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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

_______________

FORM 10-K

Commission file number: 001-12115

CONTINUCARE CORPORATION

Registrant’s telephone number, including area code: (305) 350-7515

Securities registered pursuant to Section 12(b) of the Act:

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 o

     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 o No x

     Aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant at September 5, 2003 (computed by reference to the last reported sale price of the registrant’s Common Stock on the American Stock Exchange on such date): $25,427,401.

     Number of shares outstanding of each of the registrant’s classes of Common Stock at September 5, 2003: 42,379,001 shares of Common Stock, $.0001 par value per share.

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GENERAL

     Unless otherwise indicated or the context otherwise requires, all references in this Form 10-K to “we,” “us,” “Continucare” or the “Company” refers to Continucare Corporation and our consolidated subsidiaries. We disclaim any intent or obligation to update “forward looking statements.” All references to a Fiscal year are to our fiscal year which ends June 30. As used herein, Fiscal 2004 refers to fiscal year ending June 30, 2004, Fiscal 2003 refers to fiscal year ending June 30, 2003, Fiscal 2002 refers to fiscal year ending June 30, 2002 and Fiscal 2001 refers to fiscal year ending June 30, 2001.

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

     Sections of this Annual Report contain statements that are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934 (the “Exchange Act”), and we intend that such forward-looking statements be subject to the safe harbors created thereby. Statements in this Report containing the words “estimate,” “project,” “anticipate,” “expect,” “intend,” “believe,” “will,” “could,” “should,” “may,” and similar expressions may be deemed to create forward-looking statements. Accordingly, such statements, including without limitation, those relating to our future business, prospects, revenues, working capital, liquidity, capital needs, interest costs and income, wherever they may appear in this document or in other statements attributable to us, involve estimates, assumptions and uncertainties which could cause actual results to differ materially from those expressed in the forward-looking statements. Specifically, this Annual Report contains forward-looking statements, including the following:

	•		our ability to service our indebtedness, make capital expenditures and respond to capital needs;
	•		our ability to restructure any of our debt or current liabilities;
	•		our ability to enhance the services we provide to our members;
	•		our ability to strengthen our medical management capabilities;
	•		our ability to improve our physician network;
	•		our ability to renew our managed care agreements and negotiate terms which are favorable to us and affiliated physicians;
	•		our ability to maintain our listing with the American Stock Exchange and our ability to regain compliance with the listing standards of the American Stock Exchange;
	•		our ability to respond to future changes in Medicare reimbursement levels and reimbursement rates from other third parties; and
	•		our ability to establish relationships and expand into new geographic markets.

     The forward-looking statements reflect our current view about future events and are subject to risks, uncertainties and assumptions. We wish to caution readers that certain important factors may have affected and could in the future affect our actual results and could cause actual results to differ significantly from those expressed in any forward-looking statement. The following important factors, in addition to factors we discuss elsewhere in this Annual Report, including the section entitled “Risk Factors,” could prevent us from achieving our goals, and cause the assumptions underlying the forward-looking statements and the actual results to differ materially from those expressed in or implied by those forward-looking statements:

	•		pricing pressures exerted on us by managed care organizations and the level of payments we receive under governmental programs or from other payors;
	•		future legislation and changes in governmental regulations;
	•		the impact of Medicare Risk Adjustments on payments we receive for our managed care operations;
	•		loss of significant contracts;
	•		general economic and business conditions;
	•		changes in estimates and judgments associated with our critical accounting policies;
	•		retroactive cost report adjustments;
	•		federal and state investigations;
	•		the enactment of unfavorable legislation by the Congress of the United States;
	•		the ability of our home health agencies to become profitable;
	•		the collection of our home health agencies’ receivables from Medicare and other payors on a timely basis;
	•		our ability to successfully recruit and retain medical professionals; and
	•		impairment charges that could be required in future periods.

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RISK FACTORS

Our Working Capital Deficit and Substantial Leverage Could Adversely Affect Our Ability to Satisfy Our Obligations as They Become Due

     Our auditors’ opinion on the June 30, 2003 consolidated financial statements states that, although our financial statements have been prepared on a going concern basis, there is a significant uncertainty as to whether we will be able to fund our obligations and satisfy our debt obligations as they become due in Fiscal 2004. At June 30, 2003, our working capital deficit was approximately $5,211,000, our total indebtedness accounted for approximately 87% of our total capitalization and we had principal and interest of approximately $2,363,000 outstanding under our credit facility.

     Our credit facility matures on March 31, 2004, is personally guaranteed by one of our principal shareholders and contains, among other conditions, a financial covenant that requires us to maintain a fixed charge coverage ratio of 1.05 to 1.00 beginning December 31, 2003 and measured quarterly thereafter. There can be no assurances that we will be able to meet this financial covenant at December 31, 2003 or be able to maintain it as required by the credit facility. Our failure to satisfy this financial covenant could result in a default under our credit facility. If a default occurs under our credit facility, the lender could elect to declare all our outstanding borrowings, as well as accrued interest, to be due and payable and require us to apply our available cash to repay these borrowings. Based on our current cash flow projections, it appears unlikely that we will have sufficient funds available to fully repay the credit facility on or before March 31, 2004. Additionally, uncertainty exists as to whether we will be able to extend or replace the credit facility without either extending the personal guarantee of our principal shareholder or finding replacement guarantees, and there can be no assurance that we will be able to obtain such guarantees. Additionally, there can be no assurance that we will be successful in our attempts to either repay, extend or replace the credit facility and, if so, if this will occur on terms acceptable to us.

     In Fiscal 2003, we continued to review our operations and institute measures intended to operate profitably and reduce a significant working capital deficiency that resulted from losses incurred in prior years. In spite of the measures we have instituted, our home health agencies have continued to experience significant increases in their direct and indirect costs while their revenues have decreased. This has resulted in home health operating losses in Fiscal 2003, 2002, and 2001 of approximately $1,824,000, $1,275,000 and $534,000, respectively, before consideration of interest expense. In the fourth quarter of Fiscal 2003, we began to reorganize the home health agencies in an effort to reduce their overhead costs and began to explore new payor sources to increase patient referrals. There can be no assurances that these efforts will improve the operating results of our home health operations. If these efforts do not significantly improve the operating results of our home health operations, we may consider other alternatives with respect to the home health operations.

     During Fiscal 2003, the claims loss ratio for our managed care operations has stabilized. However, negative changes in the claims loss ratio, due to increases in the utilization of healthcare services as well as increases in medical costs without counterbalancing increases in premium revenues from our contracts with Health Maintenance Organizations (“HMOs”), would reduce the profitability and cash flows from our managed care operations. See “Our Physician Group Practice Contracts Require Us to Assume the Responsibility of Providing Medicare to our Managed Care Patients.” If in Fiscal 2004 we are unable to reduce our home health losses by increasing our referrals and reducing our indirect costs and are unable to maintain our current claims loss ratio for our managed care operation, these factors, compounded by the lack of availability of additional financing through the credit facility and the need to make annual payments for medical malpractice insurance which are due in the first and second quarters of Fiscal 2004, will result in a severe strain on our cash flow. If we are unable to satisfy our cash requirements, we may be required to take certain steps, such as borrowing additional funds, restructuring our indebtedness, selling assets, selling equity, reducing or delaying capital expenditures or payments to trade creditors

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and forgoing certain business opportunities. If we need additional capital to repay our obligations or fund operations, there can be no assurances that such capital can be obtained, or, if obtained, will be on terms acceptable to us. The incurring or assumption of additional indebtedness could result in the issuance of additional equity and/or debt which can have a dilutive effect on current shareholders and a significant effect on our operations.

Our Physician Group Practice Contracts Require Us to Assume the Responsibility of Providing Medical Care to our Managed Care Patients

     Approximately 96% of our net medical services revenue is determined under the terms of our managed care agreements with Vista Healthplan of South Florida, Inc. and its related affiliated companies (“Vista”) and Humana Medical Plans, Inc. (“Humana”) (collectively, the “HMOs”). Under these physician group practice (“PGP”) agreements we receive either a capitated fee or a percentage of the premium (“POP”) that the HMOs charge to their commercial members or receive from the Centers for Medicare and Medicaid Services (“CMS”) for their Medicare members or from the Agency for Health Care Administration (“AHCA”) for their Medicaid members. In exchange for our revenue under a POP agreement, we assume the responsibility for the provision of and payment for all medical services provided to each covered individual who selects one of our employed or contracted physicians as their primary care provider. Because the majority of members for whom we provide care are Medicare-eligible, our revenue to a large extent is determined by the premiums that CMS pays to the HMOs under their Medicare+Choice contracts (“M+C”). For the past three years on January 1st, CMS has increased the premiums paid to HMO’s for M+C members by approximately 2%. 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. While CMS has implemented annual 2% increases, the cost of providing health care services, including prescription drugs, has increased approximately 7.3% to 8.7% per year on a national average. To address this disparity, the HMOs have historically implemented various annual cost reduction measures, typically effective on January 1st of each year, such as reducing the benefits provided to their Medicare-eligible members, instituting copayments for certain services including prescription drug coverage, and by withdrawing from selective markets. Benefit changes that reduce the cost of providing services have a positive effect on our profitability and cash flows. There can be no assurances that any such benefit changes will be implemented in January 2004 or that benefit changes, if any, will be sufficient to offset the increasing cost of providing health care services. Additionally, the HMOs’ contracts with hospitals and medical specialists are subject to renegotiation and may be renegotiated on unfavorable terms, and could, therefore, offset any beneficial change in the HMO’s benefit packages. There can be no assurance that the HMOs will be able to renegotiate contracts with hospitals and other health care providers on favorable terms.

     We attempt to control certain of the health care costs of our HMO members by emphasizing preventive care, encouraging frequent health check-ups, monitoring compliance with drug therapies, entering into our own contracts with health care providers such as medical specialists and recommending that our members utilize hospitals and outpatient facilities that have favorable rate structures. Throughout Fiscal 2003, we have focused on strengthening our managed care operations by enhancing the services provided to members, strengthening our medical management capabilities and improving our physician network. We continue to focus on streamlining our managed care operations and implementing measures to contain the rising costs of providing heath services. However, increased utilization or unit cost, competition, government regulations and many other factors may, and often do, cause actual healthcare costs to exceed what was estimated. These factors may include, among other things:

	•		increased use of medical facilities and services, including prescription drugs;
	•		increased cost of such services;
	•		changes or reductions of our utilization management functions such as preauthorization of services, concurrent review or requirements for physician referrals;
	•		catastrophes or epidemics;
	•		the introduction of new or costly treatments, including new technologies;
	•		new government mandated benefits or other regulatory changes; and
	•		increased use of health care services, including doctors’ office visits and prescriptions resulting from terrorists’ attacks and subsequent terrorists threats, including bioterrorism.

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     If we cannot continue to improve our controls and procedures for managing our costs, our business, results of operations, financial condition and ability to satisfy our obligations could be adversely affected. To the extent that our HMO members require more frequent or extensive care, our operating margins may be reduced and, in certain cases, the revenue derived from our PGP contracts where we have assumed full financial responsibility for the provision of medical care may be insufficient to cover the costs of the services provided. In any of these events, our business prospects, financial condition, results of operations and cash flows may be materially adversely affected and we may be unable to meet our financial obligations as they become due.

     In addition, in certain jurisdictions, PGP agreements in which the provider bears the risk are regulated under state insurance laws. The degree to which these PGP arrangements are regulated by insurance laws varies on a state by state basis, and as a result, we may be limited in certain states, such as Florida, in which we may seek to enter into or arrange PGP agreements when those PGP contracts involve the assumption of risk. There can be no guarantee that the state of Florida will continue to maintain the position that we are not regulated as an insurer.

We Rely on Contracts with Two Key Health Maintenance Organizations and the Loss of a Material Contract with One of these Organizations Would Adversely Affect our Results of Operations

     In Fiscal 2003, we generated approximately 23% of our net medical services revenue from contracts with Vista and approximately 73% of our net medical services revenue from contracts with Humana.

     Our ability to expand is dependent in part on increasing the number of managed care patients served by our staff model clinics or managed under PGP agreements, primarily through negotiating additional and renewing existing contracts with managed care organizations. Our managed care agreement with Vista is a 10-year agreement with the initial term expiring on June 30, 2008, unless terminated earlier for cause. We have the right to close unprofitable centers under our managed care agreement with Vista. In the event of termination of the Vista agreement, we must continue to provide services on a fee for service basis to a patient with a life-threatening or disabling and degenerative condition for sixty days as medically necessary.

     We currently have four managed care agreements with Humana. Two of the Humana agreements are POP full-risk agreements. One of the Humana agreements is a limited-risk agreement (the “Humana Limited-Risk Agreement”) and one agreement is a no-risk management agreement (See Item 1-“Business” and Note 1 of our consolidated financial statements). The majority of our business with Humana is governed by one of the Humana POP full-risk agreements (the “Humana POP Agreement”) which has a 10-year term expiring on July 31, 2008, unless terminated earlier for cause. The Humana POP Agreement automatically renews for subsequent one-year terms unless either party provides 180-days written notice of such party’s intent not to renew. In addition, the Humana POP Agreement may be terminated by the mutual consent of both parties at any time. Under certain limited circumstances, Humana may immediately terminate the Humana POP Agreement for cause, otherwise termination for cause shall require 90 days prior written notice with an opportunity to cure. In the event of termination of the Humana POP Agreement, we must continue to provide or arrange for services on a fee for service basis to any member hospitalized on the date of termination until the date of discharge or until we have made arrangements for substitute care. In some cases, Humana may provide 30 days notice as to an amendment or modification of the agreement, including but not limited to, renegotiation of rates, covered benefits and other terms and conditions. We have the right to terminate unprofitable physicians and to close unprofitable centers under the Humana POP Agreement.

     The other POP full-risk agreement with Humana and the Humana Limited-Risk Agreement are not material to our operations and contain similar termination provisions as described above.

     We maintain other managed care relationships subject to various negotiated terms. There can be no assurance that we will be able to renew any of these managed care agreements or, if renewed, that they will contain terms favorable to us and our affiliated physicians.

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     The loss of our managed care agreement with Vista or the Humana POP Agreement or significant reductions in reimbursement rates under these contracts could have a material adverse effect on our business, financial condition and results of operations.

Reimbursement for Our Managed Care Operations will be Effected by the Medicare Risk Adjustment

     The Balanced Budget Act of 1997 directed the Health Care Financing Administration (now CMS) to replace the existing system of risk adjustment, which previously relied solely on demographic factors, with one that took enrollees’ health status into account (the “Medicare Risk Adjustment” or “MRA”). The demographic-only portion of the payment was adjusted for age, gender, Medicaid eligibility, institutional status and working aged status. The revised MRA portion of the payment, however, includes these same categories but adds health status as a new criteria. Such health status is measured by the previous medical costs for inpatient hospital stays incurred by the individual. These are then used to determine each individual’s expected future medical risk and, therefore, how much the health plan in which they are enrolled should be paid. To ensure that health plans had time to adjust to the new payment method, CMS built a five-year transition period into the MRA methodology it adopted. The initial data used to facilitate the transition to MRA was based solely upon inpatient hospital encounter data. For 2000 and 2001, under the Balanced Budget Refinement Act of 1999 (“BBRA”) the transition to risk adjustment was based upon a blend percentage consisting of 10% risk adjustment payment and 90% on the adjustment for demographic factors. For 2002, the blend percentage was adjusted to 20% risk adjustment payment and 80% on the adjustment for demographic factors. The law requires that the ambulatory data be incorporated beginning January 1, 2004, at which time the blend percentage will consist of 30% risk adjustment payment and 70% on the adjustment for demographic factors. In 2005, the blend percentage will consist of 50% risk adjustment payment and 50% on the adjustment for demographic factors. In 2006, the blend percentage will consist of 75% risk adjustment payment and 25% on the adjustment for demographic factors. In 2007, the blend percentage will consist of 100% risk adjustment payment and 0% on the adjustment for demographic factors. Through Fiscal 2003, our payments from the HMOs have substantially been based on the demographic model. However, in Fiscal 2004, we anticipate that the payments we receive from the HMOs will begin reflecting the MRA methodology. At this time, it cannot be determined if this impact will be favorable or unfavorable.

Our Intangible Assets Represent a Substantial Portion of Our Total Assets

     As of June 30, 2003, intangible assets, which include goodwill and other separately identifiable intangible assets, represented approximately 78% of our total assets. Effective July 1, 2001, we adopted Statement of Financial Accounting Standards No. 141, “Business Combinations” (“SFAS No. 141”) and Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets” (“SFAS No. 142”). These standards require that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. SFAS No. 141 also specifies criteria that intangible assets acquired in a purchase method business combination must meet to be recognized and reported apart from goodwill, noting that any purchase price allocable to an assembled workforce may not be accounted for separately. Under SFAS No. 142, goodwill and intangible assets with indefinite useful lives are no longer amortized, but are reviewed annually for impairment or more frequently if certain impairment 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. Indicators of a permanent impairment include, among other things, significant adverse change 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 business that is to be sold.

     As 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 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 value of the total net assets, including goodwill and intangible assets. We perform our annual impairment test on May 1st of each year. We completed our annual impairment test on May 1, 2003 and determined that no impairment existed. Accordingly, no impairment charges were required at June 30, 2003. 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 which could result in the determination that a portion of our intangible assets are impaired and must be written-off. Depending on

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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. Any impairment charges required in future periods could also have an adverse impact on our ability to regain compliance with the continued listing standards of the American Stock Exchange and could result in the delisting of our common stock. See “If We Do Not Regain Compliance with the Continued Listing Standards by December 31, 2003, Our Common Stock May be Delisted by the American Stock Exchange.”

     In the event we engage in future acquisitions that result in the recognition of additional intangible assets with definite useful lives, our amortization expense would increase. In certain circumstances, amortization generated by these intangible assets may not be deductible for tax purposes.

We Have Various Legal Proceedings Pending Against Us and Our Insurance Coverage May Not Adequately Cover Our Losses; We Are Subject to Insurance Premium Increases

     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, some of which are currently ongoing. See Item 3 “Legal Proceedings” and Note 12 of our consolidated financial statements. Medical malpractice claims are subject to the attendant risk of substantial damage awards. While we intend to defend these matters vigorously, there can be no assurances that we will prevail. 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. While we attempt to conduct our operations in such a way as to reduce the risk that results in litigation, there can be no assurance that pending or future litigation, including litigation other than medical malpractice claims and whether or not described in this Annual Report, will not have a material adverse affect on us or that liability resulting from litigation will not exceed our insurance coverage.

     As a result of the national malpractice award trends and the significant loss of professional insurance underwriting capacity, the cost of our medical malpractice insurance has increased while the coverage afforded under the policies available has decreased. Additionally, as a result of the events of September 11, 2001, as well as recent high profile director and officer related litigation, the cost of our director and officer insurance policy has increased. We anticipate that the cost for both our medical malpractice insurance as well as our director and officer insurance will increase again in Fiscal 2004. We also maintain stop-loss insurance for which the premium is based on a cost per member. We may experience future increases in stop-loss insurance, which would have a material adverse effect on our business, financial condition and results of operations.

If We Do Not Regain Compliance with Continued Listing Standards by December 31, 2003, Our Common Stock May be Delisted by the American Stock Exchange

     On July 30, 2002, the American Stock Exchange (the “Exchange”) notified us it had completed its review of our listing qualifications and has accepted our plan to regain compliance with continued listing standards by December 31, 2003. The plan includes quarterly milestones which, as of the date of the filing of this annual report, we have not met. If we do not show progress in obtaining these milestones or if we are unable to regain compliance with the continued listing standards by December 31, 2003, our common stock may be delisted from the Exchange. As of the date of this filing, we are still below the continued listing requirements of the Exchange with respect to requirements which include the need for us to maintain stockholders’ equity of at least $4 million and not sustain losses from continuing operations and/or net losses in three of our four most recent fiscal years. We are unable to guarantee that the Exchange will continue to list our common stock.

We are Subject to Risks Under Our Fee for Service Arrangements

     Certain of our physicians also render services under a fee-for-service arrangement and typically bill various payors, such as governmental programs (e.g. Medicare and Medicaid), private insurance plans and managed care plans, for health care services provided to patients. In 1992, the Medicare program began reimbursing physicians and certain non-physician professionals such as physical, occupational and speech therapists, clinical psychologists

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and clinical social workers, pursuant to a fee schedule derived using a resource-based relative value scale (“RBRVS”). Reimbursement amounts under the physician fee schedule are subject to periodic review and adjustment and may affect our revenues to the extent they are dependent on reimbursement under the fee schedule. There can be no assurance that payments under governmental programs or from other payors will remain at present levels. In addition, payors can deny reimbursement if they determine that treatment was not performed in accordance with the cost-effective treatment methods established by such payors or was experimental or for other reasons. Also, fee-for-service arrangements involve credit risks related to the uncollectibility of accounts receivable.

We Depend on Reimbursement by Third-Parties

     Our home health agencies (“HHAs”) receive reimbursement from the Medicare and Medicaid programs, insurers, self-funded benefit plans for home health agencies and other third-party payors. The Medicare and Medicaid programs are subject to statutory and regulatory changes, retroactive and prospective rate adjustments, administrative rulings and funding restrictions, any of which could have the effect of limiting or reducing reimbursement levels. Although we derived less than 4% of our net medical services revenue directly from the Medicare and Medicaid programs in Fiscal 2003, a substantial portion of our managed care revenues are based upon Medicare reimbursable rates. Any changes that limit or reduce Medicare reimbursement levels could have a material adverse effect on our business. Further, significant changes have or may be made in the Medicare program, which could have a material adverse effect on our business, results of operations, prospects, financial results, financial condition or cash flows. In addition, the Congress of the United States may enact unfavorable legislation, which could adversely affect operations by, for example, decreasing Medicare reimbursement rates.

     Effective October 1, 2000, our Medicare HHA services became subject to the prospective pay system (“PPS”). Under PPS, we are reimbursed a fixed fee per treatment unit. If we have costs greater than the fixed fee amount, we will incur losses for our Medicare HHA services. Effective October 1, 2002, as a result of the Balanced Budget Act of 1997 (the “BBA”) we became subject to a 15% reduction to the cost limits and per-patient limits that were in place as of September 30, 1999. In addition, future changes in reimbursement rates could have a material adverse effect on our business, financial condition or results of operations.

     For periods beginning on or after October 1, 1997, HHAs are required to submit claims for payment for HHA services only on the basis of the geographic location at which the service was furnished. However, as each of our HHAs only operate in the single county in which they are licensed, we have not been impacted by these requirements. As we expand into other counties, any resultant reduction in our cost limits could have a material adverse effect on our business, financial condition or results of operation.

     Most services and medical supplies provided by a Medicare HHA during a particular episode of care must be billed by the HHA. Outside suppliers may not bill the Medicare program directly for services or medical supplies provided by the supplier to patients while under the care of a Medicare HHA. Instead, the HHA must provide most home health services or medical supplies either directly or pursuant to an arrangement with an outside supplier if the HHA bills Medicare directly. CMS clarifies that the law is silent regarding the specific terms of HHA payments to outside suppliers and does not authorize Medicare to impose any such requirements. To the extent that our HHAs utilize outside providers for the provision of applicable home health services, we believe we are in compliance with the consolidated billing requirements. Additionally, to the extent that we use outside providers, our cost to obtain such services and medical supplies may be greater than the reimbursement provided by the Medicare program, especially if Medicare reimbursement decreases but the cost of such services and medical supplies to us increases or stays constant.

     Pursuant to the Medicaid program, the Federal government supplements funds provided by the various states for medical assistance to the indigent. Payment for such medical and health services is made to providers in an amount determined in accordance with procedures and standards established by state law under federal guidelines. Significant changes have been and may continue to be made in the Medicaid program, which may have an adverse effect on our financial condition, results of operations and cash flows. During certain fiscal years, the amounts appropriated by state legislatures for payment of Medicaid claims have not been sufficient to reimburse providers for services rendered to Medicaid patients. During Fiscal 2003, we did not provide care to any patients where payment for those services would have been due to us directly from the Medicaid program. However, if in the future we

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begin providing services directly to Medicaid-eligible patients, failure of a state to pay Medicaid claims on a timely basis may have an adverse effect on our cash flow, results of operations and financial condition.

Pricing Pressures Exerted by Managed Care Organizations on Home Health Reimbursement Could Have a Material Adverse Effect on Us

     Payments per visit from managed care organizations typically have been lower than cost-based reimbursement from Medicare and reimbursement from other payors for nursing and related patient services. In addition, payors and employer groups are exerting pricing pressure on home health care providers, resulting in reduced profitability. Such pricing pressures could have a material adverse effect on our business, results of operations, prospects, financial results, financial condition or cash flows.

Future Legislation, Retroactive Adjustments and the Economic Downturn Could Have a Material Adverse Effect on Us

     Congress and the State Legislature may propose legislation altering the financing and delivery of healthcare services provided by us. It is difficult to predict the ultimate effect that any future legislation will have on us. Congress has recently been debating the initiation of a federally funded prescription drug coverage package. If adopted, this could result in a decrease in enrollment in M+C plans which would have a material adverse effect on our business and results of operations. However, it is unclear as this time if prescription drug coverage will be established as a result of the Congressional debates, and, if established, what form of prescription drug coverage will be enacted.

     Medicare retrospectively audits all reimbursements paid to participating providers, including those now or previously managed and/or owned by us. Accordingly, at any time, we could be subject to overpayment notices for Medicare reimbursement we have previously received and refund obligations for prior period cost reports that have not been audited and settled as of the date hereof. However, our Medicare home health agencies are the only portion of our current operations which would still be subject to these overpayment notices. Effective October 1, 2000, Medicare changed the manner in which home health agencies are reimbursed. Reimbursement to our Medicare home health agencies for services provided after October 1, 2000 are no longer subject to overpayment notices. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Notes 2, 5 and 11 of our Consolidated Financial Statements regarding the manner in which our home health agencies are reimbursed by Medicare and the overpayments that have been assessed against us.

     Military and security activities which followed terrorist attacks have impacted the United States economy and government spending priorities, and the effects of any further such developments pose risks and uncertainties to all U.S.-based business, including Continucare. Deficit spending by the government as the result of adverse developments in the economy and costs of the government’s response to the terrorist attacks could lead to increased pressure to reduce government expenditures for other purposes, including governmentally funded programs such as Medicare.

Continued Scrutiny of Healthcare Industry

     The healthcare industry has in general 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 healthcare 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.

     Federal and state governments have focused significant attention on healthcare reform intended to control healthcare costs and to improve access to medical services for uninsured individuals. These proposals include cutbacks to the Medicare and Medicaid programs and steps to permit greater flexibility in the administration of Medicaid. It is uncertain at this time what legislation regarding healthcare reform may ultimately be enacted or whether other changes in the administration or interpretation of governmental healthcare programs will occur. There

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can be no assurance that future healthcare legislation or other changes in the administration or interpretation of governmental healthcare programs will not have a material adverse effect on our business, results of operations, prospects, financial results, financial condition or cash flows.

We are Subject to Extensive Government Regulation

     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 exchange for, or in order to induce, referrals of patients or business for items or services for which reimbursement is payable in whole or in part by a federal healthcare program, including without limitation the Medicare and Medicaid programs. Violations of these laws are punishable by monetary fines, civil and criminal penalties, exclusion from participation in government-sponsored healthcare 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. CMS has published regulations, which describe certain “safe harbor” arrangements that will not be deemed to constitute violations of the Anti-Kickback Law. Because the regulations describe safe harbors and do not purport to describe comprehensively all lawful or unlawful economic arrangements or other relationships between health care providers and referral sources, the failure of an arrangement to meet the requirements of a safe harbor is not a per se violation of the Anti-kickback Law.

     We believe that our contracts with providers, physicians and other referral sources are in material compliance with the Anti-Kickback Law and we will continue to make every effort to comply with the Anti-Kickback Law. However, the Office of the Inspector General of the Department of Health and Human Services (“HHS”), the Department of Justice and other federal agencies interpret these fraud and abuse provisions liberally and enforce them aggressively. While we believe that we are in material compliance with such laws, there can be no assurance that our practices, if reviewed, would be found to be in full compliance with such laws, as such laws ultimately may be interpreted. It is our policy to monitor our compliance with such laws and to take appropriate actions to ensure such compliance.

     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.

     We believe that our contracts with providers, physicians and other referral sources are in material compliance with the state laws and will make every effort to comply with the state laws. However, there can be no assurances that we will not be alleged to have violated the state laws, and if an adverse determination is reached, whether any sanction imposed would have a material adverse effect on our financial condition, results of operations or cash flows.

     Restrictions on Physician Referrals. The federal Anti-Self Referral Law (the “Stark Law”) prohibits certain patient referrals by interested physicians. Specifically, the Stark Law prohibits a physician, or an immediate family member, who has a financial relationship with an 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 or other diagnostic 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, an entity. The Stark Law also prohibits an entity receiving a prohibited referral from billing the Medicare or Medicaid programs for any services rendered to a patient. 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 the Medicare and Medicaid programs.

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     In January 2001, HHS issued part one of final regulations interpreting the Stark Law, which became effective in January 2002. We believe that we are presently in material compliance with the Stark Law, including the new regulations that became effective in January 2002, and will make every effort to comply with the Stark Law. However, there can be no assurances that we will not be alleged to have violated the Stark Law, and if an adverse determination is reached, whether any sanction imposed would have a material adverse effect on our results of operations, financial condition or cash flows.

     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”) were issued in August 2002 and became effective in April 2003. In addition, regulations with respect to the transmission of Protected Health Information were to become effective in October 2002 and would establish uniform standards relating to data reporting, formatting, and coding that certain health care providers must use when conducting certain transactions involving health information. While the compliance date for these regulations was October 2002, we applied for an extension to October 2003 by submitting a compliance extension plan to the Department of Health and Human Services before October 16, 2002. All covered entities must comply with the transaction and code set standards by October 16, 2003. We believe we are currently in compliance with the regulations regarding the transmission of Protected Health Information. However, it is possible that some covered entities, including our payors, will not be sufficiently prepared to meet these transaction requirements, potentially causing disruption in the current claim submission and payment cycles, which could cause us to experience loss of anticipated revenue until compliance is achieved. Further, since many of the existing transaction systems established by our payors have not operated at full capacity using the newly-mandated standard transactions, it is possible that currently undetected errors may cause rejection of claims, extended payment cycles, system implementation delays, cash flow reduction, with the attendant risk of liability and claims against us. Regulations issued in February 2003 set standards for the security of electronic health information requiring compliance by April 21, 2005.

     Some of our operations will be subject to HIPAA and both sets of regulations. In addition we will have to comply with any applicable state privacy laws that are more stringent than HIPAA or are not preempted by HIPAA. The HIPAA regulations could result in significant financial obligations for us and will pose increased regulatory risk. The privacy regulations could limit our use and disclosure of protected health information and could impede the implementation of some of our business strategies. In addition, failure to comply with federal or state privacy laws and regulations could subject us to civil or criminal penalties. We have reviewed the regulations and implemented changes we believe cause us to continue to be in compliance with all applicable requirements of HIPAA, its regulations, and state privacy laws. We believe we are currently in material compliance with applicable state and federal privacy laws.

     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. We currently operate only in Florida, which does not have a corporate practice of medicine doctrine with respect to the types of physicians employed by or that contract with us at this time. There, however, can be no assurance that 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.

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     Clinic Registration. The State of Florida passed new legislation, effective October 1, 2001, which required us to register our medical centers as clinics with the state. The new legislation also placed some restrictions on reimbursement for certain services, such as magnetic resonance imaging, when payable by personal injury payors. Because such services represent a very small portion of our medical services revenue, we do not expect the new legislation to have an impact on our revenues. We have registered each of our medical centers as clinics with the State of Florida. We believe we are in compliance with the clinic registration requirements of the State of Florida.

     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. We believe our contractual arrangements with HMOs are not of the type identified in the OIG Bulletin.

     Financial Arrangements. We are also subject to federal and state laws that govern financial and other arrangements between healthcare providers. These laws often prohibit certain direct and indirect payments or fee-splitting arrangements between healthcare providers that are designed to induce or encourage over-utilization, under-utilization or the referral of patients or payor funded business, or the recommendation of a particular provider for medical products and services.

     Legislative Proposals. Congress is evaluating proposals to include establishing additional protections for personal health information, tax credits for the uninsured, proposals to reduce the number of medical errors by healthcare providers and systems of care, and various state and federal purchasing plans to allow individuals and small employers to purchase health insurance. Also, Congress is evaluating proposals to expand Medicare benefits to cover prescription drugs for Medicare-eligible seniors, including a pharmacy discount card.

Our Operations are Concentrated in Florida

     All of our medical services revenue in Fiscal 2003 were derived from our operations in Florida. We anticipate that in Fiscal 2004 our net medical services revenue will continue to be derived from our operations in Florida. Unless and until our operations become more diversified geographically (as a result of acquisitions or internal expansion), adverse economic, regulatory, or other developments in Florida 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 healthcare 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.

We May Not be able to Successfully Recruit or Retain Existing Relationships with Qualified Physicians and Medical Professionals

     The revenue generated by our managed care operations depends on the employment of physicians and other medical professionals providing medical services to our managed care patients and independent physicians contracting with us to participate in provider networks which are developed or managed by us. The revenue generated by our home health agencies is dependant upon our ability to recruit and retain nurses, therapists and other medical professionals to provide medical services to our home health patients. Physicians and other medical professionals can typically terminate their employment or service contract with us to provide medical services by providing notice of such termination. This type of termination would require us to find other medical professionals to provide services to our patients. We compete with general acute care hospitals and other healthcare providers for the services of medical professionals. Demand for physicians and other medical professionals is high and such professionals often receive competing offers. In the midst of this competitive environment, the need to recruit and retain quality nurses to service our home health care patients is further challenged by a nursing shortage which currently exists in South Florida. 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. The inability to successfully recruit and

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retain medical professionals could adversely affect our ability to successfully implement our business strategy. In such a competitive environment as currently exists, there can be no assurances that the cost to recruit and retain qualified physicians and other medical professionals will not exceed the revenues we receive for those services which could have a material adverse effect on our business, results of operations, prospects, financial results, financial condition or cash flows. In addition, any failure of these professionals to maintain the quality of care provided or to otherwise adhere to certain general operating procedures at our facilities or any damage to the reputation of a significant number of our practitioners could damage our reputation, subject us to liability and significantly reduce our revenues.

We are Controlled by One Shareholder

     Dr. Phillip Frost and entities affiliated with Dr. Frost, owned approximately 51.7% of our outstanding common stock as of September 5, 2003, assuming conversion of stock options and a convertible promissory note. Based on Dr. Frost’s stock ownership, the stock ownership of his affiliates and the conversion of stock options and the convertible promissory note, Dr. Frost has the ability to control most corporate actions requiring shareholder approval, including the election of directors. 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 or 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.

Our Industry is Already Competitive and Increased Competition Could Adversely Affect our Business

     The healthcare industry is highly competitive. We compete with many regional and national healthcare companies, some of which have greater resources than we do. Competition is generally based upon reputation, price and the ability to offer management expertise, financial benefits and other benefits for the particular provider in a quality and cost-effective manner. The pressure to reduce healthcare expenditures has emphasized the need to manage the appropriateness of health services provided to patients. We many not be able to continue to compete effectively in this industry, additional competitors may enter our markets, and this increased competition may have an adverse effect on our revenues.

We Depend on Our Management Information System

     Our operations are heavily dependent on our management information systems. Both the software and hardware used by us in connection with the services we provide have been subject to rapid technological change. Although we believe that our technology can be upgraded as necessary, the development of new technologies or refinements of existing technology could make our existing equipment obsolete. Although we are not currently aware of any pending technological developments that would be likely to have a material adverse effect on our business, there is no assurance that such developments will not occur.

* * * * * * *

     The risk factors described above could cause actual results or outcomes to differ materially from those expressed in any forward-looking statements made by us or on our behalf. Any forward-looking statement speaks only as of the date on which such statement is made, and we undertake no obligation to update any forward-looking statement or statements to reflect events or circumstances after the date on which such statement is made or to reflect the occurrences of unanticipated events. New factors emerge from time to time and it is not possible for us to predict all of such factors. Further, we cannot assess the impact of each such factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.

AVAILABLE INFORMATION

     Our internet 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.

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PART I

ITEM 1. BUSINESS

General

     We are a provider of outpatient healthcare and home healthcare services in Florida. Our managed care operations, through various capitated or POP arrangements, are responsible for providing primary care medical services (the “Primary Care Services”) or overseeing the provision of these Primary Care Services by affiliated physicians to approximately 16,700 patients on a full-risk basis and 7,100 patients on a limited or non-risk basis at June 30, 2003. Full-risk managed care agreements represent the majority of our managed care revenues and require that in exchange for a percentage of premium we assume responsibility to provide and pay for all of our patients’ medical needs. Our home health operations provide home healthcare services to recovering, disabled, chronically ill and terminally ill patients in their homes. In April 2003, we entered into a new contract with an HMO to provide management services on a non-risk basis to a group of South Florida primary care physicians that have contracts with the HMO. See discussion of our managed care contracts below and Note 1 to our consolidated financial statements.

Historical Development of Business

     On August 9, 1996, a subsidiary of Zanart Entertainment Incorporated (“Zanart”) was merged into Continucare Corporation (the “Merger”), which was incorporated on February 1, 1996 as a Florida corporation (“Old Continucare”). As a result of the Merger, the shareholders of Old Continucare became shareholders of Zanart, and Zanart changed its name to Continucare Corporation. During Fiscal 1997, our business focused on managing and providing services to behavioral health programs in hospitals and freestanding centers. We assigned these contracts in Fiscal 1998 and began to develop our current strategy, which currently consists of staff model clinics, Independent Practice Associations (“IPAs”) and Home Health Agencies (“HHAs”).

Industry Overview

     We believe the following three principal industry elements have created an opportunity for us: (i) the continued penetration of managed care in the M+C market; (ii) the highly fragmented nature of the delivery of outpatient services; and (iii) the shift in the provision of healthcare services from the hospital to lower cost outpatient locations and the home.

     Continued Penetration of Managed Care in the M+C market. In response to escalating expenditures in healthcare costs, payors, such as Medicare and managed care organizations operating under M+C contracts, have increasingly pressured physicians, hospitals and other providers to contain costs. This pressure has led to the growth of lower cost outpatient care, and efforts to reduce hospital admissions and lengths of stay. To further increase efficiency and reduce the incentive to provide unnecessary healthcare services to patients, payors have developed a reimbursement structure called percentage of premium. POP contracts require the payment to healthcare providers of a percentage of the total healthcare premium that an HMO receives from various payor sources. For this POP, providers assume responsibility for servicing all of the healthcare needs of those patients, regardless of their condition, and paying for all the costs associated with those medical services. We believe that low cost providers will succeed in the POP environment because such companies have the ability to manage certain critical components of the cost of patient care. While there has been a shift away from entering into these types of arrangements to provide services to commercial patients, rising healthcare costs and the financial imbalance of the Medicare delivery system has renewed interest in cost containment concepts.

     Highly Fragmented Market. The highly fragmented nature of the delivery of outpatient services has created an inefficient healthcare services environment for patients, payors and providers. Managed care companies and other payors must negotiate with multiple healthcare service providers, including physicians, hospitals and

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ancillary service providers, to provide geographic coverage to their patients. Physicians who practice alone or in small groups have experienced difficulty negotiating favorable contracts with managed care companies and have trouble providing the burdensome documentation required by such entities. In addition, healthcare service providers may lose control of patients when they refer them out of their network for additional services that such providers do not offer. We intend to continue affiliating with physicians who are sole practitioners or who operate in small groups to staff and expand our network.

     Shift Toward Low Cost Outpatient Treatment. Outpatient treatment has grown rapidly as a result of: (i) advances in medical technology, which have facilitated the delivery of healthcare in alternate sites; (ii) demographic trends, such as an aging population; (iii) significant cost savings in moving these non-emergent services from an acute care setting to a more cost effective outpatient setting; and (iv) preferences among patients to receive care outside of an inpatient setting. We expect this trend to continue as managed care companies and healthcare providers continue shifting towards the lower cost providers.

Business Strategy

     Our goal is to leverage the current industry dynamics by: (i) increasing our managed care revenue; (ii) maintaining a profitable physician network; and (iii) improving the operating results of our home health agencies.

     Increasing Managed Care Revenue. Our core business is comprised of our established network of staff model clinics from which we provide primary care services to our patients and to the public at large. By securing additional and expanding existing managed care contracts with the leading managed care companies in Florida, we believe that we will be able to increase our managed care enrollments. We believe that we have been successful in developing managed care relationships due to our network of quality physicians, the provision of a range of healthcare services, and the depth of our delivery network.

     Maintaining Physician Network. The physician network is the platform of our managed care delivery system. Our goal is to expand the profitability of our physician network by: (i) adding physicians to our IPAs; (ii) terminating relationships with physicians that fail to meet the operating criteria that we have set forth; and/or (iii) hiring physicians to work in our staff model clinics.

     Improving the Operating Results of Our Home Health Agencies. The home healthcare industry continues to undergo major restructuring in response to federal legislative enactments. Although we have taken steps to address these scheduled reimbursement changes, there can be no assurance that these reimbursement changes will not have a material adverse effect on our business. In addition to the changes in the home healthcare industry resulting from legislative enactments, there has also been a growth in the home healthcare industry for patients of worker compensation cases and in long-term care patients. In the fourth quarter of Fiscal 2003 we began to reorganize our home health operations in an effort to reduce certain overhead costs. At June 30, 2003, we operated five HHAs in South Florida.

Business Model

     Our core business model consists of three areas: staff model clinics, IPAs and HHAs. We provide medical services to patients through our employee physicians, affiliated IPA physicians, nurses, physical therapists and nurse aides. Additionally, we provide management and administrative services to both our employee physicians and to the physicians that are affiliated with us. See “We Depend on Reimbursement from Third Parties.”

     Staff Model Clinics. Our staff model clinics are medical centers where physicians, who are our employees or independent contractors, act as primary care physicians practicing in the area of general, family and internal medicine. Our revenue is generated through either capitated or POP monthly fee arrangements with HMOs or on a fee for service basis. The monthly POP fee arrangement is based upon a negotiated percentage of healthcare premium which is related to either Medicare, Medicaid or a commercial medical insurance program.

     IPAs. We have contracted on an independent contractor basis with various physicians and physician practices who currently provide or are qualified to provide medical services to our IPA members. We currently administer 3 IPA contracts. One IPA contract is a full-risk POP contract, one is a limited-risk contract and one is a

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management contract where we bear no financial risk for the performance of the affiliated IPA physicians. We pay the physicians a capitated fee for providing the services and offer the physician an opportunity to obtain bonus distributions if they operate their practice in accordance with their negotiated contract. In addition to providing certain administrative services to the physicians, we also provide utilization assistance.

     Home Health Agencies. Our home health services include five HHAs, two located in Miami-Dade county, two located in Broward county and one located in Palm Beach County. These agencies provide comprehensive nursing, physical therapy, nurse’s aides and home health aides to individuals in their home who are disabled, elderly or recovering from a debilitating illness, accident or surgery. Two of the agencies are compensated by Medicare and Medicaid in accordance with a pre-determined rate schedule. The remaining three agencies are private license HHAs.

Integrated Outpatient Healthcare

     We are a provider of integrated outpatient healthcare. We have established a network of physician practices as the primary caregiver to our patients and to the public at large and we also provide home health services.

     Office and Physician/Health Center Practices. Since commencing our operations in 1996, we have expanded our physician network through the acquisition of physician practices, employment of new physicians and affiliations with physicians through our IPAs. We operate fifteen staff model health center clinics that employ or contract with approximately 28 physicians and, as of the date of filing this annual report, provide management oversight assistance for IPAs with 34 physicians all of whom are located in Florida. As of June 30, 2003, we provided services to approximately 16,700 patients on a full-risk basis and 7,100 patients on a limited or non-risk basis.

     The physicians within our network treat patients in office-based settings as well as health centers. A typical office-based practice is operated in an office space that ranges from 2,500 to 3,000 square feet. The office typically employs or contracts with approximately one to two physicians. The physicians provide primary care services to their patients. A typical health center is operated in an office space that ranges from 5,000 to 8,000 square feet. A health center is typically staffed with approximately two to three physicians, and is open five days a week.

     Home Healthcare. We provide home healthcare services to recovering, disabled, chronically ill and terminally ill patients in their homes. Typically, a service care provider (such as a registered nurse, home health aide, therapist or technician) will visit the patient daily, several times a week or, in some instances, around-the-clock. Treatment may last for several weeks, several months or the remainder of the patient’s life. The services provided by us include skilled nursing, physical therapy, speech therapy, occupational therapy, medical social services and home health aide services. Reimbursement sources for the home health services we provided include Medicare, Medicaid, commercial insurers and private individuals.

Administrative Support Operations

     Administrative Functions. We enhance the operations of our physician practices by providing management functions such as payor contract negotiations, credentialing assistance, financial reporting, risk management services, access to lower cost professional liability insurance and the operation of integrated billing and collection systems. We believe we offer physicians increased negotiating power associated with managing their practice and fewer administrative burdens, which allows the physician to focus on providing care to patients.

     We enhance the operations of IPA physician practices by providing assistance with utilization management, pharmacy management, and specialist network development. Additionally, we provide financial reporting for the IPA practices to further assist with their operations.

     Employment and Recruiting of Physicians. We generally enter into multiple-year employment agreements that contain 90-day termination clauses with the physicians that we employ. These agreements usually provide for base compensation and benefits and may contain incentive compensation provisions based on quality indicators. The recruitment process includes interviews and reference checks. Our physicians are generally either board certified or board eligible.

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     Contract Negotiations. We believe that our experience in negotiating and managing risk contracts enhances our ability to market the services of our affiliated physicians to managed care payors and to negotiate favorable terms from such payors. The managed care contracts are held, managed and administered by one of our wholly-owned subsidiaries. We also perform quality assurance and utilization management under each contract on behalf of our affiliated physicians.

     Information Systems. We support freestanding systems for our physician practices to facilitate patient scheduling, patient management, billing, collection and provider productivity analysis. Although we are not currently aware of any pending technological developments that will likely require upgrades or additions to our information system, there is no assurance that such developments will not occur.

Managed Care

     Our strategy is to increase enrollment at our wholly-owned centers through joint marketing efforts with the HMOs and by adding new payor relationships and new providers to the existing network, as well as by expanding the network into new geographic areas where the penetration of managed healthcare is growing. We believe new payor and provider relationships are possible because of our ability to manage the cost of health care without sacrificing quality. During Fiscal 2003, substantially all of the revenues from the managed care operations were generated under a POP monthly fee arrangement with HMOs.

     Contracts with Payors. Contracts with payors generally provide for terms of one to ten years, may be terminated earlier upon notice for cause or upon renewal and in some cases without cause. Additionally, the contracts are subject to renegotiation of POP rates, covered benefits and other terms and conditions. Pursuant to payor contracts, we provide covered medical services and receive POP payments from payors for each enrollee who selects one of our network physicians as his or her primary care physician. To the extent that patients require more care or require supplemental medical care that is not otherwise reimbursed by payors, aggregate POP payments may be insufficient to cover the costs associated with the treatment of patients. We maintain stop-loss insurance coverage, which mitigates the effect of occasional high utilization of health care services. If revenues are insufficient to cover costs or we are unable to maintain stop-loss coverage at favorable rates, our business results of operations and financial condition could be materially adversely affected. In Fiscal 2003, we generated approximately 23% of our net medical services revenue from Vista and approximately 73% of our net medical services revenue from Humana. The loss of significant payor contracts and/or the failure to regain or retain such payor’s patients or the related revenues without entering into new payor relationships could have a material adverse effect on our business results of operations and financial condition.

     Our POP managed care agreement with Vista is a ten-year agreement with the initial term expiring on June 30, 2008, unless terminated earlier by Vista for cause. In the event of termination of the Vista agreement, we must continue to provide services on a fee for service basis to a patient with a life-threatening or disabling and degenerative condition for sixty days as medically necessary. Vista can terminate the agreement with respect to one or more benefit programs, we may only terminate the agreement in its entirety. However, we have the right to terminate unprofitable physicians and close unprofitable centers. Vista may also terminate the agreement with us for cause upon 30 days written notice of a material breach; 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.

     Effective March 31, 2001, we negotiated an amendment to our professional provider agreement with Vista (the “2001 Amendment”). The 2001 Amendment eliminated the medical claims liability incurred by a Vista IPA through March 31, 2001 and reduced other liabilities to Vista by $1,000,000. The 2001 Amendment also terminated our association with certain physician practices effective April 1, 2001 through May 31, 2001, which represented approximately 70% of the Vista IPA’s membership at that time. Effective January 1, 2003, we cancelled the remaining physician contracts under the Vista IPA (The “Terminated Vista IPA”.) The results of the Terminated Vista IPA’s operations are shown in the accompanying consolidated financial statements as discontinued operations. (See Note 1 to the consolidated financial statements.)

     We currently have four managed care agreements with Humana. Two of the Humana agreements are POP full-risk agreements. One of the Humana agreements is a limited-risk agreement and one agreement is a no-risk

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management agreement. The majority of our business with Humana is governed by one of the Humana POP full-risk agreements which has a 10-year term expiring on July 31, 2008 unless terminated earlier for cause. The Humana POP Agreement renews for subsequent one-year terms unless either party provides 180-days written notice of its intent not to renew. In addition, the Humana POP Agreement may be terminated by the mutual consent of both parties at any time. We have the right to terminate unprofitable physicians and to close unprofitable centers. Under certain limited circumstances, Humana may immediately terminate the Humana POP Agreement for cause, otherwise termination for cause shall require 90 days prior written notice with an opportunity to cure, if possible. Humana may terminate the POP Agreement, and/or any individual physician credentialed under the POP Agreement, upon written notice if Humana reasonably determines that: (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) if we engage in or acquiesce to any act of bankruptcy, receivership or reorganization; or (vi) if Humana loses its authority to do business in total or as to any limited segment or business (but only to that segment). In the event of termination of the Humana POP Agreement, we must continue to provide or arrange for services on a fee for service basis to any member hospitalized on the date of termination until the date of discharge or until we have made arrangements for substitute care. 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. In the event that 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. Such amendments may include changes to the compensation rates. If we object to such amendment within the requisite time frame, Humana may terminate the Humana POP Agreement upon 90 days written notice.

     The other POP full-risk agreement with Humana and the Humana Limited-Risk Agreement are not material to our operations and contain similar termination requirements as described above.

     On February 14, 2003 we executed a Letter of Agreement (the LOA”) and a Promissory Note Restructuring Agreement (the “PSNR Agreement”) with Humana. The PSNR Agreement canceled a $3,850,000 defaulted note. See Note 1 to our consolidated financial statements regarding the accounting treatment of the canceled note. Pursuant to the LOA, we agreed to execute a no-risk Physician Group Participation Agreement (“PGP Agreement”.)

     In April 2003, the PGP Agreement was executed that memorialized the terms of the LOA. The PGP Agreement is a two-year agreement that automatically renews for subsequent one (1) year terms unless either party provides written notice of non-renewal at least 60 days prior to end of the initial term or any subsequent renewal term. At any time during the original or any subsequent renewal term, either party can terminate the PGP Agreement without cause upon at least 90 days prior written notice. Additionally, Humana may terminate the PGP Agreement, and/or any individual physician or group of physicians employed or contracted by us (“Physician”), immediately upon written notice in the event Humana reasonably determines that: (i) continued participation by either us and/or a Physician under this PGP Agreement may affect adversely the health, safety or welfare of any Humana member or bring Humana or its provider networks into disrepute; or (ii) in the event of a Physician’s death or incompetence; or (iii) a Physician(s) fails to meet Humana’s credentialing or re-credentialing criteria; or (iv) if any Physician or any employee, subcontractor or independent contractor of a Physician is excluded from participation in any federal health care program; or (v) as specified in Humana’s Physician Administration Manual. Further, Humana may terminate the PGP Agreement immediately upon written notice to us in the event that: (i) we engage in or acquiesce to any act of bankruptcy, receivership or reorganization; or (ii) Humana loses its authority to do business in total or as to any segment of business, but then only as to that segment. The PGP Agreement also contains a provision for liquidated damages in the amount of $4,000,000 which can be asserted by Humana if we fail to exert our best efforts to perform under the contract or other specific events occur. (See Note 1 to our Consolidated Financial Statements.)

     Pursuant to the PGP Agreement, after June 30, 2003, we agreed to provide management services in connection with the oversight of an additional 10 physician groups (the “Physician Groups”) who provide care to approximately 4,500 patients; however, the management of the care for these patients will not have a material effect on the revenue, or expenses of our managed care operations. We have not accepted the financial responsibility for the cost of the medical care provided by the Physician Groups under the PGP Agreement to the Humana members.

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Accordingly, we do not record any POP revenue, claims expense, claims surplus or claims deficits for the Physician Groups. As compensation for the management services we are providing to the Physician Groups, we receive a management fee based on the number of patients for which are providing services on a monthly basis. Pursuant to the PGP Agreement, profits and losses incurred by the Physician Groups will be accounted for in a reserve account (the “PGPA Reserve Account”). We do not have any responsibility to replenish any losses in the PGPA Reserve Account nor will we receive any distribution from surpluses in the reserve account until the balance of the PGPA Reserve Account reaches $4,000,000. Once the PGPA Reserve Account reaches a balance of $4,000,000, the PGPA Reserve Account will no longer be used to account for the profits and losses incurred by the Physician Group. After that time, any accumulated PGP Agreement surplus will be paid to us, although we will not be at risk for any accumulated PGP Agreement losses.

     Neither the Vista nor the Humana agreements imposes a limit on the number of adjustments that may be made to their provider agreement.

     We had one additional non-risk based managed care contract during Fiscal 2003 which was cancelled effective July 1, 2003.

     We continually review and attempt to renegotiate the terms of our managed care agreements in an effort to obtain more favorable terms.

     Although we did not lose, on an aggregate basis, any significant payor contracts in Fiscal 2003, the loss of any of our current managed care contracts or significant reductions in capitated reimbursement rates under these contracts could have a material adverse effect on our business, financial condition and results of operations.

     Fee-for-Service Arrangements. Certain of our physicians also render services under a fee-for-service arrangement and typically bill various payors, such as governmental programs (e.g., Medicare and Medicaid), private insurance plans and managed care plans, for the health care services provided to their patients. There can be no assurance that payments under governmental programs or from other payors will remain at present levels. In addition, payors can deny reimbursement if they determine that treatment was not performed in accordance with the cost-effective treatment methods established by such payors or was experimental or for other reasons.

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: (i) written policies; (ii) 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 (iii) a “hot line” for employees to anonymously report violations.

Competition

     The healthcare industry is highly competitive. We compete with many regional and national healthcare companies, some of which have greater resources than we do. Competition is generally based upon reputation, price and the ability to offer management expertise, financial benefits and other benefits for the particular provider in a quality and cost-effective manner. The pressure to reduce healthcare expenditures has emphasized the need to manage the appropriateness of health services provided to patients.

Government Regulation

     General. Our business is affected by federal, state and local laws and regulations concerning healthcare. These laws and regulations impact the provision of healthcare to patients in physicians’ offices and in patients’ homes. Licensing, certification, reimbursement and other applicable government regulations vary by jurisdiction and are subject to periodic revision. We are not able to predict the content or impact of future changes in laws or regulations affecting the healthcare industry. See “Risk Factors.”

     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,

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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.

     HHAs, including those now or previously managed and/or owned by us, are subject to numerous licensing, certification and accreditation requirements. These include, but are not limited to, requirements relating to Medicare participation and payment, requirements relating to state licensing agencies, private payors and accreditation organizations. Renewal and continuance of certain of these licenses, certifications and accreditation are based upon inspections, surveys, audits, investigations or other review, some of which may require or include affirmative action or response by us. An adverse determination could result in a fine, and/or loss or reduction in the scope of licensure, certification or accreditation or could reduce the payment received or require the repayment of amounts previously remitted.

     Significant changes have been and may be made in the Medicare and Medicaid programs, which changes could have a material adverse impact on our financial condition. In addition, legislation has been or may be introduced in the Congress of the United States, which, if enacted, could adversely affect our operations by, for example, decreasing reimbursement by third-party payors such as Medicare or limiting our ability to maintain or increase the level of services provided to the patients.

     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.

     We believe that our contracts with providers, physicians and other referral sources are in material compliance with the Anti-Kickback Law and we will make every effort to continue to comply with the Anti-Kickback Law. However, in light of the narrowness of the safe harbor regulations and the scarcity of case law interpreting the Anti-Kickback Law, there can be no assurances that we will not be alleged to have violated the Anti-Kickback Law, and if an adverse determination is reached, whether any sanction imposed would have a material adverse effect on the Company’s financial condition, results of operations or cash flows

     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.

     We believe that our contracts with providers, physicians and other referral sources are in material compliance with the State laws and will make every effort to comply with the State laws. However, there can be no assurances that we will not be alleged to have violated the State laws, and if an adverse determination is reached, whether any sanction imposed would have a material adverse effect on our financial condition, results of operations or cash flows.

     Restrictions on Physician Referrals. The federal Anti-Self Referral Law (the “Stark Law”) prohibits certain patient referrals by interested physicians. Specifically, the Stark Law prohibits a physician, or an immediate family member, who has a financial relationship with an 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 or other diagnostic 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, an entity. The Stark Law also prohibits an entity receiving a prohibited referral from

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billing the Medicare or Medicaid programs for any services rendered to a patient. 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 the Medicare and Medicaid programs.

     On January 4, 2001, HHS issued part one of final regulations interpreting the Stark Law, which become effective on January 4, 2002. We believe that we are presently in material compliance with the Stark Law, including the new regulations that became effective January 4, 2002, and will make every effort to continue to comply with the Stark Law. However, there can be no assurances that we will not be alleged to have violated the Stark Law, and if an adverse determination is reached, whether any sanction imposed would have a material adverse effect on our results of operations, financial condition or cash flows.

     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”) were issued in August 2002 and became effective in April 2003. In addition, regulations with respect to the transmission of protected health information became effective in October 2002 and established uniform standards relating to data reporting, formatting, and coding that certain health care providers must use when conducting certain transactions involving health information. While the compliance date for