1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 1999

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

COMMISSION FILE NUMBER 001-12115

CONTINUCARE CORPORATION
(Exact Name of Registrant as Specified in its Charter)

FLORIDA 59-2716023
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)

80 SOUTHWEST EIGHTH STREET
SUITE 2350
MIAMI, FLORIDA 33130
(Address of principal executive offices)
(Zip Code)

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

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, and (2) has been subject to such filing requirements
for the past 90 days. Yes [X] No [ ]

At February 9, 2000, the Registrant had 14,740,091 shares of $0.0001 par value
common stock outstanding.

CONTINUCARE CORPORATION

INDEX

PART I FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets - December 31, 1999 (Unaudited) and June 30, 1999........... 3
Consolidated Statements of Operations - Three Months Ended December 31, 1999
(Unaudited) and 1998 (Unaudited)..................................................... 4
Consolidated Statements of Operations - Six Months Ended December 31, 1999
(Unaudited) and 1998 (Unaudited)..................................................... 5
Consolidated Statements of Cash Flows - Six Months Ended December 31, 1999
(Unaudited) and 1998 (Unaudited)..................................................... 6
Notes to Consolidated Financial Statements - December 31, 1999 (Unaudited).............. 7

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.............................................................................. 12

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.............................. 21

PART II OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS....................................................................... 21

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS............................................... 22

ITEM 3. DEFAULTS UPON SENIOR SECURITIES......................................................... 22

SIGNATURE PAGE..................................................................................... 24

2
3

PART I - FINANCIAL INFORMATION

ITEM 1. - FINANCIAL STATEMENTS

CONTINUCARE CORPORATION

CONSOLIDATED BALANCE SHEETS

DECEMBER 31, 1999 JUNE 30, 1999
----------------- -------------
(UNAUDITED)

ASSETS
Current assets
Cash and cash equivalents........................................... $1,615,350 $3,185,077
Accounts receivable, net of allowance for doubtful accounts of
$5,752,000 at December 31, 1999 and June 30, 1999.................. 37,303 604,524
Due from Medicare................................................... 457,796 --
Other receivables................................................... 359,198 266,057
Prepaid expenses and other current assets........................... 226,491 298,899
----------- -------------
Total current assets............................................ 2,696,138 4,354,557
Equipment, furniture and leasehold improvements, net................... 1,039,496 1,098,289
Cost in excess of net tangible assets acquired, net of
accumulated amortization of $4,825,000 at December 31, 1999 and
$3,837,000 at June 30, 1999.......................................... 21,038,670 22,346,156
Deferred financing costs, net of accumulated amortization of
$1,422,000 at December 31, 1999 and $1,203,000 at June 30, 1999...... 2,238,604 2,551,811
Other assets, net...................................................... 84,439 69,165
----------- -------------
Total assets.................................................... $27,097,347 $30,419,978
=========== =============

LIABILITIES AND SHAREHOLDERS' DEFICIT

Current liabilities
Accounts payable.................................................... $727,762 842,442
Accrued expenses.................................................... 2,367,348 2,358,346
Accrued salaries and benefits....................................... 1,326,555 1,856,140
Medical claims payable.............................................. 2,293,637 4,825,081
Due to Medicare..................................................... -- 302,358
Due to related parties.............................................. 150,000 --
Convertible subordinated notes payable.............................. 41,000,000 45,000,000
Current portion of long term debt................................... 5,725,912 6,857,946
Accrued interest payable............................................ 3,826,612 2,400,022
Current portion of capital lease obligations........................ 123,869 112,652
----------- -------------
Total current liabilities....................................... 57,541,695 64,554,987
Capital lease obligations, less current portion........................ 204,846 123,436
Long term debt, less current portion................................... 1,833,051 1,396,753
----------- -------------
Total liabilities............................................... $59,579,592 $66,075,176
Commitments and contingencies
Shareholders' deficit
Common stock; $0.0001 par value; 100,000,000 shares authorized,
17,736,283 shares issued and 14,740,091 shares outstanding
at December 31, 1999; and 17,536,283 shares issued and
14,540,091 shares outstanding at June 30, 1999..................... 1,475 1,455
Additional paid-in capital.......................................... 33,022,945 32,910,465
Accumulated deficit................................................. (60,081,964) (63,142,417)
Treasury stock (2,996,192 shares)................................... (5,424,701) (5,424,701)
----------- -------------
Total shareholders' deficit....................................... (32,482,245) (35,655,198)
----------- -------------
Total liabilities and shareholders' deficit....................... $27,097,347 $30,419,978
=========== =============

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART
OF THESE CONSOLIDATED FINANCIAL STATEMENTS

3
4

CONTINUCARE CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

THREE MONTHS ENDED DECEMBER 31,
-------------------------------
1999 1998
------------- ------------

Revenue
Medical services, net ........................................ $ 28,840,728 $ 52,485,911
Management fees .............................................. -- 266,754
------------ ------------
Subtotal ................................................... 28,840,728 52,752,665
Expenses
Medical services:
Medical claims ........................................... 17,971,599 34,489,028
Contractual revision of previously recorded medical claims
liability................................................. (3,053,853) --
Other .................................................... 6,101,964 12,297,518
Payroll and employee benefits ................................ 1,409,532 3,693,392
Provision for bad debt ....................................... -- 2,119,978
Professional fees ............................................ 304,852 464,722
General and administrative ................................... 1,515,541 3,006,993
Loss on sale of subsidiary ................................... -- 4,152,250
Depreciation and amortization ................................ 760,166 1,415,173
------------ ------------
Subtotal ................................................... 25,009,801 61,639,054

Income (loss) from operations ..................................... 3,830,927 (8,886,389)

Other income (expense)
Interest income .............................................. 5,991 17,897
Interest expense ............................................. (1,091,090) (1,470,726)
------------ ------------
Net income (loss) ................................................. $ 2,745,828 $(10,339,218)
============ ============

Basic and diluted income (loss) per common share:
Net income (loss) ............................................ $ .19 $ (.71)
============ ============
Weighted average shares outstanding
Basic and diluted ............................................ 14,703,135 14,606,283
============ ============

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART
OF THESE CONSOLIDATED FINANCIAL STATEMENTS

4
5

CONTINUCARE CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

SIX MONTHS ENDED DECEMBER 31,
-----------------------------
1999 1998
------------- ------------

Revenue
Medical services, net ........................................ $ 57,473,221 $ 101,160,884
Management fees .............................................. 450,000 549,680
------------- -------------
Subtotal ................................................... 57,923,221 101,710,564
Expenses
Medical services:
Medical claims ........................................... 39,445,092 63,120,064
Contractual revision of previously recorded medical claims
liability................................................. (3,053,853) --
Other .................................................... 12,060,661 25,052,105
Payroll and employee benefits ................................ 3,279,091 7,691,950
Provision for bad debt ....................................... -- 2,370,503
Professional fees ............................................ 458,220 725,564
General and administrative ................................... 3,024,386 6,133,678
Loss on sale of subsidiary ................................... -- 4,152,250
Depreciation and amortization ................................ 1,567,700 3,149,749
------------- -------------
Subtotal ................................................... 56,781,297 112,395,863

Income (loss) from operations ..................................... 1,141,924 (10,685,299)

Other income (expense)
Interest income .............................................. 24,567 71,555
Interest expense ............................................. (2,162,235) (2,426,591)
Other ........................................................ 280,000 --
------------- -------------
Net loss before extraordinary items ............................... (715,744) (13,040,335)
Gain on extinguishment of debt .................................... 3,776,197 130,977
------------- -------------
Net income (loss) ................................................. $ 3,060,453 $ (12,909,358)
============= =============

Basic and diluted income (loss) per common share:
Loss before extraordinary item ............................... $ (.05) $ (.91)
Extraordinary gain on extinguishment of debt ................. $ .26 $ .01
------------- -------------
Net income (loss) ............................................ $ .21 $ (.90)
============= =============
Weighted average shares outstanding
Basic and diluted ............................................ 14,620,525 14,340,311
============= =============

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART
OF THESE CONSOLIDATED FINANCIAL STATEMENTS

5
6

CONTINUCARE CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

SIX MONTHS ENDED DECEMBER 31,
-----------------------------
1999 1998
----------- ---------------

CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) .................................................... $ 3,060,453 $(12,909,358)
Adjustments to reconcile net income (loss) to cash used in operating
activities:
Depreciation and amortization including amortization
of deferred loan costs ............................................. 2,062,485 3,527,148
Provision for bad debt ............................................. -- 2,370,503
Loss on sale of subsidiary ......................................... -- 4,152,250
Contractual revision of previously recorded medical claims liability (350,546) --
Gain on extinguishment of debt ..................................... (3,776,197) (130,977)
Changes in operating assets and liabilities, excluding the effect of
acquisitions and disposals:
Decrease (increase) in accounts receivable ......................... 567,221 (3,732,648)
Decrease in income taxes receivable ................................ -- 1,800,000
Decrease (increase) in prepaid expenses and other current assets ... 72,408 (10,703)
(Increase) decrease in other receivables ........................... (93,141) 53,823
(Increase) decrease in other assets ................................ (15,274) 711,496
(Decrease) increase in medical claims payable ...................... (2,531,444) 1,546,166
Increase in due to (from) Medicare ................................. (122,598) 321,257
(Decrease) increase in accounts payable and accrued expenses ....... (635,263) 1,539,081
Increase in accrued interest payable ............................... 1,639,923 10,521
------------ ------------
Net cash used in operating activities ................................... (121,973) (751,441)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Cash paid for acquisitions ........................................... -- (4,225,000)
Cash paid for purchase of contracts .................................. -- (652,012)
Property and equipment additions ..................................... (81,804) (660,999)
Proceeds from sale of subsidiary ..................................... -- 120,000
Proceeds from notes receivable ....................................... -- 60,351
------------ ------------
Net cash used in investing activities ................................... (81,804) (5,357,660)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Payment to extinguish debt ......................................... (210,000) (720,000)
Principal repayments under capital lease obligation ................ (10,321) (254,033)
Payment on notes payable ........................................... (1,145,629) (1,317,252)
Proceeds from long term debt ....................................... -- 5,000,000
Payment of deferred financing costs ................................ -- (168,192)
------------ ------------
Net cash (used in) provided by financing activities ..................... (1,365,950) 2,540,523
------------ ------------
Net decrease in cash and cash equivalents ............................... (1,569,727) (3,568,578)
------------ ------------
Cash and cash equivalents at beginning of period ........................ 3,185,077 7,435,724
------------ ------------
Cash and cash equivalents at end of period .............................. $ 1,615,350 $ 3,867,146
============ ============
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Stock issued for acquisition ............................................ $ -- $ 1,811,250
============ ============
Note payable for purchase of contracts .................................. $ -- $ 2,500,000
============ ============
Note payable for amendment of contract .................................. $ -- $ 3,509,983
============ ============
Note payable issued for refunds due to Medicare for overpayments ........ $ 637,556 $ --
============ ============
Purchase of furniture and fixtures with proceeds of capital lease
obligations ............................................................. $ 102,948 $ --
============ ============
Contractual revision of previously recorded medical claims liability .... $ 350,546 $ --
============ ============
Cash paid for interest .................................................. $ 40,643 $ 1,840,000
============ ============

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART
OF THESE CONSOLIDATED FINANCIAL STATEMENTS

6
7

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
(UNAUDITED)

NOTE 1 - UNAUDITED INTERIM INFORMATION

The accompanying unaudited consolidated financial statements of Continucare
Corporation ("Continucare" or the "Company") have been prepared in accordance
with generally accepted accounting principles for interim financial information
and with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the six months ended December 31, 1999 are not necessarily
indicative of the results that may be expected for the year ended June 30, 2000.

The balance sheet at June 30, 1999 has been derived from the audited financial
statements at that date but does not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements.

For further information, refer to the consolidated financial statements and
footnotes thereto included in the Company's annual report on Form 10-K/A-2 for
the year ended June 30, 1999.

Certain reclassifications have been made to the prior year amounts to conform to
the current year.

NOTE 2 - GENERAL

Continucare is a provider of integrated outpatient healthcare and home
healthcare services in Florida. Continucare's predecessor, Zanart Entertainment,
Incorporated ("Zanart") was incorporated in 1986. On August 9, 1996, a
subsidiary of Zanart 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 Continucare became
shareholders of Zanart, and Zanart changed its name to Continucare Corporation.
As of December 31, 1999, the Company operated, owned and/or managed: eighteen
Staff Model clinics in South and Central Florida; an Independent Practice
Association ("IPA") with 107 physicians; and two Home Health agencies. For the
six months ended December 31, 1999 approximately 54% of net medical services
revenue was derived from managed care contracts with Humana Medical Plans,
Inc.("Humana") and 42% of net medical services revenue was derived from managed
care contracts with Foundation Health Corporation ("Foundation"). For the six
months ended December 31, 1998, approximately 29% of revenue was derived from
Humana and 51% was derived from Foundation.

Throughout fiscal 1998 and 1999 the Company experienced adverse business
operations, recurring operating losses, negative cash flow from operations, and
a significant working capital deficiency developed. Furthermore, as discussed
below and further in Note 3, the Company was unable to make the interest
payments due April 30, 1999 and October 31, 1999 on the Company's Convertible
Subordinated Notes Payable (the "Notes"). The Company's operating difficulties
have in large part been due to the underperformance of various entities which
were acquired in fiscal years 1999, 1998 and 1997, the inability to effectively
integrate and realize increased profitability through anticipated economies of
scale with these acquisitions, as well as reductions in reimbursement rates
under the Balanced Budget Act of 1997.

7
8

The financial statements of the Company have been prepared assuming that the
Company will continue as a going concern. To strengthen Continucare financially
and remain a going concern, the Company began a business rationalization program
(the "Business Rationalization Program") during the fiscal year ended June 30,
1999 to divest itself of certain unprofitable operations and to close other
underperforming subsidiary divisions, and a financial restructuring program (the
"Financial Restructuring Program") to strengthen its financial condition and
performance. In connection with the implementation of its Business
Rationalization Program, Continucare sold or closed its Outpatient
Rehabilitation subsidiary, its Diagnostic Imaging subsidiary and Physician
Practice subsidiary. These divestitures generated net cash proceeds of
approximately $5,642,000 (after the payment of transaction costs and other
employee-related costs). The rationalization liability associated with these
divestitures was approximately $965,000 at June 30, 1999 and relates to
operating lease accruals requiring monthly payments through 2007. During the six
months ended December 31, 1999, payments totaling approximately $3,000 were made
on these leases. No other changes occurred in the rationalization liability. The
Business Rationalization Program has assisted management with the commencement
and implementation of its Financial Restructuring Program and has allowed the
Company to focus its resources on a core business model. As a part of the
Business Rationalization Program, the Company negotiated a restructuring of the
Company's Notes, which is described in Note 3 below. While the Company believes
that the Business Rationalization Program and Financial Restructuring Program
will improve its cash flow and profitability, there can be no assurance that it
will be able to continue implementing any of the necessary programs and, if
implemented, that the programs will improve the Company's cash flow and
profitability sufficiently to fund its operations and satisfy its obligations as
they become due.

NOTE 3 - CONVERTIBLE SUBORDINATED NOTES PAYABLE

On October 30, 1997, the Company issued $46,000,000 of the Notes which accrue
interest at 8% and are due on October 31, 2002. On August 12, 1998, the Company
repurchased $1,000,000 of the Notes and recorded an extraordinary gain on
retirement of debt of $130,977. On April 30, 1999 (the "April Default Date"),
the Company defaulted on its semi-annual payment of interest on the outstanding
Notes. Within thirty (30) days of the April Default Date, the Company commenced
negotiations with an informal committee of the holders of the Notes. On the
April Default Date, the outstanding principal balance of the Notes was
$45,000,000 and the related accrued interest was approximately $1,800,000.

On July 2, 1999, the Company repurchased $4,000,000 of the Notes for $210,000
and recorded a gain on extinguishment of debt of $3,776,197. The Company funded
the purchase of the Notes from working capital. The Company has not provided for
income taxes on the gain because it believes that it will be able to utilize
certain of its net operating loss carryforwards to offset any income tax
liability related to the transaction.

On October 31, 1999 (the "October Default Date") the Company defaulted on its
semi-annual payment of interest on the outstanding Notes. The total amount of
accrued interest on the outstanding Notes at October 31, 1999 was approximately
$3,300,000.

On September 29, 1999 the Company announced an agreement in principle with the
holders of the Notes to enter into a settlement and restructuring agreement with
respect to the remaining $41,000,000 principal balance and approximately
$3,300,000 of interest thereon accruing through October 31, 1999 (the
"Restructuring"). This agreement in principle was ratified on December 9, 1999
through the execution of a Consent Letter and Agreement to the First
Supplemental Indenture. The terms of the First Supplemental Indenture include
the following: (a) $31,000,000 of the outstanding principal of the Notes will be
converted, on a pro rata basis, into the Company's common stock at a conversion
rate of $2.00 per share (approximately 15,500,000 shares of capital stock); (b)
all interest accrued on the Notes through October 31, 1999 will be forgiven
(approximately $3,300,000); (c) no interest will accrue on the $31,000,000 from
November 1, 1999 through the date of the restructuring; (d) the interest payment
default on the remaining $10,000,000 principal balance of the Notes will be
waived and the Notes will be reinstated on the Company's books and records as a
performing non-defaulted loan (the "Reinstated Subordinated Debentures"); (e)
the Reinstated Subordinated Debentures will bear interest at the rate of 7% per
annum commencing November 1, 1999; and (f) the conversion rate for the
Reinstated Subordinated Debentures will be modified as follows:

8
9

TERM CONVERSION RATE
- ------------------------------------------------------------------------

Through October 31, 2000......................... $7.25
November 1, 2000 to Maturity..................... $2.00

The successful completion of the Restructuring is subject to a number of
significant risks and uncertainties including, but not limited to, the following
conditions precedent: (a) procuring a $3,000,000 bank credit facility (the "New
Credit Facility"); (b) obtaining a financially responsible person(s) (the
"Guarantor") to personally guarantee the "New Credit Facility" for the Company;
and (c) obtaining shareholder ratification of the Restructuring. These
conditions must be satisfied prior to February 15, 2000.

In consideration for providing the guaranty the Company will issue to the
Guarantor 3,000,000 shares of the Company's common stock. The New Credit
Facility will replace the Company's existing bank credit facility, and it will
be used to finance the Company's working capital and capital expenditure
requirements. The Company has a meeting of its shareholders scheduled for
February 14, 2000 in order to, among other things, obtain shareholder approval
of the Restructuring.

NOTE 4 - LONG-TERM DEBT

In August 1998, the Company entered into a credit facility with First Union Bank
(the "Credit Facility"). The Credit Facility provided for a $5,000,000
acquisition facility and a $5,000,000 revolving loan. The Company borrowed the
entire $5,000,000 acquisition facility to fund acquisitions. The Company never
utilized the revolving loan. Since December 31, 1998 the Company has not been in
compliance with the terms and conditions of the acquisition facility. During
April 1999, the Company used approximately $4,000,000 of the net proceeds from
the sale of its Rehabilitation subsidiary to reduce the outstanding balance of
the Credit Facility. In connection with the payment, the Company entered into an
amendment to the Credit Facility, which provided, among other things, for the
repayment of the remaining outstanding principal balance by December 31, 1999.
At December 31, 1999 and June 30, 1999, respectively, the outstanding balance of
the Credit Facility was approximately $135,000 and $1,000,000 and is included in
Current Portion of Long-Term Debt on the accompanying consolidated balance
sheet. The Company obtained a waiver which extended the due date on the
remaining balance to February 1, 2000 and repaid the remaining outstanding
balance on January 31, 2000.

Effective December 31, 1999, the Company negotiated an amendment to its contract
with Foundation (the "Amendment"). The Amendment reduces the Company's prior
medical claims and long-term debt liabilities to Foundation as of May 31, 1999
to $1,500,000. The Amendment also requires the Company to remit to Foundation
any reinsurance proceeds received for claims generated from Foundation members
for the period June 1, 1998 through August 31, 1999 up to a maximum of
$1,327,400. As a result of this Amendment the Company recorded a contractual
revision of previously recorded medical claims liability of approximately
$3,054,000. This Amendment resulted in the reduction of medical claims payable
by approximately $2,703,000 and the reduction of long-term debt by approximately
$351,000.

NOTE 5 - EARNINGS PER SHARE

Options and warrants to purchase 473,000 and 1,824,500 shares of the Company's
common stock were outstanding at December 31, 1999 and 1998, respectively, but
were not included in the computation of diluted earnings (loss) per share
because the effect would be antidilutive.

9
10

NOTE 6 - RELATED PARTY TRANSACTIONS

In May 1999, the Company entered into an agreement with Harter Financial, Inc.
("Harter") to assist it with a financial reorganization and to represent the
Company in negotiating the restructuring of the Notes and a settlement with the
noteholders. As compensation for its services, Harter received an initial fee of
$50,000 on May 18, 1999. On October 18, 1999, the Board of Directors approved a
final compensation package to be paid to Harter consisting of a cash payment of
$150,000 and the issuance of 200,000 unregistered shares of the Company's common
stock, which were valued at $112,500 based on the closing price of the Company's
stock on the date of grant. Mr. Angel, the Company's president and CEO is also
the president and a 15% shareholder of Harter. However, as of May 18, 1999, Mr.
Angel was not an officer or director of the Company.

NOTE 7 - CONTINGENCIES

On April 10, 1997, the Company, through Continucare Physician Practice
Management, Inc., ("CPPM") a wholly-owned subsidiary, acquired all of the
outstanding stock of certain arthritis rehabilitation centers and affiliated
physician practices. The acquisitions included the purchase of AARDS, INC., a
Florida corporation formerly known as Norman B. Gaylis, M.D., Inc., of
Rosenbaum, Weitz & Ritter, Inc., a Florida corporation, and of Arthritis &
Rheumatic Disease Specialties, Inc., a Florida corporation, from Sheridan
Healthcare, Inc. (collectively "AARDS").

In connection with the purchase of AARDS, the Company entered into a management
agreement with ZAG Group, Inc. ("ZAG"), an entity controlled by Jay Ziskind, Ken
Arvin and Dr. Norman Gaylis. The management agreement, among other things,
provided for ZAG to perform certain services in exchange for specified
compensation. In addition, the Company entered into a put/call agreement with
ZAG, which allowed each of the parties to require the other party, after a
two-year period, to either sell or purchase all the issued and outstanding
capital stock of ZAG for a specified price to be paid in a combination of cash
and common stock of the Company. In September 1998, the Company paid
approximately $2,000,000 to ZAG in connection with an agreement and plan of
merger executed between the Company and ZAG which effectively canceled the
put/call agreement. Cash of $115,000 was paid and the remaining $1,885,000 was
paid by issuing 575,000 unregistered shares of the Company's common stock with a
fair market value of approximately $1,600,000 on the date of issuance. However,
in the event that the common stock issued does not have an aggregate fair market
value of approximately $1,885,000 on October 15, 1999, the agreement and plan of
merger provides that the Company shall pay additional cash consideration or
issue additional shares of its common stock so that the aggregate value of the
stock issued is approximately $1,885,000. Additional consideration of
approximately $1,600,000 in cash or approximately 2,133,000 shares of the
Company's common stock (based on the December 31, 1999 market price) would have
to be issued. At this time, no additional payment has been made to ZAG.

On November 15, 1999, the Company commenced litigation against ZAG and its
affiliated parties alleging breach of fiduciary duties, improper billing, and
seeking return of all consideration previously paid by the Company to ZAG, and
damages as well as seeking rescission of the agreement and plan of merger. A
counterclaim was filed against the Company on December 20, 1999 in the Circuit
Court of the 11th Judicial District in and for Dade County, Florida. The
counterclaim alleged breach of contract, tortious interference and conversion.
In the event the Company is unsuccessful in this litigation, Continucare may be
required to pay in excess of $1,600,000 of additional consideration, in the form
of either cash or stock, representing the difference between $1,885,000 and the
fair market value of the 575,000 unregistered shares of Continucare common stock
previously issued to ZAG in connection with the agreement and plan of merger.

On September 19, 1997, the Company acquired the stock of Maxicare, Inc.
("Maxicare"), a Florida based home health agency for $4,200,000 including
approximately $900,000 of liabilities assumed. In addition, $300,000 of
additional purchase price is contingent upon maintaining various performance
criteria and, if earned, would be due in equal installments in September 1999
and 1998. No amounts have been paid to the former owner of Maxicare, Inc.
pursuant to the contingent purchase price from the acquisition.

10
11

Two former subsidiaries of the Company are parties to the case of JAMES N.
HOUGH, PLAINTIFF, v. INTEGRATED HEALTH SERVICES, INC., A DELAWARE CORPORATION,
AND REHAB MANAGEMENT SYSTEMS, INC., A FLORIDA CORPORATION ("RMS"), AND
CONTINUCARE REHABILITATION SERVICES, INC., A FLORIDA CORPORATION. This case was
filed in the Circuit Court of the Tenth Judicial Circuit in and for Polk County,
Florida in June 1998. Mr. Hough was the founder and former Chief Executive
Officer and President of RMS. Mr. Hough sold RMS to Integrated Health Services,
Inc., ("IHS"), and entered into an Employment Agreement (the "Employment
Agreement") with IHS. The complaint alleges breach of contract for the removal
of Hough as President and also alleges actions by IHS that interfered with
Hough's ability to realize his income potential under the provisions of the
agreement. RMS was acquired by Continucare in February 1998. Mr. Hough is
seeking damages from the Employment Agreement and is alleging breach of
contract. His initial demand of $1.1 million was rejected by the Company and the
Company intends to vigorously defend the claim.

The Company is a party to the case of MANAGED HEALTHCARE SYSTEMS ("MHS") v.
CONTINUCARE CORPORATION & CONTINUCARE HOME HEALTH SERVICES, INC ("CHHS"). This
case was filed in the Commonwealth of Massachusetts in August 1998. The
complaint alleges breach of contract for alleged verbal representations by CHHS
in negotiations to acquire MHS and seeks damages in excess of $2,750,000 and
treble damages. The Company believes the action has little merit and intends to
vigorously defend the claim.

The case of KAMINE CREDIT CORPORATION ("KAMINE") AS ASSIGNEE OF TRI COUNTY HOME
HEALTH v. CONTINUCARE CORPORATION was voluntarily dismissed without prejudice on
December 3, 1999.

The Company is a party to the case of WARREN GROSSMAN, M.D., ALAN REICH, M.D.,
AND RICHARD STRAIN, M.D. v. CONTINUCARE PHYSICIAN PRACTICE MANAGEMENT, INC. AND
CONTINUCARE CORPORATION. This case was filed in May 1999 in the Circuit Court
for Broward County, Florida. The complaint alleges breach of employment
contracts based on the early termination of the Plaintiffs' employment. The
original complaint, as filed, sought damages in excess of $15,000; however,
during discovery by the Company in connection with the case, it was determined
that the Plaintiffs are seeking damages in excess of $2,500,000. On January 5,
2000, the Company filed a counterclaim alleging breach of contract in connection
with the Plaintiffs' failure to return certain computer equipment, as well as a
breach of the non-compete covenant. Discovery is pending. The Company believes
the action has little merit and intends to vigorously defend the claim.

The Company is subject to a variety of claims and suits that arise from time to
time out of the ordinary course of its business, substantially all of which
involve vendor-lease claims and/or claims related to the alleged malpractice of
employed and contracted medical professionals.

11
12

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

CERTAIN FACTORS AFFECTING FUTURE OPERATING RESULTS

This Form 10-Q contains certain forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. When used in this Form 10-Q, the words
"believe," "anticipate," "think," "intend," "plan," "will be," and similar
expressions, identify such forward-looking statements. Such statements regarding
future events and/or the future financial performance of the Company are subject
to certain risks and uncertainties, which could cause actual events or the
actual future results of the Company to differ materially from any
forward-looking statement. Certain factors that might cause such a difference
are set forth in the Company's Form 10-K/A-2 for the period ended June 30, 1999,
including the following: the success or failure of the Company in implementing
its current business and operational strategies; the ability of the Company to
consummate the Restructuring on the terms specified in the First Supplemental
Indenture and the timing of such consummation; the approval of the Restructuring
by the Company's shareholders; the successful implementation of the Company's
Business Rationalization Program and Financial Restructuring Program; the
availability, terms and access to capital and customary trade credit; general
economic and business conditions; competition; changes in the Company's business
strategy; availability, location and terms of new business development;
availability and terms of necessary or desirable financing or refinancing;
unexpected costs of year 2000 compliance or failure by the Company or other
entities with which it does business to achieve compliance; labor relations; the
outcome of pending or yet-to-be instituted legal proceedings; and labor and
employee benefit costs.

GENERAL

Continucare is a provider of integrated outpatient healthcare and home
healthcare services in Florida. As of December 31, 1999, the Company operated,
owned and/or managed: eighteen Staff Model clinics in South and Central Florida;
an Independent Practice Association (the "IPA") with 107 physicians; and two
home health agencies.

Throughout fiscal 1998 and 1999 the Company experienced adverse
business operations, recurring operating losses, negative cash flow from
operations, and a significant working capital deficiency developed. Furthermore,
as discussed below under "Liquidity and Capital Resources" and in Note 3 of the
consolidated financial statements, the Company was unable to make the interest
payments due April 30, 1999 and October 31, 1999 on the Convertible Subordinated
Notes Payable (the "Notes").The Company's operating difficulties have in large
part been due to the underperformance of various entities which were acquired in
fiscal years 1999, 1998 and 1997, the inability to effectively integrate and
realize increased profitability through anticipated economies of scale with
these acquisitions, as well as reductions in reimbursement rates under the
Balanced Budget Act of 1997.

The financial statements of the Company have been prepared assuming
that the Company will continue as a going concern. To strengthen the Company
financially, and remain a going concern, the Company began a business
rationalization program (the "Business Rationalization Program") during the
fiscal year ended June 30, 1999 to divest itself of certain unprofitable
operations and to close other underperforming subsidiary divisions and a
financial restructuring program (the "Financial Restructuring Program") to
strengthen its financial condition and performance. In connection with the
implementation of its Business Rationalization Program, the Company considered a
variety of factors in determining which entities to divest and which entities to
reorganize. Some of the determining factors include: (i) projected changes in
the cost structure; (ii) changes in reimbursement rates; (iii) changes in
regulatory environment; (iv) loss of management personnel; (v) loss of
contracts; and (vi) timely opportunity for disposal. As a result of this
analysis, the Company has sold or closed its Outpatient Rehabilitation
subsidiary, Diagnostic Imaging subsidiary and Physician Practice subsidiary.
These divestitures generated net cash proceeds of approximately $5,642,000
(after the payment of transaction costs and other costs) during the fiscal year
ended June 30, 1999. The Business Rationalization Program has assisted
management with the commencement and implementation of its Financial

12
13

Restructuring Program and has allowed the Company to focus its resources on a
core business model. While the Company believes that the Business
Rationalization Program and Financial Restructuring Program will improve its
cash flow and profitability, there can be no assurance that it will be able to
continue implementing any of the necessary programs and, if implemented, that
the programs will improve the Company's cash flow and profitability sufficiently
to fund its operations and satisfy its obligations as they become due.

REIMBURSEMENT CONSIDERATIONS

The Company receives reimbursement from the Medicare and Medicaid
programs or payments from insurers, self-funded benefit plans or 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 the Company
derived less than 5% of its net patient service revenue directly from Medicare
and Medicaid in fiscal 1999, a substantial portion of the Company's managed care
revenues are based upon Medicare reimbursable rates. Therefore, any changes
which limit or reduce Medicare reimbursement levels could have a material
adverse effect on the Company.

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

The Balanced Budget Act of 1997 (the "Budget Act") enacted in August
1997 contains numerous provisions related to Medicare and Medicaid
reimbursement. It is unclear whether any or all of these provisions will be
implemented by the Health Care Financing Administration ("HCFA") as scheduled.
The general thrust of the provisions dealing with Medicare and Medicaid
contained in the Budget Act are intended to incentivize providers to deliver
services efficiently at lower costs.

The Budget Act also requires the Secretary of Health and Human Services
("HHS") to implement a prospective payment system ("PPS") for home health
agencies ("HHAs"). Prospective rates determined by the HHS would reflect a 15%
reduction to the cost limits and per-patient limits in place as of September 30,
1999. In the event the implementation deadline is not met, the reduction will be
applied to the reimbursement system then in place. Until PPS takes effect on
October 1, 2000, the Budget Act established an interim payment system ("IPS")
that provides for the lowering of reimbursement limits for home health visits.
For cost reporting periods beginning on or after October 1, 1997,
Medicare-reimbursed HHAs will have their cost limits determined as the lesser of
(i) actual costs (ii) 105% of median costs of freestanding home health agencies,
or (iii) an agency-specific per-patient cost limit, based on 98% of 1994 costs
adjusted for inflation. The new IPS cost limits apply to the Company for the
cost reporting periods beginning after October 1997. The failure to implement a
PPS for HHAs services in the next several years could adversely affect the
Company and its growth strategy.

For cost reporting periods beginning on or after October 1, 1997, the
Budget Act requires HHAs to submit claims for payment for home health services
only on the basis of the geographic location at which the service was furnished.
HCFA has publicly expressed concern that some HHAs are billing for services from
administrative offices in locations with higher per-visit cost limitations than
the cost limitations in effect in the geographic location of the home health
agency furnishing the service. The Company is unable to determine the
reimbursement impact resulting from payments for services based upon geographic
location until HCFA finalizes related regulatory guidance. Any resultant
reduction in the Company's cost limits could have a material adverse effect on
the Company's business, financial condition or results of operations. However,
until regulatory guidance is issued, the effect of such reductions cannot be
predicted with any level of certainty.

Various other provisions of the Budget Act may have an impact on the
Company's business and results of operations. For example, venipuncture will no
longer be a covered skilled nursing home care service unless it is performed in
connection with other skilled nursing services. Additionally, payments will be
frozen for durable medical equipment, excluding orthotic and prosthetic

13
14

equipment, and payments for certain reimbursable drugs and biologicals will be
reduced. Beginning with services furnished on or after January 1, 1998, coverage
of home health services is currently being shifted over a period of six years
from Medicare Part A to Medicare Part B except for a maximum of 100 visits
during a spell of illness after a three-day hospitalization initiated within 14
days after discharge or after receiving any covered services in a skilled
nursing facility, each of which will continue to be covered under Medicare Part
A. Another provision of the Budget Act would reduce Medicare reimbursements to
acute care hospitals for non-Medicare patients who are discharged from the
hospital after a very short inpatient stay to the care of a home health agency.
The impact of these reimbursement changes could have a material adverse effect
on the Company's business, financial condition or results of operations.
However, this impact cannot be predicted with any level of certainty at this
time.

Among the other changes which the Budget Act is attempting to
accomplish are the following: (i) reducing the amounts which the federal
government will pay for services provided to Medicare and Medicaid beneficiaries
by an estimated $115 billion and $13 billion, respectively over a five-year
period; (ii) reducing payments to hospitals for inpatient and outpatient
services provided to Medicare beneficiaries by an estimated $44 billion over a
five-year period; (iii) establishing the Medicare+Choice Program, which expands
the availability of managed care alternatives to Medicare beneficiaries,
including Medical Savings Accounts; (iv) converting the Medicare reimbursement
of outpatient hospital services from a reasonable cost basis to a PPS; (v)
adjusting the manner in which Medicare calculates the amount of copayments which
are deducted from the Medicare payment to hospitals for outpatient services;
(vi) freezing the Medicare hospital PPS and PPS-exempt hospital and distinct
part unit update for Fiscal year 1998 and 1999, and limiting the level of annual
updates for subsequent years; (vii) reducing various other Medicare payments to
providers; (viii) repealing the federal Boren Amendment, which imposed certain
requirements on the level of reimbursement paid to hospitals for services
rendered to Medicaid beneficiaries; (ix) permitting states to mandate managed
care for Medicaid beneficiaries without the need for federal waivers; (x)
instituting permanent, mandatory exclusion from any federal health care program
for those convicted of three health care-related crimes, and a mandatory 10-year
exclusion for those convicted of two health care-related crimes. Additionally,
the Secretary of HHS will be able to deny entry into Medicare or Medicaid or
deny renewal to any provider or supplier convicted of any felony that the
Secretary deems to be "inconsistent with the best interests" of the program's
beneficiaries; and (xi) creating a new civil monetary penalty for violations of
the Federal Medicare/Medicaid Anti-Fraud and Abuse Amendments to the Social
Securities Act ("Anti-Kickback Law") for cases in which a person contracts with
an excluded provider for the provision of health care items or services where
the person knows or should know that the provider has been excluded from
participation in a federal health care program. Violations will result in
damages three times the remuneration involved, as well as a penalty of $50,000
per violation. There can be no assurance that the Company will not be subject to
the imposition of a fine or other penalty from time to time.

RESULTS OF OPERATIONS

The following discussion and analysis should be read in conjunction
with the unaudited consolidated financial statements and notes thereto appearing
elsewhere in this Form 10-Q. The statements of operations include the operations
of acquisitions made during the six months ended December 31, 1998 from their
respective acquisition dates.

THE FINANCIAL RESULTS DISCUSSED BELOW RELATE TO THE OPERATION OF CONTINUCARE
FOR THE THREE MONTHS ENDED DECEMBER 31, 1999 AS COMPARED TO THE THREE MONTHS
ENDED DECEMBER 31, 1998

REVENUE

Medical services revenues for the three months ended December 31, 1999
decreased 45% to approximately $28,841,000 from approximately $52,486,000 for
the three months ended December 31, 1998. During Fiscal 1999 the Company
disposed of certain underperforming assets and subsidiaries (the "Rationalized

14
15

Entities"). See "Business--General." During the three months ended December 31,
1998, medical services revenue from the Rationalized Entities was approximately
$8,154,000.

As part of the Company's Business Rationalization Program, the Company
significantly reduced the number of physician practices in its IPA subsidiary
and is no longer at risk for the commercial members of its IPA physicians.
During the three months ended December 31, 1998, the Company provided managed
care services for approximately 100,700 IPA member months (members per month
multiplied by the months for which services were available), which resulted in
approximately $23,455,000 in revenue. During the three months ended December 31,
1999, the number of IPA member months decreased to approximately 13,406, which
resulted in approximately $7,036,000 in revenue. Commercial member months
contributed approximately $5,011,000 of revenue during the three months ended
December 31, 1998. IPA Medicare member months have decreased 67% from
approximately 35,400 member months during the three months ended December 31,
1998 to approximately 11,700 member months during the three months ended
December 31, 1999. IPA Medicare member months contributed approximately
$6,529,000 and $17,244,000 during the three months ended December 31, 1999 and
1998, respectively.

As a result of the rationalization of the non-managed care entities,
the revenue generated by its managed care entities under the Company's contracts
with HMO's increased to 95.4% of medical services revenues for the three months
ended December 31, 1999 compared to 81.8% of medical services revenues for the
three months ended December 31, 1998. Revenue generated by the Humana contract
was 56.5% and 29.4% of medical services revenue for the three months ended
December 31, 1999 and 1998, respectively. Revenue generated by Foundation
contracts was 38.9% and 52.2% of medical services revenue for the three months
ended December 31, 1999 and 1998, respectively.

Revenue received under fee for service arrangements which require the
Company to assume the financial risks relating to payor mix and reimbursement
rates accounted for approximately 18.7% of medical services revenue for the
three months ended December 31, 1998. The contribution from fee for service
revenue for the three months ended December 31, 1999 was insignificant,
primarily as a result of the Business Rationalization Program and the
divestiture of the Diagnostic Imaging and Physician Practice subsidiaries.

Medicare and Medicaid, as a percentage of the Company's medical service
revenue, decreased from 7.2% to 4.6% of medical services revenue for the three
months ended December 31, 1998 to December 31, 1999, respectively. This decrease
was attributable to a substantial increase in managed care revenues, the
downsizing of the home health division through the elimination of subcontracting
relationships and the respective sale and closing of the outpatient
rehabilitation and physician practice subsidiaries.

Management fee revenue of approximately $267,000 for the three month
period ended December 31, 1998 relates to services provided by the Outpatient
Rehabilitation and Physician Practice subsidiaries, which were respectively sold
and closed during Fiscal 1999.

EXPENSES

Medical services expenses for the three month period ended December 31,
1999 were approximately $21,020,000 or 73% of medical services revenue, compared
to approximately $46,787,000 or 89% of medical services revenue for the three
month period ended December 31, 1998. The decrease is primarily due to the
Company's Rationalization Program. During the three months ended December 31,
1998, medical services expenses for the Rationalized Entities were approximately
$5,265,000. Medical services expenses of the Company's IPA decreased from
approximately $24,330,000 to approximately $7,065,000 as a result of the
decrease in IPA members for which the Company is at risk. In addition, effective
December 31, 1999, the Company amended its IPA contract with Foundation which
reduced the Company's medical claims and long-term debt liabilities to
Foundation for prior medical claims by approximately $3,054,000, resulting in a
corresponding decrease in medical services expenses (See Note 4 of the Company's
Consolidated Financial Statements.).

15
16

Other direct costs include the salaries and benefits of health
professionals providing the services, capitation payments to the Company's
contracted IPA physicians, and other costs necessary to operate the Company's
facilities. Other direct costs were approximately $6,102,000 and $12,298,000 for
the three months ended December 31, 1999 and 1998, respectively, or 21.2% and
23.4% of medical services revenues.

Payroll and employee benefits for administrative personnel was
approximately $1,410,000 for the three months ended December 31, 1999, or 4.9%
of revenues, compared to approximately $3,693,000 or 7% of revenue for the three
months ended December 31, 1998. The decrease in these costs as a percent of
revenues is primarily due to the rationalization of employees. Payroll and
employee benefits for the Rationalized Entities was approximately $1,418,000 for
the three months ended December 31, 1998.

General and administrative expenses for the three months ended December
31, 1999 were approximately $1,516,000 or 5.3% of revenues compared to
approximately $3,007,000 or 6% of revenues for the three months ended December
31, 1998. The decrease in general and administrative expense as a percent of
revenues resulted from a reduction of overhead costs as part of the Company's
Business Rationalization Program. During the three months ended December 31,
1998 general and administrative expenses from the Rationalized Entities was
approximately $1,583,000.

Amortization expense of intangible assets was approximately $679,000
for the three months ended December 31, 1999, as compared to approximately
$1,098,000 for the three months ended December 31, 1998. Amortization expense
for the Rationalized Entities was approximately $223,000 for the three months
ended December 31, 1998. Additionally, during fiscal year ended June 30, 1999,
the Company determined that approximately $11,700,000 of other intangible assets
were impaired and, accordingly, wrote off the impaired assets. Amortization
expense related to these impaired assets which was included in the three months
ended December 31, 1998 totaled approximately $350,000.

Bad debt expense for the three months ended December 31, 1998, was
related to certain of the Rationalized Entities which generated revenues
primarily through fee-for-service billings to third party payors and individual
patients. The absence of bad debt expense for the three months ended December
31, 1999 is directly attributable to the increase in the percentage of revenue
received under the Company's HMO contracts, for which bad debt expense is
nominal.

During the three months ended December 31, 1998, the Company recorded a
loss on disposal of subsidiary of $4,152,000 associated with the Company's
Business Rationalization Program. No such charge was recorded during the three
months ended December 31, 1999.

INCOME (LOSS) FROM OPERATIONS

Income from operations for the three months ended December 31, 1999 was
approximately $3,831,000 or 13.3% of total revenues, compared to an operating
loss of approximately $8,886,000 or 17% of total revenues for the three months
ended December 31, 1998. The operating loss of the Rationalized Entities for the
three months ended December 31, 1998 was approximately $6,779,000.

NET INCOME/LOSS

Net income for the three months ended December 31, 1999 was
approximately $2,746,000 compared to a net loss of approximately $10,339,000 for
the three months ended December 31, 1998.

16
17

THE FINANCIAL RESULTS DISCUSSED BELOW RELATE TO THE OPERATION OF CONTINUCARE FOR
THE SIX MONTHS ENDED DECEMBER 31, 1999 AS COMPARED TO THE SIX MONTHS ENDED
DECEMBER 31, 1998

REVENUE

Medical services revenues for the six months ended December 31, 1999
decreased 43.2% to approximately $57,473,000 from approximately $101,161,000 for
the six months ended December 31, 1998. During Fiscal 1999 the Company disposed
of certain underperforming assets and subsidiaries (the "Rationalized
Entities"). See "Business--General." During the six months ended December 31,
1998, medical services revenue from the Rationalized Entities was approximately
$16,641,000.

As part of the Company's Business Rationalization Program, the Company
significantly reduced the number of physician practices in its IPA subsidiary
and is no longer at risk for the commercial members of its IPA physicians. IPA
commercial member months contributed approximately $9,530,000 of revenue during
the six months ended December 31, 1998. IPA Medicare member months have
decreased approximately 60% from approximately 65,700 member months during the
six months ended December 31, 1998 to 26,400 member months during the six months
ended December 31, 1999. IPA Medicare member months contributed approximately
$14,316,000 and $32,221,000 during the six months ended December 31, 1999 and
1998, respectively.

As a result of the rationalization of the non-managed care entities,
the revenue generated by its managed care entities under the Company's contracts
with HMO's amounted to 96% and 80% of medical services revenues for the six
months ended December 31, 1999 and 1998, respectively. Revenue generated by the
Humana contract was 54% and 29% of medical services revenue for the six months
ended December 31, 1999 and 1998, respectively. Revenue generated by the
Foundation contract was 42% and 51% of medical services revenue for the six
months ended December 31, 1999 and 1998, respectively.

Revenue received under fee for service arrangements which require the
Company to assume the financial risks relating to payor mix and reimbursement
rates accounted for approximately 20% of medical services revenue for the six
months ended December 31, 1998. The contribution from fee for service revenue
for the six months ended December 31, 1999 was insignificant, primarily as a
result of the Business Rationalization Program and the divestiture of the
Diagnostic Imaging and Physician Practice subsidiaries.

Medicare and Medicaid, as a percentage of the Company's medical service
revenue, decreased from 7.9% to 4.3% of medical services revenue for the six
months ended December 31, 1998 to December 31, 1999, respectively. This decrease
was attributable to a substantial increase in managed care revenues, the
downsizing of the home health division through the elimination of subcontracting
relationships and the respective sale and closing of the outpatient
rehabilitation and physician practice subsidiaries.

Management fee revenue of $450,000 for the six months ended December
31, 1999 relates primarily to fees received in July, 1999 through September,
1999 from Foundation. Management fee revenue of approximately $550,000 for the
six months ended December 31, 1998 relates to services provided by the
Outpatient Rehabilitation and Physician Practice subsidiaries which were
respectively sold and closed during Fiscal 1999.

EXPENSES

Medical services expenses for the six month period ended December 31,
1999 were approximately $48,452,000 or 84% of medical services revenue, compared
to approximately $88,172,000 or 87% of medical services revenue for the six
month period ended December 31, 1998. The decrease is primarily due to the
Company's Rationalization Program. During the six months ended December 31,
1998, medical services expenses for the Rationalized Entities were approximately
$10,841,000. Medical services expenses of the Company's IPA decreased from
approximately $43,454,000 to approximately $16,323,000 as a result of the
decrease in IPA members for which the Company is at risk. In addition, effective
December 31, 1999, the Company amended its IPA contract with Foundation which
reduced the Company's medical claims and long-term debt liabilities to
Foundation for prior medical claims by approximately $3,054,000, resulting in a
corresponding decrease in medical services expense (See Note 4 of the Company's
Consolidated Financial Statements).

17
18

Medical claims represent the costs of medical services provided by
providers other than the Company but which are to be paid by the Company for
individuals covered by the Company's capitated risk contracts with HMOs. Claims
expense was approximately $39,445,000 and $63,120,000 for the six months ended
December 31, 1999 and 1998, respectively, or 68.6% and 62.4% of medical services
revenues. The Company began experiencing an increase in its claims loss ratio in
the second quarter of fiscal 1999 which continued through the first quarter of
fiscal 2000. The Company has taken steps to reduce the ratio, including the
reduction in the number of IPA members for which the Company is at risk. While
claims costs as a percentage of medical services revenues decreased in the
second quarter of fiscal 2000 for both the staff model centers and the IPA to
approximately 62.3% of medical services revenues, there can be no assurance that
the Company's measures will be effective and that the claims loss ratio will not
increase in the future.

Other direct costs include the salaries and benefits of health
professionals providing the services, capitation payments to the Company's
contracted IPA physicians and other costs necessary to operate the Company's
facilities. Other direct costs were approximately $12,061,000 and $25,052,000
for the six months ended December 31, 1999 and 1998, respectively, or 21.0% and
24.8% of medical services revenues.

Payroll and employee benefits for administrative personnel was
approximately $3,279,000 for the six months ended December 31, 1999, or 5.7% of
revenues, compared to approximately $7,692,000 or 8% of revenue for the six
months ended December 31, 1998. The decrease in these costs as a percent of
revenues is primarily due to the rationalization of employees. Payroll and
employee benefits for the Rationalized Entities was approximately $3,154,000 for
the six months ended December 31, 1998.

General and administrative expenses for the six months ended December
31, 1999 were approximately $3,024,000 or 5.2% of revenues compared to
approximately $6,134,000 or 6% of revenues for the six months ended December 31,
1998. The decrease in general and administrative expense as a percent of
revenues resulted from a reduction of overhead costs as part of the Company's
Business Rationalization Program. During the six months ended December 31, 1998
general and administrative expenses from the Rationalized Entities was
approximately $3,226,000.

Amortization expense of intangible assets was approximately $1,324,000
for the six months ended December 31, 1999, as compared to approximately
$2,189,000 for the six months ended December 31, 1998. Amortization expense for
the Rationalized Entities was approximately $489,000 for the six months ended
December 31, 1998. Additionally, during fiscal year ended June 30, 1999, the
Company determined that approximately $11,700,000 of other intangible assets
were impaired and, accordingly, wrote off the impaired assets. Amortization
expense related to these impaired assets which was included in the six months
ended December 31, 1998 totaled approximately $659,000.

Bad debt expense for the six months ended December 31, 1998, was
related to certain of the Rationalized Entities which generated revenues
primarily through fee-for-service billings to third party payors and individual
patients. The absence of bad debt expense for the six months ended December 31,
1999 is directly attributable to the increase in the percentage of revenue
received under the Company's HMO contracts, for which bad debt expense is
nominal.

During the six months ended December 31, 1998, the Company recorded a
loss on disposal of subsidiary of $4,152,000 associated with the Company's
Business Rationalization Program. No such charge was recorded during the six
months ended December 31, 1999.

18
19

INCOME/LOSS FROM OPERATIONS

Income from operations for the six months ended December 31, 1999 was
approximately $1,142,000 or 2.0% of total revenues, compared to an operating
loss of approximately $10,685,000 or 11% of total revenues for the six months
ended December 31, 1998. The operating loss of the Rationalized Entities for the
six months ended December 31, 1998 was approximately $7,869,000.

EXTRAORDINARY GAIN ON EXTINGUISHMENT OF DEBT

In July, 1999, the Company recorded an extraordinary gain on
extinguishment of debt of approximately $3,776,000 as a result of repurchasing
$4,000,000 of its outstanding convertible subordinated notes payable for a cash
payment of $210,000 and the write-off of related deferred financing costs and
accrued interest payable. The Company has not provided for income taxes on the
gain because it believes that it will be able to utilize certain of its net
operating loss carryforwards to offset any income tax liability related to the
transaction. (See Note 3 of the consolidated financial statements). In August,
1998, the Company recorded an extraordinary gain on extinguishment of debt of
approximately $130,000 as a result of repurchasing $1,000,000 of the Notes for a
cash payment of approximately $700,000 and the write-off of related deferred
financing costs and accrued interest payable.

NET INCOME/LOSS

Net income for the six months ended December 31, 1999 was approximately
$3,060,000 compared to a net loss of approximately $12,909,000 for the six
months ended December 31, 1998.

LIQUIDITY AND CAPITAL RESOURCES

The discussion herein has been prepared assuming that the Company will
continue as a going concern. In order to strengthen itself financially and
remain a going concern, the Company, during the fiscal year ended June 30, 1999,
divested itself of certain unprofitable operations and disposed of other
underperforming assets.

The Company did not make the April 30, 1999 (the "April Default Date")
semi-annual payment of interest on its Subordinated Notes Payable or the October
31, 1999 (the "October Default Date") semi-annual payment. The amount of
interest due as of April 30, 1999 and October 31, 1999 was $1,800,000 and
$3,300,000, respectively. Within thirty (30) days of the April Default Date, the
Company commenced negotiations with an informal committee of the holders the
Notes to restructure a portion of the debt and related interest in exchange for
common stock and to obtain terms on the remaining portion of the debt that are
more favorable to the Company.

On July 2, 1999 the Company repurchased $4,000,000 face value of its
Notes for approximately $210,000, recognizing a gain on extinguishment of debt
of approximately $3,776,000. The Company funded the purchase of the Notes from
working capital. On September 29, 1999 the Company announced an agreement in
principle with the holders of the Notes to enter into a settlement and
restructuring agreement with respect to the remaining $41,000,000 principal
balance and approximately $3,300,000 of interest thereon accruing through
October 31, 1999. The agreement was ratified on December 9, 1999 through the
execution of a Consent Letter and Agreement. (See Note 3 of the Company's
Consolidated Financial Statements.)

19
20

by December 31, 1999. At December 31, 1999 and June 30, 1999, respectively, the
outstanding balance of the Credit Facility was approximately $135,000 and
$1,000,000 and is included in Current Portion of Long-Term Debt in the
accompanying consolidated financial statements. The Company obtained a waiver
which extended the due date of the remaining balance to February 1, 2000 and
repaid the outstanding balance on January 31, 2000.

Effective December 31, 1999, the Company negotiated an amendment to its
contract with Foundation (the "Amendment"). The Amendment reduces the Company's
prior medical claims and long-term debt liabilities to Foundation as of May 31,
1999 to $1,500,000. The Amendment also requires the Company to remit to
Foundation any reinsurance proceeds received for claims generated from
Foundation members for the period June 1, 1998 through August 31, 1999 up to a
maximum of $1,327,400. As a result of this Amendment the Company recorded a
contractual revision of previously recorded medical claims liability of
approximately $3,054,000. This Amendment resulted in the reduction of medical
claims payable by approximately $2,703,000 and the reduction of long-term debt
by approximately $351,000.

The Company's loss before extraordinary gain on extinguishment of debt
was approximately $716,000 for the six months ended December 31, 1999. Net cash
used in operating activities for the six months ended December 31, 1999 was
approximately $122,000 due primarily to the loss before the extraordinary item,
a decrease in accounts payable and accrued expenses of approximately $635,000, a
decrease of medical claims payable of approximately $2,531,444, and offset by
non-cash amortization and depreciation expenses of approximately $2,062,000, a
decrease in accounts receivable of approximately $567,000, and an increase in
accrued interest payable of approximately $1,640,000.

Net cash used in investing activities for the six months ended December
31, 1999 was approximately $82,000 for the purchase of computer equipment in
conjunction with the Company's Year 2000 computer plan. Net cash used in
financing activities for the six months ended December 31, 1999 was
approximately $1,366,000, comprised primarily of $210,000 paid to redeem
$4,000,000 of the Company's convertible subordinated notes payable, and
approximately $1,146,000 of repayments on the Company's Credit Facility and
other notes payable.

The Company's working capital deficit was approximately $54,846,000 at
December 31, 1999, which includes the classification of $41,000,000 of the Notes
as current liabilities due to the Company's default on the April 30, 1999 and
October 31, 1999 interest payments.

The Company believes that it will be able to fund all of its capital
commitments and operating cash requirements from a combination of cash on hand,
expected cash flow improvements, and the new credit facility. The Company
anticipates its capital expenditures for fiscal 2000 will not exceed $350,000, a
reduction of $400,000 (or 53%) over the prior year.

Although the Company had completed the divestiture of most of its
unprofitable operations and the reduction in its personnel by June 30, 1999, the
Company does not believe it will be able to demonstrate profitable operations or
demonstrate positive cash flow unless it completes the restructuring of the
Notes.

The Company has no current knowledge of any intermediary audit
adjustment trends with respect to previously filed cost reports. However, as is
standard in the industry, the Company remains at risk for disallowance and other
adjustment to previously filed cost reports until final settlement. The
Company's average settlement period with respect to its cost reports has
historically ranged from two to three years.

The Company has taken and continues to take steps to improve its cash
flow and profitability through the implementation of its Business
Rationalization Program and Financial Restructuring Program by: (1) assessing
the possible divestiture of non-profitable business units; (2) reducing
personnel levels and other overhead costs; (3) negotiating with the holders of
the Notes; and (4) renegotiating certain of its agreements with HMOs. However,
currently none of the Company's operations are being held for sale. While the
Company believes that these measures will improve its cash flow and
profitability, there can be no assurances that it will be able to implement any
of the above steps and, if implemented, the steps will improve the Company's
cash flow and profitability sufficiently to fund its operations and satisfy its
obligations as they become due.

20
21

If there are continuing operating losses, Continucare may need
additional capital to fund its operations, and there can be no assurance that
such additional capital can be obtained or, if obtained, that it will be on
terms acceptable to Continucare. The incurring or assumption by the Company of
additional indebtedness could result in the issuance of additional equity and/or
debt which could have a dilutive effect on current shareholders and a
significant effect on the Company's operations.

Additionally, the Company has fallen below the continued listing
requirements of the American Stock Exchange with respect to the requirements
that the Company maintain stockholders' equity of at least $2 million and not
sustain losses from continuing operations and/or net losses in two of its three
most recent fiscal years. At December 31, 1999, the Company had a shareholders'
deficit of approximately $32,482,000. There can be no assurance that the listing
of the Company's common stock will be continued.

IMPACT OF YEAR 2000

The Year 2000 Issue is the result of the computer programs being
written using two digits rather than four to define the applicable year. Any
computer programs that have time sensitive software may recognize a date using
"00" as the year 1900 rather than the Year 2000. This could result in a system
failure or miscalculations causing disruptions of operations and patient care,
including, among other things, a failure of certain patient care applications
and equipment, a failure of control systems, a temporary inability to process
transactions, send invoices, or engage in similar normal business activities.
Since January 1, 2000 the Company has experienced no disruptions in its systems
or those of third parties, or other computer related problems as a result of
processing dates beyond 1999. However, there can be no assurances that the
Company will not experience Year 2000 related problems in the future.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company has no material risk associated with interest rates,
foreign currency exchange rates or commodity prices.

PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

As previously discussed in the Company's quarterly report on
Form 10-Q/A for the quarterly period ended September 30, 1999, on November 15,
1999, the Company commenced litigation against ZAG and its affiliated parties
alleging breach of fiduciary duties, improper billing, and seeking return of all
consideration previously paid by the Company to ZAG, and damages, as well as
seeking rescission of the agreement and plan of merger. A counterclaim was filed
against the Company on December 20, 1999 in the Circuit Court of the 11th
Judicial District in and for Dade County, Florida. The counterclaim alleged
breach of contract, tortious interference and conversion. In the event the
Company is unsuccessful in this litigation, Continucare may be required to pay
in excess of $1,600,000 of additional consideration, in the form of either cash
or stock, representing the difference between $1,885,000 and the fair market
value of the 575,000 unregistered shares of Continucare common stock previously
issued to ZAG in connection with the agreement and plan of merger.

21
22

The case of KAMINE CREDIT CORPORATION ("KAMINE") AS ASSIGNEE OF TRI
COUNTY HOME HEALTH v. CONTINUCARE CORPORATION which was previously discussed in
the Company's quarterly report on Form 10-Q/A for the quarterly period ended
September 30, 1999, was voluntarily dismissed without prejudice on December 3,
1999.

The Company is a party to the case of WARREN GROSSMAN, M.D. ALAN REICH,
M.D. and RICHARD Strain, M.D. v. CONTINUCARE PHYSICIAN PRACTICE MANAGEMENT, INC.
and CONTINUCARE CORPORATION. This case was filed in May, 1999, in the Circuit
Court for Broward County, Florida. The complaint alleges breach of employment
contracts based on the early termination of the Plaintiffs' employment. The
original complaint, as filed, sought damages in excess of $15,000; however,
during discovery by the Company in connection with the case, it was determined
that the Plaintiffs are seeking damages in excess of $2,500,000. On January 5,
2000, the Company filed a counterclaim alleging breach of contract in connection
with the Plaintiffs' failure to return certain computer equipment, as well as a
breach of the non-compete covenant. Discovery is pending. The Company believes
the action has little merit and intends to vigorously defend the claim.

The Company is subject to a variety of claims and suits that arise from
time to time out of the ordinary course of its business, substantially all of
which involve vendor-lease claims and/or claims related to the alleged
malpractice of employed and contracted medical professionals.

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

On October 18, 1999, the Company issued 200,000 unregistered shares of
the Company's common stock to Harter Financial, Inc. as partial consideration
for its services rendered to the Company in connection with negotiating the
restructuring of the Notes and as settlement with the noteholders. (See Note 6
to the Consolidated Financial Statements.) All such shares were issued pursuant
to an exemption set forth under Section 4(2) of the Securities Act of 1933, as
amended.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

At December 31, 1999, the Company was not in compliance with certain
covenants of it's Credit Facility including requirements with respect to: (i)
interest coverage ratio (ii) senior debt ratio, (iii) current ratio and (iv) net
worth. In April 1999, the Company entered into an amendment to its Credit
Facility, which provided, among other things, for repayment of the remaining
outstanding principal balance by December 31, 1999. The amendment, however, did
not include a waiver of non-compliance of the covenants under the Credit
Facility. At December 31, 1999, the outstanding balance was approximately
$135,000. The Company obtained a waiver which extended the due date for the
remaining balance to February 1, 2000 and repaid the remaining outstanding
balance on January 31, 2000.

The Company did not make the April 30, 1999 or October 31, 1999
semi-annual payments of interest on its Notes. At December 31, 1999 the Company
had $41,000,000 principal amount of the Notes outstanding and accrued interest
of approximately $3,827,000. (See Note 3 to the consolidated financial
statements)

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

Not Applicable

22
23

ITEM 5. OTHER INFORMATION

Not Applicable

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits

4.1 First Supplemental Indenture

27.1 Financial Data Schedule

99.1 Consent Letter and Agreement to the First
Supplemental Indenture

(b) Reports on Form 8-K

None.

23
24

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the Company has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.

CONTINUCARE CORPORATION

Dated: February 11, 2000 By: /s/ SPENCER J. ANGEL
-----------------------------------------
Spencer J. Angel
Chief Executive Officer and President

By: /s/ JANET L. HOLT
-----------------------------------------
Janet L. Holt
Chief Financial Officer