financially literate, financially
sophisticated, and independent within the meaning of the listing standards
of the AMEX and applicable SEC regulations. The Board of Directors has
determined that Mr. Strait meets the attributes of an audit committee
financial expert within the meaning of SEC regulations. 30




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##### Table of Contents



Compliance with Section 16(a) of the Securities Exchange Act of 1934 Section 16(a) of the Securities Exchange Act of 1934 requires our
directors and executive officers and persons who own more than 10% of our
outstanding common stock, to file with the Securities and Exchange Commission
(the SEC) initial reports of ownership and reports of changes in ownership of
common stock. Such persons are required by SEC regulation to furnish us with
copies of all such reports they file. To our knowledge, based solely on a review of the copies of such reports
furnished to us and written representations that no other reports were
required, we believe that all Section 16(a) filing requirements applicable to
our officers, directors and greater than 10% beneficial owners were complied
with. Code of Ethics We have adopted a Code of Conduct and Ethics applicable to our directors,
officers and employees including our Chief Executive Officer, Chief Financial
Officer and principal accounting officer. A copy of our Code of Conduct and
Ethics is available on our website www.continucare.com. We intend to post
amendments to or waivers from our Code of Conduct and Ethics (to the extent
applicable to our Chief Executive Officer, Chief Financial Officer or principal
accounting officer) on our website. Our website is not part of this Annual
Report. 
 ITEM 11. EXECUTIVE COMPENSATION AND OTHER INFORMATION Summary of Cash and Certain Other Compensation The following table sets forth certain summary information concerning
compensation paid or accrued by us to or on behalf of (i) each person who
served as our chief executive officer during Fiscal 2004, and (ii) the other
executive officers who were serving as executive officers at the end of Fiscal
2004, whose total annual salary and bonus, determined as of the end of Fiscal
2004, exceeded $100,000 (hereinafter referred to as the Named Executive
Officers). Messrs. Pfenniger and Izquierdo were not employed with us during all of
Fiscal 2004. Information regarding the compensation of Messrs. Pfenniger and
Izquierdo set forth below relates only to the portion of Fiscal 2004 during
which they were employed with us. 31




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##### Table of Contents



SUMMARY COMPENSATION TABLE Long-TermAnnual Compensation
    
    CompensationOther
    
    No. ofAnnual
    
    SecuritiesName and
    
    Fiscal
    
    Salary
    
    Bonus
    
    Compen
    
    Underlying
    
    All OtherPrincipal Position
    
    Year
    
    ($)
    
    ($)
    
    -sation
    
    Options
    
    CompensationRichard C. Pfenniger, Jr.,
    
    
    2004
    
    
    
    226,154
    
    
    
    0
    
    
    
    0
    
    
    
    1,200,000
    (1)
    
    
    0Chairman of the Board,
    
    
    2003
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0President and Chief Executive
    
    
    2002
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0OfficerSpencer J. Angel, (2)
    
    
    2004
    
    
    
    73,715
    
    
    
    0
    
    
    
    (3
    )
    
    
    0
    
    
    
    335,500
    (2)2003
    
    
    
    259,000
    
    
    
    0
    
    
    
    (3
    )
    
    
    200,000
    (4)
    
    
    02002
    
    
    
    259,000
    
    
    
    0
    
    
    
    (3
    )
    
    
    0
    
    
    
    0Janet L. Holt,
    
    
    2004
    
    
    
    137,049
    
    
    
    0
    
    
    
    (3
    )
    
    
    0
    
    
    
    0Controller(5)
    
    
    2003
    
    
    
    133,887
    
    
    
    25,000
    
    
    
    (3
    )
    
    
    0
    
    
    
    02002
    
    
    
    127,849
    
    
    
    0
    
    
    
    (3
    )
    
    
    0
    
    
    
    0Luis H. Izquierdo,
    
    
    2004
    
    
    
    101,415
    
    
    
    0
    
    
    
    (3
    )
    
    
    300,000
    (6)
    
    
    0Senior Vice President of
    
    
    2003
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0Marketing and Business
    
    
    2002
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0Development
   (1)
    
    1,200,000 stock options were awarded on October 1, 2003, vesting ratably
over three years.(2)
    
    Mr. Angel resigned as Chief Executive Officer and President in October
2003. Pursuant to the terms of Mr. Angels severance arrangements,
severance costs of $335,500 were paid or accrued in Fiscal 2004 in
connection with Mr. Angels resignation.(3)
    
    The total perquisites and other personal benefits provided is less than
10% of the total annual salary and bonus to such officer.(4)
    
    200,000 fully vested stock options were awarded on September 23, 2002.
All these options were cancelled in connection with Mr. Angels
resignation.(5)
    
    Ms. Holt stepped down as Chief Financial Officer in June 2004, but
remains with Continucare as Controller and Assistant Secretary.(6)
    
    300,000 stock options were awarded on January 5, 2004, vesting ratably
over three years. 32




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##### Table of Contents



Option Grants During Fiscal 2004 The following table sets forth certain information concerning grants of
stock options made during Fiscal 2004 to our Named Executive Officers. We did
not grant any stock appreciation rights in Fiscal 2004. Individual Option Grants in Fiscal 2004Shares ofCommon
    
    
    
    
    
    
    
    
    
    
    
    
    
    Potential Realizable Value atStock
    
    % of Total
    
    
    
    
    
    
    
    
    
    Assumed Annual Rates of Stock PriceUnderlying
    
    Granted to
    
    Option
    
    Expiration
    
    Appreciation for Option Term (1)Name
    
    Options
    
    Employees
    
    Price ($)
    
    Date
    
    5%
    
    10%Richard C.
Pfenniger, Jr.,
Chairman of the
Board,
President and Chief
Executive Officer
    
    
    1,200,000
    
    
    
    51
    %
    
    $
    0.66
    
    
    
    10/01/13
    
    
    $
    498,085
    
    
    $
    1,262,244Luis H. Izquierdo,
Senior Vice
President Marketing
and Business
Development
    
    
    300,000
    
    
    
    13
    %
    
    $
    1.51
    
    
    
    1/05/14
    
    
    $
    284,889
    
    
    $
    721,965
   (1)
    
    The dollar amounts set forth in these columns are the result of
calculations at the 5% and 10% rates set by the Securities and Exchange
Commission, and therefore are not intended to forecast possible future
appreciation, if any, of the market price of the common stock. Option Exercises in 2004 and Year End Option Values The following table sets forth information with respect to (i) the number
of unexercised options held by the Named Executive Officers as of June 30,
2004, and (ii) the value as of June 30, 2004 of unexercised in-the-money
options. Number of Securities
    
    Value of UnexercisedUnderlying Unexercised Options
    
    In-the-Money Optionsat June 30, 2004
    
    at June 30, 2004 (1)Exercisable
    
    Unexercisable
    
    Exercisable
    
    UnexercisableRichard C. Pfenniger, Jr.
    
    
    
    
    
    
    1,200,000
    
    
    $
    
    
    
    $
    1,512,000Janet L. Holt
    
    
    75,000
    
    
    
    
    
    
    $
    51,750
    
    
    
    Luis H. Izquierdo
    
    
    
    
    
    
    300,000
    
    
    $
    
    
    
    $
    123,000
  (1)
    
    Market value of shares covered by in-the-money options on June 30, 2004,
less option exercise price. Options are in-the-money if the market value
of the shares covered thereby is greater than the option exercise price. Director Compensation For Fiscal 2004, our Directors did not receive any cash compensation for
service on the Board of Directors but were reimbursed for certain expenses in
connection with attendance at Board meetings or other meetings on our behalf.
For Fiscal 2005 our non-employee Directors will receive an annual cash retainer
of $15,000. In addition, for Fiscal 2005, the Chairmen of the Nominating and
Compensation Committees will receive an additional cash retainer of $2,500 and
the Chairman of the Audit Committee will receive an additional cash retainer of
$5,000. Also, each of our non-employee Board members were granted fully vested
options to purchase 20,000 shares of common stock, and Mr. Strait was granted
additional fully vested options to purchase 20,000 shares of common stock in
connection with his appointment to the Board. Employment Agreements Prior to the termination of his employment in October 2003, Mr. Angels
employment agreement was for a one-year period, with additional one-year
automatic renewals and provided for an annual base salary of $250,000.
Additionally, he was eligible to receive a bonus equal to 7% of our earnings
before interest, taxes, depreciation and amortization in excess of $3.0 million
for the fiscal year. Mr. Angel resigned as Chief Executive Officer and
President in October 2003. Pursuant to the terms of his agreement and his 33




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##### Table of Contents



severance arrangements, Mr. Angel is, subject to certain exceptions,
prohibited from competing with Continucare for a one year period following
termination of his employment with Continucare. In connection with his
resignation, we paid Mr. Angel a lump sum severance payment of $17,500 and
agreed to continue to pay Mr. Angels base salary in installments through
September 30, 2004. In addition, the terms of Mr. Angels severance provided
that all of his outstanding stock options were cancelled in October 2003 and,
in consideration for the cancellation of his stock options, we paid Mr. Angel
an additional lump sum payment of $68,000. Mr. Pfenniger, our Chairman and Chief Executive Officer, does not have an
employment agreement. Mr. Pfenniger is employed with Continucare on an at
will basis and, for Fiscal 2004, received an annual base salary of $300,000.
Mr. Pfennigers base salary for Fiscal 2005 was increased to $315,000 by the
Compensation Committee in August 2004. In connection with his employment with
Continucare, we granted Mr. Pfenniger 1,200,000 stock options with an exercise
price of $0.66 per share, the closing price of our common stock on the date of
grant. The options vest ratably over three years. Ms. Holts employment agreement is for one-year and provides for
additional one-year automatic renewals and an annual base salary of $130,000.
Additionally, she is eligible to receive bonuses and stock option grants as
determined by the Chief Executive Officer and the Compensation Committee. The
agreement may be terminated by Continucare with or without cause at any time.
In the event Ms. Holt is terminated without cause, Ms. Holt is entitled to her
base salary for a period of six months and any unpaid accrued bonuses. Ms.
Holt may terminate the agreement upon 60 days written notice. Pursuant to the
terms of the agreement, Ms. Holt is prohibited from competing with Continucare
for a 90-day period following termination of her employment with Continucare. Compensation Committee Interlocks The following directors served as members of the Compensation Committee as
of June 30, 2004: Mr. Healy, Dr. Nudel and Mr. Cresci (Chairman). Messrs.
Flanzraich and Pfenniger were members of the Compensation Committee during a
portion of Fiscal 2004, but stepped down from the Compensation Committee in
connection with Mr. Pfennigers employment with us as Chief Executive Officer
and now neither serves on the Compensation Committee. Mr. Strait was appointed
to the Compensation Committee in March 2004. None of the current members of
the Compensation Committee was, at any time during any period of Fiscal 2004
during which they served on the Compensation Committee an employee of ours or
any of our subsidiaries. 
 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth certain information as of September 13,
2004, concerning the beneficial ownership of the common stock by:  
    
    each person known by us to be the beneficial owner of more than 5% of our outstanding common stock,
    
    each of the directors who beneficially owns our shares,
    
    the Named Executive Officers, and
    
    all of our executive officers and directors as a group. All holders listed below have sole voting power and investment power over the
shares beneficially owned by them, except to the extent such power may be
shared with such persons spouse. Name and Address
    
    Amount and Nature of
    
    Percent ofof Beneficial Owner
    
    Beneficial Ownership (1)
    
    Common Stock (2)Spencer J. Angel
    
    
    8,627
    (3)
    
    
    *5025 Collins Ave. Apt 2409
Miami, FL 33140Robert Cresci
    
    
    320,000
    (4)
    
    
    *c/o Pecks Management Partners, Ltd.
One Rockefeller Plaza
Suite 900
New York, NY 10020Neil Flanzraich
    
    
    220,000
    (5)
    
    
    *4400 Biscayne
Boulevard
Miami, FL 33137
 34




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##### Table of Contents



Name and Address
    
    Amount and Nature of
    
    Percent ofof Beneficial Owner
    
    Beneficial Ownership (1)
    
    Common Stock (2)Phillip Frost, M.D.
    
    
    22,161,601
    (6)
    
    
    44.04400 Biscayne Boulevard
Miami, FL 33137Patrick Healy
    
    
    250,000
    (7)
    
    
    *80 S.W.
8th Street
Miami, FL 33130Janet L. Holt
    
    
    75,000
    (7)
    
    
    *80 S.W. 8th Street
Miami, FL 33130Jacob Nudel, M.D.
    
    
    120,000
    (8)
    
    
    *One Isla Bahia Drive
Fort Lauderdale, FL 33316Richard C. Pfenniger, Jr.
    
    
    605,000
    (9)
    
    
    1.280 S.W. 8th Street
Miami, FL 33130A. Marvin Strait
    
    
    20,000
    (7)
    
    
    *2 North Cascade Ave. Suite 1300
Colorado Springs, CO 80903Pecks Management Partners Ltd.
    
    
    6,511,584
    (10)
    
    
    12.9One Rockefeller Plaza
Suite 1730
New York, NY 10020All directors and executive officers
    
    
    23,771,601
    
    
    
    46.4as a group (10 persons)
   * Less than one percent.(1)
    
    For purposes of this table, beneficial ownership is computed pursuant to
Rule 13d-3 under the Exchange Act; the inclusion of shares as beneficially
owned should not be construed as an admission that such shares are
beneficially owned for purposes of the Exchange Act. Under the rules of
the Securities and Exchange Commission, a person is deemed to be a
beneficial owner of a security if he or she has or shares the power to
vote or direct the voting of such security or the power to dispose of or
direct the disposition of such security. Accordingly, more than one
person may be deemed to be a beneficial owner of the same security.(2)
    
    Based on 50,300,186 shares outstanding as of September 13, 2004.(3)
    
    Includes 8,627 shares of common stock issuable upon conversion of a
convertible promissory note. Mr. Angel resigned as Chief Executive
Officer in October 2003.(4)
    
    Includes 120,000 shares of common stock underlying options that are
currently exercisable or exercisable within 60 days after September 13,
2004.(5)
    
    Includes 20,000 shares of common stock underlying options that are
currently exercisable or exercisable within 60 days after September 13,
2004.(6)
    
    Includes (i) 21,222,288 shares owned beneficially through Frost Gamma
Investments Trust; (ii) 819,313 shares beneficially owned through Frost
Nevada Limited Partnership; (iii) 100,000 shares of stock owed directly by
Dr. Frost and (iv) 20,000 shares of common stock underlying options that
are currently exercisable or exercisable within 60 days after September
13, 2004. See Certain Transactions.(7)
    
    Represents shares of common stock underlying options that are currently
exercisable or exercisable within 60 days after September 13, 2004.(8)
    
    Includes 20,000 shares of common stock underlying options that are
currently exercisable or exercisable within 60 days after September 13,
2004.(9)
    
    Includes 400,000 shares of common stock underlying options that are
currently exercisable or exercisable within 60 days after September 13,
2004.(10)
    
    The information set forth herein is based solely on the most recent
Schedule(s) 13G/A filed with the SEC by the entity and, accordingly, may
not reflect their respective holdings as of the date of this report. 35




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##### Table of Contents



ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Certain Transactions On March 30, 2004, we obtained an extension of the maturity date for our
Credit Facility until March 31, 2005. Prior to the extension of the maturity
date, the Credit Facility was personally guaranteed by Dr. Frost. In order to
obtain the extension of the maturity date, Dr. Frost was required to extend his
personal guarantee through March 31, 2005. In consideration of Dr. Frosts
personal guarantee, we issued 300,000 shares of common stock to an entity
controlled by Dr. Frost. The terms and conditions of the Credit Facility
remain substantially unchanged, except for the removal of a financial covenant
to maintain a minimum fixed charge coverage ratio. On April 22, 2004, we sold 2,333,333 shares of our common stock for $3.5
million to twelve accredited investors in a private transaction. In connection
with the transaction, Frost Nevada converted a convertible promissory note into
819,313 shares of common stock in accordance with the terms of that note. At
the time of conversion, the note bore interest at the annual rate of 9% and had
outstanding principal and unpaid accrued interest of approximately $0.8
million. 
 ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES The following table presents fees billed for professional services
rendered by Ernst & Young LLP, our independent auditors, for Fiscal 2004 and
2003. 2004
    
    2003Audit fees (a)
    
    $
    209,707
    
    
    $
    202,224Audit-related fees (b)
    
    
    
    
    
    
    40,076Tax fees (c)
    
    
    42,800
    
    
    
    43,870Other fees (d)
    
    
    
    
    
    
    19,420Total fees
    
    $
    252,507
    
    
    $
    305,590
  (a)
    
    Audit fees consist of aggregate fees billed for professional services
rendered for the audit of our annual consolidated financial statements for
the fiscal year, reviews of the financial statements included in our
quarterly reports on Form 10-Q for the fiscal year, assistance with S-3
filings and other accounting services that are normally provided by the
accountant in connection with statutory and regulatory filings or
engagements for the fiscal year including expenses.(b)
    
    Audit-related fees consist of aggregate fees billed for assurance and
related services that are reasonably related to the performance of the
audit or review of our financial statements and are not reported under
audit fees.(c)
    
    Tax fees consists of our financial statements fees billed for
professional services rendered for tax compliance, tax advice and tax
planning.(d)
    
    Other fees consist of aggregate fees billed for product or services other
than the services reported under the other named categories. Under the Audit Committees policy and applicable law, our independent
auditors are prohibited from performing any prohibited non-audit services. Our
Audit Committee has a policy to pre-approve all audit and permitted non-audit
services performed by our independent auditors and all related fees to assure
that the provision of such services does not impair the auditors independence.
Any proposed services outside the scope of those already pre-approved or
exceeding pre-approved fee levels require specific prior approval of the Audit
Committee. The Audit Committee has delegated its pre-approval authority to its
Chairman, Mr. Strait. Under the policies of our Audit Committee, Mr. Strait
must report any pre-approval decisions to the full Audit Committee at its next
scheduled meeting. 36




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##### Table of Contents



PART IV 
 ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.  (a)(1)
    
    Financial StatementsReference is made to the Index set forth on Page F-1 of this Annual Report on Form 10-K.(a)(2)
    
    Financial Statement Schedules All schedules have been omitted because they are inapplicable or the
information is provided in the consolidated financial statements,
including the notes hereto.  (a)(3)
    
    Exhibits  3.1
    
    Restated Articles of Incorporation of Company, as amended (1)3.2
    
    Restated Bylaws of Company (1)4.1
    
    Form of certificate evidencing shares of Common Stock (1)4.2
    
    Indenture, dated as of October 30, 1997, between the Company and American Stock
Transfer & Trust Company, as Trustee, relating to 8% Convertible Subordinated
Notes due 2002 (2)4.3
    
    Registration Rights Agreement, dated as of October 30, 1997, by and between the
Company and Loewenbaum & Company Incorporated (2)4.4
    
    Continucare Corporation Amended and Restated 1995 Stock Option Plan (3)4.5
    
    Amended and Restated 2000 Stock Option Plan (6)4.6
    
    Convertible Subordinated Promissory Note (7)4.7
    
    Form of Convertible Promissory Note, dated June 30, 2001 (10)4.8
    
    Amendment to Convertible Promissory Note, dated March 31, 2003, between the
Company and Frost Nevada Limited Partnership (10)4.9
    
    Form of Amendment to Convertible Promissory Note, dated March 31, 2003 (10)10.1
    
    Severance Agreement between the Company and Spencer J. Angel dated as of October
1, 2003 (11)10.2
    
    Letter agreement dated March 26, 2004 regarding Dr. Phillip Frosts guarantee of
the credit facility (12)10.3
    
    Letter agreement dated March 19, 2004 regarding extension of credit facility (12)10.4
    
    Form of Stock Purchase Agreement, dated April 22, 2004 (12)10.5
    
    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 (5)10.6
    
    Managed Care Agreement dated July 1, 1995, by and between Continucare
Corporation and Vista Healthplan of South Florida, Inc.*10.7
    
    Employment Agreement dated July 12, 1999 between Continucare Corporation and
Spencer Angel (4) **10.8
    
    Lease Agreement, dated as of the 28th day of July 1999, between Doral Park Joint
Venture, Lennar Mortgage Holdings Corporation, LNR/CREC Brickell Bayview Limited
Partnership, and Universal American Realty Corporation, as tenants-in-common,
and Continucare Corporation (5)10.9
    
    Airport Corporate Center office lease dated June 3, 2004, by and between Miami
RPFIV Airport Corporate Center Associates Limited Liability Company and
Continucare Corporation*10.10
    
    Employment Agreement dated October 1, 2001 between Continucare Corporation and
Janet L. Holt (9) ** 37




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##### Table of Contents



10.11
    
    Agreement, dated March 31, 2003, between the Company and Phillip Frost, M.D.,
Frost Gamma Investments Trust and Frost Nevada Investments Trust (10)10.12
    
    Agreement, dated March 31, 2003, between the Company and Pecks Management
Partners, Ltd. (10)10.13
    
    Agreement, dated March 31, 2003, between the Company and
Carret & Company (10)21.1
    
    Subsidiaries of the Company *23.1
    
    Consent of Ernst & Young LLP *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 * Documents incorporated by reference to the indicated exhibit to the following
filings by the Company under the Securities Act of 1933, as amended, or the
Securities Exchange Act of 1934. (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
    )
    
    Form 8-K dated October 30, 1997 and filed with the
Commission on November 13, 1997.(3
    )
    
    Schedule 14A dated December 26, 1997 and filed with
the Commission on December 30, 1997.(4
    )
    
    Form 10-K/A for the fiscal year ended June 30, 1999.(5
    )
    
    Form 10-K for the fiscal year ended June 30, 2000.(6
    )
    
    Schedule 14A dated July 28, 2004, filed July 28, 2004.(7
    )
    
    Form 8-K dated August 3, 2001, filed August 15, 2001.(8
    )
    
    Form 10-K for the fiscal year ended June 30, 2001.(9
    )
    
    Form 10-Q for the quarterly period ended September
30, 2001.(10
    )
    
    Form 10-Q for the quarterly period ended March 31,
2003.(11
    )
    
    Form 10-Q for the quarterly period ended September
30, 2003.(12
    )
    
    Form 10-Q for the quarterly period ended March 31,
2004.*
    
    
    Filed herewith**
    
    
    Management contract or compensatory plan or
arrangement.
 38




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##### Table of Contents



SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized. CONTINUCARE CORPORATIONBy:
    
    /s/ Richard C. Pfenniger, Jr.RICHARD C. PFENNIGER, JR.Chairman of the Board, Chief Executive Officer and President
 Dated: September 28, 2004 Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, this report has been signed below by the following
persons on behalf of the registrant and in the capacities and on the dates
indicated. SIGNATURE
    
    TITLE
    
    DATE/s/ Richard C. Pfenniger, Jr.

Richard C. Pfenniger, Jr.
    
    Chairman of the Board, Chief Executive
Officer, President and Director
(Principal Executive Officer)
    
    September 28, 2004/s/ Fernando L. Fernandez

Fernando L. Fernandez
    
    Senior Vice President  Finance, Chief
Financial Officer, Treasurer and Secretary
(Principal Financial and Accounting Officer)
    
    September 28, 2004/s/ Patrick M. Healy

Patrick M. Healy
    
    Executive Vice President  Operations and
Director
    
    September 28, 2004/s/ Luis H. Izquierdo

Luis H. Izquierdo
    
    Senior Vice President  Marketing and
Business Development
    
    September 28, 2004/s/ Robert J. Cresci

Robert J. Cresci
    
    Director
    
    September 28, 2004/s/ Phillip Frost, M.D.

Phillip Frost, M.D.
    
    Director
    
    September 28, 2004/s/ Neil Flanzraich

Neil Flanzraich
    
    Director
    
    September 28, 2004/s/ Jacob Nudel, M.D.

Jacob Nudel, M.D.
    
    Director
    
    September 28, 2004/s/ A. Marvin Strait

A. Marvin Strait
    
    Director
    
    September 28, 2004
 39




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##### Table of Contents



INDEX TO FINANCIAL STATEMENTS PAGEReport of Independent Registered Public Accounting Firm
    
    
    F-2Consolidated Balance Sheets as of June 30, 2004 and 2003
    
    
    F-3Consolidated Statements of Operations for the years ended June 30, 2004, 2003
and 2002
    
    
    F-4Consolidated Statements of Shareholders Equity for the years ended
June 30, 2004, 2003 and 2002
    
    
    F-5Consolidated Statements of Cash Flows for the years ended June 30, 2004, 2003
and 2002
    
    
    F-6Notes to Consolidated Financial Statements
    
    
    F-8
 F-1




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##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM The Board of Directors and Shareholders of
Continucare Corporation: We have audited the accompanying consolidated balance sheets of
Continucare Corporation as of June 30, 2004 and 2003, and the
related consolidated statements of operations, shareholders equity and cash
flows for each of the three years in the period ended June 30, 2004. These
financial statements are the responsibility of the Companys management. Our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). 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 financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Continucare
Corporation at June 30, 2004 and 2003, and the consolidated
results of its operations and its cash flows for each of the three years in
the period ended June 30, 2004, in conformity with U.S. generally accepted
accounting principles. /s/ ERNST & YOUNG LLPCERTIFIED PUBLIC ACCOUNTANTS
 West Palm Beach, Florida
September 22, 2004 F-2




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##### Table of Contents



CONTINUCARE CORPORATION
CONSOLIDATED BALANCE SHEETS June 30,2004
    
    2003ASSETSCurrent assets:Cash and cash equivalents
    
    $
    720,360
    
    
    $
    160,743Certificates of deposit, current
    
    
    101,515
    
    
    
    101,258Accounts receivable, net of allowance for doubtful
accounts of approximately $827,000 and $4,823,000
at June 30, 2004 and 2003, respectively
    
    
    29,591
    
    
    
    323,443Other receivables
    
    
    423,215
    
    
    
    410,765Due from Medicare, net
    
    
    
    
    
    
    258,930Due from HMOs, net of a liability for incurred but not
reported medical claims expense of approximately
$11,450,000 and $13,014,000 at June 30, 2004 and 2003,
respectively
    
    
    3,337,293
    
    
    
    1,414,469Prepaid expenses and other current assets
    
    
    861,215
    
    
    
    565,935Total current assets
    
    
    5,473,189
    
    
    
    3,235,543Certificates of deposit
    
    
    30,000
    
    
    
    30,000Assets related to discontinued operations
    
    
    
    
    
    
    540,398Equipment, furniture and leasehold improvements, net
    
    
    492,054
    
    
    
    430,382Goodwill
    
    
    14,342,510
    
    
    
    14,342,510Managed care contracts, net of accumulated amortization of
approximately $2,069,000 and $1,717,000 at June 30, 2004 and
2003, respectively
    
    
    1,442,858
    
    
    
    1,793,431Deferred financing costs, net of accumulated amortization of
$222,500 and $142,160 at June 30, 2004 and 2003, respectively
    
    
    662,502
    
    
    
    518,382Other assets, net
    
    
    100,483
    
    
    
    109,330Total assets
    
    $
    22,543,596
    
    
    $
    20,999,976LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    504,151
    
    
    $
    683,488Accrued expenses
    
    
    1,451,888
    
    
    
    2,283,048Due to Medicare, net
    
    
    14,645
    
    
    
    Liabilities related to discontinued operations
    
    
    208,484
    
    
    
    110,345Credit facility
    
    
    
    
    
    
    2,315,000Current portion of convertible subordinated notes payable
    
    
    
    
    
    
    233,716Current portion of long-term debt
    
    
    
    
    
    
    2,640,943Current portion of related party note payable
    
    
    8,052
    
    
    
    63,854Accrued interest payable
    
    
    710
    
    
    
    51,754Current portion of capital lease obligations
    
    
    81,163
    
    
    
    70,913Deferred revenue
    
    
    3,000,000
    
    
    
    Total current liabilities
    
    
    5,269,093
    
    
    
    8,453,061Deferred revenue
    
    
    
    
    
    
    3,850,000Capital lease obligations, less current portion
    
    
    101,177
    
    
    
    125,606Convertible subordinated notes payable, less current portion
    
    
    
    
    
    
    4,122,751Long-term debt, less current portion
    
    
    29,077
    
    
    
    1,341,947Related party note payable, less current portion
    
    
    117,717
    
    
    
    997,333Total liabilities
    
    
    5,517,064
    
    
    
    18,890,698Commitments and contingenciesShareholders equity:Common stock, $0.0001 par value: 100,000,000 shares
authorized; 53,296,379 shares issued and 50,300,186 shares
outstanding at June 30, 2004 and 45,375,194 shares issued
and 42,379,001 shares outstanding at June 30, 2003
    
    
    5,031
    
    
    
    4,239Additional paid-in capital
    
    
    69,907,973
    
    
    
    60,279,880Accumulated deficit
    
    
    (47,461,771
    )
    
    
    (52,750,140
    )Treasury stock (2,996,193 shares at June 30, 2004 and 2003)
    
    
    (5,424,701
    )
    
    
    (5,424,701
    )Total shareholders equity
    
    
    17,026,532
    
    
    
    2,109,278Total liabilities and shareholders equity
    
    $
    22,543,596
    
    
    $
    20,999,976
 The accompanying notes are an integral part of these consolidated financial statements. F-3




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##### Table of Contents



CONTINUCARE CORPORATION 
 CONSOLIDATED STATEMENTS OF OPERATIONS For the Year Ended June 30,2004
    
    2003
    
    2002Revenue:Medical services revenue, net
    
    $
    101,758,761
    
    
    $
    97,164,834
    
    
    $
    90,828,930Management fee revenue
    
    
    677,927
    
    
    
    
    
    
    
    Other income
    
    
    22,829
    
    
    
    
    
    
    
    150,000Total revenue
    
    
    102,459,517
    
    
    
    97,164,834
    
    
    
    90,978,930Operating expenses:Medical services:Medical claims
    
    
    76,333,580
    
    
    
    74,046,265
    
    
    
    69,340,067Other direct costs
    
    
    11,665,894
    
    
    
    10,696,997
    
    
    
    10,395,210Total medical services
    
    
    87,999,474
    
    
    
    84,743,262
    
    
    
    79,735,277Administrative payroll and employee benefits
    
    
    3,822,949
    
    
    
    3,681,446
    
    
    
    2,689,562General and administrative
    
    
    5,821,871
    
    
    
    6,252,347
    
    
    
    6,446,444Gain on extinguishment of debt
    
    
    (850,000
    )
    
    
    
    
    
    
    Total operating expenses
    
    
    96,794,294
    
    
    
    94,677,055
    
    
    
    88,871,283Income from operations
    
    
    5,665,223
    
    
    
    2,487,779
    
    
    
    2,107,647Other income (expense):Interest income
    
    
    4,793
    
    
    
    6,568
    
    
    
    36,124Interest expense
    
    
    (1,006,082
    )
    
    
    (956,327
    )
    
    
    (1,567,479
    )Medicare settlement related to terminated operations
    
    
    2,218,278
    
    
    
    
    
    
    
    (2,440,971
    )Income (loss) from continuing operations
    
    
    6,882,212
    
    
    
    1,538,020
    
    
    
    (1,864,679
    )Income (loss) from discontinued operations:Home health operations
    
    
    (1,666,934
    )
    
    
    (1,830,118
    )
    
    
    (1,295,310
    )Terminated IPAs
    
    
    73,091
    
    
    
    350,696
    
    
    
    (486,399
    )Loss from discontinued operations
    
    
    (1,593,843
    )
    
    
    (1,479,422
    )
    
    
    (1,781,709
    )Net income (loss)
    
    $
    5,288,369
    
    
    $
    58,598
    
    
    $
    (3,646,388
    )Basic net income (loss) per common share:Income (loss) from continuing operations
    
    $
    .16
    
    
    $
    .04
    
    
    $
    (.05
    )Loss from discontinued operations
    
    
    (.04
    )
    
    
    (.04
    )
    
    
    (.04
    )Net income (loss) per common share
    
    $
    .12
    
    
    $
    
    
    
    $
    (.09
    )Diluted net income (loss) per common share:Income (loss) from continuing operations
    
    $
    .14
    
    
    $
    .04
    
    
    $
    (.05
    )Loss from discontinued operations
    
    
    (.03
    )
    
    
    (.04
    )
    
    
    (.04
    )Net income (loss) per common share
    
    $
    .11
    
    
    $
    
    
    
    $
    (.09
    )Weighted average common shares outstanding:Basic
    
    
    43,763,835
    
    
    
    40,776,903
    
    
    
    39,634,601Diluted
    
    
    49,232,716
    
    
    
    40,776,903
    
    
    
    39,634,601
 The accompanying notes are an integral part of these consolidated financial statements. F-4




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##### Table of Contents



CONTINUCARE CORPORATION 
 CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY Common Stock
    
    AdditionalPaid-In
    
    Accumulated
    
    Treasury
    

TotalShareholdersShares
    
    Amount
    
    Capital
    
    Deficit
    
    Stock
    
    EquityBalance at June 30, 2001
    
    
    39,459,601
    
    
    $
    3,946
    
    
    $
    59,511,632
    
    
    $
    (49,162,350
    )
    
    $
    (5,424,701
    )
    
    $
    4,928,527Issuance of stock as final consideration for a
prior business combination
    
    
    175,000
    
    
    
    18
    
    
    
    (18
    )
    
    
    
    
    
    
    
    
    
    
    Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,646,388
    )
    
    
    
    
    
    
    (3,646,388
    )Balance 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
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,288,369
    
    
    
    
    
    
    
    5,288,369Balance at June 30, 2004
    
    
    50,300,186
    
    
    $
    5,031
    
    
    $
    69,907,973
    
    
    $
    (47,461,771
    )
    
    $
    (5,424,701
    )
    
    $
    17,026,532
 The accompanying notes are an integral part of these consolidated financial statements. F-5




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##### Table of Contents



CONTINUCARE CORPORATION 
 CONSOLIDATED STATEMENTS OF CASH FLOWS For the Year Ended June 30,2004
    
    2003
    
    2002CASH FLOWS FROM OPERATING ACTIVITIESNet income (loss)
    
    $
    5,288,369
    
    
    $
    58,598
    
    
    $
    (3,646,388
    )Loss from discontinued operations
    
    
    1,593,843
    
    
    
    1,479,422
    
    
    
    1,781,709Income (loss) from continuing operations
    
    
    6,882,212
    
    
    
    1,538,020
    
    
    
    (1,864,679
    )Adjustments to reconcile net income to net cash provided by
operating activities:Depreciation and amortization, including amortization of deferred
financing costs
    
    
    1,201,675
    
    
    
    1,162,034
    
    
    
    2,317,906Provision for bad debts
    
    
    104,296
    
    
    
    44,333
    
    
    
    65,668Medicare settlement related to terminated operations
    
    
    (2,218,278
    )
    
    
    
    
    
    
    Loss (gain) on disposal of property and equipment and release
from asset related liabilities
    
    
    
    
    
    
    500
    
    
    
    (28,642
    )Director compensation paid through the issuance of restricted
common stock
    
    
    
    
    
    
    123,000
    
    
    
    Gain on extinguishment of debt
    
    
    (850,000
    )
    
    
    
    
    
    
    Changes in operating assets and liabilities, excluding the effect
of disposals:Accounts receivable
    
    
    189,556
    
    
    
    (272,809
    )
    
    
    (79,503
    )Prepaid expenses and other current assets
    
    
    (295,280
    )
    
    
    (24,422
    )
    
    
    (242,061
    )Other receivables
    
    
    (12,450
    )
    
    
    423,462
    
    
    
    (70,590
    )Other assets
    
    
    3,763
    
    
    
    (29,629
    )
    
    
    (6,641
    )Accounts payable and accrued expenses
    
    
    (1,010,497
    )
    
    
    (114,317
    )
    
    
    (399,152
    )Due from HMOs, net
    
    
    (1,922,824
    )
    
    
    384,182
    
    
    
    (1,158,598
    )Due to/from Medicare, net
    
    
    273,575
    
    
    
    (137,695
    )
    
    
    3,118,054Accrued interest payable
    
    
    (51,044
    )
    
    
    41,046
    
    
    
    (6,995
    )Net cash provided by continuing operations
    
    
    2,294,704
    
    
    
    3,137,705
    
    
    
    1,644,767Net cash used in discontinued operations
    
    
    (998,872
    )
    
    
    (1,933,360
    )
    
    
    (1,424,262
    )Net cash provided by operating activities
    
    
    1,295,832
    
    
    
    1,204,345
    
    
    
    220,505CASH FLOWS FROM INVESTING ACTIVITIESProceeds from disposal of property and equipment
    
    
    
    
    
    
    500
    
    
    
    Purchase of certificate of deposit
    
    
    (30,000
    )
    
    
    (70,000
    )
    
    
    Proceeds from maturity of certificates of deposit
    
    
    29,743
    
    
    
    99,555
    
    
    
    26,187Purchase of property and equipment
    
    
    (144,585
    )
    
    
    (170,273
    )
    
    
    (185,599
    )Net cash used in continuing operations
    
    
    (144,842
    )
    
    
    (140,218
    )
    
    
    (159,412
    )Net cash (used in) provided by discontinued operations
    
    
    (938
    )
    
    
    15,751
    
    
    
    31,086Net cash used in investing activities
    
    
    (145,780
    )
    
    
    (124,467
    )
    
    
    (128,326
    )
 Continued on next page. F-6




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##### Table of Contents



CONTINUCARE CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) For the Year Ended June 30,2004
    
    2003
    
    2002CASH FLOWS FROM FINANCING ACTIVITIESProceeds from issuance of stock in private placement transaction
    
    
    3,464,609
    
    
    
    
    
    
    
    Payments on convertible subordinated notes
    
    
    (233,716
    )
    
    
    (273,896
    )
    
    
    (273,897
    )Payments on related party notes
    
    
    (35,953
    )
    
    
    (63,853
    )
    
    
    (63,854
    )Principal repayments under capital lease obligation
    
    
    (76,000
    )
    
    
    (112,256
    )
    
    
    (106,249
    )Payment of deferred financing costs
    
    
    (15,000
    )
    
    
    (15,000
    )
    
    
    (15,000
    )Proceeds from exercise of stock options
    
    
    351,370
    
    
    
    
    
    
    
    Net (decrease) increase in credit facility
    
    
    (2,315,000
    )
    
    
    
    
    
    
    1,815,000Advances from HMOs
    
    
    
    
    
    
    75,000
    
    
    
    Payments on advances from HMOs
    
    
    
    
    
    
    (75,000
    )
    
    
    (450,000
    )Third party assumption of capital lease obligation
    
    
    
    
    
    
    (1,789
    )
    
    
    Repayments to Medicare per agreement
    
    
    (1,730,745
    )
    
    
    (632,751
    )
    
    
    (770,745
    )Net cash (used in) provided by continuing operations
    
    
    (590,435
    )
    
    
    (1,099,545
    )
    
    
    135,255Net cash used in discontinued operations
    
    
    
    
    
    
    
    
    
    
    (418,494
    )Net cash used in financing activities
    
    
    (590,435
    )
    
    
    (1,099,545
    )
    
    
    (283,239
    )Net increase (decrease) in cash and cash equivalents
    
    
    559,617
    
    
    
    (19,667
    )
    
    
    (191,060
    )Cash and cash equivalents at beginning of fiscal year
    
    
    160,743
    
    
    
    180,410
    
    
    
    371,470Cash and cash equivalents at end of fiscal year
    
    $
    720,360
    
    
    $
    160,743
    
    
    $
    180,410SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING
TRANSACTIONS:Stock issued for deferred financing costs
    
    $
    870,000
    
    
    $
    645,541
    
    
    $
    Stock issued upon conversion of subordinated notes payable
    
    $
    4,043,441
    
    
    $
    
    
    
    $
    Stock issued upon conversion of related party note payable
    
    $
    899,465
    
    
    $
    
    
    
    $
    Note payable issued for refunds due to Medicare for overpayments
    
    $
    
    
    
    $
    694,800
    
    
    $
    3,267,108Note payable canceled due to settlement of cost report reopening
    
    $
    
    
    
    $
    222,574
    
    
    $
    Purchase of furniture and fixtures with proceeds of capital lease
obligations
    
    $
    61,820
    
    
    $
    167,258
    
    
    $
    48,784SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:Cash paid for income taxes
    
    $
    
    
    
    $
    
    
    
    $
    Cash paid for interest
    
    $
    563,750
    
    
    $
    325,337
    
    
    $
    266,945
 The accompanying notes are an integral part of these consolidated financial statements. F-7




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##### Table of Contents



CONTINUCARE CORPORATION 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - GENERAL Continucare Corporation (Continucare or the Company), is a mixed model
provider of primary care physician services on an outpatient basis in Florida.
The Company provides medical services to patients through employee physicians,
nurses and nurses aides. Additionally, the Company provides practice
management services to independent physician affiliates (IPAs).
Substantially all of the Companys net medical services revenues are derived
from managed care agreements with two health maintenance organization, Humana
Medical Plans, Inc. (Humana) and Vista Healthplan of South Florida, Inc. and
its affiliated companies (Vista) (collectively, the HMOs). The Company was
incorporated in 1996 as the successor to a Florida corporation formed earlier
in 1996. In an effort to streamline operations and stem operating losses, effective
January 1, 2003, the Company terminated the Medicare and Medicaid lines of
business for all of the IPA physician contracts associated with one HMO, which
consisted of 29 physicians at the time of the termination. Additionally, in
December 2003, the Company implemented a plan to dispose of its home health
operations. The home health disposition occurred in three separate
transactions and was concluded on February 7, 2004. As a result of these
transactions, the operations of the terminated IPAs and the home health
operations are shown as discontinued operations. (See Note 3.) During the year ended June 30, 2004, the Companys claims loss ratio (medical
claims expense expressed as a percentage of medical services revenue) improved
due in part to an increase in revenue from higher per member premiums for
Medicare members resulting from the Medicare Prescription Drug Improvement and
Modernization Act of 2003 (the Medicare Modernization Act) and the increased
phase-in of the Medicare risk adjustment program. In response to the Medicare
Modernization Act, the HMOs enhanced benefits offered to Medicare members. The
Company anticipates that these benefit changes will result in an increase in
medical claims expense and may result in an increase in the claims loss ratio
in future periods. Increases in the claims loss ratio could reduce the
Companys profitability and cash flows. The Company cannot predict what
impact, if any, these developments may have on its results of operations. In addition to terminating and disposing of unprofitable operations, the
Company entered into various transactions in Fiscal 2004 in order to improve
its financial position. Effective March 30, 2004, the Company obtained an
extension of the maturity date for its Credit Facility until March 31, 2005.
Prior to the extension of the maturity date, the Credit Facility was personally
guaranteed by Dr. Phillip Frost, a principal shareholder of the Company and
member of the Board of Directors. In order to obtain the extension of the
maturity date, Dr. Frost was required to renew his personal guarantee. In
consideration of the renewal of Dr. Frosts personal guarantee, the Company
issued 300,000 shares of restricted common stock to an entity controlled by Dr.
Frost. The terms and conditions of the Credit Facility remain substantially
unchanged, except for the removal of a financial covenant that previously
required the Company to maintain a minimum fixed charge coverage ratio. (See
Note 6.) On April 12, 2004, the Company called the outstanding principal balance of
approximately $3.9 million plus accrued interest of its Convertible
Subordinated Notes Payable (the Notes) for redemption in accordance with
their terms. The terms allowed for the Noteholders right to convert the Notes
prior to the redemption date into shares of the Companys common stock at a
conversion price of $1.00 per share. On May 12, 2004, all Noteholders
converted their Notes and received 3,922,538 shares of common stock
representing the conversion and cancellation of the entire outstanding
principal balance of the Notes and the unpaid accrued interest through the
conversion date. (See Note 5.) On April 22, 2004, the Company sold 2,333,333 shares of its common stock for
$3.5 million to twelve accredited investors in a private transaction. The
proceeds were used to retire approximately $1.4 million of long-term debt
bearing interest at rates ranging from 12.625% to 13.875% (see Note 6), to
reduce the balance outstanding under
the Credit Facility and for general corporate purposes. In connection with the
transaction, Frost Nevada Investment Trust (Frost Nevada), an entity
controlled by Dr. Frost, converted a convertible promissory note having an F-8




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CONTINUCARE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) outstanding principal balance and unpaid accrued interest of approximately $0.9
million into approximately 820,000 shares of common stock in accordance with
the terms of that note. (See Note 5.) NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES A summary of significant accounting policies followed by the Company is as
follows: Principles of Consolidation The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries. All significant intercompany transactions and
balances have been eliminated in consolidation. Accounting Estimates The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States (generally
accepted accounting principles) requires management to make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenues,
and expenses. Because of the inherent uncertainties of this process, actual
results could differ from those estimates. Such estimates include the
recognition of revenue, the recoverability of intangible assets, the
collectibility of receivables, and the accrual for incurred but not reported
(IBNR) claims. Fair Value of Financial Instruments The Companys financial instruments consist mainly of cash and cash
equivalents, certificates of deposit, accounts receivable, accounts payable,
related party notes payable, long-term debt, and capital lease obligations. The
carrying amounts of the Companys cash and cash equivalents, accounts
receivable, and accounts payable approximate fair value due to the short-term
nature of these instruments. At June 30, 2003, the fair value of the convertible subordinated notes payable
was $1,643,000, based on the market value of the Companys common stock. At June 30, 2004 and 2003, the fair value of the related party notes payable
was $241,000 and $383,000, respectively, based on the market value of the
Companys common stock. At June 30, 2004 and 2003, the carrying value of the Companys long term debt
and capital lease obligations approximates fair value based on the terms of the
obligations. The Company has imputed interest on non-interest bearing debt
using an incremental borrowing rate of 8%. Cash and Cash Equivalents The Company defines cash and cash equivalents as those highly-liquid
investments purchased with an original maturity of three months or less. Certificates of Deposit Certificates of deposit have original maturities of greater than three months
and are pledged as collateral in support of various stand-by letters of credit
issued as security for various lease and insurance policies. Accounts Receivable Accounts receivable result primarily from medical services provided to patients
on a fee-for-service basis. Fee-for-service amounts are paid by government
sponsored health care programs (primarily Medicare and Medicaid), insurance
companies, self-insured employers and patients. Accounts receivable include an allowance for contractual adjustments, charity
and other adjustments. Contractual adjustments arose from the Companys former
home health operations which entered into certain contracts with insurance
companies or other payors to provide services at rates which are less than its
standard charges. The contractual adjustment was known at the time services
were provided and recorded at the same time that revenue, based on the
Companys standard rates, is recorded. Revenue is shown net of the contractual
adjustment on the income statement. We completed the disposition of our home
health operations on February 7, 2004. F-9




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CONTINUCARE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Due from HMOs The HMOs pay medical claims and other costs on the Companys behalf. Based on
the terms of the contract with the HMOs, the Company receives a net payment
from the HMOs that is calculated by offsetting revenue earned with medical
claims expense, calculated as claims paid on the Companys behalf plus the
HMOs estimate of claims incurred but not reported. Therefore, the amounts due
from HMOs are presented in the balance sheet net of the estimated amounts for
incurred but not reported medical claims. Equipment, Furniture and Leasehold Improvements Equipment, furniture and leasehold improvements are stated at cost.
Depreciation is computed using the straight-line method over the estimated
useful lives of the related assets, which range from three to five years.
Leasehold improvements are amortized over the underlying assets useful lives
or the term of the lease, whichever is shorter. Repairs and maintenance costs
are expensed as incurred. Improvements and replacements are capitalized. Goodwill and Other Intangible Assets Effective July 1, 2001, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 142, Goodwill and Other Intangible Assets (SFAS No.
142). Under SFAS No. 142, goodwill and intangible assets with indefinite
useful lives are reviewed annually for impairment, or more frequently if
certain indicators arise. Intangible assets with definite useful lives are
amortized over their respective estimated useful lives to their estimated
residual values, and also reviewed for impairment annually, or more frequently
if certain indicators arise, in accordance with SFAS No. 144, Accounting for
the Impairment or Disposal of Long-Lived Assets (SFAS No. 144). Indicators
of a permanent impairment include, among other things, significant adverse
changes in legal factors or the business climate, 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 a business that is to be
sold. As the Company operates in a single segment of business, that of managing the
provision of outpatient health care and health care related services in the
State of Florida, management has determined that the Company has a single
reporting unit and performs the impairment test for goodwill on an enterprise
level. In performing the impairment test, the fair value of the Company, as
determined by the current market value of the common stock, is compared to the
current carrying value of the total net assets, including goodwill and
intangible assets. The Company performs the annual impairment test on
May 1st
of each year. Should it be determined that an indicator of impairment has
occurred, such as those noted above, the Company would be required to perform
an additional impairment test which could result in the determination that a
portion of the intangible assets are impaired and must be written-off.
Depending on the market value of the common stock at the time that an
impairment test is required, there is a risk that a portion of the intangible
assets would be considered impaired and must be written-off during that period.
No impairment charges were required at June 30, 2004, 2003 or 2002. F-10




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CONTINUCARE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The managed care contracts
relate to the value of certain amendments to a managed care agreement
entered into with one of the Companys HMOs. The amendments,
among other things, extended the term of the original agreement with
the HMO from six to ten years and modified for the Companys
benefit the value of the Medicare premium received by the Company. In
consideration of these amendments, the Company gave the HMO a
$3.9 million promissory note. (See Note 2). The managed care
contracts are subject to amortization and are being amortized over a
weighted-average amortization period of 9.6 years. Total amortization expense
for intangible assets subject to amortization was approximately $353,000,
$360,000 and $691,000 during Fiscal 2004, 2003 and 2002, respectively. The
estimated aggregate amortization expense will be approximately $355,000 for
each of the five succeeding fiscal years. Deferred Financing Costs Expenses incurred in connection with the Credit Facility and the guarantee
related to the Credit Facility have been deferred and are being amortized using
the straight-line method which approximates the interest method over the life
of the facility and the guarantee. (See Note 5.) Extinguishments of Debt In April 2002, the Financial Accounting Standards Board issued SFAS No. 145
(SFAS No. 145), which, among other things, rescinded SFAS No. 4, Reporting
Gains and Losses from Extinguishment of Debt (SFAS No. 4). Previously,
under SFAS No. 4, all gains and losses from extinguishments of debt were
required to be aggregated and, if material, classified as an extraordinary item
in the statement of operations. SFAS No. 145 requires that gains and losses
from extinguishments of debt be classified as extraordinary items only if they
meet the criteria in APB Opinion No. 30, Reporting the Results of
OperationsReporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions
(Opinion No. 30). Any gain or loss on extinguishments of debt that were
presented as extraordinary items in prior periods but which do not qualify for
classification as an extraordinary item under Opinion No. 30, are to be
reclassified. Companies were required to adopt SFAS No. 145 in fiscal years
beginning after May 15, 2002 but could elect to early adopt. The Company elected to adopt the provisions of SFAS No. 145 during the fourth
quarter of Fiscal 2002. The Company has reviewed the extinguishments of debt
that were presented as extraordinary items in prior periods and determined that
they do not meet the criteria for such classification under SFAS No. 145 and
Opinion No. 30. As such, all extinguishments of debt in prior periods have
been reclassified and included in Loss/Income from Operations in the
Consolidated Statements of Operations. Deferred Revenue In April 2003, the Company executed a Physician Group Participation Agreement
with Humana (the Humana PGP Agreement). Pursuant to the Humana PGP
Agreement, the Company agreed to assume certain management responsibilities on
a non-risk basis for Humanas Medicare, commercial and Medicaid members
assigned to selected primary care physicians in Miami-Dade and Broward Counties
of Florida. Revenue from this contract consists of a monthly management fee
intended to cover the costs of providing these services. Simultaneously with
the execution of the Humana PGP Agreement, the Company restructured the terms
of a $3.9 million contract modification note with Humana. Pursuant to the
restructuring, the contract modification note was cancelled. The Humana PGP
Agreement expires in April 2005 and contains a provision for liquidated damages
in the amount of $4.0 million, which can be asserted by Humana in the event
that (i) continued participation by the Company under this agreement may affect
adversely the health, safety or welfare of a member or bring Humana or its
provider networks into disrepute; (ii) the Company engages in or acquiesces to
any act of bankruptcy, receivership or reorganization; (iii) the Company is
excluded from participation in any federal health care program; (iv) Humana
determines that the Company has not used its best efforts to perform under the
agreement; or (v) the Company materially breaches the agreement. Because there were contingent circumstances under which future payments of
liquidated damages to Humana could equal the amount of debt forgiven, the $3.9
million gain that otherwise would have been recognized from the extinguishment
of the debt in the fourth quarter of Fiscal 2003 was deferred. Under the terms
of the Humana PGP Agreement, if the Company remains in compliance with terms of
the agreement, Humana, at its option, may
reduce the liquidated damages at specified dates during the term of the Humana
PGP Agreement. To the extent that Humana reduces the maximum amount of
liquidated damages, a portion of the deferred gain will be recognized in a
manner consistent with the reduction in the liquidated damages. In November
2003, the Company was notified that the maximum amount of liquidated damages
had been reduced to $3.5 million, and again in May 2004, the Company was
notified that the maximum amount of liquidated damages had been further reduced
to $3.0 million. Accordingly, the Company recognized $850,000 of the deferred
gain on extinguishment of debt in Fiscal 2004. At the expiration F-11




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CONTINUCARE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) of the term of the Humana PGP Agreement, the liquidated damage provision will
lapse and the Company will recognize any remaining portion of the deferred
gain. Accounting for Stock-Based Compensation The Company follows Accounting Principles Board Opinion No. 25, (APB No. 25)
Accounting for Stock Issued to Employees and related Interpretations in
accounting for its employee stock options. Under APB No. 25, when the exercise
price of the Companys employee stock options equals or exceeds the market
price of the underlying stock on the date of grant, no compensation expense is
recognized (see Note 10). Stock options issued to independent contractors or consultants are accounted
for in accordance with SFAS No. 123 (SFAS No. 123), Accounting for
Stock-Based Compensation. Although the Company follows APB No. 25 for its employee stock options, SFAS
No. 148, Accounting for Stock Based CompensationTransition and Disclosure,
requires the Company to disclose pro forma results of operations as if the
Companys stock options had been accounted for using the fair value provisions
of SFAS No. 123. The Companys pro forma information follows: Year Ended June 30,2004
    
    2003
    
    2002Net income (loss) as reported
    
    $
    5,288,369
    
    
    $
    58,598
    
    
    $
    (3,646,388
    )Deduct:Total stock-based employee
compensation determined under SFAS No. 123 for
all awards
    
    
    (375,327
    )
    
    
    (120,168
    )
    
    
    Pro forma
    
    $
    4,913,042
    
    
    $
    (61,570
    )
    
    $
    (3,646,388
    )Basic net income (loss) per share:As reported
    
    $
    .12
    
    
    $
    
    
    
    $
    (.09
    )Pro forma
    
    $
    .11
    
    
    $
    
    
    
    $
    (.09
    )Diluted net income (loss) per share:As reported
    
    $
    .11
    
    
    $
    
    
    
    $
    (.09
    )Pro forma
    
    $
    .11
    
    
    $
    
    
    
    $
    (.09
    )
 Earnings per Share Basic earnings per share is computed by dividing net income or loss by the
weighted average common shares outstanding for the period. Diluted earnings per
share reflects the potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into common stock
or resulted in the issuance of common stock that then shared in the earnings of
the entity. Revenue Recognition The Company provides services to patients on either a fixed monthly fee
arrangement with HMOs or under a fee for service arrangement. Revenue is
recorded in the period services are rendered as determined by the respective
contract. Under the Companys full risk contracts with Humana and Vista, the Company
receives a fixed monthly fee from the HMOs for each patient that chooses one of
the Companys physicians as their primary care physician in exchange for the
Company assuming responsibility for the provision of all necessary medical
services, even those it does not provide directly. The fixed monthly fee is
typically based on a percentage of the premium received by the HMOs from
various payor sources. Total medical services net revenue from continuing
operations relating to Humana approximated 75%, 73% and 74% for Fiscal 2004,
2003 and 2002, respectively. Total medical services net revenue from
continuing operations related to Vista approximated 25%, 23% and 21% for Fiscal
2004, 2003 and 2002, F-12




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CONTINUCARE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) respectively. To the extent that patients require more frequent or expensive
care than was anticipated by the Company, revenue to the Company under a
contract may be insufficient to cover the costs of care provided. Under our limited risk and no-risk contracts with HMOs, we receive a capitation
fee or management fee based on the number of patients for which we are
providing services on a monthly basis. The capitation fee or management fee is
recorded as revenue in the period in which services are provided as determined
by the respective contract. When it is probable that expected future health care costs and maintenance
costs under a contract or group of existing contracts will exceed anticipated
capitated revenue on those contracts, the Company recognizes losses on its
prepaid health care services with HMOs. No contracts were considered loss
contracts at June 30, 2004 because the Company has the right to terminate
unprofitable physicians and close unprofitable centers under its managed care
contracts. Medical Service Expense The Company contracts with or employs various health care providers to provide
medical services to its patients. Primary care physicians are compensated on
either a salary or capitation basis. For patients enrolled under full risk
managed care contracts, the cost of specialty services are paid on either a fee
for service, per diem or capitation basis. The cost of health care services provided or contracted for under full risk
managed care contracts is accrued in the period in which services are provided.
In addition, the Company provides for an estimate of the related liability for
medical claims incurred but not yet reported based on historical claims
experience and current factors such as inpatient utilization and benefit
changes provided under HMO plans. Estimates are adjusted as changes in these
factors occur and such adjustments are reported in the year of determination.
To further corroborate our estimate of medical claims, an independent actuarial
calculation is performed on a quarterly basis. Reinsurance (stop-loss insurance) Reinsurance premiums are reported as a health care cost and are included in
medical service expense in the accompanying Consolidated Statements of
Operations. Reinsurance recoveries are reported as a reduction of related
health care costs. Recent Accounting Pronouncements In January 2003, the FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities, an Interpretation of ARB No. 51(FIN No. 46). In December 2003, the FASB issued Interpretation No. 46R (FIN No. 46R), a
revision to FIN No. 46. FIN No. 46R clarifies some of the provisions of FIN No.
46 and exempts certain entities from its requirements. FIN No. 46R is effective
at the end of the first interim period ending after March 15, 2004. The
provisions of FIN No. 46R, which will become applicable for the Company in the
first quarter of fiscal 2005, is not expected to have an impact on
the Company since the Company has no variable interest entities. Reclassifications Certain prior year amounts have been reclassified to conform with the current
year presentation. NOTE 3  DISCONTINUED OPERATIONS In an effort to streamline operations and stem anticipated operating losses,
effective January 1, 2003, the Company terminated the Medicare and Medicaid
lines of business for all of the independent physicians affiliates associated
with one HMO. The terminated IPAs, which consisted of 29 physicians at the time
of the termination and is shown as discontinued operations, contributed
approximately $4.5 million in revenue and generated operating income of F-13




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CONTINUCARE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) approximately $351,000 in Fiscal 2003. Severance costs and other exit costs
resulting from the terminated IPAs totaled less than $10,000 and were paid
prior to June 30, 2003. At June 30, 2003, liabilities related to discontinued
operations of approximately $110,000 consisted primarily of net amounts due to
the HMO for medical claims incurred by the terminated IPAs prior to January 1,
2003 and other payables which arose during the ordinary course of business. On December 16, 2003, the Company announced that it would dispose of its home
health operations. The disposition occurred in transactions with three
entities that acquired substantially all of the existing home health operations
in separate transactions that concluded on February 7, 2004. In two of the
transactions, the employees and patients of the Companys Medicare certified
home health agencies in Broward and Miami-Dade Counties of Florida were
transferred to the acquirer and no assets or liabilities were transferred. In
the third transaction, the Company sold the stock of its private duty home
health agency subsidiary for a cash purchase price of $9,000. The Company
retained all of the related accounts receivable, as well as all obligations for
payables which existed as of the date of the sale. In accordance with
Statement of Financial Accounting Standard No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets, the home health operations are
shown as discontinued operations. As a result of the decision to dispose of
its home health operations, the Company assessed the recoverability of the
long-lived assets associated with the home health operations and recorded a
disposal charge of $0.5 million during Fiscal 2004, which consisted of the
following: Goodwill
    
    $
    320,882Equipment, furniture and leasehold improvements
    
    
    111,640Other
    
    
    24,868$
    457,390
 The home health operations contributed $3.1 million, $4.2 million, and $4.5
million in revenue and generated operating losses of $1.7 million, $1.8
million, and $1.3 million during the three years ended June 30, 2004, 2003 and
2002, respectively, before any corporate overhead allocation or interest
expense. Approximately 10 employees were terminated as a result of these transactions.
In accordance with Statement of Financial Accounting Standard No. 146, (SFAS
No. 146) Accounting for Costs Associated with Exit or Disposal Activities,
the Company recorded $0.2 million of costs for severance payments and accrued
for lease obligations in the third quarter of Fiscal 2004. The remaining loss
incurred during Fiscal 2004 related to the operations of the home health
operations prior to February 7, 2004 and the cost of winding up home health
activities, including billing and collection of outstanding accounts
receivables. NOTE 4  EQUIPMENT, FURNITURE AND LEASEHOLD IMPROVEMENTS Equipment, furniture and leasehold improvements are summarized as follows: June 30,
    
    Estimated Useful Lives2004
    
    2003
    
    (in years)Furniture, fixtures and equipment
    
    $
    2,138,529
    
    
    $
    1,965,788
    
    
    
    3-5Furniture and equipment under capital lease
    
    
    406,128
    
    
    
    399,119
    
    
    
    5Leasehold improvements
    
    
    150,943
    
    
    
    124,289
    
    
    
    52,695,600
    
    
    
    2,489,196Less accumulated depreciation
    
    
    (2,203,546
    )
    
    
    (2,058,814
    )$
    492,054
    
    
    $
    430,382
 F-14




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CONTINUCARE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Depreciation expense for the years ended June 30, 2004, 2003 and 2002 was
approximately $230,000, $204,000 and $281,000, respectively. The Company has entered into various noncancellable leases for certain
furniture and equipment that are classified as capital leases. The leases are
payable over 3 to 5 years at incremental borrowing rates ranging from 8% to 11%
per annum. Accumulated amortization for assets recorded under capital lease
agreements was approximately $299,000 and $303,000 at June 30, 2004 and 2003,
respectively. Amortization of assets recorded under capital lease agreements
was approximately $56,000, $99,000 and $98,000 for the years ended June 30,
2004, 2003 and 2002, respectively, and is included in depreciation expense for
all years presented. Future minimum lease payments under all capital leases are as follows: For the year ending June 30,2005
    
    $
    96,5842006
    
    
    81,1142007
    
    
    34,0842008
    
    
    4,4192009
    
    
    216,201Less amount representing imputed interest
    
    
    33,861Present value of obligations under capital lease
    
    
    182,340Less current portion
    
    
    81,163Long-term capital lease obligations
    
    $
    101,177
 NOTE 5  CONVERTIBLE SUBORDINATED NOTES PAYABLE AND RELATED PARTY NOTE PAYABLE On October 30, 1997, the Company issued $46.0 million of 8% Convertible
Subordinated Notes Payable originally due on October 31, 2002 (the Original
Notes). Through a series of repurchases and restructurings in Fiscal 2000,
2001 and 2002, the holders of the Original Notes received new Convertible
Subordinated Notes Payable on modified terms negotiated between the Company and
the holders in exchange for their Original Notes, and new notes (the Related
Party Notes) were issued to Frost Nevada Limited Partnership, an entity
controlled by Dr. Frost, and subsequently transferred to Frost Nevada
Investments Trust, another entity controlled by Dr. Frost (Frost Nevada), and
a group of six investors. Effective March 31, 2003, the Company further modified the terms of the Notes
(the Fiscal 2003 Note Modification) to, among other things, extend the
principal payment of $1.1 million, which was originally due on October 31,
2003, to October 31, 2006. In consideration for the Fiscal 2003 Note
Modification, the Company issued an aggregate of 344,400 shares of restricted
stock to the Noteholders and increased the annual interest rate on the deferred
principal payment of $1.1 million from 7% to 9%. The shares issued, which
were valued at $120,541 based on the closing price of the Companys common
stock on March 31, 2003, were recorded as a deferred financing cost and were
being amortized over the remaining term of the Notes. The additional interest
expense resulting from the Fiscal 2003 Note Modification on the deferred
principal payment was recorded as the interest became due and payable. On April 12, 2004, the Company called the Notes for redemption in accordance
with their terms, subject to the Noteholders right to convert the Notes prior
to the redemption date into shares of the Companys common stock at a
conversion price of $1.00 per share. On May 12, 2004 all Noteholders converted
the Notes (the Fiscal 2004 Note Conversion) and received 3,922,539 shares of
common stock representing the conversion and cancellation of the entire
outstanding principal balance of the Notes and unpaid accrued interest through
the conversion date . As a result of the conversion of the Notes, the Company reclassified the
outstanding principal balance of the Notes and the interest due in future
periods that had been recorded during prior restructurings in accordance with
Statement of Financial Accounting Standards No. 15 (SFAS No. 15), Accounting
by Debtors and Creditors for Troubled F-15




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CONTINUCARE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Debt Restructurings of $4.1 million, offset by the write off of $87,000 in
unamortized deferred financing costs, to paid-in capital. In connection with the April 22, 2004 private placement of the Companys common
stock discussed in Note 1, Frost Nevada converted a convertible promissory note
that was included in Related Party Notes which had an outstanding principal
balance and unpaid accrued interest of approximately $0.9 million into
approximately 820,000 shares of common stock in accordance with the terms of
that note. The Company reclassified the outstanding principal balance of the
Frost Nevada Note and the interest due in future periods that had been recorded
in accordance with SFAS No. 15 of $0.9 million to paid-in capital. NOTE 6  CREDIT FACILITY AND LONG-TERM DEBT The following long-term debt was outstanding as of June 30, 2004 and 2003: 2004
    
    2003Credit facility
    
    $
    
    
    
    $
    2,315,000Outstanding notes
    
    
    29,077
    
    
    
    3,982,89029,077
    
    
    
    6,297,890Less current portion
    
    
    
    
    
    
    4,955,943Long-term
    
    $
    29,077
    
    
    $
    1,341,947
 Credit Facility- The Credit Facility provides for a revolving loan to the
Company of $3.0 million. Effective March 30, 2004, the Company obtained an
extension of the maturity date for the Credit Facility until March 31, 2005.
Prior to the extension of the maturity date, the Credit Facility was personally
guaranteed by Dr. Frost. In order to obtain the extension of the maturity date,
Dr. Frost was required to renew his personal guarantee. In consideration of Dr.
Frosts reaffirmation of his personal guarantee, the Company issued 300,000
shares of common stock to an entity controlled by Dr. Frost. The shares of
common stock issued were valued at $870,000 based on the market price of the
Companys common stock on March 26, 2004, the date on which the guarantee was
renewed. This amount has been recorded as deferred financing costs and will be
amortized through March 31, 2005. The terms of the Credit Facility remained
substantially unchanged, except for the removal of a financial covenant that
previously required the Company to maintain a minimum fixed charge coverage
ratio. At June 30, 2004, there was no outstanding principal balance and outstanding
interest payable on the Credit Facility was $710. Interest under the Credit
Facility is payable monthly at 2.9% plus the 30-day Dealer Commercial Paper
Rate, which was 1.22% at June 30, 2004. In addition to Dr. Frosts personal
guarantee, all assets of the Company serve as collateral for the Credit
Facility. As discussed in Note 1, the Company used the proceeds from the sale
of 2,333,333 shares of its common stock to reduce the balance outstanding under
the Credit Facility in the fourth quarter of Fiscal 2004. Outstanding NotesIn conjunction with its home health operations, the Company
entered into 15 repayment agreements (the Repayment Agreements) with a
governmental agency with an outstanding principal balance of approximately
$1,683,000 as of June 30, 2003. These Repayments Agreements resulted from
various overpayments received by the Company for expenses that were expected to
be generated in conjunction with home health patient care activities. Two of
the 15 Repayment Agreements were non-interest bearing. The interest rates on
the 13 Repayment Agreements ranged from 12.625% to 13.875%. These Repayment
Agreements were retired on April 27, 2004 using the proceeds from the private
stock transaction as discussed in Note 1. During Fiscal 2004, we recorded other income of $2.2 million relating to the
settlement of an alleged Medicare obligation. The alleged obligation related
to rehabilitation clinics that were previously operated by one of our former
subsidiaries and were sold in 1999. The Centers for Medicare and Medicaid
Services (CMS) had alleged that Medicare overpayments were made relating to
services rendered by these clinics and other related clinics during a period in
which the clinics were operated by entities other than us. In an effort to
resolve the matter with CMS and F-16




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CONTINUCARE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) avoid aggressive collection efforts that could have disrupted our business, in
2002 we entered into a memorandum of understanding under which we began making
payments to resolve the alleged liability while retaining the right to dispute
the alleged overpayments. We requested that CMS reconsider the alleged
liability and in October 2003 we were notified that the liability had been
reduced from the originally asserted amount of $2.4 million to $0.2 million. NOTE 7  INCOME/LOSS PER SHARE A reconciliation of the denominator of the basic and diluted earnings per share
computation is as follows: Year Ended June 30,2004
    
    2003
    
    2002Basic weighted average number of
shares outstanding
    
    
    43,763,835
    
    
    
    40,776,903
    
    
    
    39,634,601Dilutive effect of stock options
    
    
    1,144,918
    
    
    
    
    
    
    
    Dilutive effect of convertible debt
    
    
    4,323,963
    
    
    
    
    
    
    
    Diluted weighted average number of
shares outstanding
    
    
    49,232,716
    
    
    
    40,776,903
    
    
    
    39,634,601Not included in calculation of
dilutive earnings per share as
impact is antidilutive:Stock options outstanding
    
    
    300,000
    
    
    
    2,716,000
    
    
    
    2,316,000Warrants
    
    
    760,000
    
    
    
    760,000
    
    
    
    760,000
 NOTE 8  DIRECTOR COMPENSATION On September 23, 2002, the Company issued a combined total of 800,000 shares of
restricted common stock to Board members as compensation for their services.
The value of the restricted stock award of $112,000 (based on the closing price
of the Companys common stock on September 23, 2002) has been recorded as
director compensation in the first quarter of Fiscal 2003. Also on September
23, 2002, two of the Board members elected to receive their compensation in the
form of fully vested stock options, which represented a combined total of
400,000 stock options. The fully vested stock options have an exercise price of
$0.36 per share and are valid for a ten-year period. On October 30, 2002, the Company issued 100,000 shares of restricted common
stock to a newly elected Board member. The value of the 100,000 shares of
restricted stock awarded of $11,000 (based on the closing price of the
Companys common stock on October 30, 2002) was recorded as director
compensation in the second quarter of Fiscal 2003. For Fiscal 2004, our Directors did not receive any cash compensation for
service on the Board of Directors but were reimbursed for certain expenses in
connection with attendance at Board meetings or other meetings on our behalf.
For Fiscal 2005 our non-employee Directors will receive an annual cash retainer
of $15,000. In addition, for Fiscal 2005, the Chairmen of the Nominating and
Compensation Committees will receive an additional cash retainer of $2,500 and
the Chairman of the Audit Committee will receive an additional cash retainer of
$5,000. Also each non-employee Board member of the Company was granted fully
vested options to purchase 20,000 shares of common stock, and one Board member
was granted additional fully vested options to purchase 20,000 shares of common
stock upon appointment to the Board. NOTE 9  RELATED PARTY TRANSACTIONS In connection with a restructuring of the Notes during February 2000, the
Company was required to procure the Credit Facility and to obtain a financially
responsible person(s) to guarantee the Credit Facility for the Company. The
Company obtained such a bank credit facility and obtained personal guarantees
from Dr. Phillip Frost. In consideration for providing the guarantees, the
Company issued an aggregate of 1,500,000 shares of the Companys F-17




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CONTINUCARE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) common stock to Dr. Frost and 1,500,000 shares to an additional guarantor.
These shares were valued at $3,375,000 based on the closing price of the
Companys stock on February 11, 2000 when the original guarantees were granted. On March 31, 2003, Dr. Frost extended his personal guarantee of the Companys
Credit Facility through March 31, 2004. In consideration of Dr. Frosts
personal guarantee, the Company issued 1,500,000 shares of restricted stock to
an entity related to Dr. Frost and increased the annual interest rate on a note
payable to an entity related to Dr. Frost from 7% to 9%. The shares of common
stock issued, which were valued at $525,000 based on the closing price of the
Companys common stock on March 31, 2003 when the guarantee was granted, were
recorded as a deferred financing cost and amortized over the term of the
guarantee. On March 30, 2004, Dr. Frost extended his personal guarantee of the Companys
Credit Facility through March 31, 2005. (See Note 6). In consideration of Dr.
Frosts personal guarantee, the Company issued 300,000 shares of common stock
to an entity controlled by Dr. Frost. The shares of common stock issued, which
were valued at $870,000 based on the closing price of the Companys common
stock on March 30, 2004, have been recorded as a deferred financing cost and are
being amortized over the term of the guarantee. NOTE 10  STOCK OPTION PLAN AND WARRANTS In August 2004, the Companys shareholders approved an amendment to the Amended
and Restated Continucare Corporation 2000 Stock Option Plan (the 2000 Stock
Option Plan) to increase the authorized shares for issuance upon the exercise
of stock options from 4,000,000 to 7,000,000 and to cover employees, directors,
independent contractors and consultants of the Company. Under the terms of the
2000 Stock Option Plan, the options generally expire 10 years after the date of
the grant. Pro forma information regarding net income and earnings per share is required
by SFAS No. 123, and has been determined as if the Company had accounted for
its employee stock options under the fair value method of that Statement. The
fair value for these options was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted-average
assumptions for 2004 and 2003, respectively: risk-free interest rates of 4.25%
and 3.33%; dividend yields of 0%; volatility factors of the expected market
price of the Companys common stock of 106.5% and 107.9%, and a
weighted-average expected life of the options of 10 and 10. There were no
stock options granted in Fiscal 2002. The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because the Companys employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in
managements opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options. F-18




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CONTINUCARE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The following table summarizes information related to the Companys stock
option activity for the years ended June 30, 2004, 2003 and 2002: Year Ended June 30,2004
    
    2003
    
    2002Weighted
    
    
    
    
    
    Weighted
    
    
    
    
    
    WeightedAverage
    
    
    
    
    
    Average
    
    
    
    
    
    AverageNumber
    
    Exercise
    
    Number
    
    Exercise
    
    Number
    
    Exerciseof Shares
    
    Price
    
    of Shares
    
    Price
    
    of Shares
    
    PriceOutstanding at beginning of the year
    
    
    2,716,000
    
    
    $
    1.15
    
    
    
    2,316,000
    
    
    $
    1.29
    
    
    
    2,996,750
    
    
    $
    1.30Granted
    
    
    2,425,000
    
    
    
    1.22
    
    
    
    400,000
    
    
    
    0.36
    
    
    
    
    
    
    
    Exercised
    
    
    (546,000
    )
    
    
    0.64
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Forfeited
    
    
    (1,300,000
    )
    
    
    1.17
    
    
    
    
    
    
    
    
    
    
    
    (680,750
    )
    
    
    1.34Outstanding at end of the year
    
    
    3,295,000
    
    
    
    
    
    
    
    2,716,000
    
    
    
    
    
    
    
    2,316,000Exercisable at end of the year
    
    
    945,000
    
    
    
    
    
    
    
    2,360,997
    
    
    
    
    
    
    
    1,605,997Weighted average fair value of
options
granted during the year
    
    $
    1.20
    
    
    
    
    
    
    $
    0.12
    
    
    
    
    
    
    $
    
 The following table summarizes information about the options outstanding at
June 30, 2004: Options Outstanding
    
    Options ExercisableWeightedRange of
    
    
    
    
    
    Average
    
    Weighted
    
    
    
    
    
    WeightedExercise
    
    Outstanding at
    
    Remaining
    
    Average Exercise
    
    Number
    
    Average ExercisePrices
    
    June 30, 2004
    
    Contractual Life
    
    Price
    
    Exercisable
    
    Price$5.125-$5.25
    
    
    150,000
    
    
    
    3.13
    
    
    
    5.24
    
    
    
    150,000
    
    
    
    5.24$1.51-$2.86
    
    
    1,150,000
    
    
    
    9.86
    
    
    
    1.99
    
    
    
    
    
    
    
    $.32-$.69
    
    
    1,995,000
    
    
    
    8.26
    
    
    
    .65
    
    
    
    795,000
    
    
    
    .63
 The Company has 760,000 warrants outstanding at June 30, 2004 which are
exercisable through December 31, 2007, with exercise prices ranging from $7.25
to $12.50 per share. Shares of common stock have been reserved for future issuance at June 30, 2004
as follows: Convertible related party note
    
    
    92,195Warrants
    
    
    760,000Stock options
    
    
    3,295,000Total
    
    
    4,147,195
 NOTE 11  INCOME TAXES The Company accounts for income taxes under FASB Statement No. 109, Accounting
for Income Taxes. Deferred income tax assets and liabilities are determined
based upon differences between the financial reporting and tax bases of assets
and liabilities and are measured using the enacted tax rates and laws that will
be in effect when the differences are expected to reverse. There is no provision or benefit for income taxes for the years ended June 30,
2004, 2003 and 2002 as the Company has substantial tax assets, described more
fully below, which have not been recognized. F-19




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CONTINUCARE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Deferred income taxes reflect the net effect of temporary differences between
the carrying amount of assets and liabilities for financial reporting purposes
and the amounts used for income tax purposes. The tax effects of temporary
differences that give rise to deferred tax assets and deferred tax liabilities
are as follows: Year Ended June 30,2004
    
    2003
    
    2002Deferred tax assets:Bad debt and notes receivable reserve
    
    $
    706,992
    
    
    $
    4,620,512
    
    
    $
    4,603,954Other
    
    
    192,440
    
    
    
    379,628
    
    
    
    937,650Impairment charge
    
    
    1,975,228
    
    
    
    3,036,963
    
    
    
    2,513,767Capital loss carryover
    
    
    
    
    
    
    200,261
    
    
    
    200,261Net operating loss carryforward
    
    
    7,686,740
    
    
    
    4,590,657
    
    
    
    3,907,860Deferred tax assets
    
    
    10,561,400
    
    
    
    12,828,021
    
    
    
    12,163,492Deferred tax liabilities:Depreciable/amortizable assets
    
    
    (646,886
    )
    
    
    (965,047
    )
    
    
    (63,762
    )Valuation allowance
    
    
    (9,914,514
    )
    
    
    (11,862,974
    )
    
    
    (12,099,730
    )Deferred tax liabilities
    
    
    (10,561,400
    )
    
    
    (12,828,021
    )
    
    
    (12,163,492
    )Net deferred tax (liability) asset
    
    $
    
    
    
    $
    
    
    
    $
    
 SFAS No. 109 requires a valuation allowance to reduce the deferred tax assets
reported if, based on the weight of the evidence, it is more likely than not
that some portion or all of the deferred tax assets will not be realized.
After consideration of all the evidence, both positive and negative, management
determined that a valuation allowance of $9,914,514, $11,862,974 and
$12,099,730 is necessary at June 30, 2004, 2003 and 2002, respectively, to
reduce the deferred tax assets to the amount that will more likely than not be
realized. The change in the valuation allowance for the current period was
approximately $1,948,460 for the year ended June 30, 2004. At June 30, 2004,
the Company had available net operating loss carryforwards of approximately
$20,427,158, which expire in 2019 through 2024. Certain of the Companys net
operating loss carryforwards are subject to annual limitations. A reconciliation of the statutory federal income tax rate with the Companys
effective income tax rate for the years ended June 30, 2004, 2003 and 2002 is
as follows: Year Ended June 30,2004
    
    2003
    
    2002Statutory federal rate
    
    
    34.0
    %
    
    
    34.0
    %
    
    
    (34.0
    )%State income taxes, net of federal income tax benefit
    
    
    3.63
    
    
    
    3.63
    
    
    
    (3.63
    )Goodwill and other non-deductible items
    
    
    2.51
    
    
    
    356.26
    
    
    
    4.50Change in valuation allowance
    
    
    (40.14
    )
    
    
    (404.03
    )
    
    
    30.30Other
    
    
    
    
    
    
    10.14
    
    
    
    2.83Effective tax rate
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %
 NOTE 12  EMPLOYEE BENEFIT PLAN As of January 1, 1997, the Company adopted a tax qualified employee savings and
retirement plan covering the Companys eligible employees. The Continucare
Corporation 401(k) Profit Sharing Plan and Trust (the 401(k) Plan) was
amended and restated on July 1, 1998. The 401(k) Plan is intended to qualify
under Section 401 of the Internal Revenue Code (the Code) and contains a
feature described in Code Section 401(k) under which a participant may elect to
have his or her compensation reduced by up to 70% (subject to IRS limits) and
have that amount contributed to the 401(k) Plan. On October 25, 2001, the
Internal Revenue Service issued a favorable determination letter for the 401(k)
Plan. Under the 401(k) Plan, new employees who are at least 18 years of age are
eligible to participate in the 401(k) Plan after 90 days of service. Eligible
employees may elect to reduce their compensation by the lesser of 70% of their F-20




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CONTINUCARE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) annual compensation or the statutorily prescribed annual limit of $12,000 (for
calendar year ending December 31, 2003) and have the reduced amount contributed
to the 401(k) Plan. The Company may, at its discretion, make a matching
contribution and a non-elective contribution to the 401(k) Plan. There were no
matching contributions for the years ending June 30, 2004, 2003 or 2002.
Participants in the 401(k) Plan do not begin to vest in the employer
contribution until the end of two years of service, with full vesting achieved
after five years of service. NOTE 13  COMMITMENTS AND CONTINGENCIES Legal Proceedings The Company is a party to the case of JOAN LINDAHL v. HUMANA MEDICAL PLAN,
INC., COLUMBIA HOSPITAL COPRORATION OF SOUTH BROWARD d/b/a WESTSIDE REGIONAL
MEDICAL CENTER, INPHYNET CONTRACTING SERVICES, INC., CONTINUCARE MEDICAL
MANAGEMENT, INC., LUIS GUERRERO AND JARSLAW PARKOLAP. This case was filed on
January 24, 2002 in the Circuit Court of the 17th Judicial Circuit in and for
Broward County, Florida and served on the companies and individuals in February
2003. The complaint alleges vicarious liability for medical malpractice and
seeks damages in excess of $15,000. The stay on the case has recently been
lifted. The Company intends to defend itself against this case vigorously, but
its outcome cannot be predicted. The Companys ultimate liability, if any,
with respect to the lawsuit is presently not determinable. In addition, on August 17, 2004, we received a Notice of Intent to Initiate
Litigation for Medical Negligence from Carol Katz, as personal representative
of the estate of Charles K. Katz. Under Florida law, plaintiffs in medical
malpractice actions are required to provide such a notice at least ninety days
prior to commencing litigation. The plaintiffs notice alleges negligence in
the treatment of Mr. Katz that resulted in his death. Plaintiffs notice does
not allege any specific damages. We intend to investigate this claim and
defend it vigorously, but the outcome of this matter is not presently
determinable. Our ultimate liability, if any, with respect to this matter is
not presently determinable. The Company is also involved in other legal proceedings incidental to its
business that arise from time to time out of the ordinary course of business
including, but not limited to, claims related to the alleged malpractice of
employed and contracted medical professionals, workers compensation claims and
other employee-related matters, and minor disputes with equipment lessors and
other vendors. The Company has recorded an accrual for medical malpractice
claims, which includes amounts for insurance deductibles and projected
exposure, based on managements estimate of the ultimate outcome of such
claims. Leases The Company leases office space and equipment under various non-cancelable
operating leases. Rent expense under such operating leases was approximately
$1.8 million for each of the years ended June 30, 2004, 2003 and 2002,
respectively. Future annual minimum payments under such leases as of June 30,
2004 are as follows: For the fiscal year ending June 30,2005
    
    $
    1,834,7082006
    
    
    1,299,2822007
    
    
    1,022,2162008
    
    
    1,009,4682009
    
    
    300,730Total
    
    $
    5,466,404
 Employment Agreements The Company has an employment agreement with one of its management employees,
which includes, among other terms, non-competition provisions and salary
continuation benefits. The Company also terminated an employment contract with
its former President, which resulted in the cancellation of his stock options
with consideration paid for the cancellation, and severance payments made in a
lump sum as well as through installment payments through September 2004. F-21




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CONTINUCARE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 14  VALUATION AND QUALIFYING ACCOUNTS Activity in the Companys Valuation and Qualifying Accounts consists of the
following: Year ended June 30,2004
    
    2003
    
    2002Allowance for doubtful accounts related to accounts
receivable:Balance at beginning of period
    
    $
    4,823,000
    
    
    $
    4,807,000
    
    
    $
    4,741,000Provision for doubtful accounts
    
    
    104,296
    
    
    
    44,000
    
    
    
    66,000Write-offs of uncollectible accounts receivable
    
    
    (4,100,332
    )
    
    
    (28,000
    )
    
    
    Balance at end of period
    
    $
    826,964
    
    
    $
    4,823,000
    
    
    $
    4,807,000Allowance for doubtful accounts related to notes receivable:Balance at beginning of period
    
    $
    6,367,000
    
    
    $
    6,367,000
    
    
    $
    6,367,000Provision for doubtful accounts
    
    
    
    
    
    
    
    
    
    
    Write-offs of uncollectible notes receivable
    
    
    (6,367,000
    )
    
    
    
    
    
    
    Balance at end of period
    
    $
    
    
    
    $
    6,367,000
    
    
    $
    6,367,000Tax valuation allowance for deferred tax assets:Balance at beginning of period
    
    $
    11,862,974
    
    
    $
    12,099,730
    
    
    $
    11,106,764Additions
    
    
    
    
    
    
    
    
    
    
    992,966Deductions
    
    
    (1,948,460
    )
    
    
    (236,756
    )
    
    
    Balance at end of period
    
    $
    9,914,514
    
    
    $
    11,862,974
    
    
    $
    12,099,730
 NOTE 15  QUARTERLY CONSOLIDATED FINANCIAL INFORMATION (UNAUDITED) 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
    
    
    $
    27,127,177
    
    
    $
    102,459,517Net income (loss)
    
    $
    2,501,350
    
    
    $
    (354,808
    )
    
    $
    1,511,235
    
    
    $
    1,630,592
    
    
    $
    5,288,369Basic net income (loss) per share
    
    $
    .06
    
    
    $
    (.01
    )
    
    $
    .04
    
    
    $
    .03
    
    
    $
    .12Diluted net income (loss) per share
    
    $
    .05
    
    
    $
    (.01
    )
    
    $
    .03
    
    
    $
    .03
    
    
    $
    .11
 For the Year Ended June 30, 2003 (a)First
    
    Second
    
    Third
    
    Fourth
    
    FullQuarter
    
    Quarter
    
    Quarter
    
    Quarter
    
    YearTotal revenue from continuing operations
    
    $
    23,475,848
    
    
    $
    23,988,134
    
    
    $
    24,187,129
    
    
    $
    25,513,723
    
    
    $
    97,164,834Net (loss) income
    
    $
    (691,636
    )
    
    $
    (372,487
    )
    
    $
    298,376
    
    
    $
    824,345
    
    
    $
    58,598Basic and diluted (loss) income per share
    
    $
    (.02
    )
    
    $
    (.01
    )
    
    $
    .01
    
    
    $
    .02
    
    
    $
    
  (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-22




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EXHIBIT INDEX Description
    
    Exhibit NumberManaged Care Agreement dated July 1, 1995, by and between
Continucare Corporation and Vista Healthplan of South
Florida, Inc.
    
    
    10.6Airport Corporate Center Office Lease dated June 3, 2004,
by and between Miami RPFIV Airport Corporate Center
Associates Limited Liability Company and Continucare
Corporation
    
    
    10.9Subsidiaries of the Company
    
    
    21.1Consent of Ernst & Young LLP
    
    
    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