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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [Fee Required]
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For the fiscal year ended September 30, 2000 Commission File Number:0-17192
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REVCARE, INC.
(Name of small business issuer in its charter)
Nevada 84-1061382
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
5400 Orange Avenue, Suite 200, Cypress, California 90630
(Address of principal executive offices) (Zip Code)
Issuer's Telephone Number: (714) 995-0627
Securities registered under Section 12(b) of the Exchange Act:
(Title of each class) (Name of each exchange on
which registered)
NONE NONE
Securities registered under Section 12(g) of the Exchange Act:
(Title of class)
COMMON STOCK
Check whether the issuer (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 ( )
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB.
State issuer's revenues for its most recent fiscal year: $5,786,480.
State the aggregate market value of the voting stock held by nonaffiliates of
the registrant: $2,336,961.
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: 21,526,909 shares of Common Stock
issued and outstanding as of September 30, 2000.
Transitional Small Business Disclosure Format (Check one): Yes No X
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ITEM 1 DESCRIPTION OF BUSINESS
EXCEPT FOR THE HISTORICAL INFORMATION CONTAINED HEREIN, THE MATTERS DISCUSSED IN
THIS ANNUAL REPORT ON FORM 10-KSB ARE FORWARD-LOOKING STATEMENTS THAT INVOLVE
RISKS AND UNCERTAINTIES (SUCH FORWARD-LOOKING STATEMENTS INCLUDE, WITHOUT
LIMITATION, STATEMENTS USING SUCH WORDS AS "MAY," "POTENTIAL," "EXPECTS,"
"BELIEVES," "ESTIMATES," "PLANS," "INTENDS," "ANTICIPATES" AND SIMILAR
EXPRESSIONS). FOR A DISCUSSION OF CERTAIN FACTORS WHICH MAY AFFECT THE OUTCOMES
PROJECTED IN SUCH STATEMENTS, SEE "RISK FACTORS" ON PAGES __ TO __ OF THIS
ANNUAL REPORT ON FORM 10-KSB. ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE
PROJECTED. THESE FORWARD-LOOKING STATEMENTS REPRESENT OUR JUDGMENT AS OF THE
DATE OF THE FILING OF THIS ANNUAL REPORT ON FORM 10-KSB. WE DISCLAIM, HOWEVER,
ANY INTENT OR OBLIGATION TO UPDATE THESE FORWARD-LOOKING STATEMENTS.
Our Company
RevCare, Inc. is one of the leading providers of revenue cycle management
services in California, Nevada and Hawaii. We have traditionally focused our
services on three segments of the accounts receivable management industry -
healthcare, banking and retail. However, with our acquisition of four healthcare
revenue cycle management companies in August 2000, we are now concentrating on
offering our comprehensive and integrated suite of services to manage the
revenue cycle of healthcare providers. We now have the ability to provide the
services required by our healthcare clients to manage all phases of their
revenue cycle, which include:
. physician and hospital billing,
. non-delinquent and delinquent receivable collections,
. reimbursement maximization projects,
. back-office staffing and outsourcing, and
. litigation management services
We have significant presence in the Southern California, Las Vegas and Hawaii
healthcare markets. We provide services to approximately 750 healthcare
facilities in these geographic areas. We currently manage over $1.7 billion in
receivables for our billing and collections clients on an annual basis. We have
contracts to provide reimbursement maximization projects to approximately fifty
healthcare facilities in the western region of the Unites States. We provide
back-office temporary staffing and outsourcing to approximately 200 facilities
in Southern California.
We believe our recent acquisitions will allow us to continue to access various
sources of capital to fund our ongoing growth, which many include additional
acquisitions of companies in geographic areas where there is a demand for our
services. Our immediate goal is to become the most prominent provider of revenue
cycle management services to healthcare providers in the western region of the
United States. The August 2000 acquisitions are expected to provide us with the
additional resources necessary to embark on two important initiatives that will
enhance our client service delivery processes:
. a data repository of raw account information that we will process to
form a healthcare receivable knowledge base, and
. a professional development center designed to continually expand the
basic, technical and regulatory compliance knowledge of our staff.
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While we are directing our services primarily to the healthcare industry, we
also continue to provide national receivable management services to certain
non-healthcare companies in the financial services, auto and retail industries.
Our clients in these industries primarily utilize our delinquent debt recovery
and litigation management services.
We have discontinued purchasing charged-off receivable portfolios and do not
intend to participate in this business.
Our Business Strategy
Our business strategy focuses on positioning ourselves as a strategic partner
and business advisor to healthcare organizations for their revenue cycle
management needs. Key elements in our strategy include:
. Organizational Intelligence - We plan to build a knowledge base that will
be enriched by the significant amount of data we receive and produce in the
course of delivering our services. We have just completed the migration of
our operating system into an open database system. We believe that our
clients will benefit from the knowledge that this pool of information may
provide once it is processed and organized. We intend to use the latest
application service provider (or ASP) technology to provide our clients
with secured, ready access to our knowledge base through our website.
. Technology - We plan to continue to utilize and leverage technology to
provide our clients with more services and information that are
critical to their business in more convenient and economical ways.
. Our People - Our success will also largely depend on our ability to
recruit, retool and retain smart professionals. To ensure
professionalism and technical knowledge in our people, we created the
Professional Development Center. The center assures us that our people
will learn and understand our corporate culture, standardized basic
procedures and the latest changes in technical and regulatory
requirements in the industries we serve, and become proficient in
using the technology tools and resources that are available to them.
Fundamental to our strategy is our attention to:
. building awareness of our brand in the geographic markets that we
service, which will support the development of our service lines in
new markets
. developing strategic alliances with finance and technology companies
who focus on the healthcare industry, and marketing and cross
promotion alliances with other service providers to reach new clients
and expand value-added services provided to existing clients
. enhancing financial performance in all our service lines by maximizing
the use of technology to streamline internal processes, lowering the
cost of service and information delivery, and extracting economies of
scale from internal growth and acquisitions
Our History
We now own and operate four subsidiaries, each of which has many years of
experience in its respective field. Medical Control Services, Inc. and Lien
Solutions, Inc. provide recovery and specialty services to healthcare providers.
Merchants Recovery Services, Inc. provides delinquent collection services to
non-healthcare clients. These companies started their operations at various
times from 1977 through 1982.
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In August, 2000, we completed our acquisition of California Professional
Services, Inc., or CPS, which was founded in 1974 and primarily provides
collections services to healthcare clients. As part of our acquisition of CPS,
CPS acquired the assets of Insource Medical Solutions, or Insource, Hospital
Employee Labor Pool, or HELP, and RBA-RemCare, or RBA. Insource, a physician and
hospital billing company, started its operations in 1996. HELP, a staffing and
back office outsourcing firm, started its operations in 1988. RBA, a healthcare
reimbursement maximization consulting company, was formed in 1990.
On May 30, 2000, FBR Financial Fund II, L.P. purchased newly issued shares
representing approximately 70% of our outstanding stock for $7.5 million. With
the proceeds of this investment, we were able to complete our acquisition of
CPS, Insource, HELP and RBA in August 2000. As part of the transition we also
changed our name to RevCare, Inc. We believe the combination of experience and
knowledge acquired through the addition of these companies will allow us to
provide an integrated and comprehensive suite of services to manage the revenue
cycle of most healthcare providers. We also extended our geographic presence to
the Nevada and Hawaii markets with these acquisitions.
Our Services to the Healthcare Industry
Billing Services
We perform coding, processing and electronic submission of claims
(including Medicare and MediCal) arising from services performed by
medium to large physician groups and hospitals. We currently utilize
the SMS/Siemens billing technology to process claims for our clients.
Recovery Services
Pre-Collect Services - We provide pre-delinquency collection services
to our clients by acting as an extension of our clients' accounts
receivable department. We provide clients speed dialing and
professionally trained staff to help them achieve better penetration of
their non-delinquent pool of receivables.
Delinquent Debt Recovery - Whether the cause is improper processing of
the claims or the patient's reluctance or inability to pay, certain
receivables require specialized skills to achieve maximum liquidity.
Our staff is trained to identify the causes and the appropriate
approaches to ensure professional treatment of our clients' patients
and customers. In the future, we expect the account segmentation and
filtration processes that may result from the information provided by
the knowledge base to help us minimize the staff's efforts on accounts
with low or no collectable value.
Revenue Maximization Projects and Services
Managed Care Audits - We have a comprehensive audit program that
employs technology and experienced professionals on managed care
accounts that have been closed for over one year. This process includes
a thorough review of all payments and/or denials received under the
terms and conditions of managed care contracts. We retain an agreed
upon percentage of the re-billed services paid by the insurance
carriers.
Clinical Denial Audits - Insurance carriers deny claims due to a
variety of reasons. We will audit denied claims to determine whether
they were appropriately denied. We typically retain one-third of the
payment received by our clients from contested claims. The percentage
of re-billed claims varies according to the nature of the claim, the
services provided, and the processes and methods followed by the
business office of the healthcare provider.
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Zero Balance Reviews - This service is an extension of our managed
care audit service but applies to all accounts that have been settled
at significantly less than the amount originally billed. Prior to
accepting this engagement, our professionals conduct a feasibility
study of the client's internal receivable management process. We
review a sample of accounts throughout the period and assess the
processes and methods followed by the back office. The client
ordinarily pays for the feasibility study. We retain an agreed upon
percentage of the re-billed services paid by the insurance carriers.
Eligibility Reviews - Our experience in evaluating causes of
delinquent healthcare receivables has shown us that a portion of
MediCal and Medicare denials is due to the providers' inability to
thoroughly process eligibility claims prior to release of the
patients. Some clients do not have the time, expertise, and technology
applications to economically track these patients in order to
reprocess the various eligibility forms. We apply our skiptracing
database and technology derived from our delinquency collection
practice to locate these former patients and acquire the eligibility
information required by the paying agencies.
Compliance Reviews - We provide consulting services on healthcare
regulatory compliance matters to small to medium sized medical
offices. This service provides for a thorough review of the medical
facility. Process flow is documented for each component of the
accounts receivable management process. The review produces detailed
documentation which forms the basis of our recommendations for
implementing an effective compliance program. The ultimate goal of the
compliance program is to promote prevention, detection, and resolution
of instances of conduct that do not conform to Federal and state laws.
Fees for this service are generally fixed rates based on the size of
the office and other factors.
. Staffing and Back-Office Outsourcing -
One of the major challenges of financial officers and business office
managers is the maintenance of an adequate number of properly trained
and experienced professionals to perform the continuously increasing
workload in the receivable management units. Unexpected departures or
absences of experienced coders, billers, abstractors and collectors
within a unit may create significant backlogs which may lead to
potential increases in claims denials and deterioration of receivable
liquidation rates. Some healthcare providers prefer to outsource
portions or all of their back office processes. Our seasoned and
knowledgeable healthcare receivable specialists are available for
various assignments throughout Southern California. We have also begun
promoting this service in our recently acquired facilities in Nevada
and Hawaii. Our billings are based on hourly rates depending on staff
classification.
Our Services to Non-Healthcare Clients
We have been providing recovery services to the financial services, retail, and
commercial industries for over twenty years. We have developed a particular
expertise in the handling of accounts financed by automotive finance companies,
which comprise a large portion of our client base in this area. Most of our
services involve the earlier stages of recovery of our client's delinquent
accounts receivable.
Support Services
To provide effective and thorough services to our clients, we also offer the
following services and systems to support our core operations:
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. Litigation Management -
We have a specialty recovery department with a full time attorney to manage
litigation and bankruptcy related activities. The attorney and support
staff have more than ten years of full time employment with us. Litigation
management includes filing legal actions on collection accounts,
enforcement of judgements, and the perfecting of Chapter 13 bankruptcy
claims nationwide.
. Technology and Information Systems -
We recognize the value of combining human resources with the latest
computer and telecommunications technology to manage the receivables
assigned to us effectively. Accordingly, we maintain sophisticated data
processing support and management information systems that can be easily
operated by our billing and recovery specialists.
Our receivable management software system is compiled under a widely-used,
high level programming language. It operates under a Microsoft Windows
environment distributed by a Windows NT network system. A central computer
file server connected to an array of disc drives maintains our management
information database.
We believe that knowledge is a key differentiating factor in our business.
Our long experience in the receivable management business has allowed us to
accumulate a base of knowledge which, if properly maintained and
continually enriched, can provide a wealth of information to our clients.
With the proper management of the data we continuously gather from our
daily customer interaction, we will improve our recovery strategies and
management reports for our clients.
We expanded our data management capability by migrating to an Oracle open
database system. This system integrates our current receivable management
operating system and existing telecommunication technology. This system
also allows us to create a more precise coding system to extract, sort, and
store information that we believe will be useful to our clients' decision
making process with respect to the relative values and expected performance
of their outstanding receivables. We intend to use this system to develop
information retrieval and delivery processes for our clients utilizing the
Internet.
. Professional Development Center -
Notwithstanding the factors discussed above, the most critical factor that
impacts our ability to execute our operating mission is our ability to
manage the three R's of human resources - Recruit, Retool, Retain.
An effective recruiting program reduces the efforts we may need to expend
on retooling (training) and retention. Accordingly, we have established
experience-based selection criteria to augment our recruiting program. The
criteria are based upon a careful study of the skills common to our
most successful employees. The selection process is conducted through a
standardized scoring matrix that effectively sorts candidates according to
their ability to demonstrate the success traits that we look for.
Our retooling (training) process is comprised of two programs. The basic
training course is a twelve-week training process. It starts with a
three-week classroom course that focuses on teaching the five basic skill
sets required to become an effective recovery specialist. Graduates of this
course are accepted to the training division, where trainees work on live
accounts and fine
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tune the skills taught during the preceding three-week course under the
close supervision of training supervisors.
The advanced training course is designed to train recovery specialists on
selected specialty skills (for example, healthcare billing, specialty
recovery, loan servicing and insurance processing). Employees are able to
expand their skills on some of the more difficult or technical aspects of
the job (for example, negotiation skills, customer service techniques, team
building concepts and recent regulatory pronouncements).
Marketing and Advertising
Our marketing strategy is focused on three goals - building brand awareness,
acquiring specifically targeted clients in the western region of the United
States and cross-selling our value-added services to our existing client base.
We pursue these goals through a combination of:
. marketing through selected trade shows and conventions,
. marketing on our own web sites and other online opportunities,
. direct mail marketing, and
. attendance in industry sponsored public relations events.
Our advertising focuses on building awareness of the RevCare(TM) brand and
related services and positioning ourselves as a strategic partner and business
advisor to our clients. We place print advertisements in various industry
publications.
We are currently reconstructing our web site to incorporate the comprehensive
suite of services that we now provide to our clients.
Government Regulation
Our healthcare billing services are covered by various regulations prescribed by
Medicare, Medicaid, TRICARE and the Health Care Financing Administration, and
each major federal healthcare payment program has it own set of complex and
sometimes conflicting regulations. Additionally, regulations have been mandated
by the Balanced Budget Act and the Health Insurance Portability and
Accountability Act, each of which could have a significant impact on our
business. Several states have also imposed significant regulatory programs
applicable to billing and payment for healthcare services. The Office of
Inspector General of the Department of Health and Human Resources has issued
compliance guidelines for third-party billing companies, recommending components
for an effective billing company compliance program and identifying several risk
areas associated with medical billing. Such risk areas include routine waiver of
copayments and deductibles, unbundling, billing for undocumented services and
upcoding. The continual implementation of measures to restrict payments for
healthcare services by governmental and private payors may result in a decrease
in revenue to our provider clients, and as a result, a decrease in revenue
derived by us from such clients as well as an increase in the cost of providing
services.
Our recovery operation is regulated by the Fair Debt Collection Practice Act and
the Telephone Consumer Protection Act, which are enforced by the Federal Trade
Commission. In 1996, the Hospital Insurance Portability and Accountability Act
which addresses the compliance requirements to safeguard patient information
that is shared and communicated during the various billing and recovery
processes. In this regard, we devote continuous efforts through ongoing training
and monitoring to provide ethical, innovative, high quality receivable
management services which meet the needs of our clients and comply with
applicable laws.
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Although we believe that we are in compliance with all applicable laws and
regulations, there can be no assurance that we will always be able to maintain
such compliance. Our failure to comply with such statutes and regulations could
have a material adverse effect on us. Furthermore, the adoption of additional
statutes and regulations, changes in interpretation and enforcement of current
statutes and regulations, or the expansion of our business into jurisdictions
that have more stringent regulatory requirements than those in which we
currently conduct business could have a material adverse effect on us.
Competition
All aspects of our business are highly competitive. We compete directly with a
broad range of companies with operations similar to ours. Many of our
competitors have far greater resources and have access to capital markets that
may be unavailable to us.
We believe that the principal competitive factors affecting our business are
performance, price, and quality of service provided. We believe that our
strategic focus and innovative approaches will allow us to compete effectively
with current providers of like services.
Employees
As of September 30, 2000, we had 243 full time employees and 69 part time
employees. A total of 296 of these employees are based in Southern California, 5
are based in Las Vegas, and 11 are based in Hawaii. None of our employees is
subject to a collective bargaining agreement. We believe that our relations with
our employees are good.
RISK FACTORS
WE WISH TO CAUTION READERS THAT THE FOLLOWING IMPORTANT FACTORS, AMONG OTHERS,
IN SOME CASES HAVE AFFECTED, AND IN THE FUTURE COULD AFFECT, OUR ACTUAL RESULTS
AND COULD CAUSE OUR ACTUAL CONSOLIDATED RESULTS FOR FUTURE PERIODS TO DIFFER
MATERIALLY FROM THOSE EXPRESSED IN ANY FORWARD-LOOKING STATEMENTS MADE BY US OR
ON OUR BEHALF. WE EXPRESSLY DISCLAIM ANY OBLIGATION OR UNDERTAKING TO RELEASE
PUBLICLY ANY UPDATES OR REVISIONS TO ANY FORWARD-LOOKING STATEMENTS CONTAINED
HEREIN TO REFLECT ANY CHANGE IN OUR EXPECTATIONS WITH REGARD THERETO OR ANY
CHANGE IN EVENTS, CONDITIONS OR CIRCUMSTANCES ON WHICH ANY SUCH STATEMENT IS
BASED.
If we are unable to successfully manage the new businesses we acquired in August
2000 and integrate them into our operations, we may not be able to realize
expected operating efficiencies, eliminate redundant costs or operate the
businesses profitably.
The businesses we acquired in 2000 had combined pro forma revenues of $10
million in 2000 which was 222% of our revenue of approximately $4.5 million in
2000, prior to the restatement to reflect the acquisitions. If we are unable to
successfully manage these new businesses and integrate them into our operations,
we may not be able to realize expected operating efficiencies, eliminate
redundant costs or operate the businesses profitably. The integration of these
businesses is subject to a number of risks, including risks that:
. we may be unable to retain clients or key employees of the acquired
companies; and
. the acquired companies might have additional liabilities that we did
not anticipate at the time of the acquisitions.
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One of our shareholders holds a large percentage of our common stock and
controls our board of directors.
Two of our directors, George L. McCabe and Edward Wheeler, are managing
directors of our majority shareholder, FBR Financial Fund II, L.P., which
beneficially owns approximately 70% of the outstanding shares of our capital
stock as of September 30, 2000. Accordingly, FBR and Messrs. McCabe and Wheeler
are able to control us and our affairs and business, including any future
issuances of common stock or other securities, merger and acquisition decisions,
declaration of dividends and the election of directors. In addition, our stock
price and our ability to raise capital could be injured if FBR was to sell a
significant portion of its holdings on the open market. Generally, FBR may
either sell its shares under a registration statement or in compliance with the
volume limitations and other requirements imposed by Rule 144 adopted by the
SEC.
Our common stock is subject to price volatility.
The number of shares of our common stock that was traded daily on the OTC
Bulletin Board during 2000 averaged less than 5% of the average outstanding
common stock during 2000. As a result of our low trading volume and various
other factors beyond our control, the market price for our common stock is
volatile. Some of the factors that may subject our stock price to wide
fluctuations include:
. the timing and announcement of acquisitions by us or our competitors;
. government regulatory action;
. quarterly variations in operating results;
. announcements of technological innovations, new services or pricing by
our competitors;
. changes in, or failure to meet, the expectations of investors;
. the timing and extent of technological advancements;
. the sales of our common stock by affiliates or other shareholders with
large holdings; and
. general market conditions.
In addition, the stock market has experienced significant price and volume
fluctuations that have affected the market prices of the stock of many companies
and that often have been unrelated to the operating performance of such
companies. These broad market fluctuations may directly influence the market
price of our common stock.
We operate in a regulated business and if we fail to comply with government
regulations our ability to conduct business may be suspended or terminated which
would have a materially adverse effect on us.
The accounts receivable management and telemarketing industries are regulated
under various United States federal and state laws and regulations. Many states
require that we be licensed as a debt collection company. If we fail to comply
with applicable laws and regulations, it could result in the suspension or
termination of our ability to conduct accounts receivable management or
telemarketing services which would have a materially adverse effect on us. In
addition, new federal or state laws or regulations, or changes in the ways these
rules or laws are interpreted or enforced, could limit our activities in the
future or significantly increase the cost of regulatory compliance.
The healthcare industry and some of the other industries served by us are also
subject to varying degrees of government regulation. Although our clients are
generally responsible for complying with these regulations, we could be subject
to a variety of enforcement or private actions for its failure or the failure of
our clients to comply with these regulations.
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We compete with approximately 6,000 providers in the accounts receivable
management industry which could reduce our market share and have a materially
adverse effect on our future financial results.
We compete with approximately 6,000 providers in providing accounts receivable
management services. We compete with large national corporations as well as many
regional and local firms. We may lose existing or prospective business to
competitors that have established and larger marketing and sales organizations,
significantly greater financial and technical resources and a larger base of
customers or operate in broader geographic areas than we do. Because of the
large numbers of providers, in the future we may have to reduce our collection
fees to remain competitive. Many larger clients retain multiple accounts
receivable management providers which exposes us to continuous competition in
order to remain a preferred vendor.
Our business is dependent on the healthcare and financial services industries.
Our business is dependent on clients in the healthcare and financial
services sectors. If either of these sectors performs poorly, clients in these
sectors may have fewer or smaller accounts to refer to us or they may elect to
perform accounts receivable management services in-house. If there are any
trends in either of these sectors to reduce or eliminate the use of third-party
accounts receivable management services, the volume of referrals to us would
decrease. Further, the healthcare industry is undergoing fundamental changes
resulting from political, economic and regulatory influences. Significant
changes in healthcare systems could have a substantial impact on the manner in
which we conduct our business and could require us to revise our strategies.
Our failure to introduce value added services and products in a timely manner
may affect our ability to compete effectively.
Our success depends in large part on sophisticated telecommunications and
computer systems. We use these systems to identify and contact large numbers of
account debtors and to record the results of the collection effort. If we are
not able to respond to technological changes in telecommunications and computer
systems in a timely manner, we may not be able to remain competitive. We have
made a significant investment in technology to remain competitive and anticipate
that it will be necessary to continue to do so in the future. Computer and
telecommunication technologies are changing rapidly and are characterized by
short product life cycles, so that we must anticipate technological
developments. If we are not successful in anticipating, managing or adopting any
technological changes on a timely basis or if we do not have the capital
resources available to invest in new technologies, our business would be
materially adversely affected.
If our telecommunications and computer systems fail or become unavailable, it
could have a materially adverse effect on our business.
As noted above, our business is highly dependent on our telecommunications and
computer systems. These systems could be interrupted by natural disasters, power
losses, or similar events. Our business also is materially dependent on service
provided by various local and long distance telephone companies. If our
equipment or systems cease to work or become unavailable, or if there is any
significant interruption in telephone services, we may be prevented from
providing services. Because we generally recognize income only as accounts are
collected, any failure or interruption of services would mean that we would
continue to incur payroll and other expenses without any corresponding income.
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We may not be able to manage growth.
If successful, we will experience a period of growth that could place a
significant strain upon our managerial, financial and operational resources. Our
infrastructure, procedures and controls may not be adequate to support our
operations and to achieve the execution necessary to successfully market our
services. To continue our future growth, we will also be required to improve our
operational and financial systems and obtain additional management, operational
and financial resources. If we are unable to manage future expansion
effectively, our business, results of operations and financial condition will
suffer, our senior management will be less effective, and our revenues may
decrease.
We may need additional capital, which may be unavailable.
Our growth strategy, including our proposed technological enhancements, may
require greater expenditures than expected in our current business plan. Our
capital requirements will depend on numerous factors, including:
. our rate of sales growth--fast growth may actually increase our need
for additional capital to hire additional staff, purchase additional
equipment and technology, finance the increase in accounts receivable
and supply additional support services;
. our progress in knowledge-based technology, which will require
additional capital;
. the level of resources that we devote to the development, manufacture
and marketing of our services and products--any decision we make to
improve, expand or simply change our process, services or technology
will require increased funds; and
. market acceptance and demand for our services--although growth may
increase our capital needs, the lack of growth would also increase our
need for capital.
We may be unable to predict accurately the timing and amount of our
capital requirements. We may be required to raise additional funds through
public or private financing, bank loans, collaborative relationships or other
arrangements earlier than expected. It is possible that banks, venture
capitalists and other investors may perceive our capital structure, financial
performance or reliance on the healthcare industry and new technology as too
great a risk to bear. As a result, additional funding may not be available on
attractive terms, or at all. If we cannot obtain additional capital when needed,
we may be forced to agree to unattractive financing terms, to change our method
of operation or to curtail our operations.
ITEM 2 DESCRIPTION OF PROPERTY
We own our office building and property located at 5400 Orange Avenue, Cypress,
California, where we conduct our primary operations. The office building, which
was purchased in 1993, contains approximately 50,000 square feet of office
space. Currently, we occupy approximately 30,000 square feet for our operations,
and the remainder of the building is available for lease to third party tenants.
The mortgage note on our building with a remaining balance of $1,802,002 was due
in December 2000. The note was restructured in December 2000 by another
financial institution for a total borrowing of $2,990,000 at a variable interest
rate that has an initial rate of 8.4% and is indexed to the ISDA mid-market swap
rate for a swap period of five (5) years. The note is to be repaid based on a
20-year amortization schedule and is due in January 2021. We also have leased
offices located at 1502-C Brookhollow Drive, Santa Ana, CA 92705; at 2235 E.
Flamingo Road, Suite 405, Las Vegas, NV 89119; and at 46-001 Kamehameha Hwy,
Suite 308, Kaneohe, HI 96744.
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ITEM 3 LEGAL PROCEEDINGS
In December 1998, Federal Asset Factoring Corporation, or Federal, filed a claim
against us for negligent misrepresentation. We sold portfolio receivables to
Track, Inc., which Track then sold to Federal. Federal alleged that it was
unable to obtain media on the receivables which resulted in lower than
anticipated returns for Federal's investors. Federal sued Track and obtained a
judgment, but was unable to collect on the judgment. Consequently, Federal sued
us on the basis that Track was acting as our broker when the receivables were
sold to Federal. The case was settled in February 2000. As part of the
settlement, we transferred to Federal purchased bad debt accounts held in our
portfolio with a cost basis of $10,000.
In March 1999, DDT Medical Credit, or DDT, filed a claim against us for breach
of contract. DDT contended that it purchased receivables from Towne Medical
Center, or Towne, in May 1998 and simultaneously entered into an agreement with
us to bill and collect these receivables on DDT's behalf. Although we had been
performing billing and collection services for Towne prior to May 1998, our
agreement with Towne was mutually terminated on May 15, 1998 and no agreement
was reached between us and DDT to continue the services. The case was settled in
February 2000. As part of the settlement, we transferred to DDT purchased bad
debt accounts held in our portfolio with a cost basis of $25,000.
In addition to the litigation matters discussed above, we are involved, from
time to time, in litigation that is incidental to our collection business. We
regularly initiate legal proceedings as a plaintiff in connection with our
routine collection activities. In management's opinion, none of these legal
matters will have a material adverse effect on our financial position or the
results of our operations.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the fourth
quarter of the fiscal year ended September 30, 2000.
PART II
ITEM 5 MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock, $.001 par value, is traded under the symbol "RVCR" through the
OTC Electronic Bulletin Board maintained by the National Association of Security
Dealers, Inc. The OTC Electronic Bulletin Board has no financial eligibility
standards and is totally separate from the Nasdaq Stock Market. The OTC
Electronic Bulletin Board does not constitute an active trading market and
trading in our common stock is limited and sporadic. The following table sets
forth the range of high bid and low bid quotations for our common stock for the
periods indicated. The quotations are inter-dealer prices in the
over-the-counter market without retail mark-ups, markdowns or commissions, and
may not represent actual transactions.
<TABLE>
<CAPTION>
2000 1999
------------------- --------------------
High Low High Low
---- --- ----
<S> <C> <C> <C> <C>
4th Quarter ending 9/30 .969 .469 1.75 1.00
3rd Quarter ending 6/30 1.060 .750 1.88 1.06
2nd Quarter ending 3/31 1.250 .625 1.88 1.31
1st Quarter ending 12/31 1.500 .750 1.94 1.38
</TABLE>
-12-
<PAGE>
As of September 30, 2000 there were 1,477 holders of record of our common stock.
Dividend Policy
We have never paid a dividend and do not anticipate paying any cash dividends in
the foreseeable future. We intend to retain any earnings to provide funds to
finance future growth.
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<PAGE>
ITEM 6 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
EXCEPT FOR THE HISTORICAL INFORMATION CONTAINED HEREIN, THE MATTERS DISCUSSED IN
THIS ANNUAL REPORT ON FORM 10-KSB ARE FORWARD-LOOKING STATEMENTS THAT INVOLVE
RISKS AND UNCERTAINTIES (SUCH FORWARD-LOOKING STATEMENTS INCLUDE, WITHOUT
LIMITATION, STATEMENTS USING WORDS SUCH AS "MAY," "POTENTIAL," "EXPECTS,"
"BELIEVES," "ESTIMATES," "PLANS," "INTENDS," "ANTICIPATES" AND SIMILAR
EXPRESSIONS). THESE FORWARD-LOOKING STATEMENTS ARE SUBJECT TO RISKS AND
UNCERTAINTIES, INCLUDING THOSE SET FORTH BELOW AND IN ITEM 1 OF THIS ANNUAL
REPORT ON FORM 10-KSB UNDER THE CAPTION "RISK FACTORS," THAT COULD CAUSE ACTUAL
RESULTS TO VARY MATERIALLY FROM THOSE PROJECTED. THESE FORWARD-LOOKING
STATEMENTS SPEAK ONLY AS OF THE DATE HEREOF. WE EXPRESSLY DISCLAIM ANY
OBLIGATION OR UNDERTAKING TO RELEASE PUBLICLY ANY UPDATES OR REVISIONS TO ANY
FORWARD-LOOKING STATEMENTS CONTAINED HEREIN TO REFLECT ANY CHANGE IN OUR
EXPECTATIONS WITH REGARD THERETO OR ANY CHANGE IN EVENTS, CONDITIONS OR
CIRCUMSTANCES ON WHICH ANY SUCH STATEMENT IS BASED. THE FOLLOWING DISCUSSION AND
ANALYSIS OF OUR FINANCIAL CONDITION AND RESULTS OF OPERATIONS SHOULD BE READ IN
CONJUNCTION WITH OUR CONSOLIDATED FINANCIAL STATEMENTS (AND NOTES THERETO)
CONTAINED ELSEWHERE HEREIN.
Overview
Business
The following discussion and analysis of our financial condition and results of
our operations are based on the consolidated results of businesses, which
include the results of operations of the subsidiary and related businesses we
acquired on August 14, 2000 through September 30, 2000. A more detailed
discussion of the accounting principles used to consolidate the assets,
liabilities, and results of operations of the businesses and the specific
entities included in the consolidation is set forth in Note ONE to our
consolidated financial statements included in this report.
Revenues
Commissions and fees, which account for most of our total revenues, include
commissions earned from billing, recovery, revenue maximization projects and
consulting services that we provide to our clients. Commissions and fees for our
billing and recovery operations are primarily affected by the quality and age of
the receivable pool we are asked to manage. In general, commissions and fees for
our billing and recovery services fluctuate based on the number of accounts we
process and manage. Accounts we manage have grown 126% to $1.7 billion as of
September 30, 2000 from $750 million as of September 30, 1999. The growth was
primarily due to the active accounts brought in by the businesses we acquired on
August 14, 2000. Fees for our special projects and consulting services depend
largely on the type of service or project we perform and, therefore, are
arranged on a case by case basis. Such fees are primarily affected by the
quality and age of the receivable pools as well as the efficiency of our
clients' back office operations. These services are provided by the acquired
businesses. Accordingly, we did not perform these services prior to August 14,
2000.
We previously purchased charged-off accounts receivable portfolios. Collections
from these portfolios represented a portion of our revenues. Portions of these
portfolios were also sold to provide additional revenues. We discontinued
purchasing these portfolios in 1999 and we plan to sell the remaining
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<PAGE>
portfolios in inventory to conform to our plan not to pursue this line of
business. Accordingly, we expect revenues from collections on these portfolios
to continue to decline until such portfolios are sold.
We also earn revenues from temporary staffing and placement services provided
specifically to the healthcare industry. Revenues from our temporary staffing
services are generated based on hourly and/or per diem rates charged to our
clients. These rates vary according to the level of skills and technical
knowledge of our staff. Placement fees are negotiated on a case by case basis
and are predominantly determined by a percentage of the annual salaries of the
placed employees. These services are provided by one of the acquired businesses.
Accordingly, we did not perform these services prior to August 14, 2000.
While our primary market going forward will be healthcare providers, a
significant portion of our revenues in 2000 consisted of commissions and fees
earned from non-healthcare clients. The following is a summary of our revenues:
<TABLE>
<CAPTION>
2000 1999
---- ----
Company Acquired Companies Total
------- ------------------ -----
(August 14, 2000 through
September 30, 2000)
<S> <C> <C> <C> <C>
Commissions and Fees:
Healthcare Clients $2,542,217 $1,269,557 $3,811,774 $2,569,470
Non-Healthcare Clients 1,418,359 - 1,418,359 1,554,094
--------- ---------- ---------- ----------
$3,960,576 $1,269,557 $5,230,133 $4,123,564
Purchased Portfolios:
Collections $ 556,347 - $ 556,347 $ 946,443
Sales
---------- ---------- ----------
Total revenues $4,516,923 $1,269,557 $5,786,480 $5,241,199
</TABLE> [B
Operating Expenses
Our largest operating expense is employee compensation and benefits, which
includes salaries and wages, incentive compensation and related employee
benefits and taxes. Our compensation program for recovery specialists includes
incentives based on the amount of net fees they individually generate; as such,
compensation expense for this group will vary directly with the amount of fees
generated by our recovery business. Most of our managers receive annual
incentive compensation based on the overall operating results of our operations
in each of our business lines as well as their individual performance.
Therefore, a significant portion of compensation and benefits expense will
fluctuate based on our operating results. Compensation expense may also reflect
stock options granted to our employees under our stock option plan.
Included in selling, general and administrative expenses are postage and
telephone expenses which account for the next largest components of our
operating expenses. These expenses will fluctuate based on the volume of
accounts we manage and, correspondingly, with the commissions and fees we
generate. These expenses reflect our primary methods of communication with our
clients' customers and they include costs to send customer/payor invoices and
statements as well as telecommunication costs incurred in various negotiation
activities with such customers.
We ratably allocate the cost of purchased loans receivable portfolios on an
account by account basis. Collections received from any one account are applied
to the basis of the respective account before revenue is recognized. Integral to
our collection operations is the timely identification of accounts that are
deemed uncollectible. The uncollectability of an account is primarily based on
the current status of
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<PAGE>
the account (such as bankrupt or deceased) and the historical experience of the
specific portfolio as well as similar portfolios. We record an amortization
reflecting the accumulated costs allocated to those accounts deemed
uncollectible to properly reflect management's estimate of the remaining net
proceeds to be realized from a given portfolio. As previously mentioned, we have
not purchased any portfolios since 1999 and we will be departing from this line
of business. Accordingly, we expect this cost to decline as the remaining
unamortized cost basis of the purchased portfolios are realized through
collections or sale of such portfolios.
Depreciation expense relates primarily to the building facility we own where we
conduct a significant portion of our operations. In addition, we have invested
and will continue to invest in technology and telecommunication equipment which
will continue to impact this expense item. In accordance with our plan, we have
also acquired new businesses to rapidly expand our operations and geographic
presence. Goodwill relating to our major acquisitions is generally being
amortized over a period of 20 years from date of acquisition.
The most significant component of other income and expense relates primarily to
net proceeds received from rental of the portion of our building that we do not
occupy.
We have experienced substantial changes in and expansion of our business and
operations since we completed the acquisition of certain companies in August,
2000. Developmental spending, which includes, among other things, branch
openings, product and service rollouts, and certain information technology
systems improvements, that will be incurred is expected to be discretionary and
will vary in response to various market conditions. However, a significant
portion of our expenses, such as administrative salaries and wages, occupancy
and equipment, depreciation and amortization of goodwill should not vary, at
least in the short term, with fluctuations in our revenues. We expect to
continue to experience periods of rapid change in the future. Our current
expansion has placed, and any future expansion would place, significant demands
on our administrative, operational, financial and other resources.
-16-
<PAGE>
ITEM 1
Result of Operation and Financial Overview--Years ended September 30,
2000 and 1999
<TABLE>
<CAPTION>
2000 1999
------------------------------------------- ----
Company Acquired Total
------- -------- -----
Companies
---------
(August 14, 2000
through
September 30, 2000)
<S> <C> <C> <C> <C>
(UNAUDITED)
Revenues
Commissions and Fees $3,960,576 $1,269,557 $5,230,133 $4,123,564
Collections from Owned Portfolios 556,347 - 556,347 946,443
Sales of Owned Portfolios - - - 171,192
---------- ---------- ---------- ----------
$4,516,923 $1,269,557 $5,786,480 $5,241,199
Operating Expenses
Employee compensation and benefits 3,273,249 795,587 4,068,836 4,370,710
Selling, general and administrative expenses 1,657,408 307,402 1,964,810 2,044,205
Amortization of Loan Portfolios 341,645 - 341,645 548,014
Depreciation and amortization 206,568 73,300 279,868 198,697
Income (Loss) From Operations (961,947) 93,268 (868,679) (1,920,427)
Other Income (expense) (493) (17,500) (17,993) (28,649)
Income Tax Benefit - - - 455,964
Net Income (Loss) (962,440) 75,768 (886,672) (1,493,112)
Revenues -
</TABLE>
Commissions and fees earned by us decreased by approximately $163,000 or 4%
to $3,960,576 for the year ended September 30, 2000 from $4,123,564 for the year
ended September 30, 1999. The decrease is primarily due to decrease in
collections from a securitized pool of receivables that we service which fees
decreased to $178,000 from $321,000 for the respective years. Overall
commissions and fees increased by approximately $1.11 million or 27% to $5.23
million from $4.12 million for the respective years. The increase was largely
impacted by the additional commissions and fees earned by the newly acquired
businesses from August 14, 2000 through September 30, 2000.
Collections and sales from owned portfolios decreased by approximately $561,000
or 50% to $556,347 for the year ended September 30, 2000 from $1,117,635 for
the year ended September 30, 1999. As previously discussed, we did not replenish
the paid and cancelled accounts out of this portfolio, which ordinarily result
from collection activities, in conformance with our plan not to pursue this
line of business.
Operating Expenses
Our operating expenses decreased by $506,467 or 7% to $6,655,159 for the year
ended September 30, 2000 from $7,161,626 for the year ended September 30, 1999.
The decrease was due in large part to approximately $1.1 million in decreases in
salaries and wages as a result of the restructuring plan that we implemented at
the outset of the fiscal year. Professional fees from financial advisory, legal,
accounting, and audit activities collectively added to another decrease of
approximately $100,000 for the year ended September 30, 2000. Excluding
operating expenses incurred by the newly acquired subsidiaries from August 14,
2000 through September 30, 2000 which aggregated approximately $1 million,
total operating expenses decreased by approximately $1.7 million.
-17-
<PAGE>
Other Income and Expenses
Interest expenses increased approximately $94 thousand primarily as a result of
additional borrowings (through capitalized leases) to fund technology and
equipment acquisitions as well as a one and one-half month interest paid related
to the notes payable to the sellers of the acquired subsidiaries. Interest
income increased by $67 thousand as a result of cash raised from the issuance of
common stock. Other income, comprised mainly of rental income net of related
expenses, increased $32 thousand as a result of leasing out to third parties
previously unoccupied spaces in the Company's facility.
Net Loss
As a result of the various items discussed above, net loss for the year
decreased approximately $606 thousand, or 41% to $886,672 for the year ended
September 30, 2000 from a loss of $1,493,112 for the year ended September 30,
1999. Approximately $77 thousand of the decrease was contributed by the net
income generated by the acquired subsidiaries during the period of August 14,
2000 through September 30, 2000.
Liquidity and Capital Resources
Historically, we have financed our operations through cash flows generated by
operations and borrowings from credit facilities that are in place. Capital
expenditures and investments in new technology have been primarily financed
through non-cancelable capital leases, which expire at various times through
fiscal year 2005. As of September 30, 2000, we have outstanding long-term debt
with financial institutions totaling $2.9 million. This amount includes a
mortgage note on our building facility with a remaining balance of $1.8 million
which was due in December 2000. This note was restructured in December 2000 by
another financial institution for a total borrowing of $2,990,000 at a variable
interest rate that approximates 8.5% and is due in January 2021. This
refinancing provides us approximately $1.1 million of additional working
capital. As of September 30, 2000, our net working capital aggregated
approximately $550,000. Additionally, we will aggressively pursue the sale of
the remaining portfolio receivables that we own, which have a net book value of
$514,885 at September 30, 2000. As these portfolio receivables were purchased
with our cash, all of the proceeds from this sale will be available for working
capital purposes.
In May 2000, we sold 15,000,000 shares of our common stock to FBR Financial Fund
II, L.P. for $7,500,000 representing 62% of the our outstanding common stock
on a fully diluted basis. On August 14, 2000, we used $6.3 million of the
proceeds plus $4.2 million in two-year convertible notes bearing an interest
rate of 8% to acquire all of the outstanding stock of Orange County Professional
Services, Inc. and its affiliated companies, as well as substantially all of the
assets of Insource Medical Solutions, Inc., RBA-RemCare, Inc. and Hospital
Employee Labor Pool, which are healthcare revenue cycle management service
providers. We used the remainder of the proceeds from this transaction, after
transaction expenses, for working capital purposes. The acquisition is expected
to result in additional revenues on an annual basis. We believe that with this
additional business volume we will be better able to absorb the corporate
overhead (after the effect of the implementation of the restructuring program in
the first quarter of fiscal year 2000).
Given the cost reduction measures that had been implemented, and the potential
increase in revenues in the oncoming fiscal year, management believes that its
existing cash balances, combined with anticipated cash flows from operations as
well as existing credit facilities, will be sufficient to meet the working
capital needs required to pursue its strategic goals during the fiscal year
2001.
Year 2000
The Year 2000 issue refers to concerns that computer and other electronic
systems may not correctly interpret dates in the 21st century, possibly
resulting in errors. If these concerns were not properly addressed, our ability
to conduct normal business activities could be affected. All of our internal
systems
-18-
<PAGE>
were updated and tested for Year 2000 readiness. To ensure that our business
would not be affected, testing and evaluation steps were taken as a
precautionary matter.
As a result of these actions, our ability to conduct normal business activity
was not affected and we are confident operations will continue without any
significant disruption. We did not incur significant costs associated with Year
2000 conversion due primarily to the fact that we utilize third-party vendors
for our operating and back office systems.
Recently Issued Accounting Standards
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities" as amended
in June 1999 by SFAS No. 137, "Accounting for Derivative Instruments and Hedging
Activities - Deferral of the Effective Date of FASB Statement No. 133," and in
June 2000, by SFAS No. 138, "Accounting for Certain Derivative Instruments and
Certain Hedging Activities," (collectively SFAS No. 133). SFAS No. 133 is
effective for all fiscal years beginning after June 15, 2000, with earlier
application encouraged. SFAS No. 133 requires that an entity recognize all
derivative instruments as either assets or liabilities on its balance sheet at
their fair value. Changes in the fair value of derivatives are recorded each
period in current earnings or other comprehensive income, depending on whether a
derivative is designated as part of a hedge transaction, and, if it is, the type
of hedge transaction. The Company believes that adoption of this standard will
not have a material impact on the Company's financial position or results of
operations.
On December 3, 1999, the Securities and Exchange Commission (SEC) staff released
Staff Accounting Bulletin (SAB) No. 101, "Revenue Recognition", as amended by
SAB No. 101A, to provide guidance on the recognition, presentation and
disclosure of revenue in financial statements. SAB No. 101 explains the SEC
staff's general framework for revenue recognition, stating that certain criteria
need to be met in order to recognize revenue. SAB No. 101 also addresses the
question of gross vs. net revenue presentation and financial statement and
Management's Discussion and Analysis (MD&A) disclosures related to revenue
recognition. The adoption of SAB No. 101 in fiscal year 2001 is not expected to
have a material effect on the Company's financial statements.
In March 2000, the FASB issued FASB Interpretation No. 44 (FIN44), "Accounting
for Certain Transactions Involving Stock Compensation." The provisions of FIN44,
which were effective on July 1, 2000, have not had a material effect on the
Company's financial position or results of operations.
Management Changes
On May 30, 2000, our board of directors appointed Manuel Occiano as president
and chief executive officer. Mr. Occiano assumed management responsibility for
the daily operations and reports directly to the board. Mr. Occiano succeeds
John Hindman, who had been serving as the interim chief executive officer since
December 22, 1999.
Mr. Kenneth Leighton was appointed to the offices of secretary and interim chief
financial officer by the board of directors on July 25, 2000.
Mr. Russell Mohrmann was appointed to the office of executive vice president on
August 14, 2000.
Mr. Robert Perez was appointed to the office of senior vice president of sales
and marketing on August 14, 2000.
ITEM 7 FINANCIAL STATEMENTS
See "Index to Consolidated Financial Statements" for a listing of the
consolidated financial statements filed with this report.
ITEM 8 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
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<PAGE>
PART III
ITEM 9 DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Information required by this item will be contained in our proxy or information
statement to be filed with the Securities and Exchange Commission within 120
days after September 30, 2000 and is incorporated herein by reference.
Mr. Manuel Occiano was appointed president and chief executive officer on May
30, 2000, succeeding Mr. John Hindman. Mr. Occiano's biographical information
will be included in our proxy or information statement referenced above.
ITEM 10 EXECUTIVE COMPENSATION
The information required by this item will be contained in our proxy or
information statement to be filed with the Securities and Exchange Commission
within 120 days after September 30, 2000 and is incorporated herein by
reference.
ITEM 11 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item will be contained in our proxy or
information statement to be filed with the Securities and Exchange Commission
within 120 days after September 30, 2000 and is incorporated herein by
reference.
ITEM 12 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item will be contained in our proxy or
information statement to be filed with the Securities and Exchange Commission
within 120 days after September 30, 2000 and is incorporated herein by
reference.
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<PAGE>
PART IV
ITEM 13. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(A) DOCUMENTS FILED AS PART OF THIS REPORT:
(1) Financial Statements
The financial statements required by this item are submitted in a separate
section beginning on Page F-1 of this Annual Report on Form 10-KSB:
Report of Arthur Andersen LLP,
Independent Auditors.......................... F-2
Consolidated Balance Sheets as of September
30, 2000 and 1999............................. F-3
Consolidated Statements of Operations for
the Years ended September 30, 2000 and 1999... F-4
Consolidated Statements of Shareholders'
Equity for the Years Ended September 30, 2000
and 1999...................................... F-5
Consolidated Statements of Cash Flows
for the Years Ended September 30, 2000
and 1999...................................... F-6 to F-7
Notes to Consolidated Financial
Statements.................................... F-8 to F-24
(2) Financial Statement Schedules
Financial statement schedules have been omitted since they are either not
required or not applicable, or the information is otherwise included.
(3) Each management contract or compensatory plan or arrangement required to
be filed as an exhibit to this Form 10-KSB has been identified with an
asterisk ("*") in the table of exhibits set forth below at item 13(c).
(B) REPORTS ON FORM 8-K
A Current Report on Form 8-K was filed on August 29, 2000
(C) EXHIBITS
The exhibits listed below are required by Item 601 of Regulation S-B.
Exhibit Name of Exhibit
------- ---------------
2.1 Definitive Purchase Agreement and Plan of Reorganization dated
September 12, 1995 (incorporated by reference from September 12, 1995
Form 8-K, Exhibit 7(b)(i))
2.2 Purchase Agreement by and among RevCare, CPS, Impact, RBA, Insource,
Russell Mohrmann, Suzette Mohrmann, Robert Perez, Barbara Perez and
Maureen Brooks dated May 30, 2000 (incorporated by reference from June
14, 2000 Form 8-K, Exhibit 2.1)
2.3 Asset Purchase Agreement by and among RevCare, CPS, HELP, Russell
Mohrmann, Suzette Mohrmann and Allen Berman dated May 30, 2000
(incorporated by reference from June 14, 2000 Form 8-K, Exhibit 2.2)
3.1 Amended and Restated Articles of Incorporation as filed with the
Secretary of State of Nevada on December 7, 1995 (incorporated by
reference from December 20, 1995 Form 8-K, Exhibit 3.1)
3.2 Bylaws of RevCare (incorporated by reference from RevCare's
registration statement on Form S-18 (SEC No. 233-12361-LA) filed on
March 18, 1987, Exhibit 3.2)
3.3 Certificate of Determination re: Series A Preferred Stock
(incorporated by reference from December 27, 1996 Form 10-KSB, Exhibit
3.3)
3.4 Certificate of Amendment of Articles of Incorporation as filed with
the Secretary of State of Nevada on August 9, 2000 (incorporated by
reference from August 29, 2000 Form 8-K, Exhibit 4.3)
4.1 Specimen of Common Stock of RevCare (incorporated by reference from
RevCare's Form 8-K filed on December 20, 1995, Exhibit 4.2)
4.2 Investor's Rights Agreement by and among RevCare and FBR Financial
Fund II, L.P., dated May 30, 2000 (incorporated by reference from June
14, 2000 Form 8-K, Exhibit 99.2)
4.3 Investors' Rights Agreement by and among RevCare, CPS, RBA, Insource,
HELP, Russell Mohrmann, Suzette Mohrmann, Robert Perez and Barbara
Perez dated August 14, 2000 (incorporated by reference from August 29,
2000 Form 8-K, Exhibit 4.4)
*10.1 1995 Stock Option Plan of RevCare (incorporated by reference from
RevCare's Form 8-K filed on December 20, 1995, Exhibit 10.2)
10.2 Preferred Stock Purchase Agreement dated September 30, 1996
(incorporated by reference from RevCare's Form 10-KSB filed on
December 27, 1996)
10.3 Warrant to Purhase 400,000 Shares of Common Stock dated February 12,
1999 issued to Batchelder & Partners, Inc. (incorporated by reference
from RevCare's Form 10- QSB filed on February 12, 1999)
*10.4 Employment Agreement between CPS and Russell Mohrmann dated August 14,
2000 (incorporated by reference from August 29, 2000 Form 8-K, Exhibit
10.1)
*10.5 Employment Agreement between RevCare and Robert Perez dated August 14,
2000 (incorporated by reference from August 29, 2000 Form 8-K, Exhibit
10.2)
*10.6 Employment Agreement between RevCare and Manuel Occiano dated May 30,
2000
10.7 Common Stock Purchase Agreement by and between RevCare and FBR
Financial Fund, II, L.P., dated May 30, 2000 (incorporated by
reference from June 14, 2000 Form 8-K, Exhibit 10.1)
10.8 Voting Agreement by and among the Company, FBR Financial Fund II, L.P.
and Pacific Life Insurance Company, dated May 30, 2000 (incorporated
by reference from RevCare's June 14, 2000 Form 8-K, Exhibit 99.1)
10.9 Forms of Secured Convertible Promissory Notes issued by the Company
dated August 14, 2000 (incorporated by reference from August 29, 2000
Form 8-K, Exhibit 4.5)
27 Financial Data Schedule
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<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
REVCARE, INC.
Date: January 12, 2001
By: /s/ Manuel Occiano
-------------------
Manuel Occiano
President and
Chief Executive Officer
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
date indicated.
Signatures Title Date Signed
--------------------------------------------------------------------------
/s/ George McCabe, Jr. Director January 12, 2001
----------------------
George McCabe, Jr.
/s/ Edward Wheeler Director January 12, 2001
------------------
Edward Wheeler
/s/ Diane W. Dales Director January 12, 2001
------------------
Diane W. Dales
/s/ Manuel Occiano Chief Executive Officer January 12, 2001
------------------
Manuel Occiano
/s/ Kenneth Leighton Chief Financial Officer and January 12, 2001
--------------------
Kenneth Leighton Principal Accounting Officer
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<PAGE>
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
--------------------------------------------------------------------------------
2.1 Definitive Purchase Agreement and Plan of Reorganization dated
September 12, 1995 (incorporated by reference from September 12, 1995
Form 8-K, Exhibit 7(b)(i))
2.2 Purchase Agreement by and among RevCare, CPS, Impact, RBA, Insource,
Russell Mohrmann, Suzette Mohrmann, Robert Perez, Barbara Perez and
Maureen Brooks dated May 30, 2000 (incorporated by reference from June
14, 2000 Form 8-K, Exhibit 2.1)
2.3 Asset Purchase Agreement by and among RevCare, CPS, HELP, Russell
Mohrmann, Suzette Mohrmann and Allen Berman dated May 30, 2000
(incorporated by reference from June 14, 2000 Form 8-K, Exhibit 2.2)
3.1 Amended and Restated Articles of Incorporation as filed with the
Secretary of State of Nevada on December 7, 1995 (incorporated by
reference from December 20, 1995 Form 8-K, Exhibit 3.1)
3.2 Bylaws of RevCare (incorporated by reference from RevCare's
registration statement on Form S-18 (SEC No. 233-12361-LA) filed on
March 18, 1987, Exhibit 3.2)
3.3 Certificate of Determination re: Series A Preferred Stock
(incorporated by reference from December 27, 1996 Form 10-KSB, Exhibit
3.3)
3.4 Certificate of Amendment of Articles of Incorporation as filed with
the Secretary of State of Nevada on August 9, 2000 (incorporated by
reference from August 29, 2000 Form 8-K, Exhibit 4.3)
4.1 Specimen of Common Stock of RevCare (incorporated by reference from
RevCare's Form 8-K filed on December 20, 1995, Exhibit 4.2)
4.2 Investor's Rights Agreement by and among RevCare and FBR Financial
Fund II, L.P., dated May 30, 2000 (incorporated by reference from June
14, 2000 Form 8-K, Exhibit 99.2)
4.3 Investors' Rights Agreement by and among RevCare, CPS, RBA, Insource,
HELP, Russell Mohrmann, Suzette Mohrmann, Robert Perez and Barbara
Perez dated August 14, 2000 (incorporated by reference from August 29,
2000 Form 8-K, Exhibit 4.4)
*10.1 1995 Stock Option Plan of RevCare (incorporated by reference from
RevCare's Form 8-K filed on December 20, 1995, Exhibit 10.2)
10.2 Preferred Stock Purchase Agreement dated September 30, 1996
(incorporated by reference from RevCare's Form 10-KSB filed on
December 27, 1996)
10.3 Warrant to Purhase 400,000 Shares of Common Stock dated February 12,
1999 issued to Batchelder & Partners, Inc. (incorporated by reference
from RevCare's Form 10- QSB filed on February 12, 1999)
*10.4 Employment Agreement between CPS and Russell Mohrmann dated August 14,
2000 (incorporated by reference from August 29, 2000 Form 8-K, Exhibit
10.1)
*10.5 Employment Agreement between RevCare and Robert Perez dated August 14,
2000 (incorporated by reference from August 29, 2000 Form 8-K, Exhibit
10.2)
*10.6 Employment Agreement between RevCare and Manuel Occiano dated May 30,
2000
10.7 Common Stock Purchase Agreement by and between RevCare and FBR
Financial Fund, II, L.P., dated May 30, 2000 (incorporated by
reference from June 14, 2000 Form 8-K, Exhibit 10.1)
10.8 Voting Agreement by and among the Company, FBR Financial Fund II, L.P.
and Pacific Life Insurance Company, dated May 30, 2000 (incorporated
by reference from RevCare's June 14, 2000 Form 8-K, Exhibit 99.1)
10.9 Forms of Secured Convertible Promissory Notes issued by the Company
dated August 14, 2000 (incorporated by reference from August 29, 2000
Form 8-K, Exhibit 4.5)
27 Financial Data Schedule
-23-
<PAGE>
REVCARE, INC. AND SUBSIDIARIES
Consolidated Financial Statements
As of September 30, 2000 and 1999
Index to Consolidated Financial Statements
------------------------------------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Public Accountants F-2
Financial Statements:
Consolidated Balance Sheets as of September 30, 2000 and 1999 F-3
Consolidated Statements of Operations for the Years Ended
September 30, 2000 and 1999 F-4
Consolidated Statements of Shareholders' Equity for the
Years Ended September 30, 2000 and 1999 F-5
Consolidated Statements of Cash Flows for the Years Ended
September 30, 2000 and 1999 F-6 to F-7
Notes to Consolidated Financial Statements F-8 to F-24
</TABLE>
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of
RevCare, Inc.:
We have audited the accompanying consolidated balance sheets of RevCare, Inc.
(formerly known as Cypress Financial Services, Inc.), a Nevada Corporation, and
subsidiaries as of September 30, 2000 and 1999, and the related consolidated
statements of operations, shareholders' equity and cash flows for the years then
ended. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of RevCare, Inc. and
subsidiaries as of September 30, 2000 and 1999, and the results of their
operations and their cash flows for the years then ended in conformity with
accounting principles generally accepted in the United States.
ARTHUR ANDERSEN LLP
Orange County, California
January 9, 2001
F-2
<PAGE>
REVCARE, INC. AND SUBSIDIARIES
Consolidated Balance Sheets - September 30, 2000 and 1999
<TABLE>
<CAPTION>
Assets
------
2000 1999
------------ -----------
<S> <C> <C>
Cash $ 548,399 $ 501,557
Restricted cash 390,261 411,815
Accounts receivable, net of allowance for doubtful accounts of $187,753
and $400,000, respectively 1,364,209 180,877
Portfolio receivables, net 514,885 905,220
Property, net 3,187,802 3,127,869
Notes receivable from officers 100,000 150,000
Prepaid expenses and other 101,788 149,684
Goodwill, net 10,798,126 -
------------ -----------
Total assets $ 17,005,470 $ 5,427,022
============ ===========
Liabilities and Shareholders' Equity
------------------------------------
Accounts payable $ 327,284 $ 54,113
Trust payables 390,261 411,815
Accrued liabilities 1,137,249 330,330
Notes payable 2,616,724 1,823,510
Capital lease obligations 296,109 360,883
Notes payable to related party 3,675,000 -
------------ -----------
Total liabilities 8,442,627 2,980,651
------------ -----------
Commitments and Contingencies
Shareholders' Equity:
Series A convertible, redeemable preferred stock, $0.001 par value,
stated at $2.00 liquidation preference per share, 5,000,000
shares authorized; 345,000 shares issued and outstanding 690,000 690,000
Common stock, $0.001 par value; 50,000,000 shares authorized;
21,526,909 and 6,527,571 shares issued and outstanding in
2000 and 1999, respectively 21,520 6,527
Paid-in capital 10,658,282 3,622,403
Accumulated deficit (2,756,959) (1,870,287)
------------ -----------
8,612,843 2,448,643
Less common stock in treasury at cost, 33,000 and 662 shares, respectively 50,000 2,272
------------ -----------
Total shareholders' equity 8,562,843 2,446,371
------------ -----------
$ 17,005,470 $ 5,427,022
============ ===========
</TABLE>
The accompanying notes are an integral part of these consolidated
balance sheets.
F-3
<PAGE>
REVCARE, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
For the Years Ended September 30, 2000 and 1999
<TABLE>
<CAPTION>
2000 1999
----------- ----------
<S> <C> <C>
Revenues:
Service fees $5,232,329 $ 4,133,188
Portfolio receivables revenue 554,151 936,819
Net gain on sale of portfolio receivables - 171,192
---------- -----------
5,786,480 5,241,199
---------- -----------
Operating Expenses:
Salaries, wages and related benefits 4,068,836 4,370,710
Selling, general and administrative 1,964,810 2,044,205
Losses on portfolio receivables 341,645 548,014
Depreciation and amortization 279,868 198,697
---------- -----------
6,655,159 7,161,626
---------- -----------
Loss from Operations (868,679) (1,920,427)
---------- -----------
Other Income (Expense):
Interest expense, net (139,436) (117,690)
Rental operations, net 121,443 89,041
---------- -----------
(17,993) (28,649)
---------- -----------
Loss before Provision (Benefit) for Income Taxes (886,672) (1,949,076)
Provision (Benefit) for Income Taxes - (455,964)
---------- -----------
Net Loss $ (886,672) $(1,493,112)
========== ===========
Loss per share:
Basic $ (0.05) $ (0.23)
Diluted $ (0.05) $ (0.23)
Number of shares used in computing earnings per share:
Basic 16,979,025 6,527,225
Diluted 16,979,025 6,527,225
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
F-4
<PAGE>
REVCARE, INC. AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity
For the Years Ended September 30, 2000 and 1999
<TABLE>
<CAPTION>
Series A Convertible,
Redeemable
Preferred Stock Common Stock Total
------------------- --------------------- Treasury Paid-in Accumulated Shareholders'
Shares Amount Shares Amount Stock Capital Deficit Equity
------- -------- ---------- -------- --------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCES, at September 30,
1998 345,000 $690,000 6,527,571 $ 6,527 $ - $ 3,522,403 $ (377,175) $ 3,841,755
Common stock repurchased - - - - (2,272) - - (2,272)
Warrant issued - - - - - 100,000 - 100,000
Net loss - - - - - - (1,493,112) (1,493,112)
------- -------- ---------- ------- -------- ----------- ----------- -----------
BALANCES, at September 30,
1999 345,000 690,000 6,527,571 6,527 (2,272) 3,622,403 (1,870,287) 2,446,371
Retirement of treasury
stock - - (662) (7) 2,272 (2,265) - -
Common stock issued, net - - 15,000,000 15,000 - 7,038,144 - 7,053,144
Common stock repurchased - - - - (50,000) - - (50,000)
Net loss - - - - - - (886,672) (886,672)
------- -------- ---------- ------- -------- ----------- ----------- -----------
BALANCES, at September 30,
2000 345,000 $690,000 21,526,909 $21,520 $(50,000) $10,658,282 $(2,756,959) $ 8,562,843
======= ======== ========== ======= ======== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
F-5
<PAGE>
REVCARE, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Years Ended September 30, 2000 and 1999
<TABLE>
2000 1999
----------- ------------
<S> <C> <C>
Cash Flows from Operating Activities:
Net loss $ (886,672) $ (1,493,112)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 305,053 217,101
Losses on portfolio receivables 341,645 548,014
Issuance of warrant - 100,000
Changes in operating assets and liabilities:
Decrease in restricted cash 21,554 6,353
(Increase) decrease in accounts receivable, net (186,061) 212,909
(Increase) decrease in portfolio receivables 48,690 (688,201)
(Increase) decrease in prepaid expenses and other 146,790 (32,331)
Increase (decrease) in accounts payable 133,983 (217)
Decrease in trust payables (21,554) (6,353)
Increase in accrued liabilities 16,986 153,016
Decrease in deferred income taxes - (450,189)
----------- ------------
Net cash used in operating activities (79,586) (1,433,010)
----------- ------------
Cash Flows from Investing Activities:
Purchases of property (109,228) (347,403)
Proceeds from sale of property - 26,483
Acquisition of OCPS, net of cash acquired (6,733,670) -
----------- ------------
Net cash used in investing activities (6,842,898) (320,920)
----------- ------------
Cash Flows from Financing Activities:
Issuance of common stock, net 7,053,144 -
Purchases of common stock - (2,272)
Net loans to officers - 2,013
Principal payments on notes payable (19,044) (20,233)
Principal payments on capital lease obligations (64,774) (53,772)
----------- ------------
Net cash provided by (used in) financing activities 6,969,326 (74,264)
----------- ------------
Net Increase (Decrease) in Cash 46,842 (1,828,194)
Cash, at beginning of year 501,557 2,329,751
----------- ------------
Cash, at end of year $ 548,399 $ 501,557
=========== ============
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
F-6
<PAGE>
<TABLE>
2000 1999
------------- ----------
<S> <C> <C>
Supplemental Disclosure of Cash Flow Information -
Cash paid during the period for:
Interest $ 243,365 $ 189,816
============= ==========
Income taxes $ - $ 2,080
============= ==========
</TABLE>
Supplemental Disclosure of Noncash Investing, Financing and Operating
Activities-
On August 14, 2000, the Company issued notes payable of $4,200,000 in
conjunction with the acquisition of OCPS.
During the year ended September 30, 2000, the Company forgave a $50,000 note
receivable from a former officer in exchange for 33,000 shares of the
Company's common stock.
On February 12, 1999, the Company issued a warrant to Batchelder & Partners,
Inc. to purchase up to 400,000 shares of its common stock in exchange for
services provided. These services were valued at $415,000, of which $100,000
was recognized during the year ended September 30, 1999.
The Company entered into four capital leases during the year ended September
30, 1999. The value of the property purchased totaled $272,857.
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
<PAGE>
REVCARE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 2000
1. Organization and Basis of Presentation
--------------------------------------
RevCare, Inc. (formerly known as Cypress Financial Services, Inc.), a Nevada
corporation, (together with its subsidiaries, the Company), provides accounts
receivable management, administration, and debt collection services primarily to
health care providers and consumer credit issuers. The Company also acquires
accounts receivable and other consumer obligations for its own collection
portfolio.
The Company operates primarily through wholly owned subsidiaries that serve
specific industries. The Company's subsidiaries include: (i) Orange County
Professional Services Inc. dba California Professional Services (OCPS), a
company that provides collection services, billing services, outsourcing and
temporary staffing services, and specialty consulting services primarily in the
healthcare industry; (ii) Impact Seminars and Consulting, Inc. (Impact); (iii)
Merchants Recovery Services, Inc. (MRSI), a company that primarily offers
accounts receivable collection services to banks, credit unions, public
utilities, and retailers; (iv) Medical Control Services, Inc. (MCSI), a
collection agency servicing the health care industry; (v) Lien Solutions, Inc.
(LSI), a company that specializes in the recovery of unpaid worker's
compensation claims primarily for healthcare service providers, including
hospitals and doctors; (vi) My Boss, Inc. dba Business Office Support Services
(BOSS), a company that provides pre-collection consulting and credit monitoring
services to medical providers and other businesses that extend credit; and (vii)
Pacific Process Serving, Inc. (PPS), a statewide legal document process service
company.
2. Summary of Significant Accounting Policies
------------------------------------------
a. Principles of Consolidation
---------------------------
The consolidated financial statements include the accounts of RevCare, Inc.
and its wholly owned subsidiaries. All significant intercompany accounts
have been eliminated in consolidation.
b. Use of Estimates
----------------
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to
make certain 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 the reported amounts of
revenues and expenses during the reported periods. Actual results could
materially differ from those estimates.
F-8
<PAGE>
c. Revenue Recognition
-------------------
i. Service Fees
------------
The Company provides collection services for entities in the commercial,
retail and medical industries for a fee. Service fees are reported as
income when earned. Servicing costs are charged to expense as incurred.
ii. Portfolio Receivables
---------------------
Portfolio receivables (Receivables) represent liquidating portfolios of
delinquent accounts which have been purchased by the Company for
collection and are stated at the lower of cost or net realizable value.
Cost is reduced by cash collections on an account by account basis until
such time that aggregate collections equal the original cost. Net
realizable value represents management's estimate of the remaining net
proceeds to be realized from a given portfolio, based on an account by
account evaluation of the remaining uncollected delinquent receivables
and on the historical collection experience of the specific portfolio
and similar portfolios. Revenues from collections on purchased
portfolios of receivables are recognized on an account by account basis
after the cost of each account has been recovered. Gains and losses are
recorded as appropriate when Receivables are sold. The Company considers
a transfer of Receivables where the Company surrenders control over the
Receivables a sale to the extent that consideration other than
beneficial interests in the transferred Receivables is received in
exchange for the Receivables.
iii. Residual Interests in Securitizations and Gain on Sale of
---------------------------------------------------------
Portfolio Receivables
---------------------
The Company purchases certain Receivables with the intention of
reselling them to investors as asset-backed securities through
securitizations. During 1998, the Company completed its first
securitization. The securitizations will generally be structured as
follows: First, the Company sells a portfolio of Receivables to a wholly
owned subsidiary which has been established for the limited purpose of
buying and reselling the Company's Receivables. This wholly owned
subsidiary in turn issues interest-bearing asset-backed securities (the
Certificates) which are purchased by one or more investors. The proceeds
from the sale of the Certificates are then used to purchase the
Receivables from the Company. In addition, the Company provides a credit
enhancement for the benefit of the investors in the form of an initial
cash deposit to a specific account held by the trust which is required
to be maintained at specific levels.
At the closing of a securitization, the Company removes from its
consolidated balance sheet the Receivables sold and adds to its
consolidated balance sheet (i) the cash received and (ii) the basis
associated with the portion of the Receivables retained from the
securitizations (Residuals), which relates to (a) the cash held on
deposit by the trust and (b) the discounted cash flows to be received by
the trust in the future. The excess of the cash received and the assets
retained by the Company over the carrying value of the Receivables sold,
less transaction costs, equals the net gain on sale of Receivables
recorded by the Company.
In future periods, the Company will recognize additional revenue from
the Residuals if the actual performance of the Receivables is higher
than the original estimate or the Company may increase the estimated
fair value of the Residuals. If the actual performance of the
Receivables is lower than the original estimate, then an adjustment to
the carrying value of the Residuals may be required if the estimated
fair value of the Residuals is less than the carrying value. As of
September 30, 2000 and 1999, the carrying value of the Residuals was $0
and $36,098, respectively.
F-9
<PAGE>
The Company is responsible for the ongoing servicing of the
Receivables. The Company has recorded a liability of $140,000 based on
the present value of the estimated costs to service the Receivables
less the estimated servicing fees over the remaining life of the
Receivables.
The Company did not complete any securitzations during the years ended
September 30, 2000 and 1999.
d. Property
--------
Furniture, fixtures and equipment are carried at cost and depreciated using
both straight-line and accelerated methods over the estimated useful lives
of the assets, which are generally 5 to 7 years. The building is being
depreciated over a period of 39 years.
Repairs and maintenance are charged to expense as incurred; replacements
and betterments are capitalized.
e. Trust Accounts and Restricted Cash
----------------------------------
The Company maintains trust accounts for the benefit of its customers.
Related funds are deposited in trust bank accounts and reflected as a trust
liability until such amounts held in trust are remitted to customers. The
trust accounts cash balances of $390,261 and $411,815 are reflected as
restricted cash and trust payables in the accompanying consolidated balance
sheets at September 30, 2000 and 1999, respectively.
f. Fair Value of Financial Instruments
-----------------------------------
Fair values of financial instruments are estimated using available market
information and other valuation methodologies. The fair values of the
Company's financial instruments are estimated to approximate the related
book value, unless otherwise indicated.
g. Goodwill
--------
Goodwill represents the excess of cost over the fair value of assets
acquired and is amortized using the straight-line method over 20 years. The
Company assesses its intangible assets for impairment periodically.
h. Earnings Per Share
------------------
The Company reports basic and diluted earnings per share (EPS) for common
and converted preferred stock. Basic EPS is computed by dividing reported
earnings by weighted average shares outstanding. Diluted EPS is computed
by adding to the weighted average shares the dilutive effect if stock
options and warrants were exercised into common stock.
F-10
<PAGE>
For the year ended September 30, 2000, the computations of basic and
diluted EPS were as follows:
<TABLE>
<CAPTION>
Basic EPS Diluted EPS
------------ ------------
<S> <C> <C>
Numerator - net loss $ (886,672) $ (886,672)
Denominator - weighted average shares
outstanding 16,979,025 16,979,025
----------- -----------
Loss per share $ (0.05) $ (0.05)
=========== ===========
</TABLE>
For the year ended September 30, 1999, the computations of basic and
diluted EPS were as follows:
<TABLE>
<CAPTION>
Basic EPS Diluted EPS
----------- -----------
<S> <C> <C>
Numerator - net loss $(1,493,112) $(1,493,112)
Denominator - weighted average shares
outstanding 6,527,225 6,527,225
----------- -----------
Loss per share $ (0.23) $ (0.23)
=========== ===========
</TABLE>
For the years ended September 30, 2000 and 1999, the denominator in the
diluted EPS computation was the same as the denominator for basic EPS due
to the antidilutive effects of preferred stock, warrants and stock options
on the Company's net loss. As of September 30, 2000 and 1999, the Company
had outstanding warrants and stock options of 1,880,508 and 1,187,050,
respectively, that were antidilutive.
i. Income Taxes
------------
The Company accounts for income taxes using the asset and liability method.
Under this method, deferred tax assets and liabilities are determined based
on differences between the financial reporting and the tax basis of assets
and liabilities and are measured using the enacted tax rates and laws that
will be in effect when the differences are expected to reverse. A
valuation allowance is provided for certain deferred tax assets if it is
more likely than not that the Company will not realize tax assets through
future operations.
j. Stock Option Plan
-----------------
As permitted by Statement of Financial Accounting Standards (SFAS) No. 123,
"Accounting for Stock-Based Compensation," the Company accounts for stock-
based employee compensation plans in accordance with Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees," and
related interpretations. The Company provides the pro forma net earnings,
pro forma earnings per share, and stock based compensation plan disclosure
requirements set forth in SFAS No. 123.
F-11
<PAGE>
k. Rental Operations
-----------------
The Company leases a portion of its building to unrelated parties.
Management allocates certain costs incurred to rental operations based on a
ratio of square footage to the total square footage of the respective
building. The results of rental operations for the years ended September 30,
2000 and 1999 are as follows:
<TABLE>
<CAPTION>
2000 1999
-------- --------
<S> <C> <C>
Rental income $273,309 $192,512
Interest expense (40,771) (39,829)
Depreciation and amortization (25,185) (12,473)
Utilities and other (85,910) (51,169)
-------- --------
$121,443 $ 89,041
======== ========
</TABLE>
l. Recent Accounting Pronouncements
--------------------------------
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities" as
amended in June 1999 by SFAS No. 137, "Accounting for Derivative Instruments
and Hedging Activities - Deferral of the Effective Date of FASB Statement
No. 133," and in June 2000, by SFAS No. 138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities," (collectively SFAS
No. 133). SFAS No. 133 is effective for all fiscal years beginning after
June 15, 2000, with earlier application encouraged. SFAS No. 133 requires
that an entity recognize all derivative instruments as either assets or
liabilities on its balance sheet at their fair value. Changes in the fair
value of derivatives are recorded each period in current earnings or other
comprehensive income, depending on whether a derivative is designated as
part of a hedge transaction, and, if it is, the type of hedge transaction.
The Company believes that adoption of this standard will not have a material
impact on the Company's financial position or results of operations.
On December 3, 1999, the Securities and Exchange Commission (SEC) staff
released Staff Accounting Bulletin (SAB) No. 101, "Revenue Recognition", as
amended by SAB No. 101A, to provide guidance on the recognition,
presentation and disclosure of revenue in financial statements. SAB No. 101
explains the SEC staff's general framework for revenue recognition, stating
that certain criteria need to be met in order to recognize revenue. SAB No.
101 also addresses the question of gross vs. net revenue presentation and
financial statement and Management's Discussion and Analysis (MD&A)
disclosures related to revenue recognition. The adoption of SAB No. 101 in
fiscal year 2001 is not expected to have a material effect on the Company's
financial statements.
In March 2000, the FASB issued FASB Interpretation No. 44 (FIN44),
"Accounting for Certain Transactions Involving Stock Compensation." The
provisions of FIN44, which were effective on July 1, 2000, have not had a
material effect on the Company's financial position or results of
operations.
m. Reclassification
----------------
Certain amounts in the accompanying 1999 financial statements have been
reclassified to conform to 2000 presentation.
F-12
<PAGE>
3. Acquisition and Goodwill
------------------------
On August 14, 2000, the Company completed the purchase of all of the outstanding
stock of OCPS and its wholly owned subsidiary, Impact. Concurrent with this
acquisition, OCPS acquired substantially all of the assets of RBA Remcare, Inc.,
Insource Medical Solutions, LLC and Hospital Employee Labor Pool, affiliates of
OCPS.
This acquisition was accounted for using the purchase method of accounting. The
excess of the purchase price over the fair value of the net assets acquired was
recorded as goodwill. The operations of OCPS have been included in the
accompanying consolidated financial statements from the date of acquisition.
Below is a summary of the OCPS acquisition, subject to post closing adjustments:
<TABLE>
<CAPTION>
<S> <C>
Fair value of tangible assets acquired $ 1,317,668
Goodwill acquired 10,865,614
Liabilities assumed (1,216,216)
-----------
Acquisition price 10,967,066
Less cash acquired (33,396)
Less notes payable issued for acquisition (4,200,000)
-----------
Net cash paid for acquisition $ 6,733,670
===========
Had the acquisition occurred at the beginning of the prior fiscal year, the pro
forma results would be as follows:
2000 1999
----------- -----------
(unaudited) (unaudited)
<S> <C> <C>
Revenues $14,375,441 $13,929,680
Net loss $(1,252,971) $(1,598,738)
Diluted earnings per share $ (.07) $ (0.24)
Diluted weighted average shares outstanding 16,979,025 6,527,225
</TABLE>
F-13
<PAGE>
4. Portfolio Receivables
---------------------
The cost basis of portfolio receivables (Receivables) activity consists of the
following as of September 30, 2000 and 1999 and for the years then ended:
<TABLE>
<CAPTION>
<S> <C>
Portfolio receivables at September 30, 1998 $ 765,033
Purchases of portfolio receivables 1,100,885
Increase in allowance for losses on portfolio receivables (548,014)
Collections applied to cost basis (124,306)
Sales of portfolio receivables applied to cost basis (288,378)
----------
Portfolio receivables at September 30, 1999 905,220
Purchases of portfolio receivables -
Increase in allowance for losses on portfolio receivables (341,646)
Collections applied to cost basis (48,689)
Sales of portfolio receivables applied to cost basis -
----------
Portfolio receivables at September 30, 2000 $ 514,885
==========
</TABLE>
For the years ended September 30, 2000 and 1999, the Company had gross
collections from the Receivables of $602,840 and $1,061,125, respectively. After
applying $48,689 and $124,306 to the cost basis for the years ended September
30, 2000 and 1999, respectively, $554,151 and $936,819 was recognized as
portfolio receivables revenue in the accompanying consolidated statements of
operations.
For the year ended September 30, 1999, the Company had proceeds from sales of
the Receivables of $459,570. After applying $288,378 to the cost basis, $171,192
was recognized as net gain on sale of portfolio receivables in the accompanying
consolidated statements of operations. There were no sales of portfolio
receivables in the year ended September 30, 2000.
On August 14, 1998 the Company sold Receivables with a book value of $224,634 to
a wholly-owned subsidiary for $2,750,000, which issued interest-bearing asset-
backed securities to Pacific Life Insurance Company for the same amount. The
Company considers the transfer of Receivables where the Company surrenders
control over the Receivables a sale and does not include the wholly-owned
subsidiary in its consolidated financial statements. For the years ended
September 30, 2000 and 1999, the Company had gross collections from these
Receivables of $848,761 and $1,442,414, respectively, of which $179,128 and
$321,190 was recognized as service fee revenue in the accompanying consolidated
statements of operations.
Due to the nature of these Receivables, there is no assurance that historical
collection results will reflect the future collectibility of the face value of
the Receivables.
F-14
<PAGE>
5. Related Party Transactions
--------------------------
On July 2, 1998 Pacific Life Insurance Company (Pacific Life) purchased
2,000,000 shares of common stock from the Company, representing 28 percent of
the outstanding common stock of the Company on a fully diluted basis for
$3,000,000.
On August 14, 1998 the Company sold Receivables with a book value of $224,634 to
a wholly owned subsidiary for $2,750,000, which issued interest-bearing asset-
backed securities to Pacific Life for the same amount. As permitted by SFAS No.
125, the Company considers a transfer of Receivables where the Company
surrenders control over the Receivables a sale to the extent that consideration
other than beneficial interests in the transferred Receivables is received in
exchange for the Receivables. The sale resulted in a net gain of $2,363,148
which was recognized as net gain on sale of portfolio receivables in the
accompanying consolidated statements of operations and a carried residual
interest of $36,098. The Company continues to service the asset backed
securities and receives a 20 percent servicing fee.
In conjunction with the acquisition of OCPS on August 14, 2000 the Company
entered into $3,675,000 of Secured Convertible Promissory Notes to shareholders
and officers of OCPS, currently employees or officers of RevCare. All of these
notes bear interest at the rate of 8 percent per annum through August 2002, at
which time the unpaid principal balances and all accrued and unpaid interest are
due. At the option of the holder, the notes are convertible at $0.735 of any
unpaid principal balance into $.001 par value common stock.
6. Property
--------
Property consists of the following:
<TABLE>
<CAPTION>
2000 1999
---------- ----------
<S> <C> <C>
Land $ 866,575 $ 866,575
Building 1,540,577 1,540,577
Equipment and furnishings 1,613,548 2,378,448
---------- ----------
4,020,700 4,785,600
Less--Accumulated depreciation 832,898 1,657,731
---------- ----------
$3,187,802 $3,127,869
========== ==========
</TABLE>
Depreciation expense for the years ended September 30, 2000 and 1999 totaled
$235,354 and $209,060, respectively. At September 30, 2000 and 1999, the net
book value of equipment under capital leases was $251,044 and $379,711,
respectively. During the year ended September 30,2000, the Company removed
$1,055,483 of fully depreciated assets from its books.
7. Intangible Assets
-----------------
Intangible assets consist of the following at September 30, 2000:
Goodwill $10,865,614
Less--Accumulated amortization 67,488
-----------
$10,798,126
===========
F-15
<PAGE>
8. Lines of Credit
---------------
The Company has a line of credit, which permits borrowings up to a maximum of
$300,000 at the bank's reference rate plus two percent (11.5 percent at
September 30,2000). The line of credit expires on May 1, 2003. At September 30,
2000, borrowings on the line totaled $182,512. Borrowings are secured by
substantially all the assets of OCPS, including accounts receivable and
equipment, as well as guaranteed by principal owner of OCPS.
The Company has a line of credit, which permits borrowings up to a maximum of
$100,000, subject to an 8 percent interest rate. The line of credit expires on
February 10, 2001. At September 30, 2000, borrowings on the line totaled
$99,682.
9. Notes Payable
-------------
As of September 30, 2000 and September 30, 1999, notes payable consists of the
following:
<TABLE>
<CAPTION>
2000 1999
---------- ----------
<S> <C> <C>
Note payable to a bank, collateralized by land and a building, due in monthly
payments of $14,089, including interest at 8 percent per annum, through
December 2000, at which time the entire principal balance became due and payable. $1,802,002 $1,823,510
Note payable to a bank, interest at the bank's reference rate plus 2 percent
(11.5 percent at September 30, 2000), payments of $4,048 are due in monthly
installments through May 2001. The loan is secured by substantially all the
assets of the Insource division of OCPS, including accounts receivable and
equipment. 31,272 -
Convertible note payable to an individual, interest at 8 percent per annum,
payments of $23,744 are due in monthly installments through August 2002.
At the option of the holder, the note is convertible at $0.735 of any unpaid
principal balance into $.001 par value common stock. 501,256 -
---------- ----------
$2,334,530 $1,823,510
========== ==========
</TABLE>
Subsequent to year-end, the note collateralized by land and a building was
refinanced and now matures in January 2021. The Company entered into a
promissory note with a principal amount of $2,990,000 with a variable interest
rate of 2.5 percent plus the standard LIBOR.
F-16
<PAGE>
Annual maturities of notes payable at September 30, 2000 are as follows:
<TABLE>
<CAPTION>
Years Ending September 30,
--------------------------
<S> <C>
2001 $2,083,499
2002 251,031
----------
$2,334,530
==========
</TABLE>
10. Capital Transactions
--------------------
a. Series A Convertible, Redeemable Preferred Stock
------------------------------------------------
On September 30, 1996, the Company converted the balance of notes issued in
connection with the acquisition of MCSI totaling $690,000 into 345,000
shares of the Company's Series A convertible, redeemable preferred stock.
The preferred stock is convertible into shares of common stock at $1.50 per
share at the option of the holders, subject to antidilution provisions. The
Company has the right to redeem these preferred shares at $2.50 per share.
The holders of the Company's Series A convertible, redeemable preferred
shares are entitled to the same voting and dividend rights as the common
shareholders. Such preferred shares have a liquidation preference at $2.00
per share over common shareholders.
b. Common Stock
------------
Pursuant to an odd-lot tender offer dated January 30, 1999 whereby the
Company offered to purchase all outstanding shares of common stock held in
odd-lots of 1-99 shares at $3.00 per share and a minimum tender offer of
$5.00 to each tendering shareholder, the Company purchased 662 shares of
common stock through September 30, 1999 at an aggregate cost of $2,272.
On May 30, 2000, the Company sold 15,000,000 shares of its common stock to
FBR Financial Services Partners, L.P. (FBR), representing 69.8 percent of
the outstanding common stock of the Company on a fully diluted basis for
$7,500,000. Offering costs related to this investment totaled $446,856.
In August 2000, the Company forgave a $50,000 note receivable from a former
officer in exchange for 33,000 shares of the Company's common stock.
F-17
<PAGE>
c. Warrants and Stock Options
--------------------------
On February 12, 1999, the Company issued a warrant to Batchelder & Partners,
Inc. to purchase up to 400,000 shares of the Company's common stock in
connection with their agreement to act as the Company's non-exclusive
financial advisor. This warrant is subject to specific exercise prices
ranging from $1.75 to $4.75 with a weighted average exercise price of $3.06.
Additionally, this warrant is subject to vesting provisions whereas 100,000
shares vested immediately and the balance vests if and when certain defined
targets are achieved. The warrant is exercisable until November 13, 2005.
The fair value of the warrant was estimated to be $415,000 on the date of
grant using the Black Scholes pricing model with the following assumptions:
weighted average risk-free interest rate of 4.5 percent; a weighted average
volatility of 86.9 percent; an expected life of 6.75 years; and no expected
dividend yield. This amount will be recognized in the income statement
during the period the services are deemed to have been provided. During the
years ended September 30, 2000 and 1999, the Company recognized advisory
fees of $0 and $100,000, respectively, relating to this warrant. Any
remaining expense will be recognized in future periods if and when various
conditions have been met.
In 1995, the Company adopted, and the shareholders approved, the RevCare,
Inc. 1995 Stock Option Plan (the Plan) which authorized 450,000 stock option
grants to purchase the Company's common stock. In August 1998, the Board of
Directors and Shareholders approved a 500,000 share increase to the Plan
increasing the total number of shares reserved for issuance pursuant to the
Plan to 950,000. During fiscal year 2000, the Board of Directors and
Shareholders approved increasing the total number of shares reserved for
issuance pursuant to the Plan to 3,250,000.
The Plan provides for the grant by the Company of options to purchase shares
of the Company's common stock to its officers, directors, employees,
consultants and advisors. The Plan provides that it is to be administered by
a committee appointed by the Board of Directors (the Committee) all of whom
are "disinterested" under 16b-3 of the Securities Exchange Act of 1934, as
amended. The Committee has discretion, subject to the terms of the Plan, to
select the persons entitled to receive options under the Plan, the terms and
conditions on which options are granted, the exercise price, the time period
for vesting such shares, the number of shares subject thereto, and whether
such options shall qualify as "incentive stock options" within the meaning
of Section 422 of the Internal Revenue code, or "non-qualified stock
options."
The Company has granted 1,985,958 options under the Plan of which 505,450
have been forfeited. These options are issued at fair market value or at a
10 percent premium over fair market value if the individual is a 10 percent
or more shareholder. All options granted expire ten years from the date of
grant. At September 30, 2000, there were 1,769,492 additional shares
available for grant under the Plan.
F-18
<PAGE>
A summary of the status of the Plan at September 30, 2000 and 1999 and changes
during the years then ended is presented in the table and narrative below:
<TABLE>
<CAPTION>
September 30, 2000 September 30, 1999
--------------------- -------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
---------- -------- -------- --------
<S> <C> <C> <C> <C>
Outstanding at beg. of year 787,050 $ 1.27 797,300 $ 1.29
Granted 1,127,308 0.55 - -
Exercised - - - -
Forfeited (433,850) 1.36 (10,250) 2.75
--------- -------- ------- --------
Outstanding at end of year 1,480,508 $ 0.70 787,050 $ 1.27
========= ======== ======= ========
Exercisable at end of year 876,661 $ 0.83 567,050 $ 1.25
========= ======== ======= ========
Weighted average remaining
contractual life 9.03 8.63
======== ========
Weighted average fair value of
options granted $ 0.29 N/A
======== ========
</TABLE>
The fair value of each option grant is estimated on the date of grant using the
Black Scholes pricing model with the following assumptions used for the grants
in fiscal year 2000: weighted average risk-free interest rate of 5.5 percent; a
weighted average volatility of 107.5 percent; an expected life of 7 years; and
no expected dividend yield.
The Black Scholes pricing model was developed for use in estimating the fair
value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
F-19
<PAGE>
As permitted by SFAS No. 123, the Company continues to account for the Plan
based on APB Opinion No. 25, under which no compensation cost has been
recognized. Pro forma disclosures, as if the Company had adopted the cost
recognition method, are shown below. This alternative method recognizes the fair
value of stock options granted in net income during the period that the stock
options vest. Had compensation cost for stock options awarded under this plan
been determined consistent with this methodology, the Company's net income and
earnings per share would have reflected the following pro forma amounts:
<TABLE>
<CAPTION>
2000 1999
--------- -----------
<S> <C> <C> <C>
Net Loss: As Reported $(886,672) $(1,493,112)
Pro Forma $(891,766) $(1,596,612)
Basic EPS: As Reported $ (.05) $ (0.23)
Pro Forma $ (.05) $ (0.24)
Diluted EPS: As Reported $ (.05) $ (0.23)
Pro Forma $ (.05) $ (0.24)
</TABLE>
11. Commitments and Contingencies
-----------------------------
a. Lessee -- The Company leases certain office space and equipment under
non-cancelable operating and capital leases which expire at various
times through fiscal 2004. Future annual minimum lease payments, in
the aggregate, under operating and capital leases at September 30,
2000 are as follows:
<TABLE>
<CAPTION>
Years Ending September 30, Operating Capital
-------------------------- --------- ---------
<S> <C> <C>
2001 $ 86,447 $ 142,927
2002 36,003 88,034
2003 17,060 75,093
2004 - 64,877
--------- ---------
Total minimum lease payments $ 139,510 370,931
=========
Less - Amounts representing interest 74,822
---------
Present value of capital lease obligations $ 296,109
=========
</TABLE>
Rent expense under all operating leases totaled $11,997 in 2000 and
$10,808 in 1999.
F-20
<PAGE>
b. Lessor -- As discussed in Note 1, the Company leases a portion of its
building to unrelated entities under operating leases which expire at
various times through fiscal 2003. The Company leases to several tenants on
a month-to-month basis. Future annual collections under non-cancelable
operating leases as of September 30, 2000 are scheduled as follows:
<TABLE>
<CAPTION>
Years Ending September 30,
--------------------------
<S> <C>
2001 $ 135,849
2002 136,063
2003 104,957
----------
$ 376,869
==========
</TABLE>
c. Employment Agreements
---------------------
On May 30, 2000, the Company entered into a three-year employment agreement with
one of its officers. On August 14, 2000, the Company entered into a two-year and
a three-year employment agreement with two of its officers. The agreements
provide for annual salaries, paid vacations and other related benefits. The
minimum annual compensation pursuant to such agreements, excluding provisions
for fringe benefits (e.g., vacations, etc.), will be approximately $625,000,
$625,000 and $450,000 in fiscal years 2001, 2002 and 2003, respectively.
d. Litigation
----------
In December 1998, Federal Asset Factoring Corporation (Federal) filed a claim
against the Company for negligent misrepresentation. The Company sold certain
portfolio receivables (Receivables) to Track, Inc. (Track), which Track then
sold to Federal. Federal alleges that it was unable to obtain media on the
Receivables which resulted in lower than anticipated returns for Federal's
investors. Federal sued Track and obtained a judgment, but was unable to collect
on the judgment. Consequently, Federal sued the Company on the basis that Track
was acting as a broker for the Company when the Receivables were sold to
Federal. The case was settled in February 2000. A transfer of purchased bad debt
accounts held in the Company's portfolio was made to Federal with a cost basis
to the Company of $10,000.
In March 1999, DDT Medical Credit (DDT) filed a claim against the Company for
breach of contract. DDT contends it purchased certain Receivables from Towne
Medical Center (Towne) in May 1998 and simultaneously entered into an agreement
with the Company to bill and collect these Receivables. Although the Company had
been performing such services for Towne prior to May 1998, the agreement between
Towne and the Company was mutually terminated on May 15, 1998 and no agreement
was reached between DDT and the Company to continue such services. The case was
settled in February 2000. A transfer of purchased bad debt accounts held in the
Company's portfolio was made to DDT with a cost basis to the Company of $25,000.
F-21
<PAGE>
In addition to the litigation matters discussed above, the Company is
involved, from time to time, in litigation that is incidental to its
collection business. The Company regularly initiates legal proceedings as a
plaintiff in connection with its routine collection activities. In
management's opinion, none of these legal matters will have a material
adverse effect on the Company's financial position or the results of its
operations.
12. Income Taxes
------------
The benefits for income taxes for the years ended September 30, 2000 and 1999
are shown in the table below:
<TABLE>
<CAPTION>
2000 1999
-------- ----------
<S> <C> <C>
Federal:
Current $ - $ -
Deferred - (322,710)
State:
Current - (5,775)
Deferred - (127,479)
-------- ---------
Total tax benefit $ - $(455,964)
======== =========
</TABLE>
Although not affecting the total provision, actual income tax payments may
differ from the amounts shown as current as a result of the final determination
as to the timing of certain deductions and credits.
The total tax benefit differs from the Federal statutory rate of 34 percent for
the reasons shown in the table below:
<TABLE>
<CAPTION>
2000 1999
-------- --------
<S> <C> <C>
Federal statutory tax rate (34.0)% (34.0)%
State income taxes, net of Federal income
tax benefit (8.6) (4.8)
Other 1.2 (0.9)
Valuation Allowance 41.4 16.3
-------- --------
Actual tax benefit - % (23.4)%
======== ========
</TABLE>
Because certain items of income and expense are not recognized in the same year
in the financial statements of the Company as in its Federal and California tax
returns, deferred assets and liabilities are created. As of September 30, 2000
and 1999, the accompanying consolidated balance sheets reflect no deferred tax
assets. The net deferred tax assets as of September 30, 2000 and 1999 are
disclosed in the table below:
F-22
<PAGE>
<TABLE>
<CAPTION>
2000 1999
---------- ---------
<S> <C> <C>
Deferred tax assets:
Allowance for doubtful accounts $ 127,516 $ 417,315
Vacation accrual 17,101 45,182
Net operating loss 858,209 492,539
Warrants 42,840 -
Other 21,965 18,830
---------- ---------
Total deferred tax assets 1,067,631 973,866
---------- ---------
Deferred tax liabilities:
Securitization (456,290) (671,685)
---------- ---------
Total deferred tax liabilities (456,290) (671,685)
---------- ---------
Valuation allowance (611,341) (302,181)
---------- ---------
Net deferred tax asset $ - $ -
========== =========
</TABLE>
13. Reportable Business Segments
----------------------------
SFAS No. 131, "Disclosures About Segments of an Enterprise and Related
Information," introduces a new model for segment reporting, referred to as the
"management approach." The management approach is intended to present reportable
segments consistent with how the chief operating decision maker organizes
segments within a company for making operating decisions and assessing
performance. Presently, the Company is segregated into healthcare, banking, and
retail.
The healthcare segment consists of pre-collect services, billing services,
delinquent debt recovery, and insurance claims management and is managed as a
single strategic unit. The banking and retail segments focus primarily on
delinquent debt recovery and are therefore managed collectively while their
performance is assessed independent of one another.
Below is a summary statement of income for the years ended September 30, 2000
and 1999. The accounting policies used in the disclosure of business segments
are the same as those described in the summary of significant accounting
policies. Certain assumptions are made concerning the allocations of costs
between segments which may influence relative results, most notably, allocations
of various types of technology, legal, recruiting and training costs. Management
believes that the allocations utilized below are reasonable and consistent with
the way it manages the business.
F-23
<PAGE>
For the year ended September 30, 2000:
<TABLE>
<CAPTION>
Healthcare Banking Retail Total
----------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Revenues $3,811,774 $ 731,736 $1,242,970 $ 5,786,480
Operating expenses 2,706,443 660,225 886,317 4,252,985
Losses on portfolio receivables 341,645 341,645
---------- ---------- ---------- -----------
Operating income (loss) $1,105,331 $ (270,134) $ 356,653 1,191,850
========== ========== ==========
Overhead & administrative expenses 1,780,661
Depreciation & amortization 279,868
-----------
Loss from operations $ (868,679)
===========
For the year ended September 30, 1999:
Healthcare Banking Retail Total
----------- ---------- ----------- -----------
Revenues $2,569,469 $1,493,365 $1,178,365 $ 5,241,199
Operating expenses 2,175,184 1,080,244 715,847 3,971,275
Losses on portfolio receivables - 548,014 - 548,014
---------- ---------- ---------- -----------
Operating income (loss) $ 394,285 $ (134,893) $ 462,518 721,910
========== ========== ==========
Overhead & administrative expenses 2,443,640
Depreciation & amortization 198,697
-----------
Loss from operations $(1,920,427)
===========
</TABLE>
F-24
