**UNITED
STATES**
 **SECURITIES
AND EXCHANGE COMMISSION**
 
 **WASHINGTON,
D.C. 20549**
 
 FORM
10-QSB
 
 [X]  QUARTERLY
REPORT UNDER SECTION 13 OR 15(d) OF THE
 SECURITIES
EXCHANGE ACT OF 1934
 
 For the
quarterly period ended December 31, 2004
 
 [
]  TRANSITION
REPORT UNDER SECTION 13 OR 15(d) OF THE
 SECURITIES
EXCHANGE ACT OF 1934 for the transition period from
 _________________
to _______________
 
 Commission
File Number 0-23514
 
 **__________________________**
 
 
 ROCKPORT
HEALTHCARE GROUP, INC.
 
 (Exact
name of small business issuer as specified in its charter)
 
 
  
 Delaware
    33-0611497(State
      or other jurisdiction of incorporation or organization)
    (IRS
      Employer Identification No.)
 
 50
Briar Hollow Lane, Suite 515W, Houston, Texas 77027
 (Address
of principal executive offices)
 
 (713)
621-9424
 (Issuer’s
telephone number)
 
 
 
 Check
whether the issuer has (1) filed all reports required to be filed by Section 13
or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports) and (2) has been
subject to such filing requirements for the past 90 days. Yes
[ X] No
[_]
 
 As of
February 14, 2005, there were outstanding 15,005,976 shares of common stock,
$.001 par value per share.
 
 Transitional
Small Business Disclosure Format (Check one): Yes [ ] No [X]
 
  
  **ROCKPORT
HEALTHCARE GROUP, INC.**
 **INDEX
TO FORM 10-QSB**
 **December
31, 2004**
 
  **Part
      I**
    Financial
      Inforamtion
    
    **Page
      Number**Item
      1.
    Financial
      StatementsCondensed
      Consolidated Balance Sheets
    3December 31,
      2004 (unaudited) and March 31, 2004Condensed
      Consolidated Statements of Operations (unaudited)
    4Three
      and Nine Months Ended December 31, 2004 and 2003Condensed
      Consolidated Statement of Changes in Shareholders’
    5Deficit
      Nine Months Ended December 31, 2004 (unaudited) and Year Ended March 31,
      2004Condensed
      Consolidated Statements of Cash Flows (unaudited)
    6Nine
      Months Ended December 31, 2004 and 2003Notes
      to Condensed Consolidated Financial Statements
    7Item
      2.
    Management’s
      Discussion and Analysis of Results of Operations
      and Financial Condition
    10Item
      3.
    Controls
      and Procedures
    13**Part
      II**
    **Other
      Information**Item
      1.
    Legal
      Proceedings
    13Item
      2.
    Changes
      in Securities and Use of Proceeds
    13Item
      3.
    Defaults
      Upon Senior Securities
    13Item
      4.
    Submission
      of Matters to a Vote of Security Holders
    13Item
      5.
    Other
      Information
    13Item
      6.
    Exhibits
      and Reports on Form 8-K
    14
 
  Page
2
  **PART
I. FINANCIAL INFORMATION**
 
 Item
1.  Financial
Statements
 
 **ROCKPORT HEALTHCARE GROUP, INC.**
 **AND
SUBSIDIARIES**
 **CONDENSED
CONSOLIDATED BALANCE SHEETS**
 
 December
      31,
    
    March
      31,2004
    
    2004**ASSETS**
    
    (Unaudited)Current
      assets:Cash
    
    $
    34,146
    
    $
    72,408Accounts
      receivable, net of allowance of $22,000 and $50,000 atDecember 31 and March 31, 2004, respectively
    
    
    702,303
    
    
    703,369Prepaid
      expenses
    
    
    2,138
    
    
    1,494Total
      current assets
    
    
    738,587
    
    
    777,271Property
      and equipment:Office
      furniture and equipment
    
    
    43,644
    
    
    43,268Computer
      equipment and software
    
    
    117,764
    
    
    116,953Telephone
      equipment
    
    
    15,844
    
    
    15,844177,252
    
    
    176,065Less
      accumulated depreciation
    
    
    (151,004
    )
    
    (135,976
    )Net
      property and equipment
    
    
    26,248
    
    
    40,089Other
      assets:Deposits
    
    
    8,915
    
    
    9,038Intangible
      assets, net
    
    
    425,000
    
    
    462,500433,915
    
    
    471,538Total
      assets
    
    $
    1,198,750
    
    $
    1,288,898**LIABILITIES
      AND SHAREHOLDERS' DEFICIT**Current
      liabilities:Short-term
      debt
    
    $
    --
    
    $
    100,000Accounts
      payable, trade
    
    
    331,497
    
    
    311,265Due to
      directors, officers and employees
    
    
    125,926
    
    
    65,022Other
      current liabilities
    
    
    327,059
    
    
    338,875Total
      current liabilities
    
    
    784,482
    
    
    815,162Long-term
      debt
    
    
    1,342,342
    
    
    1,147,762Commitments
      and contingencies (Note 3)Shareholders'
      deficit:Preferred
      stock, $.001 par value, 1,000,000 shares authorized, none
      issuedCommon
      stock, $.001 par value, 50,000,000 shares authorized, 15,005,976
      and14,954,042 shares issued and outstanding at  December 31 and March
      31, 2004, respectively
    
    
    15,005
    
    
    14,954Additional
      paid-in capital
    
    
    6,964,573
    
    
    6,960,708Stock
      subscription receivable
    
    
    --
    
    
    (9,000
    )Accumulated
      deficit
    
    
    (7,907,652
    )
    
    (7,640,688
    )Total
      shareholders’ deficit
    
    
    (928,074
    )
    
    (674,026
    )Total
      liabilities and shareholders' deficit
    
    $
    1,198,750
    
    $
    1,288,898
 
 
 See
accompanying notes to condensed consolidated financial
statements.
  Page
3
  **ROCKPORT
HEALTHCARE GROUP, INC.**
 **AND
SUBSIDIARIES**
 **CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS**
 **(Unaudited)**
 
 For
      the Three Months Ended
    
    For
      the Nine Months EndedDecember
      31,
    
    December
      31,2004
    
    2003
    
    2004
    
    2003(Restated)
    
    
    
    (Restated)Revenue
    
    $
    769,403
    
    $
    707,965
    
    $
    2,350,340
    
    $
    2,303,369Cost
      of sales
    
    
    237,261
    
    
    190,412
    
    
    750,837
    
    
    702,212Gross
      profit
    
    
    532,142
    
    
    517,553
    
    
    1,599,503
    
    
    1,601,157Operating
      expenses:Selling,
      general and administrativeexpenses:Payroll
      and related expenses
    
    
    425,489
    
    
    439,305
    
    
    1,288,188
    
    
    1,325,173Office
      administration
    
    
    87,434
    
    
    85,846
    
    
    252,805
    
    
    248,896Professional
      services
    
    
    32,796
    
    
    57,335
    
    
    142,944
    
    
    165,424Other
    
    
    8,473
    
    
    10,832
    
    
    27,263
    
    
    52,548Total
      selling, general and administrative
    
    
    554,192
    
    
    593,318
    
    
    1,711,200
    
    
    1,792,041Depreciation
      and amortization
    
    
    17,510
    
    
    21,501
    
    
    52,528
    
    
    51,966Total
      operating expenses
    
    
    571,702
    
    
    614,819
    
    
    1,763,728
    
    
    1,844,007Loss
      from operations
    
    
    (39,560
    )
    
    (97,266
    )
    
    (164,225
    )
    
    (242,850
    )Interest,
      net
    
    
    34,780
    
    
    30,928
    
    
    102,739
    
    
    91,213Net
      loss
    
    $
    (74,340
    )
    $
    (128,194
    )
    $
    (266,964
    )
    $
    (334,063
    )Net
      loss per share:Basic
      and diluted
    
    $
    0.00
    
    $
    (0.01
    )
    $
    (0.02
    )
    $
    (0.02
    )Weighted
      average number of common shares outstanding:Basic
      and diluted
    
    
    14,994,828
    
    
    14,277,590
    
    
    14,971,001
    
    
    14,011,917
 
 
 See
accompanying notes to condensed consolidated financial
statements.
  Page
4
  **ROCKPORT
HEALTHCARE GROUP, INC.**
 **AND
SUBSIDIARIES**
 **CONDENSED
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(DEFICIT)**
 **FOR
THE YEAR ENDED MARCH 31, 2004 AND NINE MONTHS ENDED DECEMBER 31,
2004**
 
 
 Additional
    
    Stock
    
    
    
    TotalCommon
      Stock
    
    Paid-in
    
    Subscription
    
    Accumulated
    
    Shareholders'Shares
    
    Amount
    
    Capital
    
    Receivable
    
    Deficit
    
    DeficitBalances
      March 31, 2003
    
    
    13,626,302
    
    $
    13,626
    
    $
    6,300,916
    
    $
    --
    
    $
    (6,930,438
    )
    $
    (615,896
    )Stock
      issued for services
    
    
    727,740
    
    
    728
    
    
    135,392
    
    
    --
    
    
    --
    
    
    136,120Exercise
      of stock options
    
    
    100,000
    
    
    100
    
    
    24,900
    
    
    (9,000
    )
    
    
    
    
    16,000Stock
      issued for acquisition
    
    
    500,000
    
    
    500
    
    
    499,500
    
    
    --
    
    
    
    
    
    500,000Net
      loss
    
    
    --
    
    
    --
    
    
    --
    
    
    --
    
    
    (710,250
    )
    
    (710,250
    )Balances
      March 31, 2004
    
    
    14,954,042
    
    
    14,954
    
    
    6,960,708
    
    
    (9,000
    )
    
    (7,640,688
    )
    
    (674,026
    )Collection
      of stock subscription receivable(unaudited)
    
    
    --
    
    
    --
    
    
    --
    
    
    9,000
    
    
    --
    
    
    9,000Stock
      issued for services (unaudited)
    
    
    51,934
    
    
    51
    
    
    3,865
    
    
    --
    
    
    --
    
    
    3,916Net
      loss (unaudited)
    
    
    --
    
    
    --
    
    
    --
    
    
    --
    
    
    (266,964
    )
    
    (266,964
    )Balances
      December 31, 2004 (unaudited)
    
    
    15,005,976
    
    $
    15,005
    
    $
    6,964,573
    
    $
    --
    
    $
    (7,907,652
    )
    $
    (928,074
    )
 
 
 See
accompanying notes to condensed consolidated financial
statements.
  Page
5
  **ROCKPORT
HEALTHCARE GROUP, INC.**
 **AND
SUBSIDIARIES**
 **CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS**
 **FOR
THE NINE MONTHS ENDED DECEMBER 31, 2004 AND 2003**
 **(Unaudited)**
 
 2004
    
    2003(Restated)Cash
      flows from operating activities:Net
      loss
    
    $
    (266,964
    )
    $
    (334,063
    )Adjustments
      to reconcile net loss to cash used in operating
activities:Depreciation
    
    
    15,028
    
    
    16,663Amortization
    
    
    37,500
    
    
    35,303Issuance
      of stock for services
    
    
    3,916
    
    
    26,235Changes
      in assets and liabilities:Accounts
      receivable - trade
    
    
    1,066
    
    
    131,159Prepaid
      expenses
    
    
    (644
    )
    
    14,504Deposits
    
    
    123
    
    
    --Accounts
      payable
    
    
    20,232
    
    
    15,038Due to
      directors, officers and employees
    
    
    60,904
    
    
    16,960Other
      current liabilities
    
    
    (11,816
    )
    
    39,892Cash used
      in operating activities
    
    
    (140,655
    )
    
    (38,309
    )Cash
      flows from investing activities:Purchase of
      fixed assets
    
    
    (1,187
    )
    
    (3,951
    )Cash
      flows from financing activities:Exercise of
      stock options
    
    
    --
    
    
    16,000Collection of
      stock subscription receivable
    
    
    9,000
    
    
    --Interest
      accrued on long-term debt
    
    
    94,580
    
    
    --Cash
      provided by financing activities
    
    
    103,580
    
    
    16,000Net
      decrease in cash
    
    
    (38,262
    )
    
    (26,260
    )Cash
      and cash equivalents, beginning of period
    
    
    72,408
    
    
    65,493Cash
      and cash equivalents, end of period
    
    $
    34,146
    
    $
    39,233Supplemental
      cash flow information:Interest
      paid
    
    $
    22,500
    
    $
    31,600Non-cash
      transactions:Acquisition of
      Protegrity provider agreements
    
    $
    --
    
    $
    500,000Stock
      subscription receivable
    
    $
    --
    
    $
    9,000
 
 
 See
accompanying notes to condensed consolidated financial
statements.
  Page
6
  **ROCKPORT
HEALTHCARE GROUP, INC.**
 **AND
SUBSIDIARIES**
 **NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **December
31, 2004**
 
 Note
1.  Organization
and Nature of Business
 
 **Statement
of Information Furnished**
 
 The
accompanying condensed consolidated financial statements of Rockport Healthcare
Group, Inc. and Subsidiaries (the "Company" or "Rockport") have been prepared
pursuant to the rules and regulations for interim financial information and the
instructions to Form 10-QSB and Regulation S-B. Accordingly, certain information
and footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles in the United States
have been omitted. In the opinion of management, the consolidated financial
statements contain all adjustments (consisting of only normal recurring
accruals) necessary to present fairly the financial position as of December 31,
2004, the results of operations for the three and nine-month periods ended
December 31, 2004 and 2003, and the cash flows for the nine-month periods ended
December 31, 2004 and 2003.
 
 The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and reported amounts of revenues and expenses during the reporting
period. Operating results for interim periods are not necessarily indicative of
the results that may be expected for the complete fiscal year. The accompanying
condensed consolidated financial statements should be read in conjunction with
the audited consolidated financial statements and notes thereto included in the
Company’s Annual Report on Form 10-KSB for the year ended March 31, 2004,
previously filed with the Securities and Exchange Commission.
 
 Reclassifications
- Amounts in the prior periods' financial statements have been reclassified as
necessary to conform to the current period’s presentation.
 
 **Business**
 
 Rockport
Healthcare Group, Inc. was incorporated in the State of Delaware on May 4,
1992, as Protokopus Corporation. The Company had no operating history other than
organizational matters until December 17, 1997. On December 17, 1997, the
Company acquired all of the issued and outstanding common stock of The Rockport
Group of Texas, Inc. ("Rockport Texas"), a Nevada corporation, in a business
combination accounted for as a reverse acquisition. Pursuant to an Agreement and
Plan of Reorganization dated December 12, 1997, between the Company and Rockport
Texas, each outstanding share of common stock of Rockport Texas was converted to
the right to receive 961.6212 shares of common stock of the Company. On January
18, 1998, the Company changed its name from Protokopus Corporation to Rockport
Healthcare Group, Inc.
 
 Rockport
is a management company dedicated to developing, operating and managing networks
consisting of healthcare providers and medical suppliers that serve employees
with work-related injuries and illnesses. Rockport offers access to a
comprehensive healthcare network at a local, state or national level for its
clients and their customers. Typically, Rockport’s clients are property and
casualty insurance companies, employers, bill review/medical cost containment
companies, managed care organizations, software/bill review companies and third
party administrators.
 
 The
Company contracts with physicians, hospitals and ancillary healthcare providers
at rates below the maximum allowed by applicable state fee schedules or if there
is no state fee schedule, rates below usual and customary charges for
work-related injuries and illnesses. The Company generates revenue by receiving
as a fee, a percentage of the medical cost savings realized by its clients. The
medical cost savings realized by its clients is the difference between the
maximum rate allowed for workers’ compensation claims in accordance with the
state allowed fee schedules or usual and customary charges and the discounted
rates negotiated by the Company with its healthcare providers.
 
 The
Company has contracts with healthcare providers and/or network partners in all
fifty states and the District of Columbia. The Company currently has in excess
of 315,000 healthcare providers nationwide that serve its clients and their
customers for their injured employees’ care. Should a client or their customer
have particular needs in an under-served market, Rockport or its network partner
has a skilled team of experienced network development personnel capable of
custom building the under-served market for the client.
 
 As of
December 31, 2004, the Company has three wholly owned subsidiaries: Rockport
Community Network, Inc., Rockport Group of Texas, Inc. and Rockport Preferred,
Inc. Rockport Community Network, Inc. ("RCN") was incorporated in the State of
Nevada on November 14, 1997. Rockport Group of Texas, Inc. ("RGT") was
incorporated in the State of Nevada on July 23, 1997. RCN and RGT, for
accounting purposes, are solely disbursing entities for the Company and have no
business operations. RCN prepares and issues invoices to the Company’s clients,
collects accounts receivable and issues checks to the Company’s network partners
for network access fees, to outside sales personnel for sales commissions and
for commission overwrites. RGT processes payroll and pays payroll costs and
other selling, general and administrative expenses on behalf of the Company.
Rockport Preferred, Inc. is a dormant subsidiary, which has no ongoing
operations. All material inter-company balances and inter-company transactions
have been eliminated for the purpose of presenting the accompanying unaudited
consolidated financial statements.
 
 
 **Stock-Based
Compensation**
 
 The
Company accounts for compensation costs associated with stock options and
warrants issued to employees whereby compensation is recognized to the extent
the market price of the underlying stock at the date of grant exceeds the
exercise price of the option granted. (See Note 4, "Stock Options and
Warrants"). Accordingly, no compensation expense has been recognized for grants
of options to employees with the exercise prices at or above market price of the
Company’s common stock on the measurement dates.
  The
Company applies the intrinsic value method in accounting for its stock options.
Accordingly, no compensation expense has been recognized for grants of options
to employees with the exercise prices at or above market price of the Company’s
common stock on the measurement dates. Had compensation expense been determined
based on the estimated fair value at the measurement dates of awards under those
plans consistent with the fair value method, the Company’s December 31, 2004 and
2003, net loss would have been changed to the pro forma amounts indicated
below.
 
 For
      the Three Months Ended
    
    For
      the Nine Months EndedDecember
      31,
    
    December
      31,2004
    
    2003
    
    2004
    
    2003Net
      loss:As
      reported
    
    $
    (74,340
    )
    $
    (128,194
    )
    $
    (266,964
    )
    $
    (334,063
    )Stock
      based compensation under fair value method
    
    
    (16,924
    )
    
    (20,000
    )
    
    (31,773
    )
    
    (60,000
    )Pro
      forma
    
    $
    (91,264
    )
    $
    (148,194
    )
    $
    (298,737
    )
    $
    (394,063
    )Net
      loss per share - basic and diluted:As
      reported
    
    $
    0.00
    
    $
    (0.01
    )
    $
    (0.02
    )
    $
    (0.02
    )Stock
      based compensation under fair value method
    
    
    --
    
    
    --
    
    
    --
    
    
    (0.01
    )Pro
      forma
    
    $
    0.00
    
    $
    (0.01
    )
    $
    (0.02
    )
    $
    (0.03
    )
 
 The fair
value of each option grant was estimated on the date of grant using the
Black-Scholes option pricing model with the following assumptions: risk free
rate of 5%; volatility of 200% and 199%, 2004 and 2003, respectively; no assumed
dividend yield; and expected lives of four years.
 
  Page
7
  Note
2.  Notes
Payable
  Notes
payable consisted of the following at:
 
 December
      31,
      2004
    
    March
      31,
      2004Convertible
      unsecured notes payable to a shareholder, with interest payable monthly at
      15% per annum. The notes are personally guaranteed by two officers of the
      Company. On March 31, 2002, the Company renegotiated the terms of the
      notes which were originally convertible into Company common stock at an
      average conversion price of $1.50 per share and due April 1, 2003. The
      notes are now convertible into Company common stock at any time prior to
      April 1, 2005 at a conversion price of $.36 per share and were due April
      1, 2004. On December 31, 2002, the due date of the notes was extended to
      April 1, 2006. The Company issued 150,000 shares of its common stock in
      connection with these notes, the cost of which was recorded as loan fees
      and amortized using the interest yield method over the original term of
      the notes.
    
    $
    200,000
    
    $
    200,000Unsecured
      note payable due to a director with interest at 8% per annum and principal
      and interest due April 1, 2004. The Company has renegotiated the due date
      of the note which is now due April 1, 2006.
    
    
    227,493
    
    
    227,493Three-year
      10% convertible subordinated unsecured notes to shareholders due November
      2004 and April 2006. Interest is either accrued or paid quarterly, as
      determined by the Board of Directors. The notes are convertible into
      Company common stock at conversion prices ranging from $.18 to $.36 per
      share anytime prior to their maturity in November 2004 and April 2006. On
      December 31, 2002, the Company renegotiated the terms of $300,000
      principal amount of these notes with Mr. Baldwin, a director of the
      Company and extended the due date and conversion date to April 1, 2005,
      which has now been extended to April 2006. On March 31, 2004, the Company
      issued $60,000 principal amount to Mr. Baldwin which is due April 1, 2006
      and is convertible into Company common stock at a conversion price of $.18
      per share. In June 2004, the Company retired $200,000 principal amount and
      accrued interest due June 2004 which is now due April 2006. To raise the
      needed funds for the retirement, the Company issued Mr. Baldwin additional
      10% convertible notes in the amount of $270,000 which notes are due April
      2006 and which have a conversion price of $.20 per share.
    
    
    765,000
    
    
    660,000Accrued
      interest due on long-term portion of three-year 10% convertible unsecured
      notes
    
    
    149,849
    
    
    160,269Total
      notes payable
    
    
    1,342,342
    
    
    1,247,762Less
      current maturities of long-term debt
    
    
    --
    
    
    (100,000
    )Long-term
      debt
    
    $
    1,342,342
    
    $
    1,147,762
 
 See Note
3 "Commitments and Contingencies" and Note 4 "Liquidity" for a discussion of
financing provided by related parties.
 
  Page
8
  
 Note
3.  Commitments
and Contingent Liabilities
 
 One of
the Company’s subsidiaries has assumed leases for office space and equipment
under operating leases expiring at various dates through 2008. Management
expects that in the normal course of business, leases will be renewed or
replaced by similar leases. Future minimum lease payments under non-cancelable
leases with terms in excess of one year are as follows:
 
 Twelve
      months ending December
      31:2005
    
    $
    58,0902006
    
    
    14,2092007
    
    
    9,7712008
    
    
    4,886Total
    
    $
    86,956
 
 
 One of
the Company’s subsidiaries, Rockport Group of Texas, Inc., has issued 1,000
shares of its 8%, cumulative, non-participating preferred stock. The stock is
redeemable at the option of the Company at $200 per share and is redeemable out
of future cash flows of the Company. These shares are owned by a director of the
Company and were issued prior to the reverse merger.
 
 Mr.
Baldwin, a director of the Company, has an engagement agreement with the Company
effective April 1, 2001, whereby he earns a fee for performance of legal
services of $250 per hour, with a minimum guaranteed payment of $5,000 per
month. Effective April 1, 2002, the agreement was amended and the minimum
guaranteed payment was increased to $6,500 per month. This agreement has a
one-year term and automatically renews for one-year periods thereafter unless
either party terminates the agreement within sixty days prior to the end of any
annual period. This agreement automatically renewed effective April 1, 2004.
During the nine-month periods ended December 31, 2004 and 2003, Mr. Baldwin
earned $58,500 in each period from this agreement.
 
 Note
4.  Stock
Options and Warrants
 
 *Stock
Option Plans*
 
 On August
5, 2002, the Board of Directors of the Company adopted the 2002 Stock Option
Plan (the "2002 Plan"). The 2002 Plan was approved by the shareholders of the
Company on October 9, 2002. The 2002 Plan provides for the granting of awards of
up to 1,000,000 shares of the Company’s common stock to key employees, directors
and other persons who have contributed or are contributing to the Company’s
success. Awards under the 2002 Plan will be granted as determined by the
Company’s Board of Directors. The options that may be granted pursuant to the
2002 Plan may be either incentive stock options qualifying for beneficial tax
treatment for the recipient or nonqualified stock options. As of December 31,
2004, incentive stock options to purchase 583,400 shares exercisable at $.23 per
share that vest over a three-year period had been granted. 388,932 of these
stock options were exercisable as of December 31, 2004.
 
 On
December 7, 2000, the directors of the Company adopted the 2000 Long-Term
Incentive Plan (the "2000 Plan"). The 2000 Plan was approved by the Company’s
shareholders at its annual shareholder meeting held in September 2001. The 2000
Plan provides for the granting of awards of up to 1,000,000 shares of the
Company’s common stock to key employees, directors and other persons who have
contributed or are contributing to the Company’s success. Awards under the 2000
Plan will be granted as determined by the Company’s Board of Directors. The
options that may be granted pursuant to the 2000 Plan may be either incentive
stock options qualifying for beneficial tax treatment for the recipient or
nonqualified stock options. As of December 31, 2004, incentive stock options to
purchase 941,500 shares exercisable at prices ranging from $.19 to $.50 per
share that vest over a three-year period were outstanding. Of this amount,
840,967 stock options were exercisable as of December 31, 2004. As of December
31, 2004, non-qualified stock options to purchase 50,000 shares exercisable at
$.25 per share and immediately exercisable were outstanding. A certain number of
these options were to expire on December 7, 2004. The Company’s Board of
Directors approved the extension of the expiration date on all stock options due
to expire on  December 7, 2004 to December 7, 2006.
 
 *Stock
Warrants*
 
 On
November 26, 2001, in conjunction with a consulting services agreement with an
individual, the Company issued warrants to purchase 1,000,000 shares of
restricted common stock of the Company at any time until November 25, 2011, at a
price of $.345 per share, the fair market value on the date of grant determined
by the mean between the closing bid and asked price. The consulting services
agreement is for a period of ten years, however, the warrants issued pursuant to
the consulting agreement vested immediately and are currently exercisable
regardless of whether the consulting agreement is terminated prior to the
expiration of its ten-year term. Since the warrants are immediately exercisable,
the Company has expensed the full amount of the fair value of the warrants
issued as of the date of issuance, which was $345,000. No warrants have been
exercised as of December 31, 2004. The fair value of the warrants was estimated
at the date of grant using the Black-Scholes option pricing model with the
following assumptions: risk free rate of 6%; volatility of 320%; no assumed
dividend yield and an estimated life of three years.
 
 Note
5.  Related
Party Transactions
 
 See Note
2 "Notes Payable" for a discussion of financing provided by Mr. Baldwin,
chairman of the board and a director.
 
 See Note
3 "Commitments and Contingent Liabilities" for a discussion of legal services
provided by Mr. Baldwin.
 
 Note
6.  Significant
Concentration
 
 Three
clients accounted for approximately 25.4%, 21.4% and 10.4% of sales for the nine
months ended December 31, 2004. No other clients represented more than 10% of
sales of the Company for that period. The Company had two clients, each which
had in excess of 10% of the Company’s accounts receivable balance at December
31, 2004. These two clients represented 43.4% and 11.2% of the Company’s
accounts receivable balance.
 
 Note
7.  Liquidity
 
 The
accompanying financial statements have been prepared assuming that Rockport
Healthcare Group, Inc. will continue as a going concern. The Company has a total
deficit in shareholders’ equity of $928,074 as of December 31,
2004.
 
 The
Company has funded its operations through the sale of Company common stock,
borrowing funds from outside sources and conversion of employee, director and
shareholder debt into restricted common stock. At December 31, 2004, the Company
had available cash in non-restrictive accounts of $34,146 and negative working
capital of $45,895. As of December 31, 2004, the Company had outstanding debt
of: (a) $765,000 in principal amount in the form of 10% convertible notes, (b)
$227,493 in principal amount in the form of a 8% note, and (c) $200,000 in
principal amount in the form of a 15% convertible note.
 
 *10%
convertible notes* . As of
December 31, 2004, the Company had outstanding $765,000 principal amount in the
form of 10% convertible notes, all of which was held by Mr. Baldwin, a director
of the Company. The Company had $100,000 in principal and $34,550 in interest
due to an individual which was due October 31, 2004. On November 1, 2004, the
Company sold a new 10% convertible note to Mr. Baldwin in the amount of $135,000
due April 2006 convertible at the rate of $.18 per share. The Company used the
proceeds of the new 10% convertible note to retire the maturing note held by an
individual which note was due October 31, 2004. As of the date of this report,
the Company has the following 10% convertible notes outstanding: (a) $135,000 in
principal amount due April 2006 convertible at a price of $.18 per share; (b)
$300,000 in principal amount due April 2006 convertible at a price of $.36 per
share; (c) $60,000 in principal amount due April 2006 convertible at a price of
$.18 per share; and (d) $270,000 in principal amount due April 2006 convertible
at a price of $.20 per share.
 
 Interest
on the 10% convertible notes is payable quarterly out of available cash flow
from operations as determined by the Company’s Board of Directors, or if not
paid but accrued, will be paid at the next fiscal quarter or at maturity. The
conversion prices of the notes were calculated based on the average of the high
bid and low asked stock quotations on the date of funding.
 
 Accrued
debenture interest on the convertible debentures has been added to the principal
of the debentures resulting in a reclassification of some of the accrued
interest to long-term debt.
 
 *8%
notes.* In
November 2001 and in January 2002, the Company borrowed an aggregate of $100,000
from Mr. Baldwin. In June 2002, the Company renegotiated the terms of the notes
and added $93,000 of accrued consulting fees due and $34,493 of accrued
overwrite fees due to the principal amount of the note. In December 2002, the
Company renegotiated the terms of the note and extended the due date to April 1,
2005 and in June 2004 extended the due date to April 1, 2006. This debt is
accruing interest at 8% payable monthly, however, in accordance with a verbal
agreement with the note holder, the Company ceased paying the interest on this
note on October 1, 2003.
 
 *15%
convertible notes.* In 1998,
the Company borrowed $200,000 from a shareholder on two separate notes which
were convertible into Company common stock with
interest payable monthly at 15% per annum. The notes are personally guaranteed
by two officers of the Company. In March 2002, the Company renegotiated the
terms of the notes which were originally convertible into Company common stock
at an average conversion price of $1.50 per share and were due April 1, 2003.
The notes have been modified on two occasions and are now convertible into
Company common stock at a conversion price of $.36 per share and the due date
and the conversion date of the notes is April 1, 2006.
 
 As
discussed above, the Company does have $1,342,342 in principal and accrued
interest due in April 2006. The Company is currently seeking sources of
financing to retire these notes, as it has no current means to pay the notes as
they become due. If the Company is unable to refinance these notes, it will be
required to raise funds to retire the notes, or it will be in default of the
notes. The Company has no commitments for the needed funds to retire these
notes, and the failure to raise such funds or refinance the notes could subject
the Company to a claim by the note holders for repayment, which would materially
adversely affect the Company’s financial condition.
 
 Excluding
these notes, management believes sufficient cash flow from operations will be
available during the next twelve months to satisfy its short-term obligations.
The Company does not anticipate any funding requirements for capital
expenditures during the fiscal year ending March 31, 2006. The Company’s future
growth is conditioned on the Company signing more employers, insurers and others
for access to its provider network and obtaining a greater participation by
consumers who are covered by such payors. The Company will dedicate a
significant portion of its cash flow from operations to the continuing
development and marketing of its provider network.
 
 There can
be no assurances that management’s plans as described above can be
accomplished.
 
 Note
8.  Restatement
 
 The
Company originally filed its September 30, 2003 and December 31, 2003 quarterly
financial statements valuing the common stock issued to Protegrity at $175,000,
which was the fair market value on the date of acquisition. Since the Company
has agreed to purchase from Protegrity all of the shares Protegrity has not sold
by July 2008 at $1.00 per share, the Company has valued the common stock issued
to Protegrity at $500,000. The balance sheet has been restated to increase the
intangible asset from $175,000 to $500,000 and the statement of operations has
been restated to reflect the increase in amortization expense associated with
the acquisition.
  Page
9
  Item
2. Management's
Discussion and Analysis of Results of Operations and Financial
Condition
  *The following
discussion and analysis of the Company’s financial condition as of December 31,
2004, and the Company’s results of operations for the two periods ended December
31, 2004 and 2003, should be read in conjunction with the Company’s audited
financial statements included in its Form 10-KSB for the year ended March 31,
2004, previously filed with the Securities and Exchange
Commission..*
 
 **Overview**
 
 Rockport
Healthcare Group, Inc. ("Rockport" or the "Company") is a management company
dedicated to developing, operating and managing networks consisting of
healthcare providers and medical suppliers that serve employees with
work-related injuries and illnesses. Rockport offers access to a comprehensive
healthcare network at a local, state or national level for its clients and their
customers. Typically, Rockport’s clients are property and casualty insurance
companies, employers, bill review/medical cost containment companies, managed
care organizations, software/bill review companies and third party
administrators.
 
 The
Company contracts with physicians, hospitals and ancillary healthcare providers
at rates below the maximum allowed by applicable state fee schedules, or if
there is no state fee schedule, rates below usual and customary allowables for
work-related injuries and illnesses. The Company generates revenue by receiving
as a fee, a percentage of the medical cost savings realized by its clients. The
medical cost savings realized by its clients is the difference between the
maximum rate allowed for workers’ compensation medical services in accordance
with the state allowed fee schedules or usual and customary allowables and the
discounted rates negotiated by the Company with its healthcare
providers.
 
 The
Company’s mission to its clients and healthcare providers is to: (1) maintain,
update and distribute accurate information on each and every healthcare provider
that is directly contracted by the Company or is accessed through the Company’s
network partners relationships; (2) demonstrate, educate and offer each client
and their customer referral products and services that encourage, enable and
guide their injured workers to the Company’s healthcare providers; and (3)
provide clear, concise and accurate preferred provider organization ("PPO")
repricing information and assistance in facilitating payment to the contracted
rates and provide resolution to reimbursement problems in a timely
manner.
 
 The
Company’s goals are to: (1) create and maintain profitability within industry
standards and create shareholder value; (2) become the national network of
choice for work-related injuries and illnesses; (3) market and position its
networks, state by state, to increase business to its healthcare providers while
offering significant savings to its clients and their customers; (4) continually
develop information systems that improve processes, measurements and the
integrity of its healthcare provider data and reporting structure; (5) continue
its dedication to client and healthcare provider support services; and (6)
provide any payor, managed care organization or bill review/software company an
alternative national workers’ compensation network in a non-competitive
relationship.
 
 The
Company has healthcare providers and/or network partners in all fifty states and
the District of Columbia. As of December 31, 2004, the Company has in excess of
315,000 healthcare providers nationwide that serve its clients and their
customers for their injured employees’ care. Should a client or their customer
have particular needs in an under-served market, Rockport or its network partner
has a skilled team of experienced network development personnel capable of
custom building the under-served market for the client.
 
 **Critical
Accounting Policies**
 
 *General*
 
 The
Consolidated Financial Statements and Notes to Consolidated Financial Statements
contain information that is pertinent to this management’s discussion and
analysis. The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of any contingent assets and liabilities.
Management believes these accounting policies involve judgment due to the
sensitivity of the methods, assumptions and estimates necessary in determining
the related asset and liability amounts. Management believes it has exercised
proper judgment in determining these estimates based on the facts and
circumstances available to its management at the time the estimates were made.
The significant accounting policies are described in the Company's financial
statements (See Note 2 in Notes to Consolidated Financial Statements in the
Company’s Form 10-KSB for the year ended March 31, 2004).
 
 *Revenue
Recognition*
 
 Revenue
is recognized when earned. Revenue is earned at such time as the Company’s
contractual discounts with its healthcare providers are applied to its clients’
medical bills which produces a medical cost savings. The Company’s revenue is a
contractual percentage of the medical cost savings realized. At the time the
contractual discounts are applied and collection is reasonably assured, the
revenue is realized.
 
 *Allowance
for Doubtful Accounts*
 
 The
Company maintains an allowance for doubtful accounts, which reflects the
estimate of losses that may result from the inability of some of the Company’s
clients to make required payments. The estimate for the allowance for doubtful
accounts is based on known circumstances regarding collectability of client
accounts and historical collections experience. If the financial condition of
one or more of the Company’s clients were to deteriorate, resulting in an
impairment of their ability to make payments, additional allowances may be
required. Material differences between the historical trends used to estimate
the allowance for doubtful accounts and actual collection experience could
result in a material change to the Company’s consolidated results of operations
or financial position.
 
 *Intangible
Assets*
 
 As of
December 31, 2004, the Company had $425,000 of unamortized intangible assets
resulting from the acquisition of the Protegrity network. Effective July 7,
2003, the Company purchased all healthcare provider agreements from Protegrity
Services, Inc., ("Protegrity"), a third party administrator ("TPA") and managed
care organization. The Company was acquiring healthcare provider agreements in
order to expand the size of its network. This acquisition did not result in the
acquisition of clients or revenue. This acquisition of provider contracts was
funded with the issuance of 500,000 shares of Company common stock valued at
$500,000, and because the Company would earn revenue in the future from the
acquired provider agreements, the Company recorded the value of the stock issued
as an intangible asset. The value of $500,000 attributed to the acquisition was
based on the number of shares issued multiplied by $1.00 per share. If
Protegrity has not sold its shares of Rockport by July 2008, the Company has
agreed to purchase from Protegrity at a price of $1.00 per share, all of the
remaining outstanding shares then owned by Protegrity. Amounts paid for provider
agreements are being amortized to expense on the straight-line method over the
estimated useful lives of the agreements of ten years. However, intangible
assets are subject to an impairment assessment at least annually which may
result in a charge to operations if the fair value of the intangible asset is
impaired which would have a negative impact on the Company’s financial condition
and results would be negatively affected.
 
 *Accounting
for Stock-Based Compensation*
 
 The
Company accounts for stock-based compensation whereby no compensation expense is
recorded for stock options or other stock-based awards to employees that are
granted with an exercise price equal to or above the estimated fair value per
share of the Company’s common stock on the grant date. The Company adopted the
pro forma requirements pursuant to fair value reporting which requires
compensation expense to be disclosed based on the fair value of the options
granted at the date of the grant.
 
 In
December 2002, the Financial Accounting Standards Board issued its Statement No.
148, "Accounting for Stock-Based Compensation — Transition and Disclosure—an
amendment of Financial Accounting Standards Board Statement No. 123." This
Statement amends Statement of Financial Accounting Standards No. 123, to provide
alternative methods of transition for an entity that voluntarily changes to the
fair value based method of accounting for stock-based employee compensation. It
also amends the disclosure provisions of Statement of Financial Accounting
Standards No. 123 to require prominent disclosure about the effects on reported
net income of an entity’s accounting policy decisions with respect to
stock-based employee compensation. The transition and annual disclosure
provisions of Statement of Financial Accounting Standards No. 148 are effective
for fiscal years ending after December 15, 2002, and the interim disclosure
provisions were effective for the first interim period beginning after December
15, 2002. The Company did not voluntarily change to the fair value based method
of accounting for stock-based employee compensation, therefore, the adoption of
Statement of Financial Accounting Standards No. 148 did not have a material
impact on its operations and/or financial position. If the Company had adopted
the fair value based method of accounting for stock-based employee compensation,
it would have resulted in an additional $9,500 of compensation expense and no
affect in the Company’s basic and diluted earnings per share.
 
 Page
10
 **Results
of Operations**
 
 *Nine
Months Ended December 31, 2004 to Nine Months Ended December 31,
2003*
 
 The
following table sets forth certain operating information regarding the Company
for the nine months ended December 31, 2004 and 2003:
 
 2004
    
    2003Revenue
    
    $
    2,350,340
    
    $
    2,303,369Cost of
      sales
    
    
    750,837
    
    
    702,212Gross
      profit
    
    
    1,599,503
    
    
    1,601,157Selling,
      general and administrative expenses
    
    
    1,711,200
    
    
    1,792,041Depreciation
      and amortization
    
    
    52,528
    
    
    51,966Loss
      from operations
    
    
    (164,225
    )
    
    (242,850
    )Interest,
      net
    
    
    102,739
    
    
    91,213Net
      loss
    
    $
    (266,964
    )
    $
    (334,062
    )Net
      loss per share - basic and diluted
    
    $
    (0.02
    )
    $
    (0.02
    )
 
 *Revenue.* The
Company's source of revenue is fees it receives from its clients and their
customers that access and utilize the Company's healthcare provider network for
work-related injuries and illnesses. When an injured employee utilizes a
healthcare provider within the Company’s PPO network, the employer realizes
medical cost savings, which it would not have realized had the employee utilized
a healthcare provider not within the Company’s PPO network. The Company’s
clients and their customers, where permitted by law, direct their injured
employees to healthcare providers within the Company’s healthcare provider
network, which in turn creates a medical cost savings as a result of the
discounts the Company has negotiated with its healthcare providers. The
agreements the Company has with its clients provide the Company with a fee based
upon a percentage of the medical cost savings realized by its clients. The fee
percent the Company receives from its clients is negotiated by the Company and
usually is determined by the amount of potential business the Company will
receive from the client. Typically, these agreements are short-term in nature,
which is standard within the healthcare industry, but which make the
predictability of the Company’s future revenues difficult.
 
 The
Company continues to expand its PPO network in additional areas of the country
in conjunction with the expansion of its client base, either through direct
contracting with providers, through strategic network alliances with third party
networks, which it refers to as network partners, or through purchases of
networks. The Company utilizes its own network development staff to enhance its
PPO network and custom build in a market for a given client. Effective July 7,
2003, the Company purchased the healthcare provider agreements from Protegrity
Services, Inc., ("Protegrity") which included certified networks in the states
of Florida and Kentucky and providers in a variety of other states. As
consideration for the purchase, the Company issued 500,000 shares of restricted
common stock to Protegrity which it recorded as an intangible asset valued at
$500,000 and granted Protegrity an earnout of a percentage of the revenue the
Company receives in the states of Florida, Kentucky and Missouri over the next
five years. The Company intends to utilize this purchase to expand its sales and
marketing strategies in those states and further strengthen its position in the
southeastern United States. This purchase brought the total number of providers
within the Company’s network to in excess of 315,000 physicians, hospitals and
ancillary healthcare facilities in all 50 states and the District of Columbia.
Costs associated with developing the Company’s networks are charged to expense
when incurred and are included in selling, general and administrative
expenses.
 
 Revenue
for nine months ended December 31, 2004, was $2,350,340 which was $46,971, or
2%, greater than revenue for the nine months ended December 31, 2003, of
$2,303,369. The increase in revenue was primarily attributable to an increase in
the number of clients accessing the Company’s network of healthcare providers
which increase was significantly offset by the following: (a) the Company lost
four clients; two clients went out of business, one client terminated its
contract with the Company, and the Company terminated its contract with one
client; and (b) some of the Company’s largest clients lost significant business
from some of their largest customers.
 
 Intracorp,
the second largest provider of revenue to the Company, lost significant business
from its customers and the Company experienced a $127,000 reduction in revenue
for the 2004 period when compared to the 2003 period.
 
 The
Company has added six new clients during the 2004 period, which were not
included in the 2003 period. Additionally, the Company has seven clients which
were providing revenue during the 2003 period which have increased their revenue
contribution by $392,000 over the 2003 period. Based upon these additions,
management believes that a large portion of the reduction in revenue when
comparing the 2004 period to that of 2003 has been, or will be replaced by the
addition of these new clients.
 
 With
respect to the source of the Company's revenue, the Company had three clients,
each which provided more than 10% of the Company's revenue for the nine months
ended December 31, 2004. Those clients were, Fair Isaac Corporation which
contributed 25.4% of total revenue, Intracorp which contributed 21.4% of total
revenue and Bunch & Associates which contributed 10.4% of total
revenue.
 
 The
agreements with Fair Isaac, Intracorp and Bunch & Associates have terms of
one year with automatic one-year renewals unless terminated as set forth in the
agreement. The agreements may be terminated for any reason by giving the Company
90 days prior written notice of their intent to terminate. In the event of a
material breach of the agreement, the non-breaching party may terminate the
agreement by giving the other party 30 days prior written notice of intent to
terminate. The Company receives a fee from Fair Isaac, Intracorp and Bunch &
Associates which is a negotiated percentage of the medical cost savings realized
by Fair Isaac, Intracorp and Bunch & Associates, respectively, for accessing
the Company’s PPO network.
 
 The
agreements the Company has with its clients can be terminated with short-term
notice, which is normal within the industry the Company operates, and there can
be no assurance that a current major client of the Company will continue to be a
major client in the future. The Company is continuing to add new clients and
customers of its existing clients and believes revenue will increase as it
implements these new clients and customers.
 
 *Cost
of sales.* The
Company's cost of sales consists of fees paid for access to third party provider
networks, or network partners, fees paid for sales commissions to non-employee
sales personnel and commission overwrites. Cost of sales increased by $48,625,
or 7%, from $702,212 during the nine months ended December 31, 2003, to $750,837
during the nine months ended December 31, 2004. As the Company expands its
business outside the State of Texas, to states where it does not have its own
network, the Company will continue developing strategic network alliances and
network access fees will increase, which will in turn increase the Company’s
cost of sales and decrease its gross margins. The purchase of the Protegrity
network in Florida and Kentucky will allow the Company to increase its revenue
in those states without a corresponding increase in network access fees,
however, for a period of five years, Protegrity will receive an earnout fee as a
percentage of revenue received by the Company from the states of Florida,
Kentucky and Missouri. Those fees for the nine months ended December 31, 2004
amounted to $44,559, an increase of $37,505 over the prior year period and are
included in sales commissions. Fees incurred for access to third party provider
networks are based on a percentage of the Company’s revenue from using such
network. Sales commissions and commission overwrites paid by the Company are
based on a percentage of revenue billed and collected. For the nine months ended
December 31, 2004, cost of sales were comprised of network access fees of
$602,536, sales commissions of $101,945 and commission overwrites of
$46,355.
 
 A
marketing and sales agreement with two individuals provides for a quarterly
sales commission bonus to be paid in restricted common stock of the Company.
Pursuant to this agreement, the Company issued 5,636 shares of its restricted
common stock to Johnny Fontenot during the quarter ended December 31, 2004,
which was valued at $282. Additionally, for the quarter ended December 31, 2004,
Mr. Fontenot earned sales commissions of $2,444. The Company issued 5,636 shares
of its restricted common stock to Mike Catala during the quarter ended December
31, 2004, for this bonus which was valued at $281. Additionally, for the quarter
ended December 31, 2004, Mr. Catala earned sales commissions of $2,444. During
September 1998, the Company acquired Newton Healthcare Network, LLC from Bannon
Energy Incorporated ("Bannon") of which Robert D. Johnson, a former director of
the Company, was sole owner of Bannon. In accordance with the purchase and sale
agreement, Bannon receives a commission overwrite of 2% of the gross revenue
attributable to Rockport Community Network, Inc. For the nine months ended
December 31, 2004, Bannon earned $46,355.
 
 *Gross
profit.* The
Company's gross profit decreased by $1,654 from $1,601,157 during the nine
months ended December 31, 2003, to $1,599,503 during the nine months ended
December 31, 2004. Gross profit as a percentage of sales was 68% for the current
year period and 70% for the prior year period. The decrease in gross profit was
attributable to the increase in revenue, which was offset by an increase in cost
of sales. The Company expects its gross profit as a percentage of sales will
decrease as it expands its business outside the State of Texas and continues to
incur access fees to third party networks, however, the Company believes having
network partners is the most economical method of building a nationwide
network.
 
 *Selling,
general and administrative expenses.* Selling,
general and administrative expenses decreased by $80,841 from $1,792,041 during
the nine months ended December 31, 2003, to $1,711,200 during the nine months
ended December 31, 2004.
 
 ·
    Payroll
      and related expenses decreased from $1,325,173 during the nine months
      ended December 31, 2003, to $1,288,188 during the nine months ended
      December 31, 2004. The primary reason for the reduction was the
      resignation of two employees, which have not been replaced, and the
      voluntary reduction of salary by an executive officer of the Company. This
      was partially offset by the addition of an employee in client services and
      an additional employee in administration.
 
 ·
    Professional
      services, which are comprised of accounting and audit, legal, investor
      relations, consulting and other professional fees, decreased from
      $165,4242 during the nine months ended December 31, 2003, to $142,944
      during the nine months ended December 31, 2004. The primary components of
      the decrease were a decrease in consulting fees and investor relations
      costs.
 
 ·
    Other
      expenses decreased by $25,285, or 52%, from $52,548 during the nine months
      ended December 31, 2003 to $27,263 during the nine months ended December
      31, 2004. The Company experienced lower travel and entertainment expenses
      during the 2004 period.
 
 The
Company currently has fully staffed all of its departments with highly qualified
personnel to market its provider network to potential clients, develop its
provider network, design and develop its management information systems, perform
its client services and provide for the administration of the Company. As a
result of this staffing, the Company has increased its sales and processing
capabilities and believes the Company is well positioned to experience new
growth. The Company believes there will not be any significant increase in
selling, general and administrative expenses as it implements its business
plan.
 
 *Net
loss.* The
Company had a net loss for the nine months ended December 31, 2004, of $266,964,
or $0.02 per share (basic and diluted), compared with a net loss of $334,063, or
$0.02 per share (basic and diluted), for the nine months ended December 31,
2003. As discussed above, the primary component which resulted in the loss for
the nine months ended December 31, 2004, was a decrease in utilization of the
Company’s provider network by the Company’s clients, the loss of selected
clients and the loss of customers by some of the Company’s significant
clients.
  Page
11
  **Liquidity
and Capital Resources**
 
 The
following summary table presents comparative cash flows of the Company for the
nine month periods ended December 31, 2004 and 2003:
 
 2004
    
    2003Net
      cash used in operating activities
    
    $
    (140,655
    )
    $
    (38,309
    )Net
      cash used in investing activities
    
    $
    (1,187
    )
    $
    (3,951
    )Net
      cash provided by financing activities
    
    $
    103,580
    
    $
    16,000
 
 *Changes
in cash flow.* The
Company currently manages the payment of its current liabilities and other
obligations on a monthly basis, as cash becomes available. Net cash used in
operating activities for the nine months ended December 31, 2004, was $140,655
compared with net cash used in operating activities of $38,309 for the nine
months ended December 31, 2003. This was an increase of $102,346 when compared
to the prior year period. The components of net cash used in operating
activities for the 2004 period were a net loss of $266,964 and a decrease in
prepaid items and other current liabilities totaling $12,460. which was
partially offset by non-cash charges of $56,444 and increases in accounts
payable of $20,232 and amounts due to officers and directors of $60,904. Net
cash provided by financing activities was $103,580 which was comprised of the
collection of a stock subscription receivable of $9,000 and the transfer of
accrued interest on long-term debt from current liabilities of
$94,580.
 
 *Liquidity
and capital resources.* The
Company has funded its operations through the sale of Company common stock,
borrowing funds from outside sources and conversion of employee, director and
shareholder debt into restricted common stock. At December 31, 2004, the Company
had available cash in non-restrictive accounts of $34,146 and negative working
capital of $45,895. As of December 31, 2004, the Company had outstanding debt
of: (a) $765,000 in principal amount in the form of 10% convertible notes, (b)
$227,493 in principal amount in the form of a 8% note, and (c) $200,000 in
principal amount in the form of a 15% convertible note.
 
 *10%
convertible notes* . As of
December 31, 2004, the Company had outstanding $765,000 principal amount in the
form of 10% convertible notes, all of which was held by Mr. Baldwin, a director
of the Company. The Company had $100,000 in principal and $34,550 in interest
due to an individual which was due October 31, 2004. On November 1, 2004, the
Company sold a new 10% convertible note to Mr. Baldwin in the amount of $135,000
due April 2006 convertible at the rate of $.18 per share. The Company used the
proceeds of the new 10% convertible note to retire the maturing note held by an
individual which note was due October 31, 2004. As of the date of this report,
the Company has the following 10% convertible notes outstanding: (a) $135,000 in
principal amount due April 2006 convertible at a price of $.18 per share; (b)
$300,000 in principal amount due April 2006 convertible at a price of $.36 per
share; (c) $60,000 in principal amount due April 2006 convertible at a price of
$.18 per share; and (d) $270,000 in principal amount due April 2006 convertible
at a price of $.20 per share.
 
 Interest
on the 10% convertible notes is payable quarterly out of available cash flow
from operations as determined by the Company’s Board of Directors, or if not
paid but accrued, will be paid at the next fiscal quarter or at maturity. The
conversion prices of the notes were calculated based on the average of the high
bid and low asked stock quotations on the date of funding.
 
 *8%
notes.* In
November 2001 and in January 2002, the Company borrowed an aggregate of $100,000
from Mr. Baldwin. In June 2002, the Company renegotiated the terms of the notes
and added $93,000 of accrued consulting fees due and $34,493 of accrued
overwrite fees due to the principal amount of the note. In December 2002, the
Company renegotiated the terms of the note and extended the due date to April 1,
2005 and in June 2004 extended the due date to April 1, 2006. This debt is
accruing interest at 8% payable monthly, however, in accordance with a verbal
agreement with the note holder, the Company ceased paying the interest on this
note on October 1, 2003.
 
 *15%
convertible notes.* In 1998,
the Company borrowed $200,000 from a shareholder on two separate notes which
were convertible into Company common stock with
interest payable monthly at 15% per annum. The notes are personally guaranteed
by two officers of the Company. In March 2002, the Company renegotiated the
terms of the notes which were originally convertible into Company common stock
at an average conversion price of $1.50 per share and were due April 1, 2003.
The notes have been modified on two occasions and are now convertible into
Company common stock at a conversion price of $.36 per share and the due date
and the conversion date of the notes is April 1, 2006.
  For
fiscal 2006, the Company is projecting its monthly cash operating expenses,
excluding network access fees, commissions and commission overwrites, to be
approximately $200,000. As discussed above, the Company has $1,192,493 and
accrued interest due in April 2006. The Company is currently seeking sources of
financing to retire these notes, as it has no current means to pay the notes as
they become due, and as it does not expect to be able to retire these notes from
its operating cash. If the Company is unable to refinance these notes, it will
be required to raise funds to retire the notes, or it will be in default of the
notes. The Company has no commitments for the needed funds to retire these
notes, and the failure to raise such funds or refinance the notes could subject
the Company to a claim by the note holders for repayment, which would materially
adversely affect the Company’s financial condition.
 
 Excluding
these notes, management believes sufficient cash flow from operations will be
available during the next twelve months to satisfy its short-term obligations.
The Company’s future growth is conditioned on the Company signing more
employers, insurers and others for access to its provider network and obtaining
a greater participation by consumers who are covered by such payors. The Company
will dedicate a significant portion of its cash flow from operations to the
continuing development and marketing of its provider network.
 
 **Off-Balance
Sheet Arrangements**
 
 On July
7, 2003, the Company purchased the healthcare provider contracts from Protegrity
services for 500,000 shares of the Company’s common stock. The Company committed
to repurchase the shares for $1.00 per share if Protegrity has not been able to
realize this amount by July 2008.
 
 **New
Accounting Pronouncements**
 
 During
December 2002, the FASB issued SFAS No. 148. Statement 148 establishes standards
for two alternative methods of transition to the fair value method of accounting
for stock-based employee compensation of FASB SFAS No. 123 "Accounting for
Stock-Based Compensation" ("SFAS 123"). SFAS 148 also amends and augments the
disclosure provisions of SFAS 123 and Accounting Principles Board Opinion 28
"Interim Financial Reporting" to require disclosure in the summary of
significant accounting policies for all companies of the effects of an entity’s
accounting policy with respect to stock-based employee compensation on reported
net income and earnings per share in annual and interim financial statements.
The transition standards and disclosure requirements of SFAS 148 are effective
for fiscal years and interim periods ending after December 15, 2002. The Company
has adopted only the disclosure provisions of this statement.
 
 SFAS No.
150, *Accounting
for Certain Financial Instruments with Characteristics of Both Liabilities and
Equity,* was
issued in May 2003 and requires issuers to classify as liabilities (or assets
under certain circumstances) three classes of freestanding financial instruments
that represent obligations for the issuer. SFAS No. 150 is effective for
financial instruments entered into or modified after May 31, 2003 and is
otherwise effective at the beginning of the first interim period beginning after
December 15, 2003. The adoption of this statement did not have a material effect
on the Company’s financial position, results of operations or cash
flows.
  Page
12
  Item
3. Controls and
Procedures
 
 In
accordance with the Securities Exchange Act of 1934 ("Exchange Act"), the
Company carried out an evaluation, under the supervision and with the
participation of management, including its Chief Executive Officer and Chief
Financial Officer, of the effectiveness of its disclosure controls and
procedures as of the end of the period covered by this report. Based on this
evaluation, the Company’s Chief Executive Officer and Chief Financial Officer
concluded that the Company’s disclosure controls and procedures were effective
as of December 31, 2004, to provide reasonable assurance that information
required to be disclosed in its reports filed or submitted under the Exchange
Act is recorded, processed, summarized and reported within the time periods
specified in the Securities and Exchange Commission’s rules and
forms.
 
 **PART
II**  **OTHER
INFORMATION**
 
 Item
1.  Legal
Proceedings. - None
 
 Item
2.  Unregistered
Sales of Equity Securities and Use of Proceeds.
 
 **Recent
Sales of Unregistered Securities**
 
 Set forth
below is certain information concerning all issuances of securities by the
Company during the fiscal quarter ended December 31, 2004, that were not
registered under the Securities Act.
 
 On
December 31, 2004, under the terms of a written contract executed by the
Company, the Company issued 5,636 shares of common stock to Mike Catala in
consideration of marketing services valued at $281 pursuant to the exemption
provided by Section 4(2) of the Securities Act.
 
 On
December 31, 2004, under the terms of a written contract executed by the
Company, the Company issued 5,636 shares of common stock to Johnny Fontenot in
consideration of marketing services valued at $282 pursuant to the exemption
provided by Section 4(2) of the Securities Act.
 
 The above
transactions were completed pursuant to Section 4(2) of the Securities Act. With
respect to issuances made pursuant to Section 4(2) of the Securities Act, the
transactions did not involve any public offering and were sold to a limited
group of persons. Each recipient either received adequate information about the
Company or had access, through employment or other relationships, to such
information, and the Company determined that each recipient had such knowledge
and experience in financial and business matters that they were able to evaluate
the merits and risks of an investment in the Company.
 
 All sales
of the Company’s securities were made by officers of the Company who received no
commission or other remuneration for the solicitation of any person in
connection with the respective sales of securities described above. The
recipients of securities represented their intention to acquire the securities
for investment only and not with a view to or for sale in connection with any
distribution thereof and appropriate legends were affixed to the share
certificates and other instruments issued in such transactions.
 
 During
the quarter ended December 31, 2004, the Company did not make any repurchases of
its common stock.
 
 Item
3.  Defaults
Upon Senior Securities - None
 
 Item
4.  Submission
of Matters to a Vote of Security Holders - None
 
 Item
5.  Other
Information - None
  Page
13
  Item
6.  Exhibits
and Reports on Form 8-K
 
 (a)
    Exhibits.
      The following exhibits of the Company are included
  herein.
 
 Exhibit
No.   Description
  
  2.1
    Agreement
      and Plan of Reorganization (incorporated by reference to Exhibit 2.1 to
      Registrant’s Current Report on Form 8-K, dated January 5,
      1998)
 3.1
    Certificate
      of Incorporation of Registrant (incorporated by reference to Exhibit 3.1
      to Registrant’s Registration Statement on Form 10-SB, dated July 26, 1994,
      SEC File No. 0-23514)
 3.2
    Certificate
      of Amendment to Certificate of Incorporation of Registrant dated January
      16, 1998 (incorporated by reference to Exhibit 3.2 to Registrant’s Annual
      Report on Form 10-KSB/A, dated June 3,
2002)
 3.3
    Certificate
      of Amendment to Certificate of Incorporation of Registrant dated October
      14, 2002 (incorporated by reference to Exhibit 4.3 to Registrant’s Form
      S-8, dated October 24, 2002, SEC File No.
333-100732)
 3.4
    Amended
      and Restated Bylaws of Registrant (incorporated by reference to Exhibit
      4.4 to Registrant’s Form S-8, dated October 24, 2002, SEC File No.
      333-100732)
 4.1  Specimen
of Registrant’s Common Stock Certificate (incorporated by reference to Exhibit 4
to Registrant’s Annual Report on Form 10-KSB/A, dated June 29,
2000)
 4.2
    Three-year
      10% Convertible Subordinated Unsecured Notes (incorporated by reference to
      Exhibit 4.2 to Registrant’s Annual Report on Form 10-KSB, dated June 28,
      2001)
 10.1  Employment
Agreement with Harry M. Neer (incorporated by reference to Exhibit 10.1 to
Registrant’s Quarterly Report on Form 10-QSB/A, dated February 14, 2001)
*
 10.2
    Employment
      Agreement with Larry K. Hinson (incorporated by reference to Exhibit 10.2
      to Registrant’s Quarterly Report on Form 10-QSB/A, dated February 14,
      2001) *
 10.3
    Lease
      Agreement at 50 Briar Hollow Lane, Suite 515W Houston, Texas 77027
      (incorporated by reference to Exhibit 10.2 to Registrant’s Annual Report
      on Form 10-KSB/A, dated June 29, 2000)
 10.4
    2000
      Long-Term Incentive Plan (incorporated by reference to Exhibit 4.5 to
      Registrant’s Form S-8, dated April 24, 2001, SEC File No. 333-59476)
      *
 10.5
    Amended
      Engagement Agreement with John K. Baldwin (incorporated by reference to
      Exhibit 10.9 to Registrant’s Quarterly Report on Form 10-QSB, dated August
      14, 2001) *
 10.6
    Consulting
      Services agreement with George Bogle (incorporated by reference to Exhibit
      10.10 to Registrant’s Quarterly Report on Form 10-QSB/A, dated June 3,
      2002) *
 10.7
    Warrant
      Agreement with George Bogle (incorporated by reference to Exhibit 10.11 to
      Registrant’s Quarterly Report on Form 10-QSB/A, dated June 3, 2002)
      *
 10.8
    Workers’
      Compensation Master Preferred Client Agreement with PPONext (formerly
      Beyond Benefits) dated July 1, 2000, (incorporated by reference to Exhibit
      10.13 to Registrant’s Quarterly Report on Form 10-QSB, dated August 14,
      2002) (1)
 10.9
    Rockport
      Healthcare Group, Inc. 2002 Stock Option Plan (incorporated by reference
      to Exhibit 10.1 to Registrant’s Form S-8, dated October 24, 2002, SEC File
      No. 333-100732) *
 10.10
    Form
      of Indemnification Agreement Between Rockport Healthcare Group, Inc. and
      Its Officers and Directors (incorporated by reference to Registrant’s
      Quarterly Report on Form 10-QSB dated November 14,
2002)
 14.1  Code of
Ethics (incorporated by reference to Registrant’s Annual Report on Form 10-KSB
dated June 29, 2004)
 21.1
    Subsidiaries
      of Registrant (incorporated by reference to Exhibit 22 to Registrant’s
      Annual Report on Form 10-KSB/A, dated June 29,
2000)
 31.1
    Certification
      of Harry M. Neer, Chief Executive Officer
 31.2
    Certification
      of Larry K. Hinson, Chief Financial
Officer
 32.1  Certification
Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
 32.2
    Certification
      Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of
      the Sarbanes-Oxley Act of 2002.
 
 *  Indicates a
management contract or compensatory plan or
arrangement.
 
 (1) The Company has
omitted some portions of this exhibit and submitted it separately in a
confidential treatment request filed with the SEC
 (b)
    Reports
      on Form 8-K
 
 Registrant
filed a report on Form 8-K on February 4, 2005, disclosing events pursuant to
Item 5.02 (Departure of Directors or Principal Officers; Election of Directors;
Appointment of Principal Officers) of Form 8-K. The Company reported the
resignation of Carl A. Chase as Senior Vice President - Budgets & Controls
and Mr. Chase has been retained as a consultant by the Registrant to perform
certain financial reporting and internal audit functions.
 
 Page
14
  **SIGNATURES**
 
 In
accordance with the requirements of the Exchange Act, the Registrant caused this
report to be signed on its behalf by the undersigned, thereunto duly
authorized.
 
 ROCKPORT HEALTHCARE
GROUP, INC.
 (Registrant)
 
 
 
 February 14,
2005     /s/
Larry K. Hinson
 Larry K. Hinson
 Chief Financial and Principal
Accounting Officer
 (Duly authorized
officer)


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