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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 
 FORM 10-K
  þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended: June 30, 2006
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to
 Commission file number: 001-12115
 CONTINUCARE CORPORATION
  Florida
(State or other jurisdiction of 
incorporation or organization)
    
    59-2716023
(I.R.S. Employer
Identification No.)
 7200 Corporate Center Drive,
Suite 600
Miami, Florida 33126
 (305) 500-2000
  Title of each class
    
    Name of each exchange on which registeredCOMMON STOCK
    
    AMERICAN STOCK EXCHANGE$.0001 PAR VALUE
 None
 o þ
 o þ
 þ o
 þ
  o o þ
 o þ




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##### 



CONTINUCARE CORPORATION
ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED JUNE 30, 2006
 TABLE OF CONTENTS
 PAGEGeneral
    
    
    3PART IItem 1.
    
    Business
    
    
    4Item 1A.
    
    Risk Factors
    
    
    13Item 2.
    
    Properties
    
    
    21Item 3.
    
    Legal Proceedings
    
    
    21Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    21PART IIItem 5.
    
    Market for Registrants Common Equity, and Issuer
Purchases of Equity Securities and Related Stockholder Matters
    
    
    21Item 6.
    
    Selected Financial Data
    
    
    22Item 7.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    24Item 7A.
    
    Quantitative and Qualitative Disclosures about Market Risk
    
    
    33Item 8.
    
    Financial Statements and Supplementary Data
    
    
    33Item 9.
    
    Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
    
    
    33Item 9A.
    
    Controls and Procedures
    
    
    33Item 9B.
    
    Other Information
    
    
    34PART IIIItem 10.
    
    Directors and Executive Officers of the Registrant
    
    
    34Item 11.
    
    Executive Compensation
    
    
    34Item 12.
    
    Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters
    
    
    34Item 13.
    
    Certain Relationships and Related Transactions
    
    
    35Item 14.
    
    Principal Accounting Fees and Services
    
    
    35PART IVItem 15.
    
    Exhibits and Financial Statement Schedules
    
    
    35Signatures
    
    
    37EX-23.1 Consent of Ernst & Young LLPEX-31.1 Section 302 Certification of CEOEX-31.2 Section 302 Certification of CFOEX-32.1 Section 906 Certification of CEOEX-32.2 Section 906 Certification of CFO
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GENERAL
  CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
  
    
    Our ability to make capital expenditures and respond to capital needs;
    
    Our ability to enhance the services we provide to our patients;
    
    Our proposed acquisition of the MDHC Companies;
    
    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;
    
    The impact of the significant increase in our intangible assets that will result if
we complete our acquisition of the MDHC Companies;
    
    Our ability to respond to future changes in Medicare reimbursement levels and
reimbursement rates from other third parties;
    
    Our compliance with applicable laws and regulations;
    
    Our ability to establish relationships and expand into new geographic markets;
    
    Our ability to expand our network through additional medical centers or other facilities;
    
    The potential impact on our claims loss ratio as a result of the Medicare Risk
Adjustments (MRA), the Medicare Prescription Drug, Improvement and Modernization Act of
2003 (the Medicare Modernization Act) and the enhanced benefits our HMO affiliates
offered under their Medicare Advantage Plans for calendar 2006;
    
    The ability of our stop-loss insurance coverage to limit the financial risk to us of
our risk arrangements with the health maintenance organizations (HMOs);
    
    The application and impact of Statement of Financial Accounting Standards No. 123(R)
(SFAS 123(R)) on our future results of operations;
    
    Our ability to utilize our net operating losses for Federal income tax purposes;
    
    The impact of the newly effective Medicare prescription drug plan on our results of operations; and
    
    Our intent to repurchase our common stock under our stock repurchase program.
  
    
    Our dependence on two HMOs for substantially all of our revenues;
    
    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;
    
    Whether and when the proposed acquisition of the MDHC Companies will be consummated;
 
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
    
    Our ability to rapidly integrate the MDHC Companies operations and personnel;
    
    The realization of the expected synergies and benefits of the proposed acquisition;
    
    Our ability to comply with Section 404 of the Sarbanes-Oxley Act of 2002;
    
    Diversion of management time on acquisition-related issues;
    
    Our ability to serve a significantly larger patient base;
    
    Trends in patient enrollment both at Continucare and the MDHC Companies;
    
    Our ability to successfully recruit and retain qualified medical professionals;
    
    Future legislative or regulatory changes, including possible changes in Medicare
and Medicaid programs that may impact reimbursements to health care providers and insurers or the
benefits we expect to realize from our acquisition of the MDHC Companies;
    
    Our ability to comply with applicable laws and regulations;
    
    The impact of the Medicare Modernization Act and MRA on payments we or the MDHC
Companies receive for our respective managed care operations; including the risk that
any additional premiums we may receive as a result of the newly effective Medicare
prescription drug plan will not be sufficient to compensate us for the expenses that we
incur as a result of that plan;
    
    Technological and pharmaceutical improvements that increase the cost of providing, or
reduce the demand for, health care;
    
    Changes in our revenue mix and claims loss ratio;
    
    Changes in the range of medical services we or the MDHC Companies provide or for
which our HMO affiliates offer coverage;
    
    Our ability to enter into and renew managed care provider agreements on acceptable terms;
    
    Loss of significant contracts with HMOs;
    
    The ability of our compliance program to detect and prevent regulatory compliance problems;
    
    Delays in receiving payments;
    
    Increases in the cost of insurance coverage, including our stop-loss coverage, or the loss of insurance coverage;
    
    The collectibility of our uninsured accounts and deductible and co-pay amounts;
    
    Federal and state investigations;
    
    Lawsuits for medical malpractice and the outcome of any such litigation;
    
    Changes in estimates and judgments associated with our critical accounting policies;
    
    Our dependence on our information processing systems and the management information
systems of our HMO affiliates;
    
    Impairment charges that could be required in future periods;
    
    The impact on our liquidity of any repurchases of our common stock that we may effect;
    
    The inherent uncertainty in financial forecasts which are based upon assumptions
which may prove incorrect or inaccurate;
    
    General economic conditions; and
    
    Uncertainties generally associated with the health care business.
  
 PART I
 
 ITEM 1. BUSINESS
 General
   4




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Acquisition
    Industry Overview
  5




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6




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Our Market and Business Strategy
   
    
    increase patient volume at our existing medical centers;
    
    selectively expand our network to include additional medical centers or other medical
facilities and to penetrate new geographic markets; and
    
    further develop our IPA management activities.
  Increasing Patient Volume
  Selectively Expanding Our Network
  
    
    a history of profitable operations or a predictable synergy such as opportunities for
economies of scale through a consolidation of management functions;
    
    a competitive environment with respect to a high concentration of hospitals and physicians; and
    
    a geographic proximity to our current operations.
 Developing Our IPA Management Activities
  7




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Our Medical Centers
  Our IPAs
  Medicare Considerations
     Our HMO Affiliates
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Humana
      9




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Vista
   Wellcare
   Compliance Program
  Competition
  Government Regulation
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General.
  Present and Prospective Federal and State Reimbursement Regulation
 Federal Fraud and Abuse Laws and Regulations.
 State Fraud and Abuse Regulations
 Restrictions on Physician Referrals
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Privacy Laws.
 Corporate Practice of Medicine Doctrine.
 Clinic Regulation and Licensure.
 Limitations on Contractual Joint Ventures.
 Occupational Safety and Health Administration (OSHA)
 Medicare Marketing Restrictions.
 Sanctioned Parties
 Healthcare Reform.
 Employees
  Insurance
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Available Information
   
 ITEM 1A. RISK FACTORS
 Risks related to our business
 Our operations are dependent on two health maintenance organizations.
  Under our most important contracts we are responsible for the cost of medical services to our
patients in return for a fixed fee.
  If we are unable to manage medical benefits expense effectively, our profitability will likely be
reduced.
  A failure to estimate incurred but not reported medical benefits expense accurately will affect our
profitability.
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We compete with many health care providers for patients and HMO affiliations.
  We may not be able to successfully recruit or retain existing relationships with qualified
physicians and medical professionals.
  Our business exposes us to the risk of medical malpractice lawsuits.
  Our revenues will be affected by the Medicare Risk Adjustment program.
   We presently operate only in Florida.
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Failure to achieve and maintain effective internal controls in accordance with Section 404 of the
Sarbanes-Oxley Act could have a material adverse effect on our business and stock price.
   A significant portion of our voting power is concentrated.
  We are dependent on our executive officers and other key employees.
  We depend on the management information systems of our affiliated HMOs.
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We depend on our information processing systems.
  
    
    we fail to adequately identify or are unsuccessful in implementing solutions for all of
our information and processing needs;
    
    our processing or information systems fail; or
    
    we fail to upgrade systems as necessary.
 Volatility of our stock price could adversely affect you.
  
    
    state and federal budget decreases;
    
    adverse publicity regarding HMOs and other managed care organizations;
    
    government action regarding eligibility;
    
    changes in government payment levels;
    
    changes in state mandatory programs;
    
    changes in expectations of our future financial performance or changes in financial
estimates, if any, of public market analysts;
    
    announcements relating to our business or the business of our competitors;
    
    conditions generally affecting the managed care industry or our provider networks;
    
    the success of our operating strategy;
    
    the operating and stock price performance of other comparable companies;
    
    the termination of any of our contracts;
    
    regulatory or legislative changes;
    
    acts of war or terrorism or an increase in hostilities in the world; and
    
    general economic conditions, including inflation and unemployment rates.
 Risks related to the acquisition of the MDHC Companies.
 If we are unable to complete the acquisition of the MDHC Companies, our business may be adversely affected.
  The acquisition of the MDHC Companies will result in dilution to our current shareholders.
  We must obtain several third party consents and government permits to complete the acquisition of
the MDHC Companies.
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Substantial sales of our common stock could adversely affect its market price.
  We may not realize the anticipated benefits from the Acquisition.
  The indemnification obligations under the MDHC Agreement are limited.
  The Internal Revenue Service may disagree with the parties description of the federal income tax
consequences.
  If we are unable to successfully integrate the MDHC Companies business operations into our
business operations after the Acquisition, we may not realize the anticipated benefits from the
Acquisition and our business could be adversely affected.
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If the combined company experiences losses following the closing of the acquisition, we could
experience difficulty meeting our business plan and our stock price could be negatively affected.
  The debt we will assume in the Acquisition will increase our debt to equity ratio and expose us to
greater risks.
  
    
    increase our vulnerability to general adverse economic and industry conditions;
    
    limit our flexibility in planning for, or reacting to, changes in our business and the
healthcare industry, which may place us at a disadvantage compared to our competitors that
have less debt; and
    
    limit, along with the possible financial and other restrictive covenants in our
indebtedness, our ability to borrow additional funds.
  If we complete the acquisition of the MDHC Companies our substantial intangible assets will greatly
increase.
   
    
    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.
  Our acquisitions could result in integration difficulties, unexpected expenses, diversion of
managements attention and other
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negative consequences.
  
    
    we may be unable to centralize and consolidate our financial, operational and
administrative functions with those of the businesses we acquire;
    
    our managements attention may be diverted from other business concerns;
    
    we may be unable to retain and motivate key employees of an acquired company;
    
    litigation, indemnification claims and other unforeseen claims and liabilities
may arise from the acquisition or operation of acquired businesses;
    
    the costs necessary to complete integration may exceed our expectations or
outweigh some of the intended benefits of the transactions we complete;
    
    we may be unable to maintain the patients or goodwill of an acquired business;
and
    
    the costs necessary to improve the operating systems and services of an acquired
business may exceed our expectations.
 Competition for acquisition targets and acquisition financing and other factors may impede our
ability to acquire other businesses and may inhibit our growth.
  Risks related to our industry
 We are subject to government regulation.
  
    
    forfeiture of amounts we have been paid;
    
    imposition of civil or criminal penalties, fines or other sanctions on us;
    
    loss of our right to participate in government-sponsored programs, including Medicare;
    
    damage to our reputation in various markets;
    
    increased difficulty in hiring or retaining qualified medical personnel or marketing our products and services; and
    
    loss of one or more of our licenses to provide health care services.
  The health care industry is subject to continued scrutiny.
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Our insurance coverage may not be adequate, and rising insurance premiums could negatively affect
our profitability.
  Deficit spending and economic downturns could negatively impact our results of operations.
  Many factors that increase health care costs are largely beyond our ability to control.
  
    
    increased use of medical facilities and services, including prescription drugs and doctors office visits;
    
    increased cost of such services;
    
    new benefits to patients added by the HMOs to their covered services, whether as
a result of the Medicare Modernization Act or otherwise;
    
    changes or reductions of our utilization management functions such as
preauthorization of services, concurrent review or requirements for physician
referrals;
    
    catastrophes (including hurricanes), epidemics or terrorist attacks;
    
    the introduction of new or costly treatments, including new technologies;
    
    new government mandated benefits or other regulatory changes; and
    
    increases in the cost of stop loss or other insurance.
  Health care reform initiatives, particularly changes to the Medicare system, could adversely effect
our operations.
  Medicare premiums have generally risen more slowly than the cost of providing health care services.
  20




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ITEM 2. PROPERTIES
    
 ITEM 3. LEGAL PROCEEDINGS
  
 ITEM
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 Not applicable.
 
 PART II
 
 ITEM 5.
    
    MARKET FOR REGISTRANTS COMMON EQUITY AND ISSUER PURCHASES OF EQUITY SECURITIES AND
RELATED STOCKHOLDER MATTERS
  HIGH
    
    LOWFiscal Year 2006:Quarter Ended June 30, 2006
    
    $
    3.15
    
    
    $
    2.62Quarter Ended March 31, 2006
    
    
    2.87
    
    
    
    2.35Quarter Ended December 31, 2005
    
    
    2.76
    
    
    
    2.25Quarter Ended September 30, 2005
    
    
    2.89
    
    
    
    2.15Fiscal Year 2005Quarter Ended June 30, 2005
    
    $
    3.55
    
    
    $
    2.21Quarter Ended March 31, 2005
    
    
    2.80
    
    
    
    1.80Quarter Ended December 31, 2004
    
    
    2.54
    
    
    
    1.45Quarter Ended September 30, 2004
    
    
    1.98
    
    
    
    1.29
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Securities Authorized for Issuance Under Equity Compensation Plans
  Number ofsecurities to beissued upon
    
    Weighted averageexercise of
    
    exercise price ofoutstanding
    
    outstanding
    
    Number of securitiesoptions, warrants
    
    options, warrants
    
    remaining available forPlan Category
    
    and rights
    
    and rights
    
    future issuancePlans approved by stockholders
    
    
    3,659,304
    
    
    
    $1.56
    
    
    
    2,087,667Plans not approved by
stockholders
    
    
    
    
    
    
    
    
    
    
    3,659,304
    
    
    
    
    
    
    
    2,087,667
 Purchases of Equity Securities by the Issuer and Affiliated Purchasers
  Total Number of
    
    
    Maximum Number ofShares Purchased as
    
    
    Shares that May YetTotal Number of
    
    
    Average Price Paid
    
    
    Part of Publicly
    
    
    Be Purchased UnderPeriod
    
    Shares Purchased
    
    
    per Share
    
    
    Announced Plan
    
    
    the PlanApril 1 to April 30, 2006
    
    
    
    
    
    
    N/A
    
    
    
    
    
    
    
    1,342,533May 1 to May 31, 2006
    
    
    
    
    
    
    N/A
    
    
    
    
    
    
    
    1,342,533June 1 to June 30, 2006
    
    
    
    
    
    
    N/A
    
    
    
    
    
    
    
    1,342,533Totals
    
    
    
    
    
    
    N/A
    
    
    
    
 
 ITEM 6. SELECTED FINANCIAL DATA
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CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
 For the Year Ended June 30,2006
    
    2005
    
    2004 (1)
    
    2003 (1)
    
    2002 (1)Revenue:Medical services revenue, net
    
    $
    132,629,665
    
    
    $
    111,316,174
    
    
    $
    101,123,346
    
    
    $
    97,164,834
    
    
    $
    90,978,930Management fee revenue and other income
    
    
    361,247
    
    
    
    914,939
    
    
    
    700,756
    
    
    
    
    
    
    
    Total revenue
    
    
    132,990,912
    
    
    
    112,231,113
    
    
    
    101,824,102
    
    
    
    97,164,834
    
    
    
    90,978,930Operating expenses:Medical services:Medical claims
    
    
    97,781,447
    
    
    
    81,104,665
    
    
    
    76,333,580
    
    
    
    74,046,265
    
    
    
    69,340,067Other direct costs
    
    
    13,137,396
    
    
    
    12,648,297
    
    
    
    11,665,894
    
    
    
    10,696,997
    
    
    
    10,395,210Total medical services
    
    
    110,918,843
    
    
    
    93,752,962
    
    
    
    87,999,474
    
    
    
    84,743,262
    
    
    
    79,735,277Administrative payroll and employee benefits
    
    
    6,538,295
    
    
    
    5,107,672
    
    
    
    3,822,949
    
    
    
    3,681,446
    
    
    
    2,689,562General and administrative
    
    
    7,584,205
    
    
    
    7,059,602
    
    
    
    5,821,871
    
    
    
    6,252,347
    
    
    
    6,446,444Gain on extinguishment of debt
    
    
    
    
    
    
    (3,000,000
    )
    
    
    (850,000
    )
    
    
    
    
    
    
    Total operating expenses
    
    
    125,041,343
    
    
    
    102,920,236
    
    
    
    96,794,294
    
    
    
    94,677,055
    
    
    
    88,871,283Income from operations
    
    
    7,949,569
    
    
    
    9,310,877
    
    
    
    5,029,808
    
    
    
    2,487,779
    
    
    
    2,107,647Other income (expense):Interest income
    
    
    331,001
    
    
    
    108,000
    
    
    
    4,793
    
    
    
    6,568
    
    
    
    36,124Interest expense
    
    
    (12,870
    )
    
    
    (702,946
    )
    
    
    (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 before income
tax provision (benefit)
    
    
    8,267,700
    
    
    
    8,715,931
    
    
    
    6,246,797
    
    
    
    1,538,020
    
    
    
    (1,864,679
    )Income tax provision (benefit)
    
    
    2,930,161
    
    
    
    (7,175,561
    )
    
    
    
    
    
    
    
    
    
    
    Income (loss) from continuing operations
    
    
    5,337,539
    
    
    
    15,891,492
    
    
    
    6,246,797
    
    
    
    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
    )Total income (loss) from discontinued operations
    
    
    
    
    
    
    
    
    
    
    (1,593,843
    )
    
    
    (1,479,422
    )
    
    
    (1,781,709
    )Net income (loss)
    
    $
    5,337,539
    
    
    $
    15,891,492
    
    
    $
    4,652,954
    
    
    $
    58,598
    
    
    $
    (3,646,388
    )Basic net income (loss) per common share:Income from continuing operations
    
    $
    .11
    
    
    $
    .32
    
    
    $
    .14
    
    
    $
    .04
    
    
    $
    (.05
    )Loss from discontinued operations
    
    
    
    
    
    
    
    
    
    
    (.03
    )
    
    
    (.04
    )
    
    
    (.04
    )Net income (loss) per common share
    
    $
    .11
    
    
    $
    .32
    
    
    $
    .11
    
    
    $
    
    
    
    $
    (.09
    )Diluted net income (loss) per common share:Income from continuing operations
    
    $
    .10
    
    
    $
    .31
    
    
    $
    .12
    
    
    $
    .04
    
    
    $
    (.05
    )Loss from discontinued operations
    
    
    
    
    
    
    
    
    
    
    (.03
    )
    
    
    (.04
    )
    
    
    (.04
    )Net income (loss) per common share
    
    $
    .10
    
    
    $
    .31
    
    
    $
    .09
    
    
    $
    
    
    
    $
    (.09
    )Cash dividends declared
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
 CONSOLIDATED BALANCE SHEET DATA:
 As of June 30,2006
    
    2005
    
    2004 (1)
    
    2003 (1)
    
    2002 (1)Total assets
    
    $
    40,064,846
    
    
    $
    34,137,935
    
    
    $
    21,908,181
    
    
    $
    20,999,976
    
    
    $
    21,546,985Long-term obligations, including current portion
    
    $
    195,819
    
    
    $
    107,710
    
    
    $
    337,186
    
    
    $
    9,597,063
    
    
    $
    13,877,505
 
 (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. 23




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ITEM 7.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 General
    Medicare Considerations
    24




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Acquisition
    Critical Accounting Policies and Estimates
  Revenue Recognition
   25




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Medical Claims Expense Recognition
    Consideration of Impairment Related to Goodwill and Other Intangible Assets
   Realization of Deferred Tax Assets
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Stock-Based Compensation Expense
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Results of Operations
  Year ended June 30,2006
    
    2005
    
    2004Revenue:Medical services revenue, net
    
    
    99.7
    %
    
    
    99.2
    %
    
    
    99.3
    %Management fee revenue and other income
    
    
    0.3
    
    
    
    0.8
    
    
    
    0.7Total revenue
    
    
    100.0
    
    
    
    100.0
    
    
    
    100.0Operating expenses:Medical services:Medical claims
    
    
    73.5
    
    
    
    72.3
    
    
    
    75.0Other direct costs
    
    
    9.9
    
    
    
    11.2
    
    
    
    11.4Total medical services
    
    
    83.4
    
    
    
    83.5
    
    
    
    86.4Administrative payroll and employee benefits
    
    
    4.9
    
    
    
    4.6
    
    
    
    3.8General and administrative
    
    
    5.7
    
    
    
    6.3
    
    
    
    5.7Gain on extinguishment of debt
    
    
    
    
    
    
    (2.7
    )
    
    
    (0.8
    )Total operating expenses
    
    
    94.0
    
    
    
    91.7
    
    
    
    95.1Income from operations
    
    
    6.0
    
    
    
    8.3
    
    
    
    4.9Other income (expense):Interest income
    
    
    0.2
    
    
    
    0.1
    
    
    
    Interest expense
    
    
    
    
    
    
    (0.6
    )
    
    
    (1.0
    )Medicare settlement related to terminated operations
    
    
    
    
    
    
    
    
    
    
    2.2Income from continuing operations before income tax
provision (benefit)
    
    
    6.2
    
    
    
    7.8
    
    
    
    6.1Income tax provision (benefit)
    
    
    2.2
    
    
    
    (6.4
    )
    
    
    Income from continuing operations
    
    
    4.0
    
    
    
    14.2
    
    
    
    6.1Income (loss) from discontinued operations:Home health operations
    
    
    
    
    
    
    
    
    
    
    (1.6
    )Terminated IPAs
    
    
    
    
    
    
    
    
    
    
    0.1Total loss from discontinued operations
    
    
    
    
    
    
    
    
    
    
    (1.5
    )Net income
    
    
    4.0
    %
    
    
    14.2
    %
    
    
    4.6
    %
 COMPARISON OF FISCAL YEAR ENDED JUNE 30, 2006 TO FISCAL YEAR ENDED JUNE 30, 2005
 Revenue
   28




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##### Table of Contents



Operating Expenses
       Income from Operations
 29




---



##### Table of Contents



Interest Income
  Interest Expense
  Taxes
  Net Income
  COMPARISON OF FISCAL YEAR ENDED JUNE 30, 2005 TO FISCAL YEAR ENDED JUNE 30, 2004
 Revenue from Continuing Operations
     Expenses from Continuing Operations
  30




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##### Table of Contents



Income from Operations
  Medicare Settlement Related to Terminated Operations
  Loss from Discontinued Operations-Home Health Operations
  Income from Discontinued Operations-Terminated IPAs
  Taxes
 31




---



##### Table of Contents



Net Income
  Liquidity and Capital Resources
        32




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##### Table of Contents



Off-Balance Sheet Arrangements
  Contractual Obligations
  Payment due by PeriodTotal
    
    Less than 1 Year
    
    1-2 Years
    
    3-5 YearsCapital Lease Obligations (1)
    
    $
    217,384
    
    
    $
    97,720
    
    
    $
    98,694
    
    
    $
    20,970Operating Lease Obligations (1)
    
    
    6,144,347
    
    
    
    1,529,170
    
    
    
    2,713,393
    
    
    
    1,901,784Total
    
    $
    6,361,731
    
    
    $
    1,626,890
    
    
    $
    2,812,087
    
    
    $
    1,922,754
 
 (1)
    
    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 obligations recorded in our Consolidated
Balance Sheets.  
 ITEM 7A.
    
    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  
 ITEM 8.
    
    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
  
 ITEM 9.
    
    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
  
 ITEM 9A.
    
    CONTROLS AND PROCEDURES
 33




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##### Table of Contents



ITEM 9B.
    
    OTHER INFORMATION
  
 PART III
 
 ITEM 10.
    
    DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
  
 ITEM 11.
    
    EXECUTIVE COMPENSATION
  
 ITEM 12.
    
    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS
  34




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##### Table of Contents



ITEM 13.
    
    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
  
 ITEM 14.
    
    PRINCIPAL ACCOUNTING FEES AND SERVICES
  
 PART IV
 
 ITEM 15.
    
    EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
      3.1
    
    Restated Articles of Incorporation, as amended (1)3.2
    
    Restated Bylaws (2)4.1
    
    Form of certificate evidencing shares of Common Stock (1)4.2
    
    Registration Rights Agreement, dated as of October 30, 1997, by and
between Continucare Corporation and Loewenbaum & Company Incorporated (3)4.3
    
    Continucare Corporation Amended and Restated 1995 Stock Option Plan** (4)4.4
    
    Amended and Restated 2000 Stock Option Plan ** (5)4.5
    
    Convertible Subordinated Promissory Note (6)4.6
    
    Form of Convertible Promissory Note, dated June 30, 2001 (7)4.7
    
    Amendment to Convertible Promissory Note, dated March 31, 2003, between
Continucare Corporation and Frost Nevada Limited Partnership (7)4.8
    
    Form of Amendment to Convertible Promissory Note, dated March 31, 2003 (7)10.1
    
    Form of Stock Option Agreement**(8)10.2
    
    Physician Practice Management Participation Agreement between Continucare
Medical Management, Inc., and Humana Medical Plan, Inc. entered into as
of the 1st day of August, 1998 (9)10.3
    
    Amended and Restated Primary Care Provider Services dated November 12,
2004, by and between Vista Healthplan of South Florida, Inc., Vista
Insurance Plan, Inc. and Continucare Medical Management, Inc. (10)10.4
    
    Airport Corporate Center office lease dated June 3, 2004, by and between
Miami RPFIV Airport Corporate Center Associates Limited Liability Company
and Continucare Corporation (11)10.5
    
    Amendment No. 1 to Primary Care Provider Services Agreement dated as of
July 1, 2004 by and among Vista Healthplan of South Florida, Inc. (10)10.6
    
    Agreement, dated March 31, 2003, between the Company and Pecks Management
Partners, Ltd. (7)10.7
    
    Agreement, dated March 31, 2003, between Continucare Corporation and
Carret & Company (7)
 35




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##### Table of Contents



10.8
    
    WCMA Loan and Security Agreement dated March 9, 2000 between Merrill
Lynch Business Financial Services, Inc. and Continucare Corporation (12)10.9
    
    Letter Agreement dated March 18, 2005 between Merrill Lynch Business
Financial Services, Inc. and Continucare Corporation (13)10.10
    
    Form of Promissory Note dated December 29, 2004 (14)10.11
    
    Letter Agreement between Continucare Corporation and Merrill Lynch
Business Financial Services, Inc. regarding amendment and extension of
Credit Facility (15)10.12
    
    Asset Purchase Agreement, dated as of May 10, 2006, among Continucare
Corporation, a Florida corporation, CNU Blue 1, Inc., a Florida
corporation and a wholly-owned subsidiary of CNU, CNU Blue2, LLC, a
Florida limited liability company and a wholly-owed subsidiary of Buyer,
Miami Dade Health and Rehabilitation Services, Inc., a Florida
corporation, Miami Dade Health Centers, Inc., a Florida corporation, West
Gables Open MRI Services, Inc., a Florida corporation, Kent Management
Systems, Inc., Pelu Properties, Inc., a Florida corporation, Peluca
Investments, LLC, a Florida limited liability company owned by the
Owners, and Miami Dade Health Centers One, Inc., a Florida corporation,
MDHC Red, Inc., a Florida corporation, and each of the shareholders of
each Seller identified therein. (16)21.1
    
    Subsidiaries of the Company (11)23.1
    
    Consent of Independent Registered Public Accounting Firm *31.1
    
    Section 302 Certification of Chief Executive Officer *31.2
    
    Section 302 Certification of Chief Financial Officer *32.1
    
    Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 *32.2
    
    Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 *
  
 (1)
    
    Post Effective Amendment No. 1 to the Registration Statement on SB-2
on Form S-3 Registration Statement filed on October 29, 1996.(2)
    
    Registration Statement on Form SB-2 filed on January 17, 1995.(3)
    
    Form 8-K dated October 30, 1997 and filed with the Commission on
November 13, 1997.(4)
    
    Schedule 14A dated December 26, 1997 and filed with the Commission on
December 30, 1997.(5)
    
    Schedule 14A dated July 28, 2004, filed July 28, 2004.(6)
    
    Form 8-K dated August 3, 2001, filed August 15, 2001.(7)
    
    Form 10-Q for the quarterly period ended March 31, 2003.(8)
    
    Form 10-Q for the quarterly period ended September 30, 2004.(9)
    
    Form 10-K for the fiscal year ended June 30, 2000.(10)
    
    Form 10-Q for the quarterly period ended December 31, 2004.(11)
    
    Form 10-K for the fiscal year ended June 30, 2004.(12)
    
    Form 10-Q for the quarterly period ended March 31, 2000.(13)
    
    Form 10-Q for the quarterly period ended March 31, 2005.(14)
    
    Form 8-K dated December 30, 2004, filed January 5, 2005.(15)
    
    Form 8-K dated March 8, 2006, and filed on March 10, 2006.(16)
    
    Form 8-K dated May 10, 2006 and filed on May 11, 2006.*
    
    Filed herewith**
    
    Management contract or compensatory plan or arrangement 36




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##### Table of Contents



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

Richard C. Pfenniger, Jr.
    
    Chairman of the Board, Chief Executive
Officer, President and Director
(Principal Executive Officer)
    
    September 18, 2006/s/ Fernando L. Fernandez

Fernando L. Fernandez
    
    Senior Vice President  Finance, Chief
Financial Officer, Treasurer and Secretary
(Principal Financial and Accounting Officer)
    
    September 18, 2006/s/ Robert J. Cresci

Robert J. Cresci
    
    Director
    
    September 18, 2006/s/ Phillip Frost, M.D.

Phillip Frost, M.D.
    
    Director
    
    September 18, 2006/s/ Neil Flanzraich

Neil Flanzraich
    
    Director
    
    September 18, 2006/s/ Jacob Nudel, M.D.

Jacob Nudel, M.D.
    
    Director
    
    September 18, 2006/s/ A. Marvin Strait

A. Marvin Strait
    
    Director
    
    September 18, 2006
 37




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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, 2006 and 2005
    
    
    F-3Consolidated Statements of Income for the years ended June 30, 2006, 2005 and 2004
    
    
    F-4Consolidated Statements of Shareholders Equity for the years ended
June 30, 2006, 2005 and 2004
    
    
    F-5Consolidated Statements of Cash Flows for the years ended June 30, 2006, 2005 and
2004
    
    
    F-6Notes to Consolidated Financial Statements
    
    
    F-8
 F-1




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##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
    Share-Based Payment
 /s/ Ernst & Young LLPCertified Public Accountants 
 F-2




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##### Table of Contents



CONTINUCARE
CORPORATION
 CONSOLIDATED BALANCE SHEETS
 June 30,2006
    
    
    2005ASSETSCurrent assets:Cash and cash equivalents
    
    $
    10,681,685
    
    
    $
    5,780,544Other receivables, net
    
    
    231,832
    
    
    
    144,973Due from HMOs, net of a liability for incurred but not reported
medical claims expense of approximately $14,207,000 and
$11,700,000 at June 30, 2006 and 2005, respectively
    
    
    6,339,526
    
    
    
    3,485,530Prepaid expenses and other current assets
    
    
    689,096
    
    
    
    719,577Deferred tax assets, net
    
    
    658,768
    
    
    
    585,571Total current assets
    
    
    18,600,907
    
    
    
    10,716,195Certificates of deposit, restricted
    
    
    1,126,987
    
    
    
    530,350Equipment, furniture and leasehold improvements, net
    
    
    824,220
    
    
    
    670,665Goodwill,
net of accumulated amortization of approximately $7,610,000
    
    
    14,342,510
    
    
    
    14,342,510Managed care contracts, net of accumulated amortization of
approximately $2,773,000 and $2,422,000 at June 30, 2006 and 2005,
respectively
    
    
    737,234
    
    
    
    1,090,046Deferred tax assets, net
    
    
    3,881,061
    
    
    
    6,721,353Other assets, net
    
    
    551,927
    
    
    
    66,816Total assets
    
    $
    40,064,846
    
    
    $
    34,137,935LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    575,925
    
    
    $
    660,139Accrued expenses and other current liabilities
    
    
    2,401,933
    
    
    
    2,620,802Note payable
    
    
    -
    
    
    
    520,000Total current liabilities
    
    
    2,977,858
    
    
    
    3,800,941Capital lease obligations, less current portion
    
    
    112,068
    
    
    
    38,361Total liabilities
    
    
    3,089,926
    
    
    
    3,839,302Commitments and contingenciesShareholders equity:Common stock, $0.0001 par value: 100,000,000 shares authorized;
50,242,478 shares issued and outstanding at June 30, 2006 and
52,591,895 shares issued and 49,595,702 shares outstanding at
June 30, 2005
    
    
    5,024
    
    
    
    4,960Additional paid-in capital
    
    
    63,838,051
    
    
    
    67,924,068Accumulated deficit
    
    
    (26,868,155
    )
    
    
    (32,205,694
    )Treasury stock, 2,996,193 shares at June 30, 2005
    
    
    -
    
    
    
    (5,424,701
    )Total shareholders equity
    
    
    36,974,920
    
    
    
    30,298,633Total liabilities and shareholders equity
    
    $
    40,064,846
    
    
    $
    34,137,935
 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 INCOME
 For the Year Ended June 30,2006
    
    
    2005
    
    
    2004Revenue:Medical services revenue, net
    
    $
    132,629,665
    
    
    $
    111,316,174
    
    
    $
    101,123,346Management fee revenue and other income
    
    
    361,247
    
    
    
    914,939
    
    
    
    700,756Total revenue
    
    
    132,990,912
    
    
    
    112,231,113
    
    
    
    101,824,102Operating expenses:Medical services:Medical claims
    
    
    97,781,447
    
    
    
    81,104,665
    
    
    
    76,333,580Other direct costs
    
    
    13,137,396
    
    
    
    12,648,297
    
    
    
    11,665,894Total medical services
    
    
    110,918,843
    
    
    
    93,752,962
    
    
    
    87,999,474Administrative payroll and employee benefits
    
    
    6,538,295
    
    
    
    5,107,672
    
    
    
    3,822,949General and administrative
    
    
    7,584,205
    
    
    
    7,059,602
    
    
    
    5,821,871Gain on extinguishment of debt
    
    
    
    
    
    
    (3,000,000
    )
    
    
    (850,000
    )Total operating expenses
    
    
    125,041,343
    
    
    
    102,920,236
    
    
    
    96,794,294Income from operations
    
    
    7,949,569
    
    
    
    9,310,877
    
    
    
    5,029,808Other income (expense):Interest income
    
    
    331,001
    
    
    
    108,000
    
    
    
    4,793Interest expense
    
    
    (12,870
    )
    
    
    (702,946
    )
    
    
    (1,006,082
    )Medicare settlement related to terminated operations
    
    
    
    
    
    
    
    
    
    
    2,218,278Income from continuing operations before income tax
provision (benefit)
    
    
    8,267,700
    
    
    
    8,715,931
    
    
    
    6,246,797Income tax provision (benefit)
    
    
    2,930,161
    
    
    
    (7,175,561
    )
    
    
    Income from continuing operations
    
    
    5,337,539
    
    
    
    15,891,492
    
    
    
    6,246,797Income (loss) from discontinued operations:Home health operations
    
    
    
    
    
    
    
    
    
    
    (1,666,934
    )Terminated IPAs
    
    
    
    
    
    
    
    
    
    
    73,091Loss from discontinued operations
    
    
    
    
    
    
    
    
    
    
    (1,593,843
    )Net income
    
    $
    5,337,539
    
    
    $
    15,891,492
    
    
    $
    4,652,954Basic net income (loss) per common share:Income from continuing operations
    
    $
    .11
    
    
    $
    .32
    
    
    $
    .14Loss from discontinued operations
    
    
    
    
    
    
    
    
    
    
    (.03
    )Net income per common share
    
    $
    .11
    
    
    $
    .32
    
    
    $
    .11Diluted net income (loss) per common share:Income from continuing operations
    
    $
    .10
    
    
    $
    .31
    
    
    $
    .12Loss from discontinued operations
    
    
    
    
    
    
    
    
    
    
    (.03
    )Net income per common share
    
    $
    .10
    
    
    $
    .31
    
    
    $
    .09Weighted average common shares outstanding:Basic
    
    
    49,907,898
    
    
    
    50,231,870
    
    
    
    43,763,835Diluted
    
    
    51,230,435
    
    
    
    52,006,064
    
    
    
    49,232,716
 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
 Additional
    
    
    
    
    
    
    
    
    
    TotalCommon Stock
    
    Paid-In
    
    Accumulated
    
    Treasury
    
    ShareholdersShares
    
    Amount
    
    Capital
    
    Deficit
    
    Stock
    
    EquityBalance at June 30, 2003
    
    
    42,379,001
    
    
    $
    4,239
    
    
    $
    60,279,880
    
    
    $
    (52,750,140
    )
    
    $
    (5,424,701
    )
    
    $
    2,109,278Issuance of stock to guarantor of credit facility
    
    
    300,000
    
    
    
    30
    
    
    
    869,970
    
    
    
    
    
    
    
    
    
    
    
    870,000Issuance of stock in private placement transaction
    
    
    2,333,333
    
    
    
    233
    
    
    
    3,464,376
    
    
    
    
    
    
    
    
    
    
    
    3,464,609Issuance of stock upon exercise of stock options
    
    
    546,000
    
    
    
    55
    
    
    
    351,315
    
    
    
    
    
    
    
    
    
    
    
    351,370Issuance of stock upon conversion of related
party note payable
    
    
    819,313
    
    
    
    82
    
    
    
    899,383
    
    
    
    
    
    
    
    
    
    
    
    899,465Issuance of stock upon conversion of subordinated
notes payable
    
    
    3,922,539
    
    
    
    392
    
    
    
    4,043,049
    
    
    
    
    
    
    
    
    
    
    
    4,043,441Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,652,954
    
    
    
    
    
    
    
    4,652,954Balance at June 30, 2004
    
    
    50,300,186
    
    
    
    5,031
    
    
    
    69,907,973
    
    
    
    (48,097,186
    )
    
    
    (5,424,701
    )
    
    
    16,391,117Recognition of compensation expense related to
issuance of stock options
    
    
    
    
    
    
    
    
    
    
    264,802
    
    
    
    
    
    
    
    
    
    
    
    264,802Issuance of stock upon exercise of stock options
    
    
    156,666
    
    
    
    16
    
    
    
    91,683
    
    
    
    
    
    
    
    
    
    
    
    91,699Fees related to private placement transactions
    
    
    
    
    
    
    
    
    
    
    (98,244
    )
    
    
    
    
    
    
    
    
    
    
    (98,244
    )Issuance of stock upon conversion of related
party note payable
    
    
    14,550
    
    
    
    1
    
    
    
    14,549
    
    
    
    
    
    
    
    
    
    
    
    14,550Repurchase of common stock
    
    
    (875,700
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,256,783
    )
    
    
    (2,256,783
    )Retirement of treasury stock
    
    
    
    
    
    
    (88
    )
    
    
    (2,256,695
    )
    
    
    
    
    
    
    2,256,783
    
    
    
    Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    15,891,492
    
    
    
    
    
    
    
    15,891,492Balance at June 30, 2005
    
    
    49,595,702
    
    
    
    4,960
    
    
    
    67,924,068
    
    
    
    (32,205,694
    )
    
    
    (5,424,701
    )
    
    
    30,298,633Recognition of compensation expense related to
issuance of stock options
    
    
    
    
    
    
    
    
    
    
    1,292,234
    
    
    
    
    
    
    
    
    
    
    
    1,292,234Issuance of stock upon exercise of stock options
    
    
    826,363
    
    
    
    82
    
    
    
    640,386
    
    
    
    
    
    
    
    
    
    
    
    640,468Issuance of stock upon conversion of related
party note payable
    
    
    102,180
    
    
    
    10
    
    
    
    102,170
    
    
    
    
    
    
    
    
    
    
    
    102,180Repurchase of common stock
    
    
    (281,767
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (696,134
    )
    
    
    (696,134
    )Retirement of common stock
    
    
    
    
    
    
    (28
    )
    
    
    (6,120,807
    )
    
    
    
    
    
    
    6,120,835
    
    
    
    Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,337,539
    
    
    
    
    
    
    
    5,337,539Balance at June 30, 2006
    
    
    50,242,478
    
    
    $
    5,024
    
    
    $
    63,838,051
    
    
    $
    (26,868,155
    )
    
    $
    
    
    
    $
    36,974,920
 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 30,2006
    
    
    2005
    
    
    2004CASH FLOWS FROM OPERATING ACTIVITIESNet income
    
    $
    5,337,539
    
    
    $
    15,891,492
    
    
    $
    4,652,954Loss from discontinued operations
    
    
    
    
    
    
    
    
    
    
    1,593,843Income from continuing operations
    
    
    5,337,539
    
    
    
    15,891,492
    
    
    
    6,246,797Adjustments to reconcile net income to net cash provided by
operating activities:Depreciation and amortization, including amortization of deferred
financing costs
    
    
    695,095
    
    
    
    1,258,289
    
    
    
    1,201,675Provision for bad debts
    
    
    163,105
    
    
    
    15,787
    
    
    
    104,296Recognition of compensation expense related to issuance of stock
options
    
    
    1,292,235
    
    
    
    264,802
    
    
    
    Medicare settlement related to terminated operations
    
    
    
    
    
    
    
    
    
    
    (2,218,278
    )Gain on extinguishment of debt
    
    
    
    
    
    
    (3,000,000
    )
    
    
    (850,000
    )Deferred tax expense (benefit)
    
    
    2,767,095
    
    
    
    (7,306,924
    )
    
    
    Changes in operating assets and liabilities, excluding the
effect of disposals:Other receivables
    
    
    (249,964
    )
    
    
    262,455
    
    
    
    (12,450
    )Due from HMOs, net
    
    
    (2,853,996
    )
    
    
    (783,652
    )
    
    
    (1,287,409
    )Prepaid expenses and other current assets
    
    
    30,481
    
    
    
    171,230
    
    
    
    (105,724
    )Other assets
    
    
    (125,965
    )
    
    
    33,667
    
    
    
    3,763Accounts payable
    
    
    (84,214
    )
    
    
    155,988
    
    
    
    (179,337
    )Accrued expenses and other current liabilities
    
    
    (98,580
    )
    
    
    894,710
    
    
    
    (608,629
    )Net cash provided by continuing operations
    
    
    6,872,831
    
    
    
    7,857,844
    
    
    
    2,294,704Net cash used in discontinued operations
    
    
    (32,512
    )
    
    
    (151,399
    )
    
    
    (998,872
    )Net cash provided by operating activities
    
    
    6,840,319
    
    
    
    7,706,445
    
    
    
    1,295,832CASH FLOWS FROM INVESTING ACTIVITIESPurchase of certificate of deposit
    
    
    (596,637
    )
    
    
    (500,000
    )
    
    
    (30,000
    )Proceeds from maturity of certificates of deposit
    
    
    
    
    
    
    101,165
    
    
    
    29,743Purchase of property and equipment
    
    
    (280,675
    )
    
    
    (421,586
    )
    
    
    (144,585
    )Other assets
    
    
    (359,147
    )
    
    
    
    
    
    
    Net cash used in continuing operations
    
    
    (1,236,459
    )
    
    
    (820,421
    )
    
    
    (144,842
    )Net cash used in discontinued operations
    
    
    
    
    
    
    
    
    
    
    (938
    )Net cash used in investing activities
    
    
    (1,236,459
    )
    
    
    (820,421
    )
    
    
    (145,780
    )
 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 30,2006
    
    
    2005
    
    
    2004CASH FLOWS FROM FINANCING ACTIVITIESProceeds from note payable
    
    
    
    
    
    
    1,040,000
    
    
    
    Repayments on note payable
    
    
    (520,000
    )
    
    
    (520,000
    )
    
    
    Proceeds from issuance of stock in private placement transaction
    
    
    
    
    
    
    
    
    
    
    3,464,609Payment of fees related to private placement transactions
    
    
    
    
    
    
    (98,244
    )
    
    
    Payments on convertible subordinated notes
    
    
    
    
    
    
    
    
    
    
    (233,716
    )Payments on related party notes
    
    
    
    
    
    
    (7,882
    )
    
    
    (35,953
    )Principal repayments under capital lease obligations
    
    
    (127,053
    )
    
    
    (74,630
    )
    
    
    (76,000
    )Payment of deferred financing costs
    
    
    
    
    
    
    
    
    
    
    (15,000
    )Proceeds from exercise of stock options
    
    
    640,468
    
    
    
    91,699
    
    
    
    351,370Repurchase and retirement of common stock
    
    
    (696,134
    )
    
    
    (2,256,783
    )
    
    
    Payments on credit facility
    
    
    
    
    
    
    
    
    
    
    (2,315,000
    )Repayments to Medicare per agreement
    
    
    
    
    
    
    
    
    
    
    (1,730,745
    )Net cash used in financing activities
    
    
    (702,719
    )
    
    
    (1,825,840
    )
    
    
    (590,435
    )Net increase in cash and cash equivalents
    
    
    4,901,141
    
    
    
    5,060,184
    
    
    
    559,617Cash and cash equivalents at beginning of fiscal year
    
    
    5,780,544
    
    
    
    720,360
    
    
    
    160,743Cash and cash equivalents at end of fiscal year
    
    $
    10,681,685
    
    
    $
    5,780,544
    
    
    $
    720,360SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING
TRANSACTIONS:Retirement of treasury stock
    
    $
    5,424,701
    
    
    $
    2,256,783
    
    
    $
    Stock issued for deferred financing costs
    
    $
    
    
    
    $
    
    
    
    $
    870,000Stock issued upon conversion of subordinated notes payable
    
    $
    
    
    
    $
    
    
    
    $
    4,043,441Stock issued upon conversion of related party notes payable
    
    $
    102,180
    
    
    $
    14,550
    
    
    $
    899,465Purchase of equipment, furniture and fixtures with proceeds of
capital lease obligations
    
    $
    215,162
    
    
    $
    
    
    
    $
    61,820SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:Cash paid for taxes
    
    $
    270,000
    
    
    $
    
    
    
    $
    Cash paid for interest
    
    $
    12,870
    
    
    $
    40,229
    
    
    $
    563,750
 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
  Business
   NOTE 2  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
  Principles of Consolidation
  Accounting Estimates
  F-8




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##### Table of Contents



Fair Value of Financial Instruments
  Cash and Cash Equivalents
  Certificates of Deposit
  Due from HMOs
  Equipment, Furniture and Leasehold Improvements
  Goodwill and Other Intangible Assets
  st
  F-9




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##### Table of Contents



Deferred Financing Costs
  Deferred Revenue
   Accounting for Stock-Based Compensation
   Earnings Per Share
  F-10




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##### Table of Contents



Revenue Recognition
     Medical Service Expense
   Stop-loss Insurance
  F-11




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##### Table of Contents



Recent Accounting Pronouncements
 Accounting for Uncertainty in Income Taxes  an interpretation of FASB Statement No. 109
 Accounting Changes and Error Corrections, Accounting Changes, Reporting Accounting Changes in Interim Financial
Statements,
 Accounting for Stock-Based
Compensation . Accounting for Stock
Issued to Employees, Statement of Cash Flows
  Other Comprehensive Income
  Reclassifications
  NOTE 3  DISCONTINUED OPERATIONS
 F-12




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##### Table of Contents



Accounting for the Impairment or Disposal of
Long-Lived Assets,
 Goodwill
    
    $
    320,882Equipment, furniture and leasehold improvements
    
    
    111,640Other
    
    
    24,868$
    457,390
  Accounting for Costs
Associated with Exit or Disposal Activities
 NOTE 4  EQUIPMENT, FURNITURE AND LEASEHOLD IMPROVEMENTS
  Estimated UsefulJune 30,
    
    
    Lives2006
    
    
    2005
    
    
    (in years)Furniture, fixtures and equipment
    
    $
    2,705,674
    
    
    $
    2,437,852
    
    
    
    3-5Furniture and equipment under capital lease
    
    
    737,271
    
    
    
    522,109
    
    
    
    5Leasehold improvements
    
    
    163,900
    
    
    
    157,225
    
    
    
    53,606,845
    
    
    
    3,117,186Less accumulated depreciation
    
    
    (2,782,625
    )
    
    
    (2,446,521
    )$
    824,220
    
    
    $
    670,665
   F-13




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##### Table of Contents



For the year ending June 30,2007
    
    $
    97,7202008
    
    
    61,7002009
    
    
    36,9942010
    
    
    20,9702011
    
    
    217,384Less amount representing imputed interest
    
    
    21,565Present value of obligations under capital lease
    
    
    195,819Less current portion
    
    
    83,751Long-term capital lease obligations
    
    $
    112,068
  NOTE 5  DEBT
   NOTE 6  EARNINGS PER SHARE
  Year Ended June 30,2006
    
    
    2005
    
    
    2004Basic weighted average number of shares outstanding
    
    
    49,907,898
    
    
    
    50,231,870
    
    
    
    43,763,835Dilutive effect of stock options
    
    
    1,303,126
    
    
    
    1,689,274
    
    
    
    1,144,918Dilutive effect of convertible debt
    
    
    19,411
    
    
    
    84,920
    
    
    
    4,323,963Diluted weighted average number of shares outstanding
    
    
    51,230,435
    
    
    
    52,006,064
    
    
    
    49,232,716Not included in calculation of dilutive earnings per
share as impact is antidilutive:Stock options outstanding
    
    
    20,000
    
    
    
    255,000
    
    
    
    300,000Warrants
    
    
    760,000
    
    
    
    760,000
    
    
    
    760,000
 F-14




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##### Table of Contents



NOTE 7  STOCK OPTION PLAN AND WARRANTS
       F-15




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##### Table of Contents



Year Ended
    
    
    Year EndedJune 30, 2005
    
    
    June 30, 2004Net income as reported
    
    $
    15,891,492
    
    
    $
    4,652,954Add:Total stock-based employee
compensation expense reported in
net income
    
    
    254,000
    
    
    
    Deduct:Total stock-based employee
compensation expense determined
under SFAS No. 123 for all awards
    
    
    (1,372,348
    )
    
    
    (375,327
    )Pro forma net income
    
    $
    14,773,144
    
    
    $
    4,277,627Basic net income per common share:As reported
    
    $
    .32
    
    
    $
    .11Pro forma
    
    $
    .29
    
    
    $
    .10Diluted net income per common share:As reported
    
    $
    .31
    
    
    $
    .09Pro forma
    
    $
    .28
    
    
    $
    .09
  Year EndedJune 30, 2006Number
    
    
    Weighted Averageof Shares
    
    
    Exercise PriceOutstanding at beginning of the year
    
    
    3,814,000
    
    
    $
    1.22Granted
    
    
    730,000
    
    
    
    2.44Exercised
    
    
    (826,362
    )
    
    
    .78Forfeited
    
    
    (58,334
    )
    
    
    1.78Outstanding at end of the year
    
    
    3,659,304
    
    
    $
    1.56Exercisable at end of the year
    
    
    1,864,635Weighted average fair value per
share of options granted during the
year
    
    $
    1.41
  F-16




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##### Table of Contents



Options Outstanding
    
    Options ExercisableWeighted
    
    
    
    
    
    
    
    
    
    WeightedAverage
    
    
    
    
    
    
    
    
    
    AverageRange of
    
    
    
    
    
    Weighted
    
    Remaining
    
    
    
    
    
    Weighted
    
    RemainingExercise
    
    Number
    
    Average
    
    Contractual
    
    Number
    
    Average
    
    ContractualPrices
    
    Outstanding
    
    Exercise Price
    
    Life
    
    Exercisable
    
    Exercise Price
    
    Life$1.61-$2.99
    
    
    1,819,000
    
    
    $
    2.25
    
    
    
    8.73
    
    
    
    584,333
    
    
    $
    2.21
    
    
    
    8.33$.66-$1.51
    
    
    1,840,304
    
    
    $
    .87
    
    
    
    6.56
    
    
    
    1,280,302
    
    
    $
    .86
    
    
    
    6.20
     Warrants
    
    
    760,000Stock options
    
    
    2,087,667Total
    
    
    2,847,667
 NOTE 8  INCOME TAXES
   Year Ended June 30,2006
    
    2005
    
    2004Current:Federal
    
    $
    163,066
    
    
    $
    131,363
    
    
    $
    State
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    163,066
    
    
    
    131,363
    
    
    
    Deferred:Federal
    
    
    2,339,256
    
    
    
    2,411,423
    
    
    
    State
    
    
    427,839
    
    
    
    435,273
    
    
    
    Total
    
    
    2,767,095
    
    
    
    2,846,696
    
    
    
    Change in valuation allowance
    
    
    
    
    
    
    (10,153,620
    )
    
    
    Total income tax provision (benefit)
    
    $
    2,930,161
    
    
    $
    (7,175,561
    )
    
    $
    
 F-17




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##### Table of Contents



June 30,2006
    
    2005
    
    2004Deferred tax assets:Bad debt and notes receivable reserve
    
    $
    294,922
    
    
    $
    294,922
    
    
    $
    706,992Alternative minimum tax credit
    
    
    291,467
    
    
    
    131,363
    
    
    
    Other
    
    
    363,847
    
    
    
    160,296
    
    
    
    192,440Impairment charge
    
    
    1,726,600
    
    
    
    1,746,800
    
    
    
    1,975,228Share-based compensation
    
    
    395,246
    
    
    
    
    
    
    
    Net operating loss carryforward
    
    
    3,397,248
    
    
    
    6,340,985
    
    
    
    7,925,846Deferred tax assets
    
    
    6,469,330
    
    
    
    8,674,366
    
    
    
    10,800,506Deferred tax liabilities:Depreciable/amortizable assets
    
    
    (1,929,501
    )
    
    
    (1,367,442
    )
    
    
    (646,886
    )Valuation allowance
    
    
    
    
    
    
    
    
    
    
    (10,153,620
    )Deferred tax liabilities
    
    
    (1,929,501
    )
    
    
    (1,367,442
    )
    
    
    (10,800,506
    )Net deferred tax asset
    
    $
    4,539,829
    
    
    $
    7,306,924
    
    
    $
    
   Year Ended June 30,2006
    
    2005
    
    2004Statutory federal rate
    
    
    34.0
    %
    
    
    34.0
    %
    
    
    34.0
    %State income taxes, net of federal income tax benefit
    
    
    3.63
    
    
    
    3.63
    
    
    
    3.63Goodwill and other non-deductible items
    
    
    (2.22
    )
    
    
    (3.46
    )
    
    
    2.85Change in valuation allowance
    
    
    
    
    
    
    (116.49
    )
    
    
    (40.48
    )Other
    
    
    0.03
    
    
    
    
    
    
    
    Effective tax rate
    
    
    35.44
    %
    
    
    (82.32
    )%
    
    
    0
    %
 NOTE 9  SHARE REPURCHASE PROGRAM
  NOTE 10  EMPLOYEE BENEFIT PLAN
  F-18




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##### Table of Contents



NOTE 11  COMMITMENTS AND CONTINGENCIES
 Legal Proceedings
  Leases
  For the fiscal year ending June 30,2007
    
    $
    1,529,1702008
    
    
    1,480,7262009
    
    
    1,232,6672010
    
    
    1,036,5972011
    
    
    865,187Total
    
    $
    6,144,347
 NOTE 12  VALUATION AND QUALIFYING ACCOUNTS
  Year ended June 30,2006
    
    2005
    
    2004Allowance for doubtful accounts related to
other receivables and accounts receivable:Balance at beginning of period
    
    $
    842,751
    
    
    $
    826,964
    
    
    $
    4,823,000Provision for doubtful accounts
    
    
    163,105
    
    
    
    15,787
    
    
    
    104,296Write-offs of uncollectible accounts receivable
    
    
    (207,599
    )
    
    
    
    
    
    
    (4,100,332
    )Balance at end of period
    
    $
    798,257
    
    
    $
    842,751
    
    
    $
    826,964Allowance for doubtful accounts related to notes receivable:Balance at beginning of period
    
    $
    
    
    
    $
    
    
    
    $
    6,367,000Provision for doubtful accounts
    
    
    
    
    
    
    
    
    
    
    Write-offs of uncollectible notes receivable
    
    
    
    
    
    
    
    
    
    
    (6,367,000
    )Balance at end of period
    
    $
    
    
    
    $
    
    
    
    $
    Valuation allowance for deferred tax assets:Balance at beginning of period
    
    $
    
    
    
    $
    10,153,620
    
    
    $
    11,862,974Additions
    
    
    
    
    
    
    
    
    
    
    Deductions
    
    
    
    
    
    
    (10,153,620
    )
    
    
    (1,709,354
    )Balance at end of period
    
    $
    
    
    
    $
    
    
    
    $
    10,153,620
 F-19




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##### Table of Contents



NOTE 13  ACQUISITION
    F-20




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##### Table of Contents



NOTE 14  QUARTERLY CONSOLIDATED FINANCIAL INFORMATION (UNAUDITED)
 For the Year Ended June 30, 2006First
    
    
    
    
    
    Third
    
    
    
    
    
    FullQuarter
    
    Second Quarter
    
    Quarter
    
    Fourth Quarter
    
    YearTotal revenue
    
    $
    29,871,150
    
    
    $
    29,382,706
    
    
    $
    37,524,804
    
    
    $
    36,212,252
    
    
    $
    132,990,912Net income
    
    $
    1,438,752
    
    
    $
    1,457,850
    
    
    $
    1,332,765
    
    
    $
    1,108,172
    
    
    $
    5,337,539Basic net income per common share
    
    $
    .03
    
    
    $
    .03
    
    
    $
    .03
    
    
    $
    .02
    
    
    $
    .11Diluted net income per common share
    
    $
    .03
    
    
    $
    .03
    
    
    $
    .03
    
    
    $
    .02
    
    
    $
    .10
 For the Year Ended June 30, 2005First
    
    
    
    
    
    Third
    
    
    
    
    
    FullQuarter
    
    Second Quarter
    
    Quarter
    
    Fourth Quarter
    
    YearTotal revenue
    
    $
    26,208,017
    
    
    $
    27,113,675
    
    
    $
    29,775,441
    
    
    $
    29,133,980
    
    
    $
    112,231,113Net income
    
    $
    1,109,029
    
    
    $
    2,138,397
    
    
    $
    1,471,455
    
    
    $
    11,172,611
    
    
    $
    15,891,492Basic net income per common share
    
    $
    .02
    
    
    $
    .04
    
    
    $
    .03
    
    
    $
    .22
    
    
    $
    .32Diluted net income per common share
    
    $
    .02
    
    
    $
    .04
    
    
    $
    .03
    
    
    $
    .21
    
    
    $
    .31
 F-21




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##### Table of Contents



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