UNITED STATES SECURITIES AND EXCHANGE COMMISSION

FORM 10-K

(Mark One)

OR

[  ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number: 001-12115

CONTINUCARE CORPORATION

80 Southwest Eighth Street,
Suite 2350
Miami, Florida 33130
(Address of principal executive offices)

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

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

Securities registered pursuant to Section 12(g) of the Act: None

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [  ]

     Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendments to this Form 10-K. [X]

     Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes [  ] No [X]

     Aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant at September 13, 2004 (computed by reference to the last reported sale price of the registrant’s Common Stock on the American Stock Exchange on such date): $37,905,022.

     Number of shares outstanding of each of the registrant’s classes of Common Stock at September 13, 2004: 50,300,186 shares of Common Stock, $.0001 par value per share.

CONTINUCARE CORPORATION
ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED JUNE 30, 2004

TABLE OF CONTENTS

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GENERAL

     Unless otherwise indicated or the context otherwise requires, all references in this Form 10-K to “we,” “us,” “our,” “Continucare” or the “Company” refers to Continucare Corporation and its consolidated subsidiaries. All references to a “Fiscal year” refer to our fiscal year which ends June 30. As used herein, Fiscal 2005 refers to fiscal year ending June 30, 2005, Fiscal 2004 refers to fiscal year ending June 30, 2004, Fiscal 2003 refers to fiscal year ending June 30, 2003, and Fiscal 2002 refers to fiscal year ending June 30, 2002.

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

     All statements included in this Annual Report other than statements of historical fact, are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and we intend that such forward-looking statements be subject to the safe harbors created thereby. These forward-looking statements are based on our current expectations, estimates and projections about our industry, management’s beliefs, and certain assumptions made by us, all of which are subject to change. Forward-looking statements can often be identified by words such as “anticipates,” “expects,” “intends,” “plans,” “predicts,” “believes,” “seeks,” “estimates,” “may,” “will,” “should,” “would,” “could,” “potential,” “continue,” similar expressions, and variations or negatives of these words. These forward-looking statements are not guarantees of future results and are subject to risks, uncertainties and assumptions that are difficult to predict. Therefore, our actual results could differ materially and adversely from those expressed in any forward-looking statement as a result of various factors. Forward-looking statements may include statements about:

	•		Our ability to make capital expenditures and respond to capital needs;
	•		Our ability to enhance the services we provide to our patients;
	•		Our ability to strengthen our medical management capabilities;
	•		Our ability to improve our physician network;
	•		Our ability to enter into or renew our managed care agreements and negotiate terms which are favorable to us and affiliated physicians;
	•		Our ability to respond to future changes in Medicare reimbursement levels and reimbursement rates from other third parties;
	•		Our compliance with applicable laws and regulations;
	•		Our ability to establish relationships and expand into new geographic markets;
	•		The potential impact on our claims loss ratio as a result of the Medicare Risk Adjustments (“MRA”) and the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the “Medicare Modernization Act”); and
	•		Our ability to utilize our net operating losses for Federal income tax purposes.

     Forward-looking statements involve risks and uncertainties that cannot be predicted or quantified and, consequently, actual results may differ materially from those expressed or implied by such forward-looking statements. Forward-looking statements, therefore, should be considered in light of all of the information included or incorporated by reference in this Annual Report, including the section entitled “Risk Factors.” Such risks and uncertainties include, but are not limited to the following:

	•		Our ability to respond to capital needs;
	•		Our ability to achieve expected levels of patient volumes and control the costs of providing services;
	•		Pricing pressures exerted on us by managed care organizations;
	•		The level of payments we receive from governmental programs and other third party payors;
	•		Our ability to successfully recruit and retain qualified medical professionals;
	•		Future legislative changes in governmental regulations, including possible changes in Medicare programs that may impact reimbursements to health care providers and insurers;
	•		Our ability to comply with applicable laws and regulations;
	•		The impact of the Medicare Modernization Act and MRA on payments we receive for our managed care operations;
	•		Technological and pharmaceutical improvements that increase the cost of providing, or reduce the demand for, health care;
	•		Changes in our revenue mix and claims loss ratio;
	•		Our ability to enter into and renew managed care provider agreements on acceptable terms;
	•		Loss of significant contracts, including the PGP Agreement;
	•		Delays in receiving payments;
	•		Increases in the cost of insurance coverage, including our stop-loss coverage, or the loss of insurance coverage;
	•		The collectibility of our uninsured accounts and deductible and co-pay amounts;

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	•		Federal and state investigations;
	•		Lawsuits for medical malpractice and the outcome of any such litigation;
	•		Changes in estimates and judgments associated with our critical accounting policies;
	•		Our dependence on the management information systems of our HMO affiliates;
	•		Impairment charges that could be required in future periods;
	•		General economic conditions; and
	•		Uncertainties generally associated with the health care business.

     We caution our investors not to place undue emphasis on these forward-looking statements, which speak only as of the date of this Annual Report and we undertake no obligation to update or revise these statements as a result of new information, future events or otherwise.

RISK FACTORS

Our operations are dependent on two health maintenance organizations.

     We derive substantially all of our net medical services revenues under our managed care agreements with two health maintenance organizations (“HMOs”), Humana Medical Plans, Inc. (“Humana”) and Vista Healthplan of South Florida, Inc. and its affiliated companies (“Vista”). In Fiscal 2004, we generated approximately 75% of our revenues from contracts with Humana and 25% of our revenues from contracts with Vista. Most of our business with Humana is governed by one agreement (the “Humana POP Agreement”). The loss of the Humana POP Agreement or our managed care agreement with Vista, or significant reductions in payments to us under these contracts, could have a material adverse effect on our business, financial condition and results of operations.

Under our most important contracts we are responsible for the cost of medical services to our patients in return for a fixed fee.

     Our most important contracts with Humana and Vista are “full risk” agreements under which we receive for our services fixed monthly payments per patient at a rate established by the contract, also called a capitated fee. In return, we assume full financial responsibility for the provision of all necessary medical care to our patients, even services we do not provide directly. Accordingly, we will be unable to adjust the revenues we receive under those contracts, and if medical claims expense exceeds our estimates our profits may decline. Relatively small changes in the ratio of our health care expenses to capitated revenues we receive can create significant changes in our financial results.

If we are unable to manage medical benefits expense effectively, our profitability will likely be reduced or we could cease to be profitable.

     We cannot be profitable if our costs of providing the required medical services exceed the revenues that we derive from those services. However, our most important contracts with Humana and Vista require us to assume full financial responsibility for the provision of all necessary medical care in return for a capitated fee per patient at a rate established by the contract. Accordingly, as the costs of providing medical services to our patients under those contracts increases, the profits we receive with respect to those patients decreases. If we cannot continue to improve our controls and procedures for estimating and managing our costs, our business, results of operations, financial condition and ability to satisfy our obligations could be adversely affected.

A failure to estimate incurred but not reported medical benefits expense accurately will affect our profitability.

     Our medical benefits expense includes estimates of medical claims incurred but not reported, or IBNR. We estimate our medical cost liabilities using actuarial methods based on historical data adjusted for payment patterns, cost trends, utilization of health care services and other relevant factors. Actual conditions, however, could differ from those assumed in the estimation process. Due to the inherent uncertainties associated with the factors used in these assumptions, materially different amounts could be reported in our financial statements for a particular period under different possible conditions or using different, but still reasonable, assumptions. Adjustments, if necessary, are made to medical benefits expense when the criteria used to determine IBNR change and when actual claim costs are ultimately determined. Although our past estimates of IBNR have been adequate, they may be inadequate in the future, which would adversely affect our results of operations. Further, our inability to estimate IBNR accurately may also affect our ability to take timely corrective actions, further exacerbating the extent of any adverse effect on our results.

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Many factors that increase health care costs are largely beyond our ability to control.

     Increased utilization or unit cost, competition, government regulations and many other factors may, and often do, cause actual health care costs to increase. These factors may include, among other things:

	•		increased use of medical facilities and services, including prescription drugs and doctors’ office visits;
	•		increased cost of such services;
	•		new benefits to patients added by the HMOs to their covered services, whether as a result of the Medicare Modernization Act or otherwise;
	•		changes or reductions of our utilization management functions such as preauthorization of services, concurrent review or requirements for physician referrals;
	•		catastrophes , epidemics or terrorist attacks;
	•		the introduction of new or costly treatments, including new technologies;
	•		new government mandated benefits or other regulatory changes;
	•		increases in the cost of “stop loss” or other insurance.

Many of these factors are beyond our ability to control or predict.

Health care reform initiatives, particularly changes to the Medicare system, could adversely effect our operations.

     Substantially all of our net medical services revenues from continuing operations are based upon Medicare funded programs. The federal government from time to time explores ways to reduce medical care costs through Medicare reform and through health care reform generally. Any changes that would limit, reduce or delay receipt of Medicare funding or any developments that would disqualify us from receiving Medicare funding could have a material adverse effect on our business, results of operations, prospects, financial results, financial condition or cash flows. Due to the diverse range of proposals put forth and the uncertainty of any proposal’s adoption, we cannot predict what impact any Medicare reform proposal ultimately adopted may have on our business, financial position or results of operations.

Medicare premiums have generally risen more slowly than the cost of providing health care services.

     Our revenues are largely determined by the premiums that the Centers for Medicare and Medicaid Services (“CMS”) pay to the HMOs under their Medicare Advantage (formerly known as Medicare+Choice) contracts. Although CMS has generally increased the premiums paid to the HMOs for Medicare Advantage patients each year, the rate of increase has generally been less than the rate at which the cost of providing health care services, including prescription drugs, has increased on a national average. As a result, we are under increasing pressure to contain our costs, and the margin we realize on providing health care services has generally decreased over time. There can be no assurance that CMS will maintain its premiums at the current level or continue to increase its premiums each year. Additionally there can be no assurances that we will receive the total benefit of any premium increase the HMOs may receive.

Our revenues will be affected by the Medicare Risk Adjustment.

     The majority of patients to whom we provide care are Medicare-eligible and participate in the Medicare Advantage program. CMS is now implementing its Medicare Risk Adjustment project during which it is transitioning its methodology to a new system that takes into account the health status of Medicare Advantage participants in determining premiums paid for each participant rather than merely demographic factors, as historically has been the case. Beginning January 1, 2004, the new risk adjustment system requires that ambulatory data be incorporated, starting from a blend consisting of a 30% risk adjustment payment and the remaining 70% based on demographic factors. Thereafter the blend percentages will be adjusted as follows:

     For the first six months of Fiscal 2004, our payments from the HMOs were substantially based on the demographic model. For the six-month period ended June 30, 2004, we estimate that the new risk adjustment methodology increased our revenues per patient by approximately 3%. We cannot assure what future impact this new risk adjustment methodology will have on our business,

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results of operations, or financial condition, however, it is possible that the new risk adjustment methodology may result in fluctuations in our medical services revenues from year to year.

Our intangible assets represent a substantial portion of our total assets.

     Our balance sheet includes intangible assets, including goodwill and other separately identifiable intangible assets, which represented approximately 73% of our total assets at June 30, 2004. We are required to review our intangible assets for impairment on an annual basis or more frequently if certain indicators of permanent impairment arise. Indicators of a permanent impairment include, among other things:

	•		a significant adverse change in legal factors or the business climate;
	•		the loss of a key HMO contract;
	•		an adverse action by a regulator;
	•		unanticipated competition;
	•		loss of key personnel; or
	•		allocation of goodwill to a portion of business that is to be sold.

     Because we operate in a single segment of business, we perform our impairment test on an enterprise level. In performing the impairment test, we compare our fair value, as determined by the current market value of our common stock, to the current value of the total net assets, including goodwill and intangible assets. We completed our annual impairment test on May 1, 2004, and determined that no impairment existed. Accordingly, no impairment charges were required at June 30, 2004. Should we determine that an indicator of impairment has occurred, such as those noted above, we would be required to perform an additional impairment test. Depending on the market value of our common stock at the time that an impairment test is required, there is a risk that a portion of our intangible assets would be considered impaired and must be written-off during that period. Such a write-off could have a material adverse effect on our results of operations.

We are subject to government regulation.

   Our business is regulated by the federal government and the State of Florida. The laws and regulations governing our operations are generally intended to benefit and protect health plan members and providers rather than shareholders. The government agencies administering these laws and regulations have broad latitude to enforce them. These laws and regulations, along with the terms of our contracts, regulate how we do business, what services we offer, and how we interact with our patients, other providers and the public. We are subject to various governmental reviews, audits and investigations to verify our compliance with our contracts and applicable laws and regulations. Any adverse review, audit or investigation could result in:

	•		forfeiture of amounts we have been paid;
	•		imposition of civil or criminal penalties, fines or other sanctions on us;
	•		loss of our right to participate in government-sponsored programs, including Medicare;
	•		damage to our reputation in various markets;
	•		increased difficulty in hiring or retaining qualified medical personnel or marketing our products and services; and
	•		loss of one or more of our licenses to provide health care services.

   Any of these events could reduce our revenues and profitability and otherwise adversely affect our operating results.

The health care industry is subject to continued scrutiny.

     The health care industry has been the subject of increased government and public scrutiny in recent years, which has focused on the appropriateness of the care provided, referral and marketing practices and other matters. Increased media and public attention has focused on the outpatient services industry in particular as a result of allegations of fraudulent practices related to the nature and duration of patient treatments, illegal remuneration and certain marketing, admission and billing practices by certain health care providers. The alleged practices have been the subject of federal and state investigations, as well as other legal proceedings. There can be no assurance that we will not be subject to federal and state review or investigation from time to time, and any such investigation could adversely impact our business or results of operations, even if we are not ultimately found to have violated the law.

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We compete with many health care providers for patients and HMO affiliations.

     The health care industry is highly competitive. We compete for patients with many other health care providers, including local physicians and practice groups as well as local, regional and national networks of physicians and health care companies. We believe that competition for patients is generally based upon the reputation of the physician treating the patient, the physician’s expertise, and the physician’s demeanor and manner of engagement with the patient, and the HMOs that the physician is affiliated with. We also compete with other local, regional and national networks of physicians and health care companies for the services of physicians and for HMO affiliations. Some of our competitors have greater resources than we do, and we may not be able to continue to compete effectively in this industry. Further, additional competitors may enter our markets, and this increased competition may have an adverse effect on our revenues.

The agreement relating to most of our IPA relationships may soon expire.

     As of June 30, 2004, our independent physician affiliates (“IPAs”) provided services to approximately 1,200 patients on a full risk basis and to approximately 8,200 patients on a limited or non-risk basis. Most of our IPA relationships, including most of our non-risk IPA relationships, are governed under a single Physician Group Participation Agreement that we entered into with Humana in April 2003 (the “Humana PGP Agreement”). The Humana PGP Agreement expires in April 2005. We hope to maintain our relationship with these IPAs through Humana and intend to seek an extension or renewal of the Humana PGP Agreement, but we can not provide assurance that such an extension or renewal will be available to us on commercially acceptable terms or at all.

We may not be able to successfully recruit or retain existing relationships with qualified physicians and medical professionals.

     We depend on our physicians and other medical professionals to provide medical services to our managed care patients and independent physicians contracting with us to participate in provider networks we develop or manage. We compete with general acute care hospitals and other health care providers for the services of medical professionals. Demand for physicians and other medical professionals is high and such professionals often receive competing offers. If we are unable to successfully recruit and retain medical professionals our ability to successfully implement our business strategy could suffer. No assurance can be given that we will be able to continue to recruit and retain a sufficient number of qualified physicians and other medical professionals.

Our business exposes us to the risk of medical malpractice lawsuits.

     Our business entails an inherent risk of claims against physicians for professional services rendered to patients, and we periodically become involved as a defendant in medical malpractice lawsuits. Medical malpractice claims are subject to the attendant risk of substantial damage awards. Although these claims are generally covered by insurance, if liability results from any of our pending or any future medical malpractice claims, there can be no assurance that our medical malpractice insurance coverage will be adequate to cover liability arising out of these proceedings. There can be no assurance that pending or future litigation will not have a material adverse affect on us or that liability resulting from litigation will not exceed our insurance coverage.

Our insurance coverage may not be adequate, and rising insurance premiums could negatively affect our profitability.

     We rely on insurance to protect us from many business risks, including, “stop loss” insurance. In most cases, as is the trend in the health care industry, as insurance policies expire, we may be required to procure policies with narrower coverage, more exclusions and higher premiums. In some cases, coverage may not be available at any price. There can be no assurance that the insurance that we maintain and intend to maintain will be adequate, or that the cost of insurance and limitations in coverage will not adversely affect our business, financial position or results of operations.

Deficit spending and economic downturns could negatively impact our results of operations.

     Adverse developments in the economy often result in decreases in the federal budget and associated changes in the federal government’s spending priorities. We are presently in a period of deficit spending by the federal government, and those deficits are presently expected to continue for at least the next several years. Deficit spending by the federal government could lead to increased pressure to reduce government expenditures, including governmentally funded programs such as Medicare. If governmental funding of the Medicare program was reduced without a counterbalancing adjustment in the benefits offered to patients, our results of operations could be negatively impacted.

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We presently operate only in Florida.

     All of our medical services revenues are presently derived from our operations in Florida. Adverse economic, regulatory, or other developments in Florida (including hurricanes) could have a material adverse effect on our financial condition or results of operations. In the event that we expand our operations into new geographic markets, we will need to establish new relationships with physicians and other health care providers. In addition, we will be required to comply with laws and regulations of states that differ from the one in which we currently operate, and may face competitors with greater knowledge of such local markets. There can be no assurance that we will be able to establish relationships, realize management efficiencies or otherwise establish a presence in new geographic markets.

A significant portion of our voting power is concentrated in one shareholder.

     One of our directors, Dr. Phillip Frost, and entities affiliated with him, beneficially owned approximately 44% of our outstanding common stock as of September 13, 2004. Based on Dr. Frost’s significant beneficial ownership of our common stock, he has a substantial ability to influence most corporate actions requiring shareholder approval, including the election of directors, and will be able to effectively control any shareholder votes or actions with respect to such matter. This influence by Dr. Frost may make us less attractive as a target for a takeover proposal. It may also make it more difficult to discourage a merger proposal that Dr. Frost favors or to wage a proxy contest for the removal of incumbent directors. As a result, this may deprive the holders of our common stock of an opportunity they might otherwise have to sell their shares at a premium over the prevailing market price in connection with a merger or acquisition of us or with or by another company.

We are dependent on our executive officers and other key employees.

     Our operations are highly dependent on the efforts of our Chief Executive Officer and our other key employees. Our executive officers and key employees generally do not have employment agreements with us, but are instead employed on an “at will” basis. While we believe that we could find replacements, the loss of any of their leadership, knowledge and experience could negatively impact our operations. Replacing any of our executive officers or key employees might be difficult or take an extended period of time because a limited number of individuals in the managed care industry have the breadth and depth of skills and experience necessary to operate a business such as ours. Our success is also dependent on our ability to hire and retain qualified management, technical and medical personnel. We may be unsuccessful in recruiting and retaining such personnel, which could negatively impact our operations.

We depend on the management information systems of our affiliated HMOs.

     Our operations are dependent on the management information systems of the HMOs with which we contract. Our affiliated HMOs provide us with certain financial and other information, including reports and calculations of costs of services provided and payments to be received by us. Both the software and hardware our HMO affiliates use to provide us with that information have been subject to rapid technological change. Because we rely on this technology but do not own it, we have limited ability to ensure that it is properly maintained, serviced and updated. In addition, information systems such as these may be vulnerable to failure, acts of sabotage such as “hacking,” and obsolescence. If either of our principal HMO affiliates were to temporarily or permanently lose the use of the information systems that provide us with the information on which we depend or the underlying patient and physician data, our business and results of operations could be materially and adversely affected. Because our HMO affiliates generate certain of the information on which we depend, we have less control over the manner in which that information is generated than we would if we generated the information internally.

Volatility of our stock price could adversely affect you.

   The market price of our common stock could fluctuate significantly as a result of many factors, including factors that are beyond our ability to control or foresee and which, in some cases, may be wholly unrelated to us or our business. These factors include:

	•		state and federal budget decreases;
	•		adverse publicity regarding health maintenance organizations and other managed care organizations;
	•		government action regarding eligibility;
	•		changes in government payment levels;
	•		changes in state mandatory programs;
	•		changes in expectations of our future financial performance or changes in financial estimates, if any, of public market analysts;

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	•		announcements relating to our business or the business of our competitors;
	•		conditions generally affecting the managed care industry or our provider networks;
	•		the success of our operating strategy;
	•		the operating and stock price performance of other comparable companies;
	•		the termination of any of our contracts;
	•		regulatory or legislative changes;
	•		acts of war or terrorism or an increase in hostilities in the world; and
	•		general economic conditions, including inflation and unemployment rates.

PART I

ITEM 1. BUSINESS

General

     We are a mixed model provider of primary care physician services. Through our network of 15 medical centers we provide primary health care services on an outpatient basis. We also provide practice management services to 31 IPAs. All of our medical centers and IPAs are located in Miami-Dade, Broward and Hillsborough Counties, Florida. As of June 30, 2004, we provided services to or for approximately 28,700 patients through our medical centers and IPAs. A majority of these patients participate in the Medicare Advantage (formerly known as Medicare+Choice) program.

     We were incorporated in Florida in 1996 as the successor to a Florida corporation formed earlier in 1996. During Fiscal 2000 and 2001 we restructured much of our indebtedness, including the convertible subordinated notes we then had outstanding. During Fiscal 2004, the notes were converted into shares of our common stock. In an effort to streamline operations and stem operating losses, effective January 1, 2003, we terminated the Medicare and Medicaid lines of business for all of our IPA relationships associated with one HMO. Additionally, in February 2004, we completed the disposition of our home health operations. As a result of these transactions, the operations of the terminated IPAs and our home health operations are shown as discontinued operations.

     Our principal place of business is 80 S.W. 8^th Street, Suite 2350, Miami, Florida 33130. Our telephone number is 305-350-7515.

Industry Overview

     The United States health care market is large and growing. According to CMS, total outlays on health care in the United States were $1.6 trillion in 2002 and were projected to reach $3.4 trillion in 2013, representing an annual rate of increase of approximately 7.3%. The rate of the overall increase of health care outlays in the United States has been greater than the growth of the economy as a whole (measured by gross domestic product, or GDP). For example, in 2002 the rate of growth of total United States medical outlays was 5.7 percentage points higher than the growth of GDP. The high growth rate of health care outlays is expected to continue. In 2002, health care outlays represented 14.9% of GDP. CMS projects that this amount will increase to 18.4% of GDP by 2013. In addition, United States health care outlays have increased at a faster rate than the consumer price index. In early 2004, CMS projected that United States medical outlays grew by approximately 7.8% in 2003, as compared to actual increases of 9.3% in 2002 and 8.5% in 2001.

     The Medicare sector of the United States health care market is also large and growing. Medicare currently provides health care benefits to approximately 41 million elderly and disabled Americans, or approximately 14% of the population of the United States. With the coming retirement of the “Baby Boom” generation, a significant increase in the number of Medicare beneficiaries is forecast, with the number of Medicare beneficiaries expected to rise to over 70 million, or greater than 20% of the projected population of the United States, by 2030. Medicare outlays have also grown faster than both the GDP and the consumer price index, which growth is forecast to continue. For example, annual Medicare outlays exceeded $220 billion in 2003 and are expected to grow to over $400 billion by 2012.

     Medicare was established in 1965 and traditionally provided fee-for-service (indemnity) coverage for its members. Under fee-for-service coverage, Medicare assumes responsibility for paying all or a portion of the member’s covered medical fees, subject, in some cases, to a deductible or coinsurance payment. The Medicare Advantage program represents private health plans’ participation in Medicare. Through a contract with CMS, private insurers, such as HMOs, may contract with CMS to provide health insurance coverage in exchange for a fixed monthly payment per member per month for Medicare-eligible individuals. Individuals who elect to

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participate in Medicare Advantage typically receive additional benefits not covered by Medicare’s traditional fee-for-service coverage program and are relieved of the obligation to pay some or all deductible or coinsurance amounts due.

     Participation in private Medicare managed care programs (then called Medicare+Choice) increased during the 1990s reaching a peak of 6.2 million participants in 1998, or approximately 16% of the Medicare-eligible population. As of November 2003, the number of participants had decreased to 4.6 million, or approximately 11% of the Medicare-eligible population. The number of participating private health plans also decreased during this period going from 346 plans in 1998 to 155 in November 2003. This decline in participation has been attributed to unpredictable and insufficient payments resulting from the alteration of payments to private plans associated with the Balanced Budget Act of 1997.

     The Medicare Modernization Act, adopted in December 2003, was intended, in part, to modernize and revitalize private plans under Medicare. The Medicare Modernization Act made favorable changes to the premium rate calculation methodology and generally provides for program rates that we believe will better reflect the increased cost of medical services provided to Medicare beneficiaries.

     As a result of the growing increases in health care outlays in the United States, insurers, employers, state and federal governments and other health insurance payors have sought to reduce or control the sustained increases in health care costs. One response to these cost increases has been a shift away from the traditional fee-for-service method of paying for health care to managed health care models, such as HMOs.

     HMOs offer a comprehensive health care benefits package in exchange for a fixed prepaid monthly fee or premium per enrollee that does not vary through the contract period regardless of the quantity of medical services required or used. HMOs enroll members by entering into contracts with employer groups or directly with individuals to provide a broad range of health care services for a prepaid charge, with minimal deductibles or co-payments required of the members. HMOs contract directly with medical clinics, independent physician associations, hospitals and other health care providers to administer medical care to HMO enrollees. The affiliated physician organization contracts with the HMOs provide for payment to the affiliated physician organizations. Often the payment to the affiliated physician organization is in the form of a fixed monthly fee per enrollee, which is called a capitation payment. Once negotiated, the total payment is based on the number of enrollees covered, regardless of the actual need for and utilization of covered services.

     Physicians, including those in small to mid-sized physician groups, find themselves at a competitive disadvantage in the current managed care environment. Physicians are generally not equipped by training or experience to handle all of the functions of a modern medical practice, such as negotiation of contracts with specialists and HMOs, claims administration, financial services, provider relations, member services, medical management including utilization management and quality assurance, data collection and management information systems. Additionally, a proliferation of state and federal regulations has increased the paper-work burden and hampered the application of the traditional controls used by managed care organizations. Physicians increasingly are responding to these pressures within the managed care industry by affiliating with organizations such as us to assist them in managing their practices.

Our Market and Business Strategy

   The population of Florida was approximately 17 million as of April 2004, and approximately 30% of those residents are located in Miami-Dade, Broward and Hillsborough Counties. As of June 30, 2004, approximately 543,000 residents of Florida were enrolled in Medicare Advantage plans out of a Medicare-eligible population of approximately 2.8 million. The three HMOs with which we are affiliated account for approximately 50% of Medicare Advantage patients in the markets we serve.

     Our strategy is to:

	•		increase patient volume at our existing medical centers through enhanced marketing efforts;
	•		consider adding new HMO affiliations, such as our new relationship with Wellcare, Inc. (“Wellcare”);
	•		selectively expand our network to include additional medical centers and to penetrate new geographic markets; and
	•		further develop our IPA management activities.

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Increasing Patient Volume

     Our core business is comprised of our established network of medical centers from which we provide primary care services on an outpatient basis. In addition, we provide services to a network of IPAs. As of June 30, 2004, we provided services under agreements with HMOs relating to both our medical centers and the IPAs to approximately 15,700 patients on a full risk basis and approximately 13,000 patients on a limited or non-risk basis. For our full risk patients we assume full financial responsibility for the provision of substantially all necessary medical care to those patients in return for a fixed fee per member per month. For our limited or non-risk patients, we are responsible only for the services we actually provide to those patients, and not the cost of specialists, hospitalization or other services that we do not provide. In addition, we provide primary care services on a fee-for-service basis. We seek to increase the number of patients using our medical centers through the general marketing efforts of our affiliated HMOs and on our own through targeted marketing efforts with a particular focus on Medicare eligible patients.

Consider Adding New HMO Affiliations

     We are currently affiliated with three HMOs — Humana and Vista, with whom we have long-standing relationships, and Wellcare, with whom we became affiliated in September 2004. We work closely with our affiliated HMOs and strive to attain a high level of HMO satisfaction with our services. We believe that increasingly margin conscious HMOs value our operational strengths and expertise at providing quality health care, retaining patients and effectively managing medical utilization. As a result, we believe that we are well positioned to establish additional HMO affiliations to enable us to serve a larger number of the patients in our markets. There can be no assurances that we will obtain additional HMO affiliations and, depending upon a number of factors, including the level of support we are receiving from our current HMO affiliates, we may elect not to pursue additional affiliates.

Selectively Expanding Our Network

     We may seek to add additional medical centers to our network either through acquisition or start up, although no assurance can be given of our ability to establish or acquire any additional medical centers. To date, we have focused on Miami-Dade, Broward and Hillsborough Counties, Florida. We expect we will identify and select acquisition candidates based in large part on the following broad criteria:

•		a history of profitable operations or a predictable synergy such as opportunities for economies of scale through a consolidation of management functions;
•		a competitive environment with respect to a high concentration of hospitals and physicians; and
•		a geographic proximity to our current operations.

Developing Our IPA Management Activities

     We also seek to add additional IPAs, although no assurance can be given of our ability to establish any of those IPA relationships. We believe that HMOs are increasingly reluctant to contract directly with small to mid-sized physician groups who wish to accept HMO patients on a risk basis, preferring instead to contract with management service organizations such as us. We enhance the operations of our IPA physician practices by providing assistance with medical utilization management, pharmacy management and specialist network development. Additionally, we provide financial reports for our IPA practices to further assist with their operations. We believe that we can leverage our skill at providing practice management services to IPA practices to a larger group of IPA practices and will seek to selectively add new IPA practices to enhance our IPA management activities. We intend to continue affiliating with physicians who are sole practitioners or who operate in small groups to staff and expand our network.

Our Medical Centers

     At our medical centers physicians who are our employees or independent contractors act as primary care physicians practicing in the area of general, family and internal medicine. A typical medical center is operated in an office space that ranges from 5,000 to 8,000 square feet. A medical center is typically staffed with approximately two to three physicians, and is open five days a week. The physicians we employ or with whom we contract are generally retained under written agreements that provide for a rolling one-year term, subject to earlier termination in some circumstances. Under our standard physician agreements we are responsible for providing our physicians with malpractice insurance coverage.

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Our IPAs

     We provide practice management assistance to IPAs. Our services include providing assistance with medical utilization management, pharmacy management and specialist network development. Additionally, we provide financial reports for our IPAs to further assist with their practices. These services currently relate only to those patients served by the IPAs who are enrolled in Humana health plans. We currently have 31 IPA relationships. Most of our IPA relationships, including most of our non-risk IPA relationships, are governed under the Humana PGP Agreement, which expires in April 2005 unless we obtain a renewal of that agreement. As of June 30, 2004, our IPA physicians provided services to approximately 1,200 patients on a full risk basis and to approximately 8,200 patients on a limited or non-risk basis. Our IPAs practice primary care medicine on an outpatient basis in facilities similar to our medical centers. Our IPA physicians typically earn a capitated fee for providing the services and may be entitled to obtain bonus distributions if they operate their practice in accordance with their negotiated contract.

Our HMO Affiliates

     We currently have managed care agreements with Humana, Vista and Wellcare. In Fiscal 2004, we generated approximately 75% of our net medical services revenue from Humana and approximately 25% of our net medical services revenue from Vista. We continually review and attempt to renegotiate the terms of our managed care agreements in an effort to obtain more favorable terms. We may selectively add new HMO affiliations, but we can provide no assurance that we will be successful in doing so. The loss of significant HMO contracts and/or the failure to regain or retain such HMO’s patients or the related revenues without entering into new HMO affiliations could have a material adverse effect on our business results of operations and financial condition.

Humana

     We currently have four agreements with Humana. However, the majority of the revenue that we derive from our relationship with Humana is generated under the Humana POP Agreement. Under the Humana POP Agreement we provide or arrange for the provision of covered medical services to each Humana member who selects one of our physicians as his or her primary care physician. We receive a capitated fee with respect to the patients assigned to us. For most of our Humana patients the capitated fee is a percentage of the premium that Humana receives with respect to that patient. The Humana POP Agreement is subject to Humana’s changes to the covered benefits that it elects to provide to its members and other terms and conditions. We must also comply with the terms of Humana’s policies and procedures, including Humana’s policies regarding referrals, approvals and utilization management and quality assessment.

     The initial term of the Humana POP Agreement extends through July 31, 2008, unless terminated earlier for cause, and, thereafter, the Humana POP Agreement renews for subsequent one-year terms unless either party provides 180-days written notice of its intent not to renew. Humana may immediately terminate the Humana POP Agreement, and/or any individual physician credentialed under the Humana POP Agreement, upon written notice, if (i) we and/or any of our physician’s continued participation in the Humana POP Agreement may affect adversely the health, safety or welfare of any Humana member; (ii) we and/or any of our physician’s continued participation in the Humana POP Agreement may bring Humana or its health care networks into disrepute; (iii) in the event of one of our doctor’s death or incompetence; (iv) if any of our physicians fail to meet Humana’s credentialing criteria; (v) in accordance with Humana’s policies and procedures, (vi) if we engage in or acquiesce to any act of bankruptcy, receivership or reorganization; or (vii) if Humana loses its authority to do business in total or as to any limited segment or business (but only to that segment). We and Humana may also each terminate the Humana POP Agreement upon 90 days’ prior written notice (with an opportunity to cure, if possible) in the event of the other’s material breach of the Humana POP Agreement.

     In some cases, Humana may provide 30 days’ notice as to an amendment or modification of the Humana POP Agreement, including but not limited to, renegotiation of rates, covered benefits and other terms and conditions. Such amendments may include changes to the compensation rates. If Humana exercises its right to amend the Humana POP Agreement upon 30 days’ written notice, we may object to such amendment within the 30-day notice period. If we object to such amendment within the requisite time frame, Humana may terminate the Humana POP Agreement upon 90 days’ written notice.

     One of our other agreements with Humana is the Humana PGP Agreement. Under the Humana PGP Agreement, we agreed to assume certain management responsibilities on a non-risk basis for Humana’s Medicare, Commercial and Medicaid members assigned to selected primary care physicians in Miami-Dade and Broward Counties, Florida, for a period of two years in return for a capitated fee per patient. The Humana PGP Agreement relates to approximately 29 physicians that we service on a non-risk basis and expires in April 2005. We intend to seek an extension or renewal of the Humana PGP Agreement, but we can not provide assurance that such an extension or renewal will be available to us on commercially acceptable terms or at all.

     Although the Humana PGP Agreement is not generally material to our business, in connection with our entering into the

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Humana PGP Agreement we and Humana simultaneously cancelled a $3.9 million contract modification note payable to Humana, and, instead, the Humana PGP Agreement contains a provision for liquidated damages in the amount of $4.0 million, which can be asserted by Humana in certain circumstances. Under the terms of the Humana PGP Agreement, if we remain in compliance with the terms of the agreement, Humana, at its option, may reduce the maximum amount of liquidated damages at specified dates during the two-year term of the Humana PGP Agreement.

     Because there were contingent circumstances under which future payments of liquidated damages to Humana could have equaled the amount of debt forgiven, we deferred the $3.9 million gain that we would otherwise have recognized from the cancellation of the Humana note. To the extent that Humana reduces the maximum amount of liquidated damages, we will recognize a portion of the deferred gain. We were notified in November 2003 and again in May 2004, that the maximum amount of liquidated damages had been reduced to $3.5 and $3.0 million, respectively. Accordingly, we recognized $0.4 million and $0.5 million, respectively, of the deferred gain on extinguishing the debt during the second and fourth quarters of Fiscal 2004. At the expiration of the term of the Humana PGP Agreement, the liquidated damage provision will lapse and we will recognize any remaining portion of the deferred gain.

Vista

     Under our agreement with Vista, we provide or arrange for the provision of covered medical services to each Vista member who selects one of our physicians as his or her primary care physician. We receive a capitated fee with respect to the patients assigned to us. For most of our Vista patients the capitated fee is a percentage of the premium that Vista receives with respect to that patient. Our agreement with Vista is subject to Vista’s changes to the covered benefits that Vista elects to provide to its members and other terms and conditions. We must also comply with the terms of Vista’s policies and procedures, including Vista’s policies regarding referrals, approvals and utilization management and quality assessment.

     Our agreement with Vista runs through June 30, 2008 (unless earlier terminated in accordance with its terms). Vista may terminate the agreement with us for cause upon 30 days’ written notice if, among other things, we (i) fail to maintain certain reserve funding levels, (ii) fail to provide covered medical services in accordance with the standard of quality established by the medical community or Vista, (iii) are disqualified from participation in the Medicare program, or (iv) material breach the Vista agreement; provided however, that we are afforded an opportunity to cure such breach. Vista may also immediately terminate its agreement with us upon Vista’s determination that the health, safety or welfare of any member may be in jeopardy if the agreement is not terminated.

Wellcare

     Effective September 1, 2004, we entered into a Physician Provider Agreement with Wellcare under which we provide or arrange for the provision of covered medical services to each Wellcare member who selects one of our physicians as his or her primary care physician. To date we have not received meaningful revenue under our agreement with Wellcare.

     Under our agreements with Humana, Vista and Wellcare, there exist circumstances under which we could be obligated to continue to provide medical services to patients in our care following a termination of the applicable agreement. In certain cases, this obligation could require us to provide care to patients following the bankruptcy or insolvency of our HMO affiliate. Accordingly, our obligations to provide medical services to our patients (and the associated costs we incur) may not terminate at the time that our agreement with the HMO terminates, and we may not be able to recover our cost of providing those services from the HMO.

Compliance Program

     We have implemented a compliance program to provide ongoing monitoring and reporting to detect and correct potential regulatory compliance problems. The program establishes compliance standards and procedures for employees and agents. The program includes, among other things: written policies, including our Code of Conduct and Ethics; in-service training for each employee on topics such as insider trading, anti-kickback laws, Federal False Claims Act and Anti-Self Referral Act; and a “hot line” for employees to anonymously report violations.

Competition

     The health care industry is highly competitive. We compete for patients with many other health care providers, including local physicians and practice groups as well as local, regional and national networks of physicians and health care companies. We believe that competition for patients is generally based upon the reputation of the physician treating the patient, the physician’s expertise, the physician’s demeanor and manner of engagement with the patient, and the HMOs that the physician is affiliated with.

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We also compete with other local, regional and national networks of physicians and health care companies for the services of physicians and for HMO affiliations. Some of our competitors have greater resources than we do, and we may not be able to continue to compete effectively in this industry. Further, additional competitors may enter our markets, and this increased competition may have an adverse effect on our revenues.

Government Regulation

     General. Our business is regulated by the federal government and the State of Florida. The laws and regulations governing our operations are generally intended to benefit and protect health plan members and providers rather than shareholders. The government agencies administering these laws and regulations have broad latitude to enforce them. These laws and regulations, along with the terms of our contracts, regulate how we do business, what services we offer, and how we interact with our members, other providers and the public. We are subject, to various governmental reviews, audits and investigations to verify our compliance with our contracts and applicable laws and regulations. We believe we are in material compliance with all government regulations applicable to our business, however, many of the regulatory requirements to which we are subject contain narrow safe harbor provisions and, in some cares, are subject to limited case law interpretations. Accordingly, there can be no assurances that we will not be alleged to have violated any of the applicable government regulations to which we are subject.

     A summary of the material aspects of the government regulations to which we are subject are set forth below. However, there can be no assurance that any such laws will not change or ultimately be interpreted in a manner inconsistent with our practices, and an adverse interpretation could have a material adverse effect on our results of operations, financial condition or cash flows.

     Present and Prospective Federal and State Reimbursement Regulation. Our operations are affected on a day-to-day basis by numerous legislative, regulatory and industry-imposed operational and financial requirements, which are administered by a variety of federal and state governmental agencies as well as by self-regulatory associations and commercial medical insurance reimbursement programs. We have filed for all our physicians the necessary reassignments of billing rights applications with Medicare.

     Federal “Fraud and Abuse” Laws and Regulations. The Anti-Kickback Law makes it a criminal felony offense to knowingly and willfully offer, pay, solicit or receive remuneration in order to induce business for which reimbursement is provided under federal health care programs, including without limitation, the Medicare and Medicaid programs. Violations of these laws are punishable by monetary fines, civil and criminal penalties, exclusion from care programs and forfeiture of amounts collected in violation of such laws. The scope of prohibited payments in the Anti-Kickback Law is broad and includes economic arrangements involving hospitals, physicians and other health care providers, including joint ventures, space and equipment rentals, purchases of physician practices and management and personal services contracts.

     State Fraud and Abuse Regulations. Various states also have anti-kickback laws applicable to licensed healthcare professionals and other providers and, in some instances, applicable to any person engaged in the proscribed conduct. For example, Florida enacted “The Patient Brokering Act” which imposes criminal penalties, including jail terms and fines, for receiving or paying any commission, bonus, rebate, kickback, or bribe, directly or indirectly in cash or in kind, or engage in any split-fee arrangement, in any form whatsoever, to induce the referral of patients or patronage from a healthcare provider or healthcare facility. The Florida statutory provisions regulating the practice of medicine include similar language as grounds for disciplinary action against a physician.

     Restrictions on Physician Referrals. Federal regulations under the Social Security Act that restrict physician referrals to health care entities with which they have financial relationships (commonly referred to as the “Stark Law”) prohibit certain patient referrals by physicians. Specifically, the Stark Law prohibits a physician, or an immediate family member, who has a financial relationship with a health care entity, from referring Medicare or Medicaid patients with limited exceptions, to that entity for the following “designated health services”: clinical laboratory services, physical therapy services, occupational therapy services, radiology services, including magnetic resonance imaging, computerized axial tomography scans and ultrasound services, durable medical equipment and supplies, radiation therapy services and supplies, parenteral and enteral nutrients, equipment and supplies, prosthetics, orthotics and prosthetic devices, home health services, outpatient prescription drugs, and inpatient and outpatient hospital services. A financial relationship is defined to include an ownership or investment in, or a compensation relationship with, a health care entity. The Stark Law also prohibits a health care entity receiving a prohibited referral from billing the Medicare or Medicaid programs for any services rendered to a patient as a result of the prohibited referral. The Stark Law contains certain exceptions that protect parties from liability if the parties comply with all of the requirements of the applicable exception. The sanctions under the Stark Law include denial and refund of payments, civil monetary penalties and exclusions from participation in the Medicare and Medicaid programs.

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     Privacy Laws. The privacy, security and transmission of health information is subject to federal and state laws and regulations, including the Healthcare Insurance Portability and Accountability Act of 1996 (“HIPAA”). Final regulations with respect to the privacy of certain individually identifiable health information (the “Protected Health Information”) became effective in April 2003 (the “Privacy Rule”). The Privacy Rule specifies authorized or required uses and disclosures of the Protected Health Information, as well as the rights patients have with respect to their health information. In addition, in October 2002, regulations under HIPAA became effective with respect to the transmission of protected health information (“Transactions and Code Sets” regulations). The Transactions and Code Sets regulations establish uniform standards relating to data reporting, formatting, and coding that certain health care providers must use when conducting certain transactions involving health information.

     The Department of Health and Human Services issued final Regulations under HIPAA in February 2003 setting standards for the security of electronic health information (“Security Standards”). We are required to satisfy the Security Standards by April 21, 2005, and are currently actively working to meet that deadline.

     Corporate Practice of Medicine Doctrine. Many states prohibit business corporations from providing, or holding themselves out as a provider of medical care. Possible sanctions for violation of any of these restrictions or prohibitions include loss of licensure or eligibility to participate in reimbursement programs (including Medicare and Medicaid), asset forfeitures and civil and criminal penalties. These laws vary from state to state, are often vague and loosely interpreted by the courts and regulatory agencies. Currently, we only operate in Florida, which does not have a corporate practice of medicine doctrine with respect to the types of physicians employed with us.

     Clinic Licensure. The State of Florida Agency for Health Care Administration requires us to license each of our medical centers individually as health care clinics. Each medical center completed its application for licensure by the March 1, 2004 deadline and has posted the license as required in each center. Each medical center must renew its health care clinic licensure bi-annually.

     Limitations on Contractual Joint Ventures. On April 23, 2003, the Office of Inspector General (“OIG”) issued a Special Advisory Bulletin raising concerns throughout the healthcare industry about the legality of a variety of provider joint ventures. The suspect arrangements involve a healthcare provider expanding into a related service line by contracting with an existing provider of that service to serve the providers existing patient population. In the OIG’s view, the provider’s share of the profits of the new venture constitutes remuneration for the referral of the provider’s Medicare/Medicaid patients and thus may violate the federal Anti-kickback Statute.

     Occupational Safety and Health Administration (“OSHA”). In addition to OSHA regulations applicable to businesses generally, we must comply with, among other things, the OSHA directives on occupational exposure to blood borne pathogens, the federal Needlestick Safety and Prevention Act, OSHA injury and illness recording and reporting requirements, federal regulations relating to proper handling of laboratory specimens, spill procedures and hazardous waste disposal, and patient transport safety requirements. We conduct annual compliance training and annual on-site internal inspection, audits and evaluations with regard to these matters.

     Medicare Marketing Restrictions As a health care provider, we are subject to federal marketing rules and regulations that limit, among other things, offering any gift or other inducement to Medicare beneficiaries to encourage them to come to us for their health care. We have implemented policies and procedures in our marketing department to prevent any breach of applicable marketing restrictions.

     Sanctioned Parties. The Balanced Budget Act of 1997 (“BBA”) includes provisions that allow for the temporary or permanent exclusion from participation in Medicare or any state health care program of any individual or entity who or which has been convicted of a health care related crime as well as specified. The BBA also provides for fines against any person that arranges or contracts with an excluded person for the provision of items or services. We currently do not employ or contract with any debarred individual or entity. We conduct background checks for all employees, including checking the sanctions and exclusions lists maintained by the Office of the Inspector General and the General Services Administration and perform sanctions and exclusions checks on all independent contractors that we retain, including staffing agencies.

     Healthcare Reform. The federal government from time to time explores ways to reduce medical care cost through Medicare reform and through healthcare reform, generally. Any changes that would limit, reduce or delay receipt of Medicare funding or any developments that would disqualify us from receiving Medicare funding could have a material adverse effect on our business, results of operations, prospects, financial results, financial condition or cash flows. Due to the diverse range of proposals put forth and the uncertainty of any proposal’s adoption, we cannot predict what impact any Medicare reform proposal ultimately adopted may have on our business, financial position or results of operations.

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Employees

     At June 30, 2004, we employed or contracted with approximately 248 individuals of whom approximately 31 are physicians in our medical centers.

Insurance

     We rely on insurance to protect us from many business risks, including “stop-loss” insurance. In most cases, as is the trend in the health care industry, as insurance policies expire, we may be required to procure policies with narrower coverage, more exclusions and higher premiums. In some cases, coverage may not be available at any price. There can be no assurance that the insurance that we maintain and intend to maintain will be adequate, or that the cost of insurance and limitations in coverage will not adversely affect our business, financial position or results of operations.

Available Information

     We file annual, quarterly and special reports, proxy statements and other information with the SEC. You may read and copy any document we file at the SEC’s public reference rooms in Washington, D.C., New York, New York, and Chicago, Illinois. Please call the SEC at 1-800-SEC-0330 for further information on the public reference rooms. Our SEC filings are also available to the public from the SEC’s website at http://www.sec.gov. In addition, you can inspect the reports, proxy statements and other information we file at the offices of the American Stock Exchange, Inc., 86 Trinity Place, New York, New York 10006.

     Our website address is www.continucare.com. We make available free of charge on or through our internet website our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports, filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as soon as reasonably practicable after such material has been filed with, or furnished to, the SEC.

ITEM 2. PROPERTIES

     We lease approximately 10,000 square feet of space for our corporate offices in Miami, Florida under a lease expiring in September 2004 with average annual base lease payments of approximately $200,000. In October 2004, we will relocate our corporate offices to a new facility. We will lease approximately 9,800 square feet of space in Miami, Florida under a lease expiring in December 2009 with average annual base lease payments of approximately $161,000.

     Of the 15 medical centers that we operated as of June 30, 2004, five are leased from independent landlords and the other 10 clinics are leased from Humana. The leases with Humana are tied to our managed care arrangement. We are negotiating a multiple year lease for one medical center that we currently lease from an independent landlord on a month-to-month basis. However, until a multiple year lease is executed with the landlord, that lease arrangement can be cancelled at the option of the landlord, without cause, in a manner that complies with local tenancy laws.

ITEM 3. LEGAL PROCEEDINGS

     We are a party to the case of JOAN LINDAHL v. HUMANA MEDICAL PLAN, INC., COLUMBIA HOSPITAL CORPORATION OF SOUTH BROWARD d/b/a WESTSIDE REGIONAL MEDICAL CENTER, INPHYNET CONTRACTING SERVICES, INC., CONTINUCARE MEDICAL MANAGEMENT, INC., LUIS GUERRERO AND JARSLAW PARKOLAP. This case was filed on January 24, 2002 in the Circuit Court of the 17^th Judicial Circuit in and for Broward County, Florida and served on the companies and individuals in February 2003. The complaint alleges vicarious liability for medical malpractice and seeks damages in excess of $15,000. The stay on the case has recently been lifted. We intend to defend ourselves against this case vigorously, but its outcome cannot be predicted. Our ultimate liability, if any, with respect to the lawsuit is presently not determinable.

     In addition, on August 17, 2004, we received a Notice of Intent to Initiate Litigation for Medical Negligence from Carol Katz, as personal representative of the estate of Charles K. Katz. Under Florida law, plaintiffs in medical malpractice actions are required to provide such a notice at least ninety days prior to commencing litigation. The plaintiff’s notice alleges negligence in the treatment of Mr. Katz that resulted in his death. The plaintiff’s notice does not allege any specific damages. We intend to investigate this claim and defend it vigorously, but the outcome of this matter, and our ultimate liability, if any, are not presently determinable.

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     We are also involved in other legal proceedings incidental to our business that arise from time to time out of the ordinary course of business – including, but not limited to, claims related to the alleged malpractice of employed and contracted medical professionals, workers’ compensation claims and other employee-related matters, and minor disputes with equipment lessors and other vendors. We have recorded an accrual for medical malpractice claims, which includes amounts for insurance deductibles and projected exposure, based on our estimate of the ultimate outcome of such claims.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

     At our Annual Meeting of Shareholders held on August 24, 2004, our shareholders voted to re-elect each of the Directors named and to approve an amendment to our Amended and Restated 2000 Stock Option Plan to increase the shares available for grant under that plan from 4,000,000 to 7,000,000. The number of votes cast for, against or withheld, with respect to each of the nominees, were as follows: