CONTINUCARE CORP, 10-Q, 1999-05-20

CONTINUCARE CORP
10-Q, 1999-05-20
HOME HEALTH CARE SERVICES

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<PAGE> 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 MARCH 31, 1999

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

COMMISSION FILE NUMBER 0-21910

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)

100 SOUTHEAST SECOND STREET
36TH FLOOR
MIAMI, FLORIDA 33131
(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 April 30, 1999, the Registrant had 14,606,283 shares of $0.0001 par value
common stock outstanding.

<PAGE> 2

CONTINUCARE CORPORATION

INDEX

PART I FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

<S> <C> <C>
Consolidated Balance Sheets - March 31, 1999 (Unaudited) and June 30, 1998..............
3
Consolidated Statements of Operations - Three Months Ended March 31, 1999
(Unaudited) and 1998 (Unaudited)..................................................... 4

Consolidated Statements of Operations - Nine Months Ended March 31, 1999
(Unaudited) and 1998 (Unaudited)..................................................... 5

Consolidated Statements of Cash Flows - Nine Months Ended March 31, 1999
(Unaudited) and 1998 (Unaudited)..................................................... 6

Notes to Consolidated Financial Statements March 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.............................. 18

PART II OTHER INFORMATION

SIGNATURE PAGE..................................................................................... 20

</TABLE>

2
<PAGE> 3

PART I - FINANCIAL INFORMATION

ITEM 1. - FINANCIAL STATEMENTS

CONTINUCARE CORPORATION
CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
MARCH 31, 1999 JUNE 30, 1998
-------------- -------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents........................................... $ 2,854,531 $ 7,435,724
Accounts receivable, net of allowance for doubtful accounts of
$3,750,000 at March 31, 1999 and $2,071,000 at June 30, 1998....... 2,959,499 9,009,462
Other receivables................................................... 364,098 1,091,744
Prepaid expenses and other current assets........................... 821,989 595,086
Assets held for sale................................................ 5,648,341 --
Income taxes receivable............................................. -- 1,800,000
------------ ------------
Total current assets............................................ 12,648,458 19,932,016
Notes receivable, net of allowance for doubtful accounts of
$5,510,000 at March 31, 1999 and at June 30, 1998.................... 1,540,100 1,644,420
Equipment, furniture and leasehold improvements, net................... 1,289,282 5,496,025
Cost in excess of net tangible assets acquired, net of
accumulated amortization of $3,384,000 at March 31, 1999 and
$2,252,000 at June 30, 1998.......................................... 26,433,945 38,621,561
Other intangible assets net of accumulated amortization of
$539,000 at March 31, 1999........................................... 9,696,442
Deferred financing costs, net of accumulated amortization of
$994,000 at March 31, 1999 and $400,000 at June 30, 1998............. 2,871,050 3,373,999
Other assets, net...................................................... 64,526 418,084
------------ ------------
Total assets.................................................... $ 54,543,803 $ 69,486,105
============ ============

LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities
Accounts payable.................................................... $ 848,928 $ 816,844
Accrued expenses.................................................... 6,464,629 5,223,153
Medical claims payable.............................................. 5,487,876 966,251
Current portion of long term debt................................... 7,565,378 850,000
Accrued interest payable............................................ 1,500,022 623,556
Current portion of capital lease obligations........................ 49,676 328,295
------------ ------------
Total current liabilities....................................... 21,916,509 8,808,099
Long term debt......................................................... 3,066,958 --
Convertible subordinated notes payable................................. 45,000,000 46,000,000
Deferred tax liability................................................. 514,894 954,894
Obligations under capital lease........................................ 148,864 496,766
------------ ------------
Total liabilities............................................... $ 70,647,225 $ 56,259,759
------------ ------------
Commitments and contingencies
Shareholders' equity (deficit/equity)
Common stock; $0.0001 par value; 100,000,000 shares authorized,
17,536,283 shares issued at March 31, 1999 and 16,661,283
at June 30, 1998; 14,606,283 shares outstanding at March 31, 1999
and 13,731,283 at June 30, 1998................................... $ 1,462 $ 1,374
Additional paid-in capital.......................................... 32,910,465 31,099,303
Accumulated deficit................................................. (43,772,669) (12,631,651)
Treasury stock (2,930,000 shares)................................... (5,242,680) (5,242,680)
------------ ------------
Total shareholders' equity (deficit/equity)....................... (16,103,422) 13,226,346
------------ ------------
Total liabilities and (deficit/equity) shareholders' equity....... $ 54,543,803 $ 69,486,105
============ ============

</TABLE>

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

3
<PAGE> 4

CONTINUCARE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

THREE MONTHS ENDED MARCH 31,
------------------------------------
1999 1998
------------ ------------
<S> <C> <C>
Operations continuing
Revenue
Medical services, net............................................. $ 49,983,429 $ 16,259,662
Management fees................................................... -- 473,873
------------ ------------
Subtotal........................................................ 49,983,429 16,733,535
------------ ------------
Expenses
Medical services.................................................. 46,346,967 11,014,500
Payroll and employee benefits..................................... 3,524,840 3,869,129
Provision for bad debt............................................ 1,135,713 --
Professional fees................................................. 502,982 474,146
General and administrative........................................ 2,954,930 2,206,762
Depreciation and amortization..................................... 1,502,012 917,127
Loss on assets held for sale...................................... 11,003,541 --
------------ ------------
66,970,985 18,481,664
------------ ------------
Operations disposed of
Revenue............................................................. 468 365,343
Expenses............................................................ (131,090) (348,273)
------------ ------------
Subtotal.......................................................... (130,622) 17,070
Provision for notes receivable.................................... -- (600,000)
------------ ------------
Subtotal.......................................................... (130,622) (582,930)
------------ ------------
Loss from operations................................................... (17,118,178) (2,331,059)
------------ ------------
Other income (expense)
Interest income................................................... 50,758 437,766
Interest expense.................................................. (1,164,240) (860,964)
------------ ------------
Loss before income taxes............................................... (18,231,660) (2,754,257)
Benefit for income taxes............................................... -- (223,993)
------------ ------------
Net loss............................................................... $(18,231,660) $(2,530,264)
============ ===========
Net loss per share
Basic............................................................. $(1.25) $(.19)
Diluted........................................................... $(1.25) $(.19)
Shares used in earnings per share calculations
Basic............................................................. 14,606,283 13,656,283
Diluted........................................................... 14,606,283 13,656,283

</TABLE>

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

4
<PAGE> 5

CONTINUCARE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

NINE MONTHS ENDED MARCH 31,
-----------------------------------
1999 1998
------------ ------------

<S> <C> <C>
Operations continuing
Revenue
Medical services, net............................................. $149,253,258 $24,813,252
Management fees................................................... 516,642 939,146
------------ -----------
Subtotal........................................................ 149,769,900 25,752,398
Expenses
Medical services.................................................. 132,986,251 14,567,503
Payroll and employee benefits..................................... 10,774,229 7,270,320
Provision for bad debt............................................ 2,866,306 281,201
Professional fees................................................. 1,161,628 855,834
General and administrative........................................ 8,409,629 4,815,126
Depreciation and amortization..................................... 4,401,319 1,491,115
Loss on assets held for sale...................................... 11,003,541 --
------------ -----------
171,602,903 $29,281,099
Operations disposed of
Revenue............................................................. 1,924,560 2,621,621
Expenses............................................................ (3,742,785) (2,670,790)
------------ -----------
Subtotal.......................................................... (1,818,225) (49,169)
Provision for notes receivable.................................... -- (2,767,000)
------------ -----------
Subtotal.......................................................... (1,818,225) (2,816,169)
------------ -----------
Loss from operations................................................... (23,651,228) (6,344,870)
------------ -----------
Other income (expenses)
Loss on sale of subsidiary........................................ (4,152,250) --
Interest income................................................... 122,313 784,950
Interest expense.................................................. (3,590,830) (1,656,792)
------------ -----------
Loss before income taxes and extraordinary items....................... (31,271,995) (7,216,712)
Benefit for income taxes............................................... -- (1,792,317)
------------ -----------
Net loss before extraordinary items.................................... (31,271,995) (5,424,395)
Gain on extinguishment of debt, net of taxes........................... 130,977 --
------------ -----------
Net loss............................................................... $(31,141,018) $(5,424,395)
============ ===========
Net loss per share before extraordinary items..........................
Basic............................................................. $(2.17) $(.45)
Diluted........................................................... $(2.17) $(.45)
Extraordinary items
Basic............................................................. $.01 --
Diluted........................................................... $.01 --
Net loss per share
Basic............................................................. $(2.16) $(.45)
Diluted........................................................... $(2.16) $(.45)
Shares used in earnings per share calculations
Basic............................................................. 14,428,968 12,078,041
Diluted........................................................... 14,428,968 12,078,041

</TABLE>

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

5
<PAGE> 6

CONTINUCARE CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)

NINE MONTHS ENDED MARCH 31,
-------------------------------------
1999 1998
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss).......................................................... $(31,141,018) $ (5,424,395)
------------ ------------
Adjustments to reconcile net loss to cash used in operating
activities:
Depreciation and amortization including amortization
of deferred loan costs............................................ 5,322,902 1,663,307
Provision for bad debt............................................ 3,506,217 281,201
Provision for notes receivable.................................... -- 2,767,000
Loss on sale of subsidiary........................................ 4,152,250 --
Loss on assets held for sale...................................... 11,003,541 --
Gain on extinguishment of debt, net of taxes...................... (130,977) --
Changes in assets and liabilities, excluding the effect of
acquisitions and dispositions:
Increase in accounts receivable................................... (2,339,113) (7,784,665)
Decrease in income taxes receivable............................... 1,800,000 --
Increase in prepaid expenses and other current assets............. (507,323) (798,832)
Decrease in other receivables..................................... 692,045 --
Decrease in other assets.......................................... 271,840 515,274
Increase in medical claims payable................................ 4,521,625 --
Increase in accounts payable and accrued expenses................. 457,368 4,137,522
Increase in accrued interest payable.............................. 876,466 1,530,056
Decrease in income and other taxes payable........................ -- (2,392,314)
------------ ------------
Net cash used in operating activities.................................. (1,514,177) (5,505,846)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Cash paid for acquisitions.......................................... (4,225,000) (32,413,291)
Cash paid for purchase of contracts................................. (734,806) --
Property and equipment additions.................................... (673,638) (3,984,663)
Proceeds from sale of subsidiary.................................... 141,187 --
Proceeds from notes receivable...................................... 104,320 --
------------ ------------
Net cash used in investing activities.................................. (5,387,937) (36,397,954)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Payment to extinguish debt........................................ (720,000) (2,500,000)
Principal repayments under capital lease obligation............... (369,037) (15,559)
Payment on acquisition notes...................................... (1,421,850) --
Proceeds from long term debt...................................... 5,000,000 48,500,000
Repayment of shareholder note..................................... -- (599,000)
Payment of deferred financing costs............................... (168,192) (3,050,257)
Payment from issuance of notes payable............................ -- 1,214,395
Proceeds from issuance of common stock............................ -- 11,279,241
------------ ------------
Net cash provided by financing activities.............................. 2,320,921 54,828,820
------------ ------------
Net increase (decrease) in cash and cash equivalents................... (4,581,193) 12,925,020
------------ ------------
Cash and cash equivalents at beginning of period....................... 7,435,724 6,989,580
------------ ------------
Cash and cash equivalents at end of period............................. $ 2,854,531 $ 19,914,600
============ ============
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Stock issued for acquisition........................................... $ 1,811,250 $ 1,990,000
============ ============
Note payable for purchase of contracts................................. $ 2,500,000 $ --
============ ============
Note payable for amendment of contract................................. $ 3,509,983 $ --
============ ============
Purchase of furniture and fixtures with proceeds of capital lease
obligation............................................................ $ -- $ 762,400
============ ============
Cash paid for income taxes............................................. $ -- $ 980,136
============ ============
Cash paid for interest................................................. $ 228,005 $ 90,471
============ ============

</TABLE>

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

6
<PAGE> 7

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

NOTE 1 - UNAUDITED INTERIM INFORMATION

The accompanying interim consolidated financial data for Continucare
Corporation ("Continucare" or the "Company") are unaudited; however, in the
opinion of management, the interim data include all adjustments, consisting of
normal recurring accruals, necessary for a fair presentation of the results for
the interim period. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities at
the date of the financial statements and the reported amounts of revenue and
expenses during the reporting period. Actual results could differ from those
estimates.

The results of operations for the three months and nine months ended
March 31, 1999 are not necessarily indicative of the results to be expected for
the year ending June 30, 1999.

The interim unaudited consolidated financial statements should be read
in conjunction with the audited consolidated financial statements and notes
thereto for the year ended June 30, 1998 as set forth in the Company's Form
10-KSB.

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

NOTE 2 - GENERAL

The Company's consolidated financial statements have been prepared
(and the other information in this Form 10-Q has been presented) assuming the
Company will continue as a going concern. The Company has suffered recurring
losses from operations and has an excess of current liabilities over current
assets and a capital deficit that raise substantial doubt about its ability to
continue as a going concern. The financial statements of the Company do not
include any adjustments that might result from the outcome of this uncertainty.

The Company continues to take steps to improve its cash flow and
profitability including but not limited to (1) divesting of its non-profitable
business units, (2) reducing personnel levels to reduce costs, (3) as discussed
in Note 11 to Notes to Company's Consolidated Financial Statements, negotiating
with the holders of the Debentures, and (4) negotiating an amendment to its
provider agreement with one of its HMOs, which includes a settlement of the
medical claims expense reported by the HMO. 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.

For the nine months ended March 31, 1999, the Company incurred a loss
of approximately $31,141,000 and the net cash used in operating activities was
approximately $1,514,000 primarily as a result of the net loss, offset by (i)
non-cash operating items, including depreciation and amortization, provision
for bad debt, loss on sale of subsidiary and loss on assets held for sale, and
(ii) increase in medical claims payable. For the nine months ended March 31,
1999, net cash used in investing activities was approximately $5,388,000,
primarily related to the purchase of contracts with approximately 30 physicians
from an unrelated entity. Net cash provided by financing activities for the
nine months ended March 31, 1999 was approximately $2,321,000, comprised
primarily of the $5 million borrowed under the Credit Facility, partially
offset by repayments of other debt.

The Company's working capital deficit was approximately $9,268,000 at
March 31, 1999, which includes the $5,000,000 outstanding under the Credit
Facility due to the Company's violation of certain financial covenants,
compared to working capital of $11,124,000 at June 30, 1998. See Note 6 to the
Consolidated Financial Statements.

7
<PAGE> 8

During the nine months ended March 31, 1999, capital expenditures
amounted to approximately $673,000. Capital expenditures during fiscal 1999
principally for computers and equipment are not expected to exceed $1.0
million.

NOTE 3 - BASIS OF PRESENTATION

In fiscal 1998, the Company's focus shifted away from the behavioral
health area, an area which had previously been a substantial source of the
Company's revenue. In fiscal 1997, contracts to manage and provide staffing and
billing services for behavioral health programs in hospitals and freestanding
mental health rehabilitation centers represented approximately 86% of total
revenue. In the first quarter of fiscal 1998, the Company assigned its
behavioral health management contracts with freestanding centers and hospitals.
During fiscal 1999, the Company sold its diagnostic imaging services subsidiary
and rehabilitation subsidiaries and closed its physician practice management
subsidiary, see Notes 9 and 10, respectively. As of March 31, 1999, the results
pertaining to the diagnostic imaging services subsidiary are segregated and
classified as operations disposed of in the accompanying consolidated
statements of operations. The assets of the rehabilitation and physician
practice management subsidiaries are classified as assets held for sale at
March 31, 1999.

NOTE 4 - BUSINESS COMBINATION

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.
("AARDS"), a Florida corporation formerly known as Norman G. Gaylis, M.D., Inc.
In connection with the purchase the Company entered into a management agreement
with ZAG Group, Inc. ("ZAG"), an entity controlled by the principals of AARDS.
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
August 1998 the Company paid approximately $2 million to ZAG in connection with
the cancellation of the put/call agreement of which $115,000 was paid in cash
and the remaining $1,885,000 was paid by issuing 575,000 shares of the Company's
common stock with a fair market value of approximately $1.6 million. 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 Company is obligated to 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. The
management agreement was terminated upon the cancellation of the put/call
agreement. The total amount paid in connection with the cancellation of the
put/call agreement was included in cost in excess of tangible assets acquired on
the accompanying balance sheet and was being amortized over a weighted average
life of 14 years. Due to the decision to close and sell the offices of CPPM on
March 12, 1999, the net realizable value of these assets is included in the
assets held for sale at March 31, 1999 (see Note 10).

NOTE 5 - OTHER INTANGIBLE ASSETS

In August 1998, the Company purchased professional provider contracts
with approximately 30 physicians from an unrelated entity. The total purchase
price was approximately $6.7 million of which $4.2 million was paid in cash at
closing and the remaining $2.5 million is payable in equal monthly installments
over the ensuing 24 months. The Company has not made any of the payments
required under the purchase agreement during the three months ended March 31,
1999. The total amount in arrears is approximately $312,000 at March 31, 1999.
The payments were not made due to the dispute with one of its HMO payors as
discussed in Note 8. The total amount is included in other intangible assets on
the accompanying consolidated balance sheet and is being amortized over 10
years, the term of the contracts.

Effective August 1, 1998, the Company entered into two amendments to
its professional provider agreements with an HMO. The amendments, among other
things, extended the term of the original agreement from six to ten years and
increased the percentage of Medicare premiums received by the Company effective

8
<PAGE> 9
January 1, 1999. In exchange for the amendments, the Company signed a $4.0
million non interest bearing promissory note (the "Note") with the HMO of which
$1.0 million will be paid over the 12 months commencing January 1999 and the
remaining $3.0 million over the ensuing 24 months. None of the payments
required under the Note have been paid. The total amount in arrears is
approximately $250,000 at March 31, 1999. The $4.0 million, net of imputed
interest calculated at 8% of approximately $500,000, is included in other
intangible assets on the accompanying consolidated balance sheet and is being
amortized over 9.6 years, the remaining term of the contract.

NOTE 6 - LONG TERM DEBT

As of March 31, 1999, the Company was not (and currently is not) in
compliance with certain covenants required under the terms of its $5 million
Credit Facility with First Union of which $5.0 million was owed at March 31,
1999. As a result, First Union may demand repayment of the outstanding
principal balance under the Credit Facility. During April 1999, the Company
used approximately $4.0 million of the net proceeds of the sale of its
rehabilitative subsidiaries (see Note 10) 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 of approximately
$1.0 million to First Union by December 31, 1999. The Company continues to not
be in compliance with certain non-monetary covenants under the Credit Facility
and therefore, the total amount outstanding has been classified as a current
liability in the accompanying March 31, 1999 consolidated balance sheet. In the
event that the Company does not obtain a waiver from First Union, remains out
of compliance with the loan covenants and payment is demanded, the Company
believes it will need to obtain additional financing from sources outside of
the Company to fund its remaining obligation. The additional financing may be
obtained from, but not limited to, the sale of stock, sale of assets or
additional borrowings. The ultimate outcome of this matter may have a material
adverse effect on the Company's financial position and operations.

NOTE 7 - CONVERTIBLE SUBORDINATED NOTES PAYABLE

In August 1998, the Company purchased $1.0 million face value of its
8% Convertible Subordinated Notes due 2002 for approximately $744,000,
recognizing a gain of approximately $200,000 which is included in gain on
extinguishment of debt on the accompanying consolidated statement of operations
net of the related income taxes.

The Company did not make the April 30, 1999 semi-annual payment of
interest on its 8% Convertible Subordinated Debentures due 2002 (the
"Debentures"), as discussed in Note 11. In the event the Company does not make
the interest payment and remains in default, the amount outstanding under the
Debentures of $45 million at March 31, 1999 and any accrued interest,
approximately $1.8 million at March 31, 1999, may become due and payable
immediately. At March 31, 1999, the Company was not in default of any of the
terms under the Debentures.

NOTE 8 - CONTINGENCIES

The Company is a party 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, in the Circuit Court of the Tenth
Judicial Circuit in and for Polk County, Florida, Civil Division. 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. 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 HEALTH CARE SYSTEMS AND
AFFILIATES ("MHS") V. CONTINUCARE ACQUISITION CORP. AND CONTINUCARE HOME HEALTH
SERVICES, INC. MHS is seeking in excess of $1 million damages for an alleged
breach of contract. The Company believes the claim has little merit and intends
to vigorously defend the claim.

9
<PAGE> 10

The Company is a party to the case of KAMINE CREDIT CORP: AS ASSIGNEE
OF TRICOUNTY HOME HEALTH CARE SERVICES, INC. (KAMINE) V. CONTINUCARE
CORPORATION. Kamine is seeking in excess of $5 million damages for alleged
breach of contract. The Company believes the claim has little merit and intends
to vigorously defend the claim.

The Company records its results of operations for its managed care
contracts with HMO's based on information provided by the respective HMO and
attempts to monitor the reliability of that information utilizing a variety of
internal analytical tools. One HMO representing two managed care contracts
provided information to the Company indicating a liability to the HMO of
approximately $700,000 at June 30, 1998, and approximately $4.6 million at
March 31, 1999. Based on such information, the Company's consolidated
statements of operations include a loss of approximately $1.1 million for the
three months ended March 31, 1999 and $2.1 million for the nine months ended
March 31, 1999, relating to the Company's relationship with the HMO. The
Company believes, based on its internal analysis, that the information provided
by the HMO is materially incorrect, significantly overstating the magnitude of
claims paid which would be properly charged to the Company. The Company has
advised the HMO of this issue and the HMO has advised the Company that it is
undertaking a complete review of the information it previously provided.
Because the HMO did not timely provide the information as required by the
contractual relationship, this issue could not be resolved prior to the filing
of this report. Accordingly the Company's consolidated statements of operations
and balance sheets include a liability to the HMO in the amount originally
included in the HMO's report to the Company. The Company is currently
negotiating a settlement of the liability with the HMO, which may also
include a reduction in reimbursement rates and/or a change in the risk-sharing
allocation between the parties.

The Company is also involved in various legal proceedings incidental
to its business.

In the opinion of the Company's management, no individual item of
litigation or group of similar items of litigation, taking into account the
insurance coverage maintained by the Company and any accounts for self-insured
retention, is likely to have a material adverse effect on the Company's
financial position, results of operations or liquidity.

NOTE 9 - LOSS ON SALE OF SUBSIDIARY

On December 27, 1998, the Company sold the stock of its diagnostic
imaging services subsidiary (the "subsidiary") for a cash purchase price of
$120,000. Prior to the sale, the subsidiary conveyed through dividends all of
the accounts receivable of the subsidiary to the Company. All obligations
existing on the date of sale remained the obligations of the Company. As a
result of this transaction, the Company recorded a loss on sale of subsidiary
of approximately $4,152,000, including a write off of approximately $1,800,000
of costs in excess of the net assets acquired, and an accrual for operating
leases not assumed by the seller which expire through 2007 of approximately
$1,000,000.

NOTE 10 - ASSETS HELD FOR SALE

On March 12, 1999, the Company closed all offices of CPPM. The Company
intends to sell the assets, excluding the receivables, of CPPM. Based on
current negotiations, the Company anticipates that such sales will occur during
the fourth quarter of fiscal 1999. In accordance with SFAS No. 121 ("Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of" ) ("FAS 121"), the Company has recorded a loss on assets held for
sale of approximately $4.2 million during the third quarter of fiscal 1999. The
loss consisted principally of the excess of the net tangible assets to be sold
over the expected sales price, which is based on the status of current
negotiations and on independent property appraisals, plus the goodwill
associated with the assets to be sold. The results of operations for CPPM for
the three and nine months ended March 31, 1999 were approximately ($5,610,000)
and ($6,106,000), respectively, including the loss discussed above.

On April 8, 1999, the Company, sold substantially all the assets of
its rehabilitation subsidiaries, consisting of Rehab Management Systems, Inc.,
IntegraCare, Inc., J.R. Rehab Associates, and Continucare Occmed Services, Inc.
(collectively referred to as the "Rehab Companies"), to Kessler Rehabilitation
of Florida, Inc. ("Kessler") for $5.5 million in cash and the assumption of
certain liabilities. The Company used approximately $4.0 million of the net
proceeds of the sale to reduce the outstanding balance of the Credit Facility
(see Note 6). In accordance with FAS 121, the Company has recorded a loss on
assets held for sale of approximately $6.8 million during the third quarter of
fiscal 1999. Accordingly, the realizable value of the assets of the Rehab

10
<PAGE> 11
Companies, which consists primarily of accounts receivable and equipment,
furniture and leasehold improvements, total approximately $5.5 million and are
included in assets held for sale at March 31, 1999. The results of operations
for the Rehab Companies for the three and nine months ended March 31, 1999 were
approximately $(7,743,000) and $(8,729,000), respectively, including the loss
discussed above.

NOTE 11 - SUBSEQUENT EVENT

The Company did not make the April 30, 1999 semi-annual payment of
interest on its 8% Convertible Subordinated Debentures due 2002. Should the
Company not make such payment for a period of 30 days after such payment has
become due and payable, such failure would constitute an Event of Default under
the Indenture dated as of October 30, 1997 between the Company and American
Stock Transfer & Trust Company, as Trustee. If an Event of Default occurs and is
continuing, then the Trustee or the holders of not less than 25% in principal
amount of the outstanding securities under the Indenture may declare the
principal of all the securities to be due and payable immediately, including any
accrued and unpaid interest. At March 31, 1999, the Company had $45,000,000
principal amount outstanding under the Debentures and accrued and unpaid
interest of approximately $1,540,000. The Company has begun negotiations with
the holders of the Debentures to address a possible restructuring of the
Debentures, which may include issuance of a significant amount of equity, cash
or a combination of equity and cash. In the event the Company negotiates a cash
settlement with the holders of the Debentures it will need to obtain additional
financing in the form of equity or debt or a combination of the two. There can
be no assurance the Company will be able to negotiate a settlement with the
holders of the Debentures and in the event they do negotiate a settlement it
will be able to obtain the funds necessary to complete the restructuring. In the
event the Company is unable to negotiate a settlement with the holders of the
Debentures, or negotiates a settlement and is unable to obtain the funds
necessary to complete the restructuring, remains in default and the amount due
under the Debentures is accelerated, it would have a material adverse effect on
the Company's financial position and operations. In addition, if the Company is
not successful in its negotiations with the holders of the Debentures, the $45.0
million principal amount of the Debentures will be classified as a current
liability on the Company's balance sheet.

11
<PAGE> 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 including statements regarding the potential
adjustment to information provided by an HMO which are reflected in the
Company's consolidated financial statements. There is no assurance that any
adjustment will be achieved nor, if achieved, that the amount of such an
adjustment would be significant. 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 for the period ended June 30, 1998,
including the following: (1) limited operating history of the Company in
current business; (2) various risks associated with the acquisition of
businesses including the expenses associated with the integration of the
acquired businesses, difficulties in assimilating the operations of the
acquired entities, and diversion of management resources; (3) statutory and
regulatory changes, retroactive and prospective rate adjustments,
administrative rulings and funding restrictions, any of which could limit or
reduce reimbursement levels; (4) ability to attract and retain a sufficient
number of qualified medical professionals; and (5) fluctuations in the volume
of services rendered and/or the number of patients using the Company's
services.

GENERAL

Continucare is a provider of integrated outpatient healthcare services
in Florida. The Company provides a broad continuum of healthcare services
through its network of physician practices, outpatient clinics, home healthcare
services and laboratory services (within its group physician practices). As a
result of its ability to provide a quality continuum of healthcare services
through approximately 225 locations, the Company has become a preferred
healthcare provider in Florida to some of the nation's largest managed care
organizations, including (i) Humana Medical Plans, Inc., for which, as of March
31, 1999, it managed the care for approximately 18,400 patients on a capitated
basis and (ii) Foundation Health Corporation Affiliates, for which, as of March
31, 1999, it managed the care for approximately 30,000 patients on a capitated
basis. As of March 31, 1999, the Company's Florida delivery services network
included approximately 275 physicians.

In fiscal 1998, the Company's focus shifted away from the behavioral
health area, an area which had previously been a substantial source of the
Company's revenue. In the fiscal year 1997, the contracts to manage and provide
staffing and billing services for behavioral health programs in hospitals and
freestanding mental health rehabilitation centers represented approximately 86%
of total revenue. In the first quarter of fiscal 1998, the Company assigned its
behavioral health management contracts with freestanding centers and hospitals.
During fiscal 1999 the Company sold its diagnostic imaging services and
rehabilitation subsidiaries and closed its physician practice management
subsidiary. As of March 31, 1999, the results pertaining to the services of the
diagnostic imaging services subsidiary have been segregated and classified as
operations disposed of in the accompanying consolidated statement of
operations. Comparative data for the three months and nine months ended on
March 31, 1999 and the three months and nine months ended March 31, 1998 would
represent this change in focus on the Company's businesses, and the Company has
limited its discussion with respect to comparison of these periods. The assets
of the rehabilitation and physician practice management subsidiary are
classified as assets held for sale as of March 31, 1999.

RESULTS OF OPERATIONS

The following discussion and analysis should be read in conjunction
with the unaudited consolidated statements and notes thereto appearing
elsewhere in this Form 10-Q.

12
<PAGE> 13

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

REVENUE FROM OPERATIONS CONTINUING

Medical services revenue increased from approximately $16,260,000 for
the three months ended March 31, 1998 to approximately $49,983,000 for the
three months ended March 31, 1999. The Company made a number of acquisitions
during fiscal 1998 as it developed its outpatient services strategy. The
substantial increase of approximately $33,724,000 in medical services revenues
for the three months ended March 31, 1999 was a result of these acquisitions.

Approximately 11.3% of the Company's medical services revenue is
derived from fee-for-service arrangements and 88.7% from capitated payments
from HMOs.

Fee-for-service revenue represents amounts realized that relate
directly to medical services provided by a facility owned by the Company.
Capitated revenue represents a fixed monthly fee from a HMO in exchange for the
Company assuming responsibility for the provision of medical services for each
covered individual. The Company also has arrangements with hospitals whereby a
percentage of the hospital's charges are remitted to the Company for services
provided to patients of the hospital.

EXPENSES FROM OPERATIONS CONTINUING

Medical services expense of approximately $46,347,000 for the three
months ended March 31, 1999, represents the direct cost of providing medical
services to patients as well as the medical claims incurred by the Company
under the capitated contracts with HMOs. The costs of the medical services
provided include the salaries and benefits of health professionals providing
the services, insurance and other costs necessary to operate the centers.
Medical claims costs represent the cost of medical services provided by
providers other than the Company but which are to be paid by the Company for
individuals covered by capitated arrangements with HMOs. Medical services of
approximately $11,015,000 for the three months ended March 31, 1998 represent
the direct cost of providing medical services to patients, including salaries
and benefits and insurance and other costs. The increase of approximately
$35,332,000 was primarily attributable to acquisitions made during fiscal 1998.

Payroll and related benefits decreased by approximately $344,000, or
8.9%, from approximately $3,869,000 for the three months ended March 31, 1998
to approximately $3,525,000 for the three months ended March 31, 1999. This
decrease was a direct result of the downsizing in certain subsidiaries which
occurred in fiscal 1999.

Provision for bad debts was approximately $1,136,000 for the three
months ended March 31, 1999, compared to no provision for bad debts for the
three months ended March 31, 1998. The increase is due primarily to growth in
revenues from acquisitions made during fiscal 1998.

General and administrative expenses were approximately $2,955,000 for
the three months ended March 31, 1999, as compared to approximately $2,207,000
for the three months ended March 31, 1998. The increase of approximately
$748,000 or 34% was primarily related to the acquisitions made during fiscal
1998.

The loss on assets held for sale of approximately $11,004,000 for the
three months ended March 31, 1999 related to the decision to dispose of the
Company's rehabilitative and CPPM subsidiaries. There were no such losses
recorded for the three months ended March 31, 1998. The Company may dispose of
additional assets in the future and may realize losses in connection with those
disposals.

Depreciation and amortization increased to approximately $1,502,000
for the three months ended March 31, 1999 as compared to approximately $917,000
for the three months ended March 31, 1998. The incurrence of $585,000 or 64%
was primarily as a result of the amortization of goodwill and other intangibles
related to the acquisitions made during fiscal 1998.

13
<PAGE> 14

REVENUES AND EXPENSES FROM OPERATIONS DISPOSED OF

Revenue decreased approximately $365,000. The decrease was related to
the disposal of the subsidiary which occurred in the second quarter of fiscal
1998.

Expenses decreased approximately $217,000 from approximately $348,000
for the three months ended March 31, 1998 to approximately $131,000 for the
three months ended March 31, 1999. The decrease was related to the disposal of
the subsidiary which occurred in the second quarter of fiscal 1998.

INTEREST

Consolidated net expense for the three months ended March 31, 1999,
was approximately $1,113,000, compared to approximately $423,000 for the three
months ended March 31, 1998. Approximately $900,000 of interest expense for the
three months ended March 31, 1999 primarily relates to the $45 million of 8%
Convertible Subordinated Notes due September 30, 2002 (the "Debentures") issued
on October 30, 1997 and amortization of deferred financing costs incurred in
connection with issuing the Debentures. Interest on the Debentures is payable
semiannually beginning April 30, 1998.

NET LOSS

Continucare's consolidated net loss for the three months ended March
31, 1999 was approximately $18,232,000 compared to net loss for the three
months ended March 31, 1998 of approximately $2,530,000. The increase of
approximately $15,702,000 was primarily attributable to the loss on assets held
for sale of approximately $11,004,000 and the items discussed above.

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

REVENUE FROM OPERATIONS CONTINUING

Medical services revenue increased from approximately $24,813,000 for
the nine months ended March 31, 1998 to approximately $149,253,000 for the nine
months ended March 31, 1999. The Company made a number of acquisitions during
fiscal 1998 as it developed its outpatient services strategy. The substantial
increase of approximately $124,440,000 in medical services revenues for the
nine months ended March 31, 1999 was a result of the acquisitions which
occurred during fiscal 1999.

Approximately 17.0% of the Company's medical services revenue is
derived from fee-for-service arrangements; 82.7% from capitated payments from
HMOs and the remaining 0.3% from other sources.

EXPENSES FROM OPERATIONS CONTINUING

Medical services expense of approximately $132,986,000 for the nine
months ended March 31, 1999, represent the direct cost of providing medical
services to patients as well as the medical claims incurred by the Company
under the capitated contracts with HMOs. The costs of the medical services
provided include the salaries and benefits of health professionals providing
the services, insurance and other costs necessary to operate the centers.
Medical claims costs represent the cost of medical services provided by
providers other than the Company but which are to be paid by the Company for
individuals covered by capitated arrangements with HMOs. Medical services of
approximately $14,568,000 for the nine months ended March 31, 1998 represent
the direct cost of providing medical services to patients, including salaries
and benefits and insurance and other costs. The increase of approximately
$118,418,000 was attributable to the acquisitions which occurred during fiscal
1998.

14
<PAGE> 15

Payroll and related benefits increased by approximately $3,504,000 or
4.8%, from approximately $7,270,000 for the nine months ended March 31, 1998 to
approximately $10,774,000 for the nine months ended March 31, 1999. This
increase was a direct result of the growth from the acquisitions made during
fiscal 1998.

Provision for bad debts was approximately $2,866,000 for the nine
months ended March 31, 1999, as compared to approximately $281,000 for the nine
months ended March 31, 1999. The increase is due to the revenue increase from
the acquisitions during fiscal 1998.

Professional fees were approximately $1,162,000 for the nine months
ended March 31, 1999 as compared to approximately $856,000 for the nine months
ended March 31, 1998. The increase of approximately $306,000 is due to
additional matters relating to acquisitions made during fiscal 1998.

General and administrative expenses were approximately $8,410,000 for
the nine months ended March 31, 1999, as compared to approximately $4,815,000
for the nine months ended March 31, 1998. The increase of approximately
$3,595,000 or 43% was primarily related to the increased administrative costs
related to the rehabilitation entities, home health agencies, outpatient
primary care centers acquired during fiscal 1998.

The loss on assets held for sale of approximately $11,004,000 for the
nine months ended March 31, 1999 related to the decision to dispose of the
Company's rehabilitative and CPPM subsidiaries. There were no such losses
recorded for the nine months ended March 31, 1998. The Company may dispose of
additional assets in the future and may realize losses in connection with those
disposals.

Depreciation and amortization increased to approximately $4,401,000
for the nine months ended March 31, 1999 as compared to approximately
$1,491,000 for the nine months ended March 31, 1998 primarily as a result of
the amortization of goodwill and other intangibles related to the acquisitions
made during fiscal 1998.

REVENUES AND EXPENSES FROM OPERATIONS DISPOSED OF

Revenue decreased approximately $697,000 from approximately $2,622,000
for the nine months ended March 31, 1998 to approximately $1,925,000 for the
three months ended March 31, 1999. The decrease was related to the disposal of
the subsidiaries in previous quarters.

Expenses increased approximately $1,072,000 from approximately
$2,671,000 for the three months ended March 31, 1998 to approximately $3,743,00
for the three months ended March 31, 1999. The increase was related to
additional operational cost incurred related to the disposition of the
subsidiary.

LOSS ON SALE OF SUBSIDIARY

The loss on sale of approximately $4,152,000 for the nine months ended
March 31, 1999 related to the sale of the Company's diagnostic subsidiary.
There were no such losses recorded for the nine months ended March 31, 1998.
The Company may dispose of additional assets in the future and may realize
losses in connection with those disposals.

INTEREST

Consolidated net interest expense for the nine months ended March 31,
1999, was approximately $3,469,000 compared to approximately $872,000 for the
nine months ended March 31, 1998. Approximately $3,077,000 of interest expense
for the nine months ended March 31, 1999 primarily relates to the $45 million
of 8% Convertible Subordinated Notes due September 30, 2002, (the "Notes")
issued on October 30, 1997 and amortization of deferred financing costs
incurred in connection with issuing the Notes. Interest on the Notes is payable
semiannually beginning April 30, 1998.

15
<PAGE> 16

NET LOSS

Continucare's consolidated net loss for the nine months ended March
31, 1999 was approximately $31,141,000 compared to net loss for the nine months
ended March 31, 1998 of approximately $5,424,000 for the reasons discussed
above. The increase of approximately $25,717,000 was primarily attributable to
the loss on sale of subsidiary of approximately $4,152,000, the loss on assets
held for sale of approximately $11,004,000 and the items discussed above.

LIQUIDITY AND CAPITAL RESOURCES

In addition to the Company's liquidity difficulties, the Company is
experiencing administrative difficulties, including the loss of key personnel.
Also, the Company has fallen below the continued listing requirements of the
American Stock Exchange and there can be no assurance that the listing will be
continued.

The Company did not make the April 30, 1999 semi-annual payment of
interest on its 8% Convertible Subordinated Debentures due 2002. Should the
Company not make such payment for a period of 30 days after such payment has
become due and payable, such failure would constitute an Event of Default under
the Indenture dated as of October 30, 1997 between the Company and American
Stock Transfer & Trust Company, as Trustee. If an Event of Default occurs and is
continuing, then the Trustee or the holders of not less than 25% in principal
amount of the outstanding securities under the Indenture may declare the
principal of all the securities to be due and payable immediately, including any
accrued and unpaid interest. At March 31, 1999, the Company had $45,000,000
principal amount outstanding under the Debentures and accrued and unpaid
interest of approximately $1,540,000. The amount of interest due as of April 30,
1999 was $1,800,000. The Company has begun negotiations with the holders of the
Debentures to address a possible restructuring of the Debentures, which may
include issuance of a significant amount of equity, cash or a combination
of equity and cash. In the event the Company negotiates a cash settlement with
the holders of the Debentures it will need to obtain additional financing in the
form of equity or debt or a combination of the two. There can be no assurance
the Company will be able to negotiate a settlement with the holders of the
Debentures and in the event they do negotiate a settlement it will be able to
obtain the funds necessary to complete the restructuring. In the event the
Company is unable to negotiate a settlement with the holders of the Debentures,
or negotiates a settlement and is unable to obtain the funds necessary to
complete the restructuring, remains in default and the amount due under the
Debentures is accelerated, it would have a material adverse effect on the
Company's financial position and operations. In addition, if the Company is not
successful in its negotiations with the holders of the Debentures, the $45.0
million principal amount of the Debentures will be classified as a current
liability on the Company's balance sheet.

In August 1998, the Company entered into a credit facility (the
"Credit Facility") with First Union National Bank of Florida ("First Union")
which provides for a $5,000,000 Acquisition Facility and a $5,000,000 Revolving
Loan. Under the terms of the Credit Facility, the Company may elect the
interest rate to be either the bank's prime rate or the London InterBank
Offered Rate plus 250 basis points. Interest only on each acquisition advance
under the Acquisition Facility is payable monthly in arrears for the first six
months. The Company borrowed the entire $5 million Acquisition Facility to fund

16
<PAGE> 17

acquisitions in the first quarter of 1999. Interest only on the Revolving Loan
advances is payable quarterly in arrears. The Credit Facility (a) is secured by
substantially all of the assets of the Company, (b) is decreased by $1.5
million placed in a restricted account at First Union if the pending letter of
credit is issued, which will be released when certain covenants have been met
by the Company and (c) contains restrictive covenants which, among other
things, require the Company to maintain certain financial ratios and minimum
liquidity requirements and limit the incurrence of additional debt, the payment
of dividends and the amount of capital expenditures.

At March 31, 1999, the Company was not (and currently is not) in
compliance with certain non-monetary covenants required under the terms of its
Credit Facility. As a result, the lender may demand repayment of the
outstanding principal amount under the Credit Facility. Subsequent to March 31,
1999, the Company used approximately $4 million of the net proceeds of the sale
of its rehabilitative subsidiaries in April 1999 to reduce the outstanding
balance of the Credit Facility. Also in April 1999, the Company entered into an
amendment to its Credit Facility, which provides, among other things, for
repayment of the remaining outstanding principal balance of $1.0 million under
the Credit Facility by December 31, 1999. The Company currently has no
availability under its Credit Facility, including the Acquisition Facility and
Revolving Loan. In the event that the Company does not obtain a waiver from the
lender under the Credit Facility, remains out of compliance with the loan
covenants and payment is demanded, the Company believes it will need to obtain
additional financing from sources outside of the Company to fund its remaining
obligation under the Credit Facility. The additional financing may be obtained
from, but not limited to, the sale of stock, sale of assets or additional
borrowings. The ultimate outcome of this matter may have a material adverse
effect on the Company's financial position and operations.

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 of
the Company's 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.

Based on recent assessments, the Company determined that it was
necessary to modify or replace certain portions of its software, hardware and
patient care equipment so that its systems will function properly with respect
to dates in the year 2000 and thereafter. Affected systems included clinical
and biomedical instrumentation and equipment used within the Company for
purposes of direct or indirect patient care such as imaging, laboratory,
pharmacy and respiratory devices; cardiology measurement and support devices;
emergency care devices (including monitors, defibrillators, dialysis equipment
and ventilators); and general patient care devices (including telemetry
equipment and intravenous pumps). The Company presently believes that with
these modifications to existing software and conversions to new clinical and
biomedical instrumentation and equipment, the Year 2000 Issue does not pose
significant operational problems.

17
<PAGE> 18

The Company has engaged in formal communications with all of its
significant suppliers to determine the extent to which the Company's interface
systems are vulnerable to those third parties' failure to remediate their own
Year 2000 Issues. The Company's total Year 2000 project included the costs and
time associated with the impact of third-party Year 2000 Issues based on
presently available information. However, there can be no guarantee that the
systems of other companies on which the Company's systems rely will be timely
converted and would not have an adverse effect on the Company's systems.

The Company has utilized both internal and external resources to
reprogram, or replace and test the software and patient care equipment for Year
2000 modifications. As of March 31, 1999, the Company has completed its Year
2000 project. The total cost of the Year 2000 project was approximately
$700,000 and was funded through operating cash flows. Of the total projected
cost, approximately $500,000 was attributable to the purchase of new software
and patient care equipment, which has been capitalized. The remaining $200,000
was expensed as incurred. As a result of these modifications and replacements,
the Company currently believes that its equipment and software applications are
Year 2000 compliant. However, there can be no guarantees that the Year 2000
issue will not have a material impact on the operations of the Company.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE UNDER MARKET RISK

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

18
<PAGE> 19

PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

Reference is made to Note 8 (Contingencies) to the Notes to
Consolidated Financial Statements for March 31, 1999.

ITEM 2. CHANGES IN THE RIGHTS OF THE COMPANY'S SECURITY HOLDERS

Not applicable.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

At March 31, 1999, the Company was not (and currently is not) in
compliance with certain covenants required under the terms of its Credit
Facility. Subsequent to March 31, 1999, the Company used approximately $4
million of the net proceeds of the sale of its rehabilitative subsidiaries in
April 1999 to reduce the outstanding balance of the Credit Facility. Also in
April 1999, the Company entered into an amendment to its Credit Facility, which
provides, among other things, for repayment of the remaining outstanding
principal balance of $1.0 million by December 31, 1999.

The Company did not make the April 30, 1999 semi-annual payment of
interest on its 8% Convertible Subordinated Debentures due 2002 (the
"Debentures"). Should the Company not make such payment for a period of 30 days
after such payment has become due and payable, such failure would constitute an
Event of Default under the Indenture dated as of October 30, 1997 between the
Company and American Stock Transfer & Trust Company, as Trustee. If an Event of
Default occurs and is continuing, then the Trustee or the holders of not less
than 25% in principal amount of the outstanding securities under the Indenture
may declare the principal of all the securities to be due and payable
immediately, including premium, if any, and accrued and unpaid interest, if
any. The Company has $45,000,000 principal amount of outstanding Debentures.
The amount of interest due as of April 30, 1999 was $1,800,000.

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

Not applicable.

ITEM 5. OTHER INFORMATION

Not applicable.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits

Financial Data Schedule

(b) Reports on Form 8-K

None.

19
<PAGE> 20

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: May 19, 1999 By: /s/ CHARLES M. FERNANDEZ
----------------------------------
Charles M. Fernandez, Chairman,
Chief Executive Officer President
and Principal Financial Officer

<ARTICLE> 5

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<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> MAR-31-1999
<CASH> 2,854,531
<SECURITIES> 0
<RECEIVABLES> 4,499,599
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