**UNITED STATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

**AMENDMENTNO. 2**

**FORM10-KSB/A**

 
| **(Mark One)** |
|----------------|
|           |
| **ý**     | **ANNUAL  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF  1934** |
|           |   |
|           | **For the fiscal year ended December 31,  2002** |
|           |   |
| **OR**         |
|           |   |
| **o**          | **TRANSITION  REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT** |
|           |   |
|           | **For the transition period  from                       to                       .** |

 

**Commission file number: 333-45464**

 

**MEDICALCAPITAL MANAGEMENT, INC.**

(Name of small business issuer in itscharter)

 

| **Delaware**                                                    |   | **88-0473359**                    |
|-----------------------------------------------------------------|--------|-----------------------------------|
| (State or other jurisdiction of  incorporation or organization) |   | (IRS Employer Identification No.) |
|                                                            |   |                              |
| **3770 Howard Hughes Parkway, Las Vegas,  Nevada  89109**  |
| (Address of principal executive  offices)(Zip Code)             |
|                                                            |   |                              |
| Issuer’s telephone number: **(800) 824-3700**              |

 

Securities registered under Section 12(b) of the ExchangeAct:  **None**

 

Securities registered under Section 12(g) of the ExchangeAct:  **None**

 

Check whether the issuer (1) filed all reports required to be filed bySection 13 or 15(d) of the Exchange Act during the 12 months (or for suchshorter 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  ý  No  o

 

Check ifdisclosure of delinquent filers pursuant to Item 405 of Regulation S-B is notcontained in this form, and no disclosure will be contained, to the best ofregistrant’s knowledge, in definitive proxy or information statementsincorporated by reference in Part III of this Form 10-KSB or any amendment tothis Form 10-KSB.  ý.

 

State issuer’srevenues as restated for its most recent fiscal year:                                        $827,870

 

All of theregistrant’s common equity is held by its parent company, Medical CapitalHoldings, Inc.  There is no publicmarket for the registrant’s common equity.

 

As of February 27,2004, there were 2,000 shares of the registrant’s sole class of common stockissued and outstanding.

 

Transitional Small Business Disclosure Format                      Yes  o         No  ý

 

 

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**PART I**

 

#### **We are hereby amending our Form 10KSB for the fiscal year ended December 31, 2002 to reflect the correctionof errors for the years ended December 31, 2002 and 2001. The Companyrevised its method of recording income to the cost recovery method. See Note 12to the audited financial statements.**

#### ** **

#### **Item 1.  Description ofBusiness.**

 

**Overview**

 

Ourprimary business plan is to purchase healthcare provider accounts receivablesat a discount to the face amount of the receivable.  We then attempt to collect 100% of the account balance.  The receivables generally are purchased fromhealthcare sellers and other businesses, which we refer to in this prospectusas our “sellers.”  In addition, to alesser extent, we may also purchase general business receivables not related tothe healthcare industry.  We rely on ouraffiliates to provide us the services required for the purchase, monitoring andadministration of the receivables, like servicing, underwriting and acquisitionservices.

 

Ourreceivable purchases generally are limited to those having payors like:

 

•                  Medicare;

 

•                  Medicaid;

 

•                  other governmental agencies like CivilianHealth and Medical Program of the Uniform Services (“CHAMPUS”);

 

•                  commercial insurance companies with anestablished credit quality rating of “A” or better from A.M.  Best or an equivalent rating by anotherrecognized rating agency, like Standard & Poor’s;

 

•                  casualty insurers;

 

•                  other solvent payors, like managed careproviders, preferred provider organizations and self-insured companies; and

 

•                  other businesses that we determine on a caseby case basis through the underwriting process to be of low risk.

 

An“A” credit rating for an insurance carrier means that the carrier has anexcellent to superior ability to meet its obligations when due.  A.M. Best publishes both a financialstrength rating and a financial performance rating on more than 6,000 health,property and casualty insurance companies. A.M. Best’s financial strength ratings range from A++ (Superior) to F(In Liquidation) and include 15 separate ratings (not including the S ratingfor “Suspended”).  Our receivablespurchases from insurance carriers are generally limited to those with an “A” orbetter rating because we believe insurance carriers with an “A” or betterrating are more likely to pay a healthcare receivable on time.  A.M. Best’s “A” rating is its third highestrating.

 

Weonly purchase accounts receivable that are payable by commercial payors.  These are obligations owed by one businessto another business for goods and services already provided or rendered.  For healthcare receivables, we will onlypurchase the insured portion of an account receivable generated from patientservices rendered by healthcare providers that meet the financial requirementsand underwriting standards established by Medical Capital Corporation.  The insured portion of a healthcarereceivable represents an obligation of third-party insurance companies, largecorporations, state or federal government agencies, preferred providerorganizations or health maintenance organizations.  Medical

 

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CapitalCorporation has been using and continually refining these underwritingstandards for over eight years.

 

Theunderwriting department of Medical Capital Corporation uses credit criteriawhich is similar to that used by other similar lending institutions.  The relevant operating, historical andfinancial data of prospective sellers are reviewed to assess the financial riskinvolved in purchasing that prospective seller’s receivables.  We will not purchase any portion ofreceivables that are owed by individuals or that are “self-pay.”  Self-pay relates to the portion of ahealthcare receivable to be paid by an individual patient or other individual thatis financially responsible for the patient.

 

WhenMedical Capital Corporation identifies investment opportunities, it determineswhich one of our affiliates will fund the purchase of receivables from a givenseller based on various factors including transaction size relative to size ofthe purchasing affiliate and amounts currently committed by each affiliateversus each affiliate’s funds available for the purchase of receivables.  Another criteria includes maintainingdiversification within each affiliate’s portfolio.  From time to time, in order to attempt to maintaindiversification of each affiliate’s portfolio, these constraints may causeMedical Capital Corporation to direct the sale of receivables from one affiliateto another.  Sales of receivables amongaffiliates are generally sold at 85-100% of fair market value.  Fair market value is determined as equal tothe sum of the total amount advanced to the seller of the receivable plus thediscount fee, less any collections already received on the receivable.

 

Wemay also provide loans secured by equipment and real property to healthcarebusinesses that we believe to be financially viable and of low risk.  Through December 31, 2002, we have madethree loans secured by real estate totaling $5,339,127.  These loans were made to healthcare providerswho have entered into receivable purchase agreements with us.  We do not have any specific plans to provideany additional loans secured by real estate in the next 12 months, but may doso as opportunities arise.

 

Fromtime to time, we may also purchase or invest in healthcare related businesses,like HMOs, preferred provider organizations, medical bill review companies andthird-party administrators.  We have notengaged in any of these activities through the date of this prospectus.  On the date of this prospectus, we did nothave any specific plans to engage in any of these activities in the next 12months, but may do so as opportunities arise.

 

**TheMedical Capital Holdings Group**

** **

Weare a wholly owned subsidiary of Medical Capital Holdings, Inc.  In addition to our company, Medical CapitalHoldings has other active operating subsidiaries engaged in healthcare relatedbusinesses.  We often refer to thesecompanies collectively as the Medical Capital Holdings group.  Medical Capital Holdings also has anotheroperating subsidiary, The Stirling Bridge Group, Inc., which is an InternetWeb-Site development and hosting company. The following chart shows the organization of Medical Capital Holdingsand its active operating subsidiaries that are engaged in healthcare relatedbusinesses:

 

 

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*Medical Capital Holdings, Inc*.  Medical Capital Holdings is our parententity and acts as a holding company for its five major operatingsubsidiaries.  Medical Capital Holdingshas been in business since 1996.  Inaddition to the active operating subsidiaries described above, Medical CapitalHoldings owns various special purpose corporations that were formed for thespecific purpose of acquiring various groups or pools of assets.  These special purpose corporations do nothave active business operations other than holding those assets.

 

*Medical Capital Corporation*.  Medical Capital Corporation acts as theadministrator for all of our receivable purchases and other lendingtransactions.  Medical CapitalCorporation essentially runs our business by administering our day to dayoperations, underwriting and originating our purchases of healthcare receivablesand performing marketing, sales and client support functions.  Medical Capital Corporation primarilyprovides services to companies within the Medical Capital Holdings group.  We compensate Medical Capital Corporationfor underwriting and administering the healthcare receivables that we purchase.

 

MedicalCapital Corporation has provided services as an administrator since 1994 and isexperienced in purchasing and monitoring healthcare receivables generated byall types of healthcare sellers.  As ofthe date of this prospectus, Medical Capital Corporation had purchased over$1,000,000,000 in face amount of receivables (excluding intercompany purchases)on behalf of companies in the Medical Capital Holdings group.  Medical Capital Corporation’s business isoperated as a closely held company. Medical Capital Corporation generally charges companies in the MedicalCapital Holdings group fees for its services that represent the approximatecost to Medical Capital Corporation of providing those services.  We believe that the fees Medical CapitalCorporation charges to companies within the Medical Capital Holdings group aresimilar to those that non-affiliated third parties would charge for providingthe same services.

 

MedicalCapital Corporation maintains an Internet website at http://www.medicalcapital.com.  Medical Capital Corporation uses thiswebsite as a marketing tool and solicits the purchase of healthcare receivablesfrom potential sellers through the website. Because Medical Capital Corporation underwrites the healthcarereceivables we purchase, some of our purchases of receivables may be made fromsellers that Medical Capital Corporation solicits through its website.  Medical Capital Corporation also underwritespurchases of healthcare receivables for other companies in the Medical CapitalHoldings group, and to a limited extent, for companies outside the MedicalCapital Holdings group.  Medical CapitalCorporation’s website is not part of this prospectus.

 

*Medical Capital Management, Inc*.  We were formed on August 4, 2000, forthe primary purpose of acquiring healthcare receivables.  The address of our principal executiveoffices is: 3770 Howard Hughes Parkway, Las Vegas, Nevada 89109.  Our telephone number is: (800) 824-3700.

 

*Medical Tracking Services, Inc*.  MediTrak acts as the servicer for all of ouraccounts receivable transaction data. MediTrak monitors, tracks and posts all asset purchases andcollections.  We compensate MediTrak forperforming these services for us. MediTrak primarily provides services to companies within the MedicalCapital Holdings group.

 

MediTrakhas been facilitating the manual and electronic tracking of healthcarereceivables since 1997.  MediTrak’sbusiness is operated as a closely held company.  MediTrak generally charges companies in the Medical CapitalHoldings group fees for its services that represent the approximate cost toMediTrak for providing those services. We believe the fees MediTrak charges to companies within the MedicalCapital Holdings group are equal to or lower than those non-affiliated thirdparties would charge for providing similar services.  For services provided to companies outside the Medical CapitalHoldings group, MediTrak generally charges higher rates.

 

*National Health BenefitsCorporation*.  NHBCprovides medical healthcare claims processing, preferred provider organization(PPO) re-pricing and negotiated claims settlement services to insurancecompanies, third-party medical claims administrators and to companies thatself-insure their medical

 

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claims. NHBC has been in business since 1987. NHBC does not actively purchase healthcare receivables and we do notanticipate that it will provide any services to us.

 

**MedicalIndustry Background**

** **

Accordingto news articles published daily and trade publications, the United Stateshealthcare industry is undergoing rapid change.  Due to the aging of the population, there is an increasing needfor medical institutions.  In recentyears, according to reports issued by the U.S. Department of Health andHuman Services, healthcare expenditures have increased at a rate approximatelytwice that of inflation.  Due to thepressure from health insurance companies, corporations and government agenciesto control these rising costs, a trend toward managed care has emerged.  We believe the shift to managed care,coupled with the increasingly complicated reimbursement procedures implementedby payors of healthcare receivables, has made billing and collection effortsmore difficult.

 

Asdiscussed in articles in Healthcare Financial Management Association magazine,the ever increasing complex reimbursement procedures require employees withsophisticated knowledge of the billing and payment procedures of the UnitedStates government and each of the hundreds of different insurancecarriers.  For example, the average 300bed hospital in the United States attempts to process approximately 4,000claims, payments and eligibility inquiries on any given day.  Many of these cases will be processed onpaper, over the phone or not at all.  Asa result, the average collection time for most healthcare receivables is 60 to90 days, which presents financial problems for many of the hospitals.  Consequently, healthcare sellers experiencea substantially increased need for immediate cash flow to support not onlydaily operational expenses, but the additional expense required for billing andcollection services.  These billingstatistics are published by Healthcare Financial Management Association on amonthly basis.

 

Inorder to improve collection efficiency, hospitals and other healthcareproviders are forced to either out-source billings and collections or hire anumber of highly skilled employees solely for this purpose.  Despite these efforts, many sellers oftenincur a significant loss due to their inability to effectively process largeamounts of claim information in a timely manner.  With payor reimbursement arrangements requiring increasingly morecomplex and lengthy procedures, the provider’s revenue collection departmentshave become less able to timely process the claims due to their limitedcapacity.  Improperly or incompletelysubmitted information will result in payment delays.

 

Consequently,we believe a serious administrative and cash flow management problem exists formany healthcare providers.  They arefaced with numerous other expenses ranging from equipment and facility costs topayroll and liability insurance fees. In the new managed care environment, healthcare providers are forced tobecome more efficient business operators in order to remain profitable.  The consequences of a provider’s inabilityor unwillingness to adapt to these changes by using more sophisticated revenuecollection systems causes the financial risk for providing healthcare to shiftfrom the payor to the provider.  Webelieve these providers have an increased need for predictable cash flow.

 

Businessesgenerally utilize working capital or accounts receivable financing to bridgethe shortfall between the turnover of current assets and the maturity ofcurrent liabilities.  A business willoften experience this shortfall during periods of revenue growth because cashflow from new revenues lags behind cash outlays required to produce newrevenues.  For example, a growing laborintensive business will often need to fund payroll obligations before paymentsare received on new services provided or products produced.  We believe that many healthcare providershave rapidly expanding businesses, and therefore require accounts receivablefinancing to fund their growth.

 

Asa result of these developments, we believe financing or sale of healthcarereceivables has become a more efficient solution to meet the cash flow needs oftoday’s healthcare providers.  Webelieve that there are several distinct trends that will continue to fuel thedemand for and the dollar value of healthcare services in the United States andthe demand for our services, including:

 

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•                  dramatic change driven by governmental andmarket forces which have put pressure on healthcare providers to reducehealthcare delivery costs and increase efficiency, often resulting inshort-term working capital needs by these providers as their businesses grow;

 

•                  favorable demographic trends, including boththe general increase in the U.S. population and the aging of the U.S.  population, which should increase the sizeof our principal target markets;

 

•                  growth, consolidation and restructuring offragmented sub-markets of the healthcare industry, including long-term care,home healthcare and physician services; and

 

•                  advances in medical technology which haveincreased demand for healthcare services by expanding the types of diseasesthat can be effectively treated and by extending the population’s lifeexpectancy.

 

**CommercialReceivables**

** **

Wemay use a portion of the proceeds of the sale of our notes to purchasenon-healthcare commercial receivables. We have not identified any specific non-healthcare related receivablesfor purchase.  We do not anticipate thatnon-healthcare related commercial receivables will constitute more than 20.0%of our pledged collateral at any time. While our administrator has developed a set of criteria for theselection of prospective healthcare receivable sellers and guidelines for thehealthcare receivables that qualify for purchase, our administrator has not hadsignificant experience in assessing prospective non-healthcare receivablesellers or applying guidelines for the qualification of non-healthcarereceivables.  If our administrator doesnot correctly assess the non-healthcare receivable sellers and non-healthcarereceivables that we may purchase, our collections on those receivables could beless than we anticipate, which could adversely affect our profitability.

 

**BusinessStrategy**

** **

Financialgroups and various smaller financing companies provide financing through thepurchase of receivables.  However, mostof these institutions have a minimum lending threshold of $5,000,000 inreceivables when offering financing to seller groups.  As a general matter, we believe these lenders typically have beenless willing to provide financing to healthcare and other sellers of the typeswe serve because these lenders have not developed the healthcare and otherindustry expertise needed to underwrite receivables generated by smallersellers.  These lenders also lackspecialized systems necessary for tracking and monitoring healthcarereceivables transactions, which are different from traditional accountsreceivable finance transactions.

 

***Target Healthcare Sellers***.  We offer financing to medium and smallerhospitals, other healthcare providers and durable medical equipmentdistributors that generally do not produce receivables at a high enough levelto attract large financial institutions, by purchasing their receivables.  Currently, our primary marketing strategy isto focus on the purchase of receivables from:

 

•                  hospitals;

 

•                  skilled nursing and assisted care facilities;

 

•                  physician groups consisting of one to sixdoctors;

 

•                  home healthcare facilities;

 

•                  durable medical equipment distributors;

 

•                  medical staffing companies;

 

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•                  radiology and diagnostic medical facilities;

 

•                  medical testing facilities; and

 

•                  other healthcare businesses and relatedbusinesses which we determine through the underwriting process to have lowrisk.

 

Wetarget those sellers with billings of $20,000 to $200,000 per month.  We believe fee-for-service practitioners area good type of client due to the relatively small nature of their business andthe manner in which they are paid. Fee-for-service practitioners are practitioners that bill for healthcareservices using a retail billing rate for the services provided.  They are then paid by the insurance companiesbased on medical fee schedules established by the insurance industry.  These healthcare practitioners usually havetwo to six practitioners in one office. We believe their billing is relatively easy to monitor and purchase, andbelieve their payment pattern is best suited for our business.  The other healthcare businesses with whichwe deal are primarily small hospitals, skilled nursing facilities, home healthagencies and medical clinics.

 

***Target Geographical Areas***.  We target both metropolitan and ruralmarkets for the purchase of receivables. Generally, we do not expend substantial marketing efforts on the largemetropolitan areas like New York, Chicago, Los Angeles,San Francisco, etc.  We believe themiddle tier of metropolitan statistical areas contain the size and type ofprospective clients that best suit our lending criteria.  This segment of the national market consistsof a majority of fee-for-service practitioners and other healthcare and non-healthcarebusinesses.  These metropolitan areaswould consist of cities like San Diego, California, Des Moines, Iowa andLittle Rock, Arkansas.

 

***Products Offered***.  In addition to accounts receivablefinancing, small to middle market healthcare providers often require additionalfinancing products like loans secured by equipment or real estate to facilitatethe growth or restructuring of their businesses.  Facility-based healthcare providers grow through the acquisitionof additional facilities. Facility-based healthcare providers generally are hospitals, skillednursing facilities and clinics.  Theseproviders can often acquire additional facilities at attractivevaluations.  This happens when somefacilities need to be sold for a variety of reasons.  Some of these reasons can include:

 

•                  thedeath of an owner of the facility;

•                  ahealthcare chain may decide to withdraw from a geographical market and sell itsfacilities;

•                  somehealthcare chains may decide to sell a facility to use the funds to purchasedifferent or other types of facilities or to purchase facilities in othergeographical markets; or

•                  whensmaller healthcare chains declare bankruptcy due to poor management, theirfacilities can be bought through bankruptcy proceedings.

 

Inorder to purchase facilities at an attractive price, quick financing is oftennecessary so that the intended acquisition can be completed before other buyersoutbid them.  We believe that whenfacilities become available for purchase, the successful bidder is often thefirst buyer to make an offer and has the necessary funds to complete thepurchase in a short period of time.

 

Manyof our affiliates’ current healthcare sellers and prospective sellers have aneed for loans as their businesses grow. Loans secured by the assets owned by the sellers are used in order tosupport the sellers’ expanding infrastructure requirements like informationsystems, enhanced professional management and marketing and businessdevelopment costs.  We also providevarious financing options to sellers, like loans secured by equipment and realestate.  We provide customized financingsolutions specifically tailored to meet the needs of each individual seller.

 

***Growth***.  We expect the trends described above under “– Medical IndustryBackground” to continue, providing us with long-term growth opportunities.  We plan to increase the number of financial

 

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products that we offer to the sellers fromwhich we purchase healthcare receivables. These financial products may include leasing medical and diagnosticequipment, real estate first and junior lien mortgages, revolving credit linesand acquisitions of companies in the healthcare industry.  In addition, we may purchase generalbusiness receivables payable by commercial enterprises that are determinedthrough the underwriting process to be low risk.  Our strategy for growth generally is based on the following keyelements:

 

•                                                                  Target sub-markets within the healthcareindustry that have favorable characteristics for working capital financing,like fragmented sub-markets experiencing growth, consolidation orrestructuring.  Our initial focus is onthe purchase of healthcare receivables in these sub-markets.

 

•                                                                  Focus on sellers with financing needs ofbetween $100,000 and $1,000,000, which is a market that we believe has beenunder-served by commercial banks, diversified finance companies, traditionalsecured lenders and our other competitors. Most commercial banks, diversified finance companies and traditionalsecured lenders have typically focused on providing financing to companies withborrowing needs in excess of $5,000,000. We believe that our target market for transactions is much larger, interms of the number of available financing opportunities, and is lesscompetitive than the market servicing larger borrowing needs, thereby producinggrowth opportunities at attractive rates.

 

•                                                                  Become the primary source for all financingneeds of sellers by introducing new financial products to leverage our and ouraffiliates’ existing expertise in healthcare and other finance, and providingother services within our target markets. We expect to selectively introduce new products to existing and newsellers, depending on their needs, general economic conditions, our resourcesand other relevant factors.  In somecases, we anticipate that new products may be introduced as part of cooperativearrangements with other companies.

 

•                                                                  Seek to make strategic acquisitions of andinvestments in businesses that are engaged in the same or similar business aswe are or that are engaged in lines of business that are complementary to ourbusiness.  These businesses may includebusinesses that are involved in financial services, receivables management,outsourcing, financial and administrative infrastructure services, HMOs,preferred provider organizations and third-party administrators.  We believe that businesses in these areasare synergistic with our proposed core business of purchasing healthcare andother receivables and could allow us to leverage our and our affiliates’expertise in healthcare to meet the needs of our target customer base.  We also seek to take advantage ofappropriate opportunities to invest in or acquire companies in the same orsimilar lines of business as we operate.

 

***Obtaining New Sellers***.  Wegenerally have four potential sources for developing and locating the sellerbase from which we acquire receivables: (1) referrals from banks and otherfinancial institutions, (2) referrals from independent financing brokersand insurance agents, (3) our affiliates’ network of companies that are inhealthcare service businesses with which our affiliates have informal crossreferral arrangements, and (4) our affiliates’ sales and marketingpersonnel.  Medical Capital Corporationuses a network of sales representatives who contact new and existing sellers intheir territory on a regular basis.  Theprimary responsibility of the sales representatives is to develop and maintainrelationships with sellers.  Most salesrepresentatives have a healthcare industry background and have receivedspecialized training from Medical Capital Corporation.

 

Withrespect to banks and financial institutions, some of our officers and those ofour affiliates have existing relationships with several financial institutionsthroughout the country.  Banks arecontinually approached by medical and other groups looking for financing.  In addition, trust departments, brokeragefirms and investment advisers are regularly asked by their clients wherefinancing might be obtained.  Thesebanks and institutions refer sellers to our affiliates from time to time.

 

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Webelieve a rapidly growing community of independent brokers exists that arrangesfinancing specific to the healthcare industry. These brokers refer sellers to different lending institutions for afee.  These brokers assist in locatingreceivables available for purchase from smaller sellers that typically cannotfind traditional financing because of their small size.  These brokers often refer sellers tous.  If we purchase receivables from thereferred seller, we pay a pre-arranged fee to the broker.

 

Ouraffiliates also have a network of contacts in the healthcare provider andhealthcare insurance industries.  Thehealthcare insurance industry consists of healthcare insurers that pay medicalclaims to healthcare providers.  It alsoincludes companies providing services to healthcare providers like medicalcoding reviews, medical necessity determination reviews, billing systemefficiency reviews and other healthcare insurance payment and billingservices.  These contacts have beendeveloped over the past years through our affiliates’ marketing and hiringefforts.  In addition, many of ouraffiliates’ officers and employees have previously worked in the healthcareprovider and healthcare insurance industries. Also, through daily marketing efforts, our affiliates are constantlyenlarging their sales and referral base of independent brokers, the customersof which include many practitioner and facility-based providers.

 

Inaddition to the above sources of obtaining new sellers, Medical CapitalCorporation maintains an Internet website athttp://www.medicalcapital.com.  MedicalCapital Corporation uses this website as a marketing tool and solicits thepurchase of healthcare receivables from potential sellers through thewebsite.  The website describes thebusiness of Medical Capital Corporation, the receivables financing process andMedical Capital’s program for financing. The website also contains a short application that sellers can completeto apply to have Medical Capital Corporation evaluate the seller’s business andreceivables to determine their eligibility for participation in the receivablespurchase program.  The website does notspecifically refer to Medical Capital Management.  However, because Medical Capital Corporation underwrites thehealthcare receivables we purchase, some of our purchases of receivables may bemade from sellers Medical Capital Corporation solicits through its website.  Medical Capital Corporation also underwritespurchases of healthcare receivables for other companies in the Medical CapitalHoldings group, and to a limited extent, for companies outside the MedicalCapital Holdings group.  Medical CapitalCorporation’s website is not part of this prospectus.

 

**ReceivablesAcquisition Process**

** **

***General***.  Theacquisition process used by Medical Capital Corporation has been in use forover eight years.  As of the date ofthis filing, Medical Capital Corporation has purchased over $1,000,000,000 inface amount of receivables (excluding intercompany purchases) on behalf of itsclients.

 

Forthe year ended December 31, 2002, we purchased receivables with an ENR of$57,727,140, of which $23,370,719 or 40.5% was purchased from our parent,Medical Capital Holdings, with the remainder purchased from independent thirdparties.  As a normal course ofbusiness, initial purchase relationships may occur between the seller andMedical Capital Holdings.  MedicalCapital Holdings has a revolving credit line with Comerica Bank, which allowsMedical Capital Holdings to purchase accounts receivable from a seller.  Then, once we have funds available, thereceivables as well as the rights, title and interest in the contractualrelationship between the seller and parent are sold to us by Medical CapitalHoldings.  For these inter-companysales, the receivables are sold to us at a price equal to the sum of the totalamount advanced to the seller of the receivable plus the discount fee, less unearneddiscount fee, less any collections already received on the receivable.  To the extent we have sufficient fundsavailable, we will purchase receivables directly from a seller without firstbeing purchased by Medical Capital Holdings. Medical Capital Corporation may also direct the sale of receivables fromone of our affiliates to us, or from us to one of our affiliates as a method ofasset/liability management and to attempt to maintain diversification in ourinvestment portfolio.  When we purchasereceivables from our affiliates, we purchase all rights, title and interest inthe receivable that our affiliated owned, including reserve amounts.  Therefore, the impact on reserves is nodifferent whether we purchase receivables from our affiliates or directly fromthe seller.

 

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Whenwe identify a healthcare seller or other seller from whom we may purchasereceivables, we enter into a receivables purchase agreement with thatseller.  This agreement gives us theright of first refusal to purchase all receivables from that seller eitherweekly, bi-weekly, semi-monthly or monthly, generally for a period of oneyear.  The terms of the agreement varyfrom seller to seller.  Each weekMedical Capital Corporation reviews all receivables purchased in the precedingweek and decides which receivables it will purchase on our behalf within thenext seven to 10 days.  We refer toeach set of receivables so purchased as a “batch.”  Medical Capital Corporation has the sole discretion as to whichreceivables it will purchase.

 

***Approval of Providers and Other Sellers***.  Generally, we purchase healthcare and otherreceivables directly from the seller after the seller and the receivables havebeen underwritten by Medical Capital Corporation.  Medical Capital Corporation has developed a set of criteria forthe selection of the prospective sellers and guidelines for the receivablesthat qualify for purchase.

 

Generally,Medical Capital Corporation focuses on healthcare and other businesses thathave sales of at least $10,000 per week. Currently, a typical seller generates receivables between $10,000 to$50,000 per week.  A prospective sellergenerally will have to generate invoices averaging at least $150.00 per serviceincident.  Medical Capital Corporationhas found that smaller receivables, those under $50.00, do not generatesufficient profit when purchased.

 

***Underwriting Policies***.  All of our underwriting procedures arecarried out on our behalf by Medical Capital Corporation.  Medical Capital Corporation employs fivepeople in its underwriting department with over fifty years of combinedexperience in underwriting healthcare accounts receivables.  The underwriting policies of Medical CapitalCorporation require a due diligence review of the prospective seller ofreceivables, its principals, its financial condition and strategic position,including a review of all available financial statements and other financialinformation, legal documentation and operational matters.  Medical Capital Corporation’s due diligencereview also includes a detailed examination of the seller’s accountsreceivable, accounts payable, billing and collection policies and practices,management information systems and real and personal property and other collateral.  Records and data of the seller for the prior24-month period are reviewed and evaluated for consistency, reliability andadequacy of performance.  While pastcollection records of a seller’s receivables are often are a good predictor oflikely future results, past results may not reflect actual future results.  Therefore, it is possible that thehistorical performance of receivables approved for purchase under ouradministrator’s program will be different from future collections on thereceivables, which could adversely affect our profitability.

 

MedicalCapital Corporation also requires:

 

•                  for healthcare receivables, the provider,each of the individual physicians and any medical personnel to be properlylicensed to practice and have no unresolved legal or medical issues regardingtheir practice or an unusual amount of malpractice litigation, or litigationmatters that were not disclosed by the healthcare provider;

 

•                  for healthcare receivables, the provider tohave been in business in its community for a minimum of 18 months;

 

•                  the seller group to demonstratecredit-worthiness as determined by assessments of credit reports, pastreceivables financing history, bank references, financial statements,accounting firm comments and UCC-1 searches; and

 

•                  the seller to agree to some or all of thefollowing terms:

 

—        to pledge all of its receivables, existingand future, as additional collateral;

 

—        to execute a guarantee ensuring payment onall receivables purchased; and

 

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—        to establish up to a 25% reserve account forthe portion of the purchase price of the receivables that will be withheld fromthe seller.

 

***Credit Risk Management***.  The healthcare receivables or portions ofhealthcare receivables that we acquire generally represent obligations of thirdparties to pay for healthcare services to patients of healthcareproviders.  Our healthcare receivablesare paid by third-party payors, like health maintenance organizations, managedcare concerns and other insurers, large corporations that may be self-insured,other healthcare sellers and government agencies.  Because we purchase these types of receivables, we rely on promptpayments from these third-party payors for collections.  We do not purchase any healthcarereceivables or portions of healthcare receivables that are payable byindividuals.

 

Thepossible insolvency or loss of funding of an individual third-party payor is asignificant risk to our business.  Inorder to minimize this risk, we impose restrictions on the amount ofreceivables that can be purchased from any individual third-party payor, withineach seller and within the total loan portfolio.  We constantly review industry rating agency reports and industryjournals and articles in order to gain any insight into possible financialproblems of any third-party payors. Medical Capital Corporation independently confirms various matters withrespect to the prospective seller’s business and the collectibility of itsaccounts receivable and any other collateral by conducting public recordsearches, and, where appropriate, by contacting third-party payors about theprospective seller’s receivables.

 

Acredit report is obtained from an appropriate credit agency on each prospectiveseller and its principals and any of its personnel with any ownershipinterest.  The seller must becreditworthy, and any negative credit comments must be explained and documentedto our satisfaction or the satisfaction of Medical Capital Corporation.  Special attention is given to any pastreceivable financing history.  If theseller finances any equipment, the applicable equipment leasing companies willbe contacted for a credit history and reference.  Prospective sellers are required to provide favorable bankreferences.  A UCC-1 Financing Statementsearch is performed to determine that there are no present liens against thereceivables of the prospective seller. If any receivable liens do exist, the lien must be paid off before, oras part of, the initial purchasing or funding of any receivables.

 

***Purchase of Receivables***.  Our purchase agreement with a sellerrequires that we have the first right of refusal on all of the seller’sreceivables on a regular-interval basis, generally for one year.  However, our total investment in receivablesfrom a seller under a receivables purchase agreement generally is made on aspecified “commitment” amount.  We donot make “one-time” purchases of receivables. For the first purchase from a seller, we review and offer to purchaseall of the receivables of that seller, depending on the above detailed analysisof the receivables.  After the firstpurchase, we analyze all receivables from the preceding week and decide whichadditional receivables we will purchase within the next seven to 10 days.

 

***Purchase Agreement***.  Our purchase agreement with our sellergoverns our relationship with the seller for each receivable we purchase fromthe seller.   The purchase agreementrequires that the seller offer all its receivables produced to us for our considerationto purchase.   The purchase agreementgives us the right to purchase all, or part of, the seller’s receivables.  However, even if we only purchase a portionof the seller’s receivables, we still have all the seller’s receivables servingas collateral against the collection of the receivables we purchase.  This is done in order to ensure the accuracyof the receivables we identify to purchase.

 

Webelieve the purchase agreement conforms to, and constitutes a true sale of thereceivables to us and as such, removes the receivables from any claims of anestate should the seller declare bankruptcy. In order to expedite collections, the collections process remains withthe seller, since the purchase agreement appoints the seller as our agent tocollect our the receivables.   Thecollections process for healthcare receivables oftentimes requires referral tomedical records to confirm procedures or justify payment.  Our affiliates, Medical Capital Corporationand Medical Tracking Services, Inc. maintain staff

 

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capable of taking over the collectionsprocess should a seller under-perform regarding collections.  The purchase agreement grants us the rightto take over the collection process if we deem it necessary.

 

Inorder to ensure compliance with the terms and conditions of the purchaseagreement, and to ensure collections are paid according to the ENR as agreed bythe seller and us, we maintain the right to adjust the ENR rate, the advancerate and the amount of reserves necessary in order to offset or mitigate risksas may be identified during the term of our relationship with the seller.  We use our discretion regarding theseadjustments on an individual basis with each seller depending on its history,office billing and collection processes, industry trends in the seller’sparticular environment and compliance with the purchase agreement.  Although we have the right to adjust theadvance amount percentage, we have not done so to date for competitive reasons.  We have, however, withheld portions of theadvance amount in order to offset uncollected receivables, which has the effectof reducing the advance amount percentage.

 

Thepurchase agreement includes an assignment of the proceeds from the purchasedaccounts receivable to us, as well as a specific power of attorney to give usthe right to bill, collect, receive and negotiate payments in the seller’sname, take all mail from the seller and, if necessary, take all equipment andmedia containing records information of the accounts receivable.  The purchase agreement includes acertificate from the seller’s medical director naming us or our agents as *Custodian of Medical Records* (as master),which gives us the right to take all medical records related to the accountsreceivable, enabling us to collect the receivables ourselves if necessary.

 

Thepurchase agreement addresses the prospect of the seller diverting ourcollections proceeds from the seller’s assigned lock box, with swift penaltiesincluding the cessation of further purchases, withholding of part, or all, ofthe advance from subsequent purchases to pay back diverted funds and penaltiesup to the face value of the purchased accounts receivable.   When the seller is not compliant with theterms of the purchase agreement, the seller forfeits all the deferred purchaseprice of the purchased accounts receivable as well as any reserve for aspecific batch of receivables, or if the seller is chronically not compliant,the forfeiture of the proceeds from all accounts receivable in the purchasedportfolio, whether or not we advanced funds.

 

Wereserve additional rights, as agreed to by the seller, to enter the seller’spremises with notice, place a keeper in the seller’s office(s) and enter ajudgment against the seller in any court venue as allowed by law.

 

Ifa seller remains compliant with the purchase agreement and all batches ofreceivables are collected within the contractual period, we may be required toreturn the seller’s reserve to the seller after satisfactory completion of thepurchase agreement term.

 

***Receivables Characteristics***.  Insome cases, we may purchase receivables that are more than 90 days old,depending on the analysis of the receivable. The age for any receivable is the number of days elapsed since itsbilling date to the payor of the receivable. We buy receivables with the goal that the average age of receivables inour portfolio generally will not exceed 180 days.  We have the sole discretion as to whichreceivables we will purchase.  Wereserve the right to disqualify some categories, or some payors, of receivablesfor purchase at our discretion.

 

Whenacquiring receivables, we only purchase receivables that are to be paid by:

 

•                  aninsurance carrier with at least an “A” rating from a recognized rating agencylike A.M. Best or Standard & Poor’s;

 

•                  anapproved HMO;

 

•                  anapproved government agency;

 

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•                  anapproved institutional facility;

 

•                  aself-insured employer; or

 

•                  another entity which meets our financial standards.

 

Exceptfor government agencies, we limit the portion of our portfolio of receivablesthat are payable by a single payor to 15%. We also ensure that at any given time, no more than 50% of our totaloutstanding investment portfolio of receivables, in the aggregate, is fromMedicare and Medicaid payors.  BecauseMedicare and Medicaid claims are submitted electronically, the turnaround timefor payment is about 30 days.  Itis for this reason we accept higher amounts of these receivables than fromtraditional commercial insurance carriers.

 

***Pricing Receivables for Purchase***.  Once a seller has met the criteria andagreed to the requirements, Medical Capital Corporation begins the process ofselecting and pricing the receivables for purchase.  One of the most important aspects of the selection process, andthe due diligence procedure performed on prospective sellers, involves ananalysis of a seller’s receivables and collections to evaluate the receivableslikely to be paid within a defined collection period.  The analysis covers a period of not less than the prior24 months.  Using this data,Medical Capital Corporation develops ratios and other data which include thefollowing information:

 

•                  themonthly total receivable balance;

•                  theamounts billed to and collected from the various payors;

•                  theamount of claims paid;

•                  theamount of claims not paid, and why;

•                  areview of claims files and related medical and billing records;

•                  theaverage payment turnaround time;

•                  theaverage response time of the prospective seller to return payor requests forinformation;

•                  theclassification of claims between insured and uninsured;

•                  theamount and number of worker’s compensation and personal injury claims;

•                  theratio of total monthly billed to total monthly collected receivables; and

•                  reviewof historical collections from the third-party payor of the receivables,including a listing of and aging of the receivables by the payor withcorresponding financial status rating of each.

 

Fromthe above data, Medical Capital Corporation calculates an average receivableamount, receivable turn time, and the payment trend analysis on each majorpayor.  We also verify the existingoutstanding receivables by randomly selecting individual billing files andcontacting the applicable third-party payor to determine whether the claim hasbeen submitted for payment and will be paid as anticipated.  Prior to a receivable being deemed eligiblefor purchase by us, one of our required conditions is that there be anestablished payment history by the payor of the receivable reimbursing anamount at least equal to the expected net receivable generally within 60 to 90days of the date the claim is submitted. Finally, we interview the prospective client’s administrative,accounting and billing personnel to document and review the integrity ofinternal controls and follow-up billing and collections procedures.

 

Ourpurchase price paid for healthcare and other receivables is based on apercentage of the face value of the receivable.  To determine the purchase price, the face value is reduced firstby the amount of any patient co-payment and any amounts in excess of what thepayor has historically paid for the procedure giving rise to thereceivable.  The resulting amount isthen further reduced by considering other factors that influence the amountwhich is likely to be collected under the receivable, including the historicalcollection experience of the seller. The resulting number is the estimate of the net collectible value of thereceivable, or the expected net receivable.

 

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***Reserve Account***.  Wepurchase the receivables at a price equal to the ENR.  Only a portion of the purchase price, typically around 80%, butnever exceeding 90%, of the ENR, is paid to the seller immediately.  A portion of the purchase price notimmediately paid is allocated to a reserve account for that seller and weretain the remaining portion of the unpaid purchase price as our fee.  When a receivable is not fully collected,the balance in the seller’s reserve account is reduced.  A reduction in a seller’s reserve accountoccurs with respect to most, if not all, sellers.  Although we monitor receivable collections on a daily basis, wemay not be able to react quickly enough to the reduction of a seller’s reserveaccount balance to cover resulting losses through collections on newerreceivables acquired from the seller.

 

Tofurther explain the reserve account, each receivable can be separated intoseveral segments including: the face amount, the expected net receivableamount, the initial purchase amount, the discount and the seller reserve.

 

•                  Face Amount: this is the full amount owed to the seller by the receivable payor, likean insurance company or Medicare for example.

•                  Expected Net Receivable (“ENR”):  this is the amount that we actually expectthe third party payor to pay on the receivable.  The ENR is determined by Medical Capital Corporation’sunderwriting department through its underwriting process.  The ENR is almost always less than the faceamount of the receivable and never more. For the receivables we purchase, the ENR ranges anywhere from 40% to 90%of the face amount of the receivable. All of our calculations of purchase price, reserve and amount advancedto the seller are based on the ENR.  Wedo not use the face amount of the receivable for any calculations because we donot expect to be able to collect anything more than the ENR.

•                  Initial Purchase Amount or Advance:  this is the amount advanced to the seller atthe time of initial purchase of a batch of receivables.  On the initial purchase from a seller, thisis typically around 80% of the ENR.  Onfuture purchases, we may advance less than 80% of the ENR in order to build upa seller’s reserve account balance.  Theamount to advance to a seller is determined through our underwritingprocess.  For the year endedDecember 31, 2002, the initial purchase amount as a percentage of ENR wasapproximately 80.0% on all receivable purchases from unaffiliated thirdparties.  Although we have the rightunder our purchase agreement with the seller to reduce the percent advanced onfuture purchases, we have not done so for competitive reasons.  We have, however, withheld a portion of theadvance on future purchases in order to offset uncollected receivables, whichhas the effect of reducing the advanced amount percentage on future purchases.

•                  The Discount:  this is our fee which we negotiate with the seller when we enterinto the receivables purchase agreement. The discount will vary based on the amount of time we expect theseller’s receivables to remain outstanding before being collected.  On average, the discount is approximately7.5% of the ENR.

•                  The Seller Reserve:  the amount of each receivable allocated to the seller reserve isequal to the ENR, minus the sum of the initial purchase amount and thediscount.  This is the batch’s bad debtreserve.  This bad debt reserve isrolled up into the overall aggregate seller reserve on the entire pool ofreceivables purchased from a seller.  Wetypically try to maintain an overall bad debt reserve of 10-25% of the ENR forthe seller’s pool of receivables.  Becauseless than 25% of the ENR is allocated to the seller’s bad debt reserve at thetime of initial purchase from a new seller, the amount advanced to the selleron future purchases may be less than 80% of the ENR, with the difference beingallocated to the seller’s bad debt reserve. When this occurs, we generally leave the advance percentage at 80%, butwithhold a portion of the advance, which has the effect of reducing the advancepercentage.  In addition, under theterms of our purchase agreement with the seller, any amounts collected in excessof the ENR are allocated to the bad debt reserve of the seller.

 

Thepurpose for establishing a reserve account is to have protection against lossesdue to uncollected receivables. Withholding a portion of the purchase price is easier to exercise thanattempting to require the replacement of an uncollected receivable or otherwiseseeking enforcement of the

 

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receivablespurchase agreement.  If a purchasedreceivable becomes outstanding for over the contract period , we may, at ouroption:

 

•                  offsetthe amount actually paid to the seller for the receivable against the seller’sreserve account;

 

•                  offsetthe amounts due to the seller from the purchase of other batches ofreceivables;

 

•                  requirethe seller to replace the uncollected receivables with additional receivables;or

 

•                  exerciseour rights under a guarantee from the seller, if any.

 

Ifa receivable is collected at a later date, the reserve account is credited bythe amount of the collection up to the amount that was previously offset.  Any time the amount collected with respectto a receivable is less than the amount invoiced, the difference is offsetagainst the reserve account.  If thereceivables purchase agreement is terminated, any remaining balance in aseller’s reserve account will be returned to the seller after the payment ofany advances made by us, and any interest and fees due have been paid.

 

Anadjustment may be made if the seller’s reserve account balance falls below 5%of the outstanding uncollected receivables balance for that seller.  The adjustment is typically made to theinitial advance amount paid to the seller on future purchases ofreceivables.  This adjustmenteffectively reduces the percentage of cash immediately paid to the seller whenfuture receivables are purchased.  Forexample, a seller may be initially paid 80% of the ENR immediately when areceivable is purchased from that seller. If that seller’s reserve account balance falls below 5% of theoutstanding receivables balance and requires an adjustment, the seller may onlybe paid 75% of the ENR at the time of purchase for future receivablepurchases.  In this example, in additionto the normal allocation to the reserve account, an additional 5% of the ENRwould be allocated to the reserve account for all future purchases until thereserve account balance reaches a pre-determined level.  This adjustment, in effect, increases theamount allocated to the reserve account on each future purchase.  We have the right under our purchaseagreement to adjust the advance percentage, the advance amount and the ENR fora seller at our sole discretion.  Wehave not adjusted the advance percentage for any seller to date, but may do soas conditions warrant.  However, we havewithheld a portion of the advance on future purchases of receivables to offsetuncollected receivables, which has the effect of reducing the advance amountpercentage.

 

Theamount of the reserve account generally ranges from 10% to 25% of the ENR.  A seller is paid the amount allocated to itsreserve account only when the amount exceeds a negotiated percentage, usually25%, of all of the receivables purchased from the seller that are outstandingat any one time.  From time to time areserve accounting will be made to the seller. When warranted by this accounting, any excess in the reserve accountwill be paid to the seller within 15 days of the accounting.  Any amount paid on a batch of receivables inexcess of the ENR is allocated as a credit to the seller’s reserve account.

 

**Administration,Servicing and Collection of Receivables**

** **

***Administration of Operations***.  We have entered into an administrativeservices agreement with Medical Capital Corporation, one of ouraffiliates.  Under the terms of theadministrative services agreement, Medical Capital Corporation has agreed toserve as the exclusive provider of management services to us and as theadministrator for the receivables.  Asthe administrator, Medical Capital Corporation is responsible for providing usthe general and administrative services to facilitate the underwritingevaluation of receivables and other assets to be purchased or used ascollateral for a loan.  It also providesthe personnel and computer systems that are necessary to ensure the collateralis safeguarded and performs as anticipated. It also ensures the adequate processing and reporting of the

 

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assets in the portfolio.  Once the receivables are identified forpurchase, we enter into purchase agreements to acquire the receivables.

 

MedicalCapital Corporation is also responsible for providing management andunderwriting services and making available to us its offices, personnel,facilities, equipment and services, as are determined to be reasonablynecessary for the proper and efficient operation of our business.  These services include:

 

•                  bookkeeping,payroll and accounting services, including administration of all promissorynotes and interest payments;

•                  marketingand public relations;

•                  maintaininga network of account consultants to develop and maintain our relationships withreceivable sellers; and

•                  opening,maintaining and directing bank accounts for our benefit.

 

Underthe administrative services agreement, we pay Medical Capital Corporation feesfor providing the above services to us. The fees for the various services they provide are equal to the lesserof (1) 2% of the ENR balance of the receivables owned by us, or (2) 25.0% ofthe discount fee charged on the purchase of the receivables.  The administrative fee is calculatedmonthly. For the year ended December 31, 2002, we incurred $1,272,960 inadministrative service fees to Medical Capital Corporation.  In addition to this fee, we also reimburseMedical Capital Corporation for compensation paid to its investor relations departmentfor services rendered to us by that department.  For the year ended December 31, 2002, we paid MedicalCapital Corporation $253,468 as reimbursement of compensation paid to employeesof Medical Capital Corporation for investor relations services provided on ourbehalf.  We also reimburse MedicalCapital Corporation for out-of-pocket expenses paid on our behalf.  We believe the above fees are competitivewith fees charged by independent third parties for providing similar services.

 

***Lock Box & Collections***.  Asrequired under the receivables purchase agreement, all proceeds from thecollection of the purchased receivables are required to be paid to a lock boxaccount.  A lock box account is a postoffice box, called a lock box, established by the bank that processes thepayments.  Payments are sent directly tothese lock boxes.  Therefore, thethird-party payor payments of receivables do not go to the seller, but ratherare sent to the appropriate lock box. When a seller enters into a receivables purchase agreement, a notice ofchange in mailing address is sent to all payors of the receivables that arebeing purchased.  The notice instructsthe payors to deliver all payments to the appropriate lock box account.  Each lock box is established and functionssolely to receive payments.  Whenpayments are sent to the lock box, the lock box processing bank deposits thepayment into a lock box account at that bank. The lock box account is in the name of the seller and Medical CapitalCorporation for government collections, and is in the name of Medical CapitalCorporation for non-government collections. The bank lock box proceeds are maintained in a zero balance accountwhich is swept daily by each bank maintaining a lock box account to the cashconcentration account that is under the control of the trustee.

 

Separatelock box accounts are established for each seller.  Receivables due and owing from government programs are subject tolaws and regulations not applicable to commercial payors.  Except in limited cases, Medicare andMedicaid laws and regulations provide that payments for services rendered undergovernment programs can only be made to the healthcare provider that hasrendered the services.  Therefore, eachseller has a lock box for non-government collections and a separate lock boxfor government collections, like Medicare, Medicaid, CHAMPUS, etc.  However, if a governmental agency refuses topay a healthcare receivable, we cannot force collection directly from thegovernment agencies that are obligated to pay the healthcare receivables owedto us unless we first successfully obtain a court order.  This inability to force collection directlyfrom the government agency without a court order could adversely affect ourbusiness.

 

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Whenwe purchase a receivable, we purchase all right, title and interest in thereceivable.  However, at the time ofpurchase, we appoint the seller as the collection agent for the receivable andthe seller remains obligated to collect the receivable.  Our purchase agreement with the seller givesus the right to take over the collection process if necessary.  Although we believe our staff has the necessaryexperience to collect receivables, we do not perform day-to-day collectionactivities.  Collection remains theobligation of the seller, and we monitor the seller’s collection activities.

 

***Tracking Receivables by Batch***. Generally, once a batch of receivables reaches an age of 180 to 300 daysfrom the purchase date, the batch is “closed.” The closed batch is reconciled and reviewed to determine if thecollections are adequate to achieve the expected performance of the purchasedreceivables.  This process is used toconstantly evaluate the expected net receivable rates used for eachseller.  If any one batch of purchasedreceivables does not perform as expected and falls short of the expected netreceivable, the seller is required to supplement the shortfall by substitutingthe receivable with another eligible receivable, or through recovering theshortfall from the reserve account, or by paying the appropriate sum to MedicalCapital Corporation.  If the batchcollects more than the applicable expected net receivable, the excess isallocated to the seller’s reserve account.

 

Weeklyreports of purchased receivables are generated on a seller by sellerbasis.  These reports provide currentlyupdated accounts receivable agings and other valuable portfolio information,including claim denial trends and collections performance.  Copies of these weekly reports are sent toour executive offices and the payment and aging update reports are sent to eachseller.

 

***Servicing of Receivables***.  Wehave a servicing agreement with our affiliated company, Medical TrackingServices, or MediTrak, which is headquartered in Las Vegas, Nevada.  The servicing agreement provides thatMediTrak will service the receivables and provide other support in connectionwith the processing, collection and valuation of receivables.  MediTrak services all receivable batchesthat we purchase from our sellers. MediTrak also prepares analysis reports of receivables that aresubmitted for purchase, but ultimately disqualified and not purchased.

 

MediTrakprocesses all receivables we purchase and reports related data on a batch bybatch basis.  The payor’s explanationsof benefits and payments, which shows how the payments on each receivable werecalculated, its remittance advices and warrants from government agencies, andall other payments, are sent directly to the bank that is performing the lockbox processing.  Copies of thesedocuments are forwarded by the bank to MediTrak for posting.  MediTrak is also provided with a report fromthe lock box processing bank of deposits into the lockbox accounts.

 

MediTrakinputs this information into its system and posts the proper credits to eachseller’s account, on an account-by-account basis.  It then transmits a report electronically to us giving details ofall amounts received.  MediTrak thensends copies of all payment documents and other accompanying documents to theseller.

 

Underthe servicing agreement, MediTrak is compensated for its services by receivinga fee for each claim posted on its tracking system.  The fee is equal to $2.00 per claim item in addition to a monthlyminimum fee of $200.00 per provider, a one-time setup fee of $1,500 andone-time data interface fee of up to $1,500.****Forthe year ended December 31, 2002, we incurred $276,846 in servicing feesto MediTrak.  We believe the feesMediTrak charges to companies within the Medical Capital Holdings group areequal to or lower than those non-affiliated third parties would charge forproviding similar services.

 

**CreditLoss Policy and Experience**

** **

Weregularly review our outstanding receivables to determine the adequacy of ourbad debt reserve for losses on receivables. We expect to maintain the bad debt reserve for losses on receivables atan amount estimated to be sufficient to absorb future losses, net ofrecoveries, inherent in the receivables. In evaluating the adequacy of the allowance, we expect to considerfactors like trends in healthcare and

 

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otherrelevant sub-markets, past-due accounts, historical charge-off and recoveryrates, credit risk indicators, economic conditions, on-going creditevaluations, overall portfolio size, average seller balances, reserve accountbalances, real estate collateral valuations, if any, and underwritingpolicies.  However, many of these considerationsinvolve the significant use of estimates and are subject to rapid changes whichmay be unforeseen and could result in immediate increased losses and materialadjustments to the allowance or actual losses.

 

Tothe extent that we may deem specific receivables to be wholly or partiallyuncollectable, we will establish a bad debt loss reserve equal to that amount.As of December 31, 2002, we had not incurred any losses and did not haveany bad debt reserve or allowance for losses established.  Historically, companies in the Medical CapitalHoldings group have used a guideline for credit loss allowances of 2% ofoutstanding debt at the time of reporting. However, this guideline is adjusted to reflect the performance of eachindividual client.  As a result, thecredit loss allowances have often been less than the 2% guideline.

 

Becausewe are likely to collect more than the amount initially paid to the seller ofthe receivable, the portion of the purchase price that has been withheldrepresents a reserve, or additional security, for the collection of the amountsdue under all of the receivables from that seller.  The amount of the holdback of a portion of the receivables’purchase price that does not represent a yield to us upon collection of the receivableis allocated to the reserve account of that seller.  Under the terms of our purchase agreement with the seller, if theseller is in compliance with the agreement and all of its batches ofreceivables are collected on time, we will return to the seller all amountsallocated to the seller reserve account that exceed 25% of the outstandingbalance of the seller’s receivables, calculated on a monthly basis.  In addition, if we cease to purchasereceivables from a seller, once that seller’s outstanding receivables arecollected in full, we will return all amounts allocated to the reserve accountto the seller.  If a receivable is indefault, we will take measures to recover the purchase price.  These measures include reducing the seller’sbalance in its reserve account, seeking replacement of the receivable from theseller, or enforcing corporate or personal guarantees given by the seller, ifany.

 

**Titleto Receivables**

** **

Webelieve that the receivables purchase transactions we enter into are “truesales” and the purchased receivables are owned by us.  However, the purchase of a receivable might be characterized as asecured financing, or a loan secured by the receivables.  Therefore, we also take a security interestin each receivable purchased and file a UCC-1 financing statement covering thereceivables.  If it is determined that atrue sale of the receivable has not occurred, we may still be able to forecloseon the receivable or the proceeds of the receivable as security for the amountpaid for the receivable.

 

Althoughwe pledge receivables to the trustee under the note agreement, we recognizethat some receivables may prove to be non-assignable.  For example, the assignment of some Medicare and Medicaidaccounts receivables may be prohibited by federal law.  However, it is common in the medicalreceivables lending industry to take other measures to secure the receipts fromMedicare and Medicaid accounts receivables. We make every effort to ensure that the accounts receivables purchasedare assignable.  If a receivable turnsout to in fact be non-assignable, it is possible that neither the trustee norwe will have received title to the receivable, or even a security interest init.  This problem is addressed by takingadditional collateral as security from the seller or its owners.  Other steps may also be taken by ourunderwriting department to ensure that the loan is fully secured.

 

Ina few cases, assignment of a receivable or any security interest in a nursinghome has been found to require the recording of a mortgage.  This is a practice we attempt to avoid anddo not currently intend to follow.  Inthe event of a default on these receivables by the payor, we could be at riskto the extent of the purchase price advanced with respect to the receivables.

 

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**Competition**

** **

Weencounter significant competition in our healthcare finance business fromnumerous commercial banks, diversified finance companies, secured lenders andspecialty healthcare finance companies. Many of these competitors have greater financial and other resourcesthan us and may have significantly lower cost of funds because they havegreater access to insured deposits or the capital markets.  Moreover, some of these competitors havesignificant cash reserves and can better fund shortfalls in collections thatmight have a more pronounced impact on companies such as ours.  They also have greater market share.  In addition, receivable sellers often seek alternativesources of financing from a number of sources, including venture capital firms,small business investment companies, suppliers and individuals.  As a result, we compete with a significantnumber of local and regional sources of financing and several large nationalcompetitors.

 

Competitioncan take many forms, including the pricing of the financing, transactionstructuring, like the use of securitization vs. portfolio lending, timelinessand responsiveness in processing a client’s financing application and customerservice.  Some of our competitors mayoffer better pricing for receivables, be more timely and responsive inprocessing receivable purchases and have better customer service than wedo.  Some of these companies may alsohave greater experience and more efficient collection methods than we mightdevelop.  Some of our competitors targetthe same type of healthcare sellers as we do and generally have operated in themarkets we service for a longer period of time.  Although many of our competitors have focused their business on largehospitals and clinics and generally prefer to buy receivables in multi-milliondollar denominations, typically with a lower profit margin, these competitorscould enter our target markets more aggressively in the future.  If we are unable to successfully competewith these companies, our business could be adversely affected.

 

**GovernmentRegulation**

** **

Ourhealthcare finance business is subject to federal and state regulation andsupervision.  Currently, there are noregulations that require us to obtain specific licenses or approvals, otherthan those applicable to businesses in general, to be able to purchasereceivables in any state.  Wecontinually research and monitor regulations and intend to apply for theappropriate licenses if regulations change and require us to be licensed toperform our business in any particular state in which we operate.

 

Governmentsat both the federal and state levels have continued in their efforts to reduce,or at least limit the growth of, spending for healthcare services.  On August 5, 1997, President Clinton signedinto law The Balanced Budget Act of 1997, or the BBA.  The BBA contains numerous Medicare andMedicaid cost-saving measures. Section 4711 of the BBA, entitled “Flexibility in Payment Methodsfor Hospital, Nursing Facility, ICF/MR, and Home Health Services,” repealed theBoren Amendment.  The Boren Amendmenthad required that state Medicaid programs pay nursing home sellers amountsreasonable and adequate to meet various costs. These costs were those that must be incurred by efficiently andeconomically operated facilities in order to provide care and services inconformity with applicable state and federal laws, regulations and quality andsafety standards and to assure access to hospital services.  The Boren Amendment was previously thefoundation of litigation by healthcare facilities seeking rate increases.

 

Inplace of the Boren Amendment, the BBA requires only that, for services anditems furnished on or after October l, 1997, a state Medicaid program mustprovide for a public process for determination of Medicaid rates of payment fornursing facility services.  Under theseproposed rates, the methodologies underlying the establishment of the rates andjustification for the proposed rates are published.  This gives sellers, beneficiaries and other concerned stateresidents a reasonable opportunity for review and comment on the proposedrates, methodologies and justifications.

 

Statesare actively seeking ways to reduce Medicaid spending for healthcare by methodslike capitated payments and substantial reductions in reimbursement rates.  The BBA also requires that nursing homestransition to a prospective payment system under the Medicare program during athree-

 

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year“transition period” commencing with the first cost reporting period beginningon or after July 1, 1998.  The BBAalso contains several new anti-fraud provisions.  We are unable to predict the long-term impact of the BBA andcontinuing changes in state Medicaid reimbursement methodologies on therevenues of our sellers.

 

Ourbusiness may be affected by our inability to directly collect receivables undergovernment programs and the right of payors under these programs to offsetagainst unrelated receivables.  Ourhealthcare receivables purchase business may also be indirectly affected byhealthcare regulation to the extent that any of our sellers’ failures to complywith the applicable regulations affects our ability to collect theirreceivables.  The most significanthealthcare regulations that could potentially affect us are:(1) certificate of need regulation, which many states require upon theprovision of new health services, particularly for long-term care and homehealthcare companies; (2) Medicare-Medicaid fraud and abuse statutes, whichprohibit, among other things, the offering, payment, solicitation or receipt ofremuneration, directly or indirectly, as an inducement to refer patients tofacilities owned by physicians if the facilities receive reimbursement fromMedicare or Medicaid; and (3) other prohibitions of physicianself-referral that have been promulgated by various states.

 

***Certificate of Need Regulation***. Various states regulate the provision of new healthcare services oracquisition of healthcare equipment through certificate of need or similarprograms.  These states requirehealthcare providers to enter into a time consuming certificate of needapplication process to be granted licenses and permits to open or expandhealthcare services.  Most states haveremoved certificate of need regulations from their state laws and have replacedthem with more streamlined licensing processes.  We believe these requirements will have a limited effect on ourbusiness.  However, there can be noassurance that future changes in those laws will not adversely affect us.  Repeal of existing regulations of this typecould also adversely affect us since sellers could face increased competitionabsent regulation.  There is noassurance that our proposed healthcare financing business within the nursinghome and home care industries will not be adversely affected by regulations ofthis type as well.

 

***Medicare-Medicaid Fraud and Abuse Statutes***.  TheU.S. Department of Health and Human Services, or “HHS,” theU.S. Department of Justice and state fraud enforcement agencies haveincreased their enforcement efforts under the Medicare-Medicaid fraud and abusestatutes.  Since we often rely on promptpayment on our healthcare receivables, reduced or denied payments undergovernment programs could have an adverse effect on our business.

 

***Regulation of Physician Self-Referral***. These statutes prohibit the offering, payment, solicitation or receiptof compensation, directly or indirectly, as an inducement to refer patients forservices reimbursable in whole or in part by the Medicare-Medicaidprograms.  HHS believes thatdistributions of profits from corporations or partnerships to physicianinvestors who refer patients to the entity for a procedure reimbursable underMedicare or Medicaid may be prohibited by the statute.  In addition, regulatory attention has beendirected toward physician-owned healthcare facilities and other arrangementswhere physicians are compensated, directly or indirectly, for referringpatients to those healthcare facilities.

 

In1988, legislation entitled the “Ethics in Patient Referrals Act” (H.R. 5198)was introduced which would have prohibited Medicare payments for all patientservices performed by an entity which a patient’s referring physician had aninvestment interest.  As enacted, thelaw prohibited only Medicare payments for patient services performed by aclinical laboratory.  The ComprehensivePhysician Ownership and Referral Act (H.R. 345), which was enacted by Congressin 1993 as part of the Deficit Reduction Package, is more comprehensive thanH.R. 5198.  This act covers additionalmedical services including medical imaging radiation therapy, physicalrehabilitation and other healthcare services.

 

Avariety of existing and pending state laws prohibit or limit a physician fromreferring patients to a facility in which that physician has a proprietary orownership interest.  Many states alsohave laws similar to the Medicare fraud and abuse statute which are designed toprevent the receipt or payment of

 

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compensationin connection with the referral of a patient. Healthcare receivables resulting from a referral in violation of theselaws could be denied payment which could adversely affect both us and oursellers.

 

**Changes in HMO and Insurance Company Payment and ReimbursementPractices**

 

Inaddition to governmental initiatives, private reform efforts have beeninstituted throughout the healthcare industry, including the capitation of somehealthcare expenditures.  Capitation isthe prepayment of a predetermined monthly fee to healthcare providers for somecosts by third-party payors, typically HMOs and other managed healthcareconcerns.  The capitation fee is basedon the aggregate number of patients under a healthcare providers’ care.  This fee does not vary, regardless of howmuch time the patient requires, the number of visits, or the nature of theillness.  The healthcare provider thenprovides healthcare to these patients when and as needed, and assumes the riskof whether the capitation fee will cover its costs and provide a profit for allof the healthcare services it renders. Because some capitation eliminates patient billing, it can reduce theprovider’s healthcare receivables and risk of collection of fees that are the primarysource of our business and cash flow. There is a risk that this practice will grow as HMOs expand.

 

Otherpossible changes in private healthcare delivery and payment systems couldadversely affect our business.  Theseinclude employer initiatives like creating purchasing cooperatives and sellerinitiatives to integrate hospitals and physicians into comprehensive deliverysystems.  Also, management and billingservices may be consolidated by integrated healthcare delivery systems.  This consolidation may result in a decreasein the willingness of providers to sell healthcare receivables and reducedemand for related billing and collection services.

 

**Employees**

** **

Asof December 1, 2003, we employed no full-time employees.  However, we make partial use ofapproximately 85 employees of our affiliates, for which we pay fees underthe administrative services agreement.

 

**Item2.  Description of Property.**

 

The principal executive offices of theCompany are located at 3770 Howard Hughes Parkway in Las Vegas, Nevada. Itsoffice space is leased by its parent, Medical Capital Holdings, from anon-affiliated landlord. The Company believes that its existing facilities areadequate for its current needs and that suitable additional space will beavailable as needed.

 

**Item3.  Legal Proceedings.**

 

The Company is not aware of any pending orthreatened legal proceedings that, if adversely determined, would have amaterial affect on its operations.

 

# **Item 4. Submission of Matters to a Vote of Security Holders.**

 

None

 

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**PART II**

 

## **Item5.  Market for Common Equity and RelatedStockholder Matters.**

 

All of the Company’s common equity is held byits parent, Medical Capital Holdings, Inc. There is no public market for the Company’s equity securities.

 

The information required by Item 701 ofRegulation S-B has been previously reported.

 

## **Item 6. Management’s Discussion and Analysis ofFinancial Condition and Results of Operations.**

 

Management’sdiscussion and analysis of the results of operations and financial conditionshould be read in conjunction with the Financial Statements and related Notes.

 

**Overview**

 

As discussed inNote 12 to the financial statements, the amended financial statements are beingpresented as a restatement to reflect the correction of errors for the yearsended December 31, 2002 and 2001.

 

*Correctionof Error.* Wepreviously had reported income using the interest accretion method, and changedthis to the cost recovery method. The cost recovery method relates to theincome recognition on purchased receivables. The cost recovery method requiresthat any amounts received be applied first against the recorded amount of theadvance and when that amount has been reduced to zero, any additional amountsreceived can be recognized as discount income. Additionally, as discussed inNote 12 to the financial statements, our 2002 and 2001 medical receivablesbalance, additional paid in capital and receivable from Parent and affiliates,net were previously incorrectly reported. These discoveries were madesubsequent to the issuance of the financial statements. The financialstatements have been restated to reflect the corrections of these errors.

 

The accompanying consolidated financial statements have been preparedin conformity with accounting principles generally accepted in the UnitedStates of America, which contemplate continuation of the Company as a goingconcern. The management of the Company has decided to wind down operationsduring 2003-2004, after collecting or selling outstanding medical receivablesand using such proceeds to settle all the Company’s obligations, includingoutstanding notes payable. These consolidated financial statements do notinclude any adjustments that might result from the outcome of this decision.

 

For 2001, the Company originally reported a medicalreceivables balance, due from (payable to) Parent for accrued expenses andincome taxes, additional paid in capital, and retained earnings (accumulateddeficit) of $15,443,166, $(74,475), $4,250,000, and $47,296, but should havebeen $9,828,907, $522,801, $250,000, and $(969,687), respectively. The impactof these changes upon stockholder’s equity (deficit) was a decrease of$(5,016,983) and upon net income (loss) of the Company was a decrease of $(1,016,983).

 

For 2002, the Company originally reported a medical receivables balance,due from (payable to) Parent (accrued expenses and income taxes), additionalpaid in capital, and accumulated deficit of $45,012,270, $211,127, $3,000,000,and $(1,149,901), but should have been $30,539,011, $6,671,753, $0, and$(6,162,534), respectively. The impact of these changes upon stockholder’sdeficit and net income (loss) was a decrease of $(8,012,633) and $(2,995,650),respectively, of which $(5,016,983) included in stockholder’s deficit relatedto the prior year 2001 (above). In 2002, the Company’s dividend of $1 millionwas first applied to additional paid in capital and then accumulated deficit.

 

For the year ending 2002, theCompany incurred net losses of $4,192,847, used cash for operations of$29,302,913 in 2002 and at December 31, 2002, had an accumulated deficitof $6,162,514.

 

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*Expected Net Receivable. *Through ourunderwriting process we determine an amount for each receivable that we expectto be collectable, which is referred to as the expected net receivable, orENR.  This amount is often less than thestated face amount of the receivable and never more than the stated faceamount.  All of our other calculationsrelated to receivables are based on the ENR of the receivable, not the faceamount of the receivable.  The followingis an table of our healthcare receivables on the ENR basis as ofDecember 31, 2002:

 
| **Aging In Days(1)** |   | **Receivables  In Open Batches(2)** |       | **Uncollected  Receivables  (Assigned A Value  Of Zero)(3)** |   | **Total  Receivables** |   |
|----------------------|--------|-------------------------------------|------------|--------------------------------------------------------------|--------|------------------------|--------|
| 0-60                 |   | $                                   | 22,777,125 |                                                         | $      | 0                      |   | $ | 22,777,125 |   |
| 61-120               |   | 12,675,015                          |       | 0                                                            |   | 12,675,015             |   |
| 121-180              |   | 10,196,440                          |       | 139,934                                                      |   | 10,336,374             |   |
| 181-240              |   | 6,827,107                           |       | 407,032                                                      |   | 7,234,139              |   |
| 241-270              |   | 1,359,658                           |       | 635,409                                                      |   | 1,995,067              |   |
| 271-360              |   | 1,086,371                           |       | 1,792,174                                                    |   | 2,878,545              |   |
| Over 360             |   | 307,004                             |       | 1,287,382                                                    |   | 1,594,386              |   |
| Total ENR            |   | $                                   | 55,228,720 |                                                         | $      | 4,261,931              |   | $ | 59,490,651 |   |

 

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(1)  The aging of the receivable is the number of days that have elapsed fromthe date of billing by the provider as averaged at the time of the purchase ofthe batch of receivables.

(2)   The table reflects reports as of thedetermination dates. These reports do not reflect restated medical receivableadjustments of $8,104,000, and un-posted cash, interim purchases and interimcollections, which amounted to $3,865,140 on December 31, 2002.  The gross medical receivable of $43,259,580is reflected in Note 8.

(3) This represents accounts receivable in batches collected to Advanceplus Discount Fee and the balance of which is assigned a value of zero.  Subsequent cash collections of thesereceivables during the period of January 1, 2003 to March 31, 2003was $ 1,306,586.76 of which $1,208,163.55 was applied to close batches ofpurchased receivables.

 

**Reserves:**

 

*Seller’s Reserve. *The amount of each receivable allocatedto each seller’s reserve account is equal to the ENR, minus the sum of theinitial purchase amount and the discount. This is the batch seller’s reserve for funds that could be returned tothe seller after claims are collected, if contractual terms are met by theseller.  This seller reserve is rolledup into the overall aggregate seller reserve on the entire pool of receivablespurchased from that seller. Receivables are posted on areceivable-by-receivable basis, and reported on a batch basis. The receivablesare also monitored by tracking the entire pool of batches for a seller todetermine the adequacy of the seller’s reserve account.  The Company typically tries to maintain anoverall seller reserve of 10-25% of the ENR for each seller’s pool ofreceivables depending on various criteria determined through the underwritingprocess and collection experience of the seller’s receivables. If a seller’sreserve account is insufficient on a pool basis, an adjustment is made toreduce the initial purchase amount on future batches of receivables purchasedfrom that seller, which increases the amount of each batch allocated to theseller’s reserve account. Although the Company has the right under its purchaseagreement with the seller to reduce the percent advanced on future purchases,the Company has not done so for competitive reasons. However, the Company haswithheld a portion of the advance on future purchases in order to offsetuncollected receivables, which has the effect of reducing the advance amountpercentage on future purchases. In addition, under the terms of the Company’spurchase agreement with each seller, any amounts collected in excess of the ENRare allocated to the reserve account of the seller to increase that seller’sreserve balance. If the seller is in compliance with the terms of the purchaseagreement and all of its batches of receivables are collected on time, theCompany will return to the seller all collections for the amounts allocated tothe seller reserve account that exceed 25% of the outstanding balance of theseller’s receivables, calculated on a monthly basis. In addition, if theCompany ceases to purchase receivables from a seller, once that seller’soutstanding receivables are collected in full, the Company will return anycollections, as well as all rights, title and interest in the receivablesallocated to the reserve account to the seller.

 

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Usually, within a period determined by the Company from the date ofpurchase (depending on the contractual terms in each seller’s agreement), ifthe full ENR of the receivable has not been fully collected, the batch ofreceivables and the individual open receivable are considered to have a valueof zero and/or replaced with a new receivable. At the same time the Company assigns a receivable a value of zero, itoffsets the uncollected portion against the seller reserve for that seller orwithholds a portion of the advance on the next purchase of receivables fromthat seller.  Even though the receivableis assigned a value of zero, the Company continues to track the receivable andattempts to collect it.  If thereceivable is subsequently collected, the Company allocates those collectionsto the seller’s reserve account under the terms of its purchase agreement withthe seller. As of December 31, 2002, the amount collected (for allsellers) in excess of their respective reserve accounts was $150,070.

 

*Discount Reserve*.  This reserve is established by deferringdiscount income on medical receivables purchased from each seller andrecognizing the discount income upon collection of the receivables after thefull collection of the net advances. The Company anticipates the receivables on which these reserves arebased to be collectable, however, if the Company does not collect the purchasedreceivables in the contractual period (as established between the seller andthe Company) then the seller forfeits the deferred purchase price of theshort-collected batch of receivables to the Company.  Once a batch of receivables, grouped by a fiscal quarter, isfully collected to the ENR amount, the Company recognizes the seller’sforfeited deferred purchase price as additional discount revenue.  As of December 31, 2002, the discountreserve was $7,612,259.

 

*Bad Debt Reserve for Losses. *The bad debtreserve for losses on medical receivables is increased by provisions chargedagainst operations and reduced by receivables charged off, as determined bymanagement.  The reserve is maintainedat a level considered adequate to provide for potential losses on medicalreceivables based on management’s evaluation. Under the terms by which the medical receivables are purchased, theCompany has significant collateral, including substitution of receivablesexceeding the contractual period ranging from 90-270 days.  Accordingly, charge-offs are not expected tobe material to the Company’s financial position or results of operations.  During the twelve months endedDecember 31, 2002 and December 31, 2001, no reserves for losses wereneeded.

 

**Results ofOperations for the Twelve Months Ended December 31, 2002 andDecember 31, 2001 (Restated).**

 

***Revenues***.  Weformally began operations after our initial registration statement, relating toour public offering of secured notes, was declared effective by the Securitiesand Exchange Commission, on February 6, 2001. For the twelve months endedDecember 31, 2002, we purchased medical receivables carrying an ENR valueof $57,727,140, and restated earned discount fees on these purchases of$661,838, and increased our discount reserves which reduced our total revenue.We anticipate the receivables on which these reserves are based to be fullycollectible and the discount fee to be earned upon collection of the netadvance and contractual discount fee. During the same period, we also earned$166,032 in administration fee.

 

Forthe twelve months ended December 31, 2001, we purchased medicalreceivables carrying an ENR value of $20,262,386 (including earned and unearneddiscount fees of $1,009,637 from our Parent and affiliates) and restated earneddiscount fees on these purchases of $31,654, and increased our discountreserves which reduced our total revenue. We anticipate the receivables onwhich these reserves are based to be fully collectible and the discount fee tobe earned upon collection of the net advance and contractual discount fee.  During the same period, we did not earn anyadministration income.

 

As of December 31,2002 the Company held $7,612,259 in discount reserves as restated, whichreduced its discount revenue.  TheCompany anticipates the receivables upon which these reserves are based to befully collectible and recognizing the discount income upon collection of thereceivables after the full collection of the net advances.  A summary of the changes in the discountreserve for the company from inception to December 31, 2002, on a grossbasis is as follows:

 

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|                         |   | **For the year ended  December 31, 2002** |      | **For the year ended  December 31, 2001** |   | **Inception to  December 31, 2002** |   |
|------------------------------|--------|------------------------------------------------|-----------|------------------------------------------------|--------|------------------------------------------|--------|
| Beginning Balance            |   | $                                              | 1,810,095 |                                           | $      | 0                                        |   | $ | 0 |   |
| Deferred income on purchases |   | 6,464,002                                      |      | 1,841,749                                      |   | 8,305,751                                |   |
| Less: income recognized      |   | (661,838                                       | )         | (31,654                                        | )      | (693,492                                 | )      |
| Ending Balance               |   | $                                              | 7,612,259 |                                           | $      | 1,810,095                                |   | $ | 7,612,259 |   |

 

***Gross Profit***.  Ourgross profit (loss) restated during the twelve months ended December 31,2002 was $(445,090), which arose from gross discount revenues of $6,464,002,less the change in discount reserves of $5,802,164, plus $166,032 inadministration income, less our administration expense incurred of $1,272,960.Our administration expense, related party, was 2.2% of the total ENR of 2002purchases.

 

Ourgross profit (loss) during the twelve months ended December 31, 2001 was$(408,002), which arose from gross discount revenues of $1,841,749, less thechange in discount reserves of $(1,810,095) and administration expense incurredof $439,656. Our administration expense, related party, was 2.2% of the totalENR of 2001 purchases.

 

***Operating Expenses***.  Ourtotal operating expenses for the twelve months ended December 31, 2002,were $6,210,223.  Expenses consistedprimarily of $4,148,405 in interest expense, which consists of interest expenseof $3,546,219, plus amortized commissions of $1,166,403, and amortized deferredoffering costs of $127,145, less interest earned of $691,362.  Interest earned included $660,356 on ourgross notes receivables of $5,339,127 from various medical providers, and$31,006 on cash and cash equivalents. We also incurred $350,437 in advertisingexpense, which is expensed as incurred, professional services of $321,298,service fees of $276,846 (related party), and legal fees of $227,131.

 

Forthe twelve months ended December 31, 2001, our total operating expenseswere $1,133,493.  Expenses consistedprimarily of $635,437 in interest expense, which consists of interest expenseof $519,191, plus amortized commissions of $189,463, and amortized deferredoffering cost of $100,014 less interest earned of $173,231. Interest earnedincluded $136,791 on our notes receivables of $4,045,000 from various medicalproviders, and $36,440 on cash and cash equivalents.  We also incurred $207,618 in advertising expense, which isexpensed as incurred, professional services of $58,998, service fees of $33,824(related party), and legal fees of $53,064.

 

***Income Tax Expense or Benefit***.  Forthe twelve months ended December 31, 2002 and 2001, our restated benefitfor income taxes was $2,462,466 and $(571,808), respectively.  For Federal and State income taxes, we areconsolidated with our parent.  We areallocated our share of the consolidated tax liability using the separate returnmethod.

 

***Net Loss***.  Wehad a net loss of $4,192,847 or basic and diluted net loss per common share of$2,096, for the twelve months ended December 31, 2002. Our net lossresulted primarily from the increase in discount reserves net of tax benefit.

 

Forthe twelve months ended December 31, 2001, we had net loss of $969,687 orbasic and diluted net loss per common share of $554. Our net loss resultedprimarily from the increase in discount reserves net of tax benefit.

 

**Liquidityand Capital Resources**

 

Duringthe twelve months ended December 31, 2002, we received $35,678,000 in cashfrom the issuance of our secured notes in our public offering, and receivedcollections on medical receivables of $28,110,534. During the same period, weused $49,480,134 of these funds to purchase medical receivables, and had$1,686,000 in notes mature and not reinvest. As of December 31, 2002, we

 

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maintained$1,494,002 in cash and cash equivalents, which we seek to utilize in purchasingadditional medical receivables and in the acquisition of other possibleinvestments.

 

Fromour inception on August 4, 2000 to December 31, 2002, we havereceived $53,895,000 from the sale of our notes, and received $31,971,936 incollections on medical receivables. Over the same period, we used $67,931,370to purchase medical receivables, and made cash loans of $5,339,127 toproviders. We have had $1,686,000 in notes that have matured and not reinvestedsince inception.

 

For the twelve monthsended December 31, 2003 (unaudited), the Company sold medical receivablesof various providers to its Parent and affiliates with a book value of$21,209,099, for which it received consideration of $21,817,912, respectively,in cash.

 

Webelieve current conditions of the stock exchanges and financial markets willhave some impact on the issuance of our secured notes, yet due to the favorableand fixed interest rates we believe we offer on the notes, we believe thisimpact will not be significant.  We donot believe that inflation has had a significant impact on our operations.

 

Ourmanagement consists of officers and employees employed by Medical CapitalCorporation.  Their salaries andbenefits are paid by Medical Capital Corporation. Our operating expenses willbe reimbursed from the net offering proceeds of the offering of our notes tothe public or from cash flow generated from our operations.  Over the next 12 months, we believe cashgenerated by our operations will be sufficient to fund all of our general andadministrative expenses.  However, if weare unable to sell a sufficient amount of notes, we may be unable to pay theprincipal on maturing notes when due. If this occurs, we may have to sell receivables to pay our obligationson maturing notes.  The amount wereceive for selling receivables may be insufficient to pay our obligations onour notes in full.

 

**Related Party Transactions**

 

TheMedical Capital Holdings Group has substantial experience and success inidentifying and evaluating healthcare providers desiring to sell theirhealthcare receivables.  We use theservices and expertise of Medical Capital Holdings and its subsidiaries topurchase a portfolio of healthcare receivables.  We have entered into contracts with Medical Capital Corporationand Medical Tracking Services, affiliated companies, to provide the appropriatesystem for purchasing and tracking our healthcare receivables.  Reimbursement for these servicesapproximates the costs to these affiliated entities which we believe equals theprevailing market rates for comparable services of this nature.

 

Forthe twelve months ended December 31, 2002 and 2001, Medical CapitalCorporation was compensated for administration of our healthcare receivables inthe amount of $1,272,960 and $439,656, respectively. For the twelve monthsended December 31, 2002 and 2001, we incurred management fees provided byMedical Capital Corporation of $126,000 and $0, respectively. For the twelvemonths ended December 31, 2002 and 2001, Medical Tracking Services wascompensated for servicing our receivables in the amount of $276,846 and$33,824, respectively. For the twelve months ended December 31, 2002 and2001, we incurred sales commissions for telemarketing expenses provided byMedical Capital Corporation in the amount of $127,930 and $0, respectively.

 

For the twelve monthsended December 31, 2002 and 2001, we purchased medical receivables ofvarious providers from our parent and affiliates with a book value of$15,212,372 and $7,088,200, respectively, for which we paid $12,866,106 and $6,078,564,respectively, in cash, with the balance included in the calculation of discountrevenue earned and reserved (deferred).  As of December 31, 2002,the Company was owed $6,671,753 from its Parent and affiliates, which includes$3,034,274 of income tax benefit receivable, and accrued expenses payable of$466,532 to the Parent or affiliate and the remaining $4,104,011 of medicalreceivable cash collections which were misdirected to an affiliate (Note 12).

 

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Forthe nine months ended September 30, 2003 and 2002 (unaudited), MCC wascompensated for administration of the healthcare receivables, which the Companypurchased in the amounts of $609,754 and $780,453, respectively. For the ninemonths ended September 30, 2003 and 2002 (unaudited), MTS was compensatedfor servicing the Company’s receivables in the amounts of $129,783 and$207,713, respectively.  For the ninemonths ended September 30, 2003 and 2002 (unaudited), the Companypurchased medical receivables of various providers from its Parent andaffiliates with a book value of $1,239,904 and $10,289,012, respectively, forwhich it paid a consideration of $1,239,904 and $9,091,952, respectively, incash with the balance included in the calculation of discount revenue earnedand reserved (deferred). For the nine months ended September 30, 2003 and2002 (unaudited), the Company sold medical receivables of various providersfrom its Parent and affiliates with a book value of $11,407,066 and $0, respectively,for which it received a consideration of $12,035,879 and $0, respectively, incash.

 

For the twelve monthsended December 31, 2003 (unaudited), the Company purchased medicalreceivables of various providers from its Parent and affiliates with a book valueof $1,239,904, for which it paid a consideration of $1,239,904, respectively,in cash with the balance included in the calculation of discount revenue earnedand reserved (deferred). For the twelve months ended December 31, 2003(unaudited), the Company sold medical receivables of various providers from itsParent and affiliates with a book value of $21,209,099, for which it received aconsideration of $21,817,912, respectively, in cash.

 

As a normal course ofbusiness, initial purchase relationships may occur between the seller andMedical Capital Holdings and its affiliates. Medical Capital Holdings has arevolving credit line with a U.S. bank, which allows Medical Capital Holdingsto purchase accounts receivable from a seller. Then, once we have funds available, the receivables, as well as therights, title and interest in the contractual relationship between the sellerand parent, are sold to us by Medical Capital Holdings.  For these inter-company sales, thereceivables are sold to us at a price generally equal to 85-100% of the sum ofthe total amount advanced to the seller of the receivable, plus the discountfee, less any collections already received on the receivable.  Medical Capital Holdings’ costs, includinginterest charges, are included in the purchase price.  To the extent we have sufficient funds available, we willpurchase receivables directly from a seller without first being purchased byMedical Capital Holdings.  MedicalCapital Corporation makes the determination as to whether we purchasereceivables from our affiliates or directly from the seller.  Medical Capital Corporation may also directthe sale of receivables from one of our affiliates to us, or from us to one ofour affiliates as a method of asset/liability management and to attempt tomaintain diversification in our investment portfolio.  When we purchase receivables from our affiliates, we purchase allrights, title and interest in the receivable that our affiliate owned,including reserve amounts.  Moreover, wepurchase medical receivables from direct sellers or our affiliates at fairvalue.  Consequently, we believe thatour results of operations are not impacted whether we purchase receivablesdirectly from the seller or from one of our affiliates.

 

**RecentAccounting Pronouncements**

 

InOctober 2001, the FASB issued SFAS No. 143, “Accounting for AssetRetirement Obligations,” which requires companies to record the fair value of aliability for asset retirement obligations in the period in which they areincurred.  The statement applies to acompany’s legal obligations associated with the retirement of a tangiblelong-lived asset that results from the acquisition, construction, anddevelopment, or through the normal operation, of a long-lived asset.  When a liability is initially recorded, thecompany would capitalize the cost, thereby increasing the carrying amount ofthe related asset.  The capitalizedasset retirement cost is depreciated over the life of the respective assetwhile the liability is accreted to its present value.  Upon settlement of the liability, the obligation is settled atits recorded amount or the company incurs a gain or loss.  The statement is effective for fiscal yearsbeginning after June 30, 2002.  Wedo not expect the adoption to have any impact on our financial position orresults of operations.

 

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InOctober 2001, the FASB issued SFAS No. 144, “Accounting for the Impairmentor Disposal of Long-Lived Assets”. Statement 144 addresses the accounting and reporting for the impairmentor disposal of long-lived assets.  Thestatement provides a single accounting model for long-lived assets to bedisposed of.  New criteria must be metto classify the asset as an asset held-for-sale.  This statement also focuses on reporting the effects of adisposal of a segment of a business. This statement is effective for fiscal years beginning afterDecember 15, 2001.  The adoption ofFASB 144 did not have any impact on our financial position or results ofoperations.

 

InApril 2002, the FASB issued Statement No. 145, “Rescission of FASBStatements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and TechnicalCorrections.”  This statement rescindsFASB Statement No. 4, “Reporting Gains and Losses from Extinguishment of Debt”,and an amendment of that Statement, FASB Statement No. 64, “Extinguishments ofDebt Made to Satisfy Sinking-Fund Requirements” and FASB Statement No. 44,“Accounting for Intangible Assets of Motor Carriers”.  This statement amends FASB Statement No. 13, “Accounting forLeases”, to eliminate an inconsistency between the required accounting forsale-leaseback transactions and the required accounting for certain leasemodifications that have economic effects that are similar to sale-leaseback transactions.The adoption of this statement did not have a material impact on our financialposition or results of operations as we have not engaged in either of theseactivities.

 

InJune 2002, the FASB issued Statement No. 146, “Accounting for CostsAssociated with Exit or Disposal Activities.” This statement addressesfinancial accounting and reporting for costs associated with exit or disposalactivities and nullifies Emerging Issues Task Force (“EITF”) Issue No. 94-3,“Liability Recognition for Certain Employee Termination Benefits and OtherCosts to Exit an Activity (including Certain Costs Incurred in aRestructuring).” The provisions of this statement are effective for exit ordisposal activities that are initiated after December 31, 2002, with earlyapplication encouraged.  We do notexpect the adoption to have a material impact on our financial position orresults of operations.

 

InOctober 2002, the FASB issued Statement No. 147, “Acquisitions of CertainFinancial Institutions-an amendment of FASB Statements No. 72 and 144 and FASBInterpretation No. 9”, which removes acquisitions of financial institutionsfrom the scope of both Statement 72 and Interpretation 9 and requires thatthose transactions be accounted for in accordance with Statements No. 141,Business Combinations, and No. 142, Goodwill and Other Intangible Assets.  In addition, this statement amends SFAS No.144, Accounting for the Impairment or Disposal of Long-Lived Assets, to includein its scope long-term customer-relationship intangible assets of financialinstitutions such as depositor- and borrower-relationship intangible assets andcredit cardholder intangible assets. The requirements relating to acquisitions of financial institutions iseffective for acquisitions for which the date of acquisition is on or afterOctober 1, 2002.  The provisionsrelated to accounting for the impairment or disposal of certain long-termcustomer-relationship intangible assets are effective on October 1, 2002.The adoption of this statement did not have a material impact on our financialposition or results of operations as we have not engaged in either of theseactivities.

 

InDecember 2002, the FASB issued Statement No. 148, “Accounting forStock-Based Compensation-Transition and Disclosure”, which amends FASBStatement No. 123, Accounting for Stock-Based Compensation, to providealternative methods of transition for a voluntary change to the fair valuebased method of accounting for stock-based employee compensation.  In addition, this statement amends thedisclosure requirements of Statement 123 to require prominent disclosures inboth annual and interim financial statements about the method of accounting forstock-based employee compensation and the effect of the method used on reportedresults.  The transition guidance andannual disclosure provisions of Statement 148 are effective for fiscal yearsending after December 15, 2002, with earlier application permitted incertain circumstances.  The interimdisclosure provisions are effective for financial reports containing financialstatements for interim periods beginning after December 15, 2002.  The adoption of this statement did not havea material impact on our financial position or results of operations as we haveelected not to change to the fair value based method of accounting forstock-based employee compensation.  There are no stock options issued or outstanding.

 

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During April 2003, the FASB issued SFAS 149 - “Amendment ofStatement 133 on Derivative Instruments and Hedging Activities”, effective forcontracts entered into or modified after June 30, 2003, except as statedbelow and for hedging relationships designated after June 30, 2003. Inaddition, except as stated below, all provisions of this Statement should beapplied prospectively. The provisions of this Statement that relate toStatement 133 Implementation Issues that have been effective for fiscalquarters that began prior to June 15, 2003, should continue to be appliedin accordance with their respective effective dates. In addition, paragraphs7(a) and 23(a), which relate to forward purchases or sales of when-issuedsecurities or other securities that do not yet exist, should be applied to bothexisting contracts and new contracts entered into after June 30, 2003. TheCompany does not participate in such transactions, however, is evaluating theeffect of this new pronouncement, if any, and will adopt FASB 149 within theprescribed time.

 

In May 2003, the FASB issued SFAS No. 150, “Accounting for CertainFinancial Instruments with Characteristics of both Liabilities and Equity”.This Statement establishes standards for how an issuer classifies and measurescertain financial instruments with characteristics of both liabilities andequity. It requires that an issuer classify a financial instrument that iswithin its scope as a liability (or an asset in some circumstances). Many ofthose instruments were previously classified as equity. Some of the provisionsof this Statement are consistent with the current definition of liabilities inFASB Concepts Statement No. 6, Elements of Financial Statements. The remainingprovisions of this Statement are consistent with the Board’s proposal to revisethat definition to encompass certain obligations that a reporting entity can ormust settle by issuing its own equity shares, depending on the nature of therelationship established between the holder and the issuer. While the Boardstill plans to revise that definition through an amendment to Concepts Statement6, the Board decided to defer issuing that amendment until it has concluded itsdeliberations on the next phase of this project. That next phase will deal withcertain compound financial instruments including puttable shares, convertiblebonds, and dual-indexed financial instruments.

 

In November 2002, the Financial Accounting Standards Board(“FASB”) issued Interpretation No. (FIN) 45, “Guarantor’s Accounting andDisclosure requirements for Guarantees, Including Indirect Guarantees ofIndebtedness of Others.” Among other things, the Interpretation requiresguarantors to recognize, at fair value, their obligations to stand ready toperform under certain guarantees. FIN 45 is effective for guarantees issued ormodified on or after January 1, 2003. The adoption of this statement didnot have a material impact to the Company’s financial position or results ofoperations.

 

InJanuary 2003, the FASB issued Interpretation No. 46, “Consolidation ofVariable Interest Entities.” Interpretation 46 changes the criteria by whichone company includes another entity in its consolidated financialstatements.  Previously, the criteriawere based on control through voting interest. Interpretation 46 requires a variable interest entity to be consolidatedby a company if that company is subject to a majority of the risk of loss fromthe variable interest entity’s activities or entitled to receive a majority ofthe entity’s residual returns or both. A company that consolidates a variable interest entity is called theprimary beneficiary of that entity.  Theconsolidation requirements of Interpretation 46 apply immediately to variableinterest entities created after January 31, 2003.  The consolidation requirements apply toolder entities in the first fiscal year or interim period beginning afterJune 15, 2003.  Some of thedisclosure requirements apply in all financial statements issued afterJanuary 31, 2003, regardless of when the variable interest entity wasestablished.  We do not expect theadoption to have a material impact on our financial position or results ofoperations.

 

**Critical Accounting Policy and Estimates**

 

Management’sDiscussion and Analysis of Financial Condition and Results of Operationsdiscusses our financial statements, which have been prepared in accordance withgenerally accepted accounting principles in the United States of America.  The preparation of these financialstatements requires us to make estimates and assumptions that affect thereported amounts of assets and liabilities at the date of the financialstatements and the reported amounts of revenues and expenses during the

 

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reporting period.  On an on-going basis, we evaluate ourestimates and judgments, including those related to revenue recognition,financing operations and contingencies and litigation.  We base our estimates and judgments onhistorical experience and on various other factors that are believed to bereasonable under the circumstances, the results of which form the basis for makingjudgments about the carrying value of assets and liabilities that are notreadily apparent from other sources. Actual results may differ from these estimates under differentassumptions or conditions.  The mostsignificant accounting estimates inherent in the preparation of our financialstatements include estimates as to the appropriate carrying value of specificassets and liabilities which are not readily apparent from other sources,primarily allowance for doubtful medical receivables, accruals for other costs,and the classification of net operating loss and tax credit carryforwardsbetween current and long-term assets. Risks are involved in calculating the discount fee reserve based onjudgments made by the underwriting team in determining the average discountfee, which was approximately 7.5%, to be charged to the medical provider andinformation obtained and analyzed to assess the financial risk involved inpurchasing that medical provider’s receivables based on relevant operating,historical and financial data.  We alsoevaluate trends in healthcare and other relevant sub-markets, past-dueaccounts, historical charge-off and recovery rates, credit risk indicators,economic conditions, on-going credit evaluations, overall portfolio size, averageseller balances, reserve account balances and real estate collateralvaluations, if any.  A significantvariation, particularly longer periods from the contractual service andcollection period, would impact the ability to recognize deferred revenues andhence impact our results of operations. In addition, any changes in the subjective estimated items mentionedabove may impact our results of operations significantly.  These accounting policies are described atrelevant sections in this discussion and analysis and in the notes to theconsolidated financial statements included in this prospectus.

** **

**ForwardLooking Statements**

 

This reportcontains forward looking statements within the meaning of the PrivateSecurities Litigation Reform Act of 1995. Forward looking statements can be identified by the use of words like“believes,” “could,” “possibly,” “anticipates,” “estimates,” “projects,”“expects,” “may,” “will,” “should,” “intend,” “plan,” “consider” or thenegative of these expressions or other variations, or by discussions ofstrategies that involve risks and uncertainties.  The Company based these forward looking statements on its currentexpectations and projections about future events and information currently availableto it.  Although the Company believesthat the assumptions for these forward looking statements are reasonable, anyof the assumptions could prove to be inaccurate.  The Company’s actual results could differ materially from thoseanticipated in the forward looking statements due to risks, uncertainties oractual events differing from the assumptions underlying these statements.

 

# **Item 7. Financial Statements.**

 

The information required by this item appearsbeginning on page F-1.

 

**Item8.  Changes in and Disagreements withAccountants on Accounting and Financial Disclosure.**

 

None

 

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**PART III**

 

**Item9.  Directors, Executive Officers,Promoters and Control Persons; Compliance with Section 16(a) of the Exchange Act.**

 

**Directorsand Executive Officers**

** **

Thefollowing is the name, age and position of our current directors and executiveofficers:

 
| **Name**               |   | **Age** |   | **Position(s)**                                             |
|------------------------|--------|---------|--------|-------------------------------------------------------------|
| Sidney  M. Field       |   | 58      |   | President,  Chief Executive Officer and Director            |
| Joseph  J. Lampariello |   | 50      |   | Chief  Operating Officer, Treasurer, Secretary and Director |
| Alan  J. Meister       |   | 55      |   | Chief  Accounting Officer                                   |
| Joseph  J. DioGuardi   |   | 62      |   | Director                                                    |
| Lawrence  J. Edwards   |   | 58      |   | Director                                                    |
| Gary  L. Nielsen       |   | 61      |   | Director                                                    |

 

Thefollowing is the name, age and position of the directors and executive officersof our parent, Medical Capital Holdings:

 
| **Name**               |   | **Age** |   | **Position(s)**                                             |
|------------------------|--------|---------|--------|-------------------------------------------------------------|
| Sidney  M. Field       |   | 58      |   | President,  Chief Executive Officer and Director            |
| Joseph  J. Lampariello |   | 50      |   | Chief  Operating Officer, Treasurer, Secretary and Director |
| Alan  J. Meister       |   | 55      |   | Chief  Accounting Officer                                   |
| Lawrence  J. Edwards   |   | 58      |   | Director                                                    |

 

Alldirectors currently hold office until the next annual meeting of stockholdersor until their successors have been elected and qualified.  All of our executive officers are electedannually by our board of directors and serve at the discretion of the board anduntil their successors are elected and qualified.  There are no family relationships between any of our directors orexecutive officers.

 

Thefollowing describes the business experience during the past five years of ourdirectors and executive officers:

 

*Sidney M. Field* joined Medical Capital Management in 2000 asPresident, Chief Executive Officer and Director.  Mr. Field has also served as President, Chief ExecutiveOfficer and Director of Medical Capital Corporation for the past eight years,and has served as the President, Chief Executive Officer and Director ofMedical Capital Holdings and other of its subsidiaries for the past sixyears.  Prior to joining us,Mr. Field was the founder, past President and Chairman of FGS, one of thelargest insurance brokers in the United States with annual sales of over$200,000,000.  Mr. Field sold hisinterest in that firm in 1990.  In 1971,he founded Field Group Services, a firm specializing in the placement andservices of group medical insurance for medium size employers.  Mr. Field has also been a principal inDelcom Inc., an advertising agency specializing in radio and television.  Mr. Field earned his Bachelor of Artsdegree at California State University at Long Beach with a major inMathematics.

 

*Joseph J. Lampariello* joined Medical Capital Management in 2000 asChief Operating Officer, Secretary and Director.  Mr. Lampariello has been the Chief Operating Officer ofMedical Capital Holdings and its subsidiaries for the past seven years and isresponsible for the day-to-day operations of Medical Capital Corporation, ouradministrator.  This responsibilityincludes funding, underwriting, collections and all computer informationservices.  Prior to joining us,Mr. Lampariello was the President of Medical Management &Acquisitions, Inc., which specialized in recovery, dissolution and collectionsof medical claims of medical groups, physician practices and medical companiesin southern California.

 

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Mr. Lampariello’s extensive experience in medical practicemanagement includes development of a proprietary UNIX platform databases formedical billing and collections. Mr. Lampariello has served as a specialist collector and receiverfor LA County Superior Court and the U.S. Bankruptcy Court.  He holds a degree in Biomedical Engineeringfrom New York Institute of Technology.

 

*Alan J. Meister* joined Medical Capital Management in 2000 asChief Accounting Officer. Mr. Meister is also the Chief Financial Officer of Medical CapitalCorporation, having joined them in September of 1997.  Prior to joining Medical Capital Corporation,Mr. Meister was the Vice President and Chief Financial Officer of AmericanExpress Educational Loans/UBL Financial Corporation, and served in thatposition since January of 1994. Prior to that, Mr. Meister was the Controller of FHP Healthsare,Inc., and served in that position since 1990. Mr. Meister holds a bachelors degree in Accounting fromNortheastern University and an MBA from Suffolk University.

 

*Joseph J. DioGuardi* joined Medical Capital Management in 2000 asa Director.  After practicing for 22years (12 years as a partner) as a certified public accountant with theaccounting firm of Arthur Andersen & Co., Mr. DioGuardi left in1984 to run for Congress.  He served asa member of the United States House of Representatives from 1985 to 1989.  Mr. DioGuardi served on the BankingCommittee and the Government Operations Committee.  Since leaving Congress, Mr. DioGuardi has engaged innumerous human rights activities, and he has become a distinguished author andpublic speaker.  Mr. DioGuardi alsoserved as a member of the board of directors of Safety ComponentsInternational, Inc. from 1994 to 2000, and served as a member of the board ofdirectors of NeuroCorp, Ltd. from 1996 to 1998.  Mr. DioGuardi holds a B.S. degree from Fordham University,where he majored in accounting and from which he graduated with honors in 1962.

 

*Lawrence J. Edwards* joined Medical Capital Management in 2000 asVice President and Director.  Mr.Edwards also served as our Treasurer until his retirement inJune 2002.  Mr. Edwards continuesto serve as one of our directors. Mr. Edwards also served as Executive Vice President of MedicalCapital Corporation from January 1994 until his retirement inJune 2002.  Mr. Edwards was one ofthe founders of Medical Capital Corporation in 1994.  Mr. Edwards has also founded and operated various specialtysales and investment organizations, including Newport Aircraft Sales andvarious real estate investment and property companies.  Mr. Edwards has also been engaged inrecovery and work-out of medical groups and partnerships.  Mr. Edwards holds a technical degreefrom Orange Coast College.

 

*Gary L. Nielsen* joined Medical Capital Management in 2000 asa Director.  Mr. Nielsen was aDirector of Healthstar Corp. from June 1997 to April 2000.  Mr. Nielsen was the Chief FinancialOfficer of Granite Golf Corporation from March 1999 to December 1999.  Prior to that he was the Vice President ofFinance and Chief Financial Officer of Best Western International, Inc. andserved in that position from May 1996. From October 1986 to May 1996, Mr. Nielsen was Vice Presidentand Treasurer of Giant Industries, Inc. Mr. Nielsen holds a degree in Accounting from Arizona StateUniversity and is a certified public accountant.

 

**EmploymentAgreements**

** **

MedicalCapital Corporation has employment agreements with Mr. Sidney Field, itsPresident, Chief Executive Officer and Director, Mr. Joseph J. Lampariello, itsChief Operating Officer, and Mr. Alan Meister, its Chief Financial Officer.

 

Mr.Field’s employment agreement is for a perpetual term until terminated by Mr.Field or Medical Capital Corporation. Mr. Field may terminate the agreement for any reason by giving 30 day’sadvance notice to Medical Capital Corporation. Medical Capital Corporation may terminate the agreement with cause bygiving five day’s advance notice to Mr. Field or without cause by giving 120day’s advance notice to Mr. Field.  IfMr. Field is terminated by Medical Capital Corporation without cause he isentitled to receive one year’s compensation and benefits as a severance.  The agreement provides for a base salary of$144,000, which may be increased by Medical Capital Corporation’s board ofdirectors.  The agreement also providesMr. Field with $3,000,000 of life insurance coverage, an auto

 

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allowance.  If Mr. Field dies or becomes disabled duringthe term of the agreement, his spouse or his estate will receive his basesalary for six months.  Mr. Field’semployment agreement also contains a non-compete provision that expires oneyear after the termination of his employment with Medical Capital Corporation.

 

Mr.Lampariello’s employment agreement is for a perpetual term until terminated byMr. Lampariello or Medical Capital Corporation.  Mr. Lampariello may terminate the agreement for any reason bygiving 30 day’s advance notice to Medical Capital Corporation.  Medical Capital Corporation may terminatethe agreement with cause by giving five day’s advance notice to Mr. Lamparielloor without cause by giving 120 day’s advance notice to Mr. Lampariello.  If Mr. Lampariello is terminated by MedicalCapital Corporation without cause he is entitled to receive one year’scompensation and benefits as a severance. The agreement provides for a base salary of $250,000, which may beincreased by Medical Capital Corporation’s board of directors.  The agreement also provides Mr. Lampariellowith $2,000,000 of life insurance coverage and an auto allowance.  If Mr. Lampariello dies or becomes disabledduring the term of the agreement, his spouse or his estate will receive hisbase salary for six months.  Mr.Lampariello’s employment agreement also contains a non-compete provision thatexpires one year after the termination of his employment with Medical CapitalCorporation.

 

Mr.Meister’s employment agreement is for a perpetual term until terminated by Mr.Meister or Medical Capital Corporation. Mr. Meister may terminate the agreement for any reason by giving 30day’s advance notice to Medical Capital Corporation.  Medical Capital Corporation may terminate the agreement withcause by giving five day’s advance notice to Mr. Meister or without cause bygiving 90 day’s advance notice to Mr. Meister. If Mr. Meister is terminated by Medical Capital Corporation withoutcause he is entitled to receive one year’s compensation and benefits as aseverance.  The agreement provides for abase salary of $120,000, which may be increased by Medical CapitalCorporation’s board of directors.  Underthe terms of the agreement, for the first five years Mr. Meister is employed byMedical Capital Corporation, he was granted 20,000 shares of common stock ofMedical Capital Holdings, Inc. on each yearly anniversary of hisemployment.  The agreement also providesMr. Meister with an auto allowance.  IfMr. Meister dies or becomes disabled during the term of the agreement, his spouseor his estate will receive his base salary for six months.  Mr. Meister’s employment agreement alsocontains a non-compete provision that expires one year after the termination ofhis employment with Medical Capital Corporation.

 

Allof Medical Capital Corporation’s executive officers are entitled to participatein a bonus pool, which is paid quarterly. The amount the pool is funded and the percentage of the pool eachparticipant is entitled to receive changes annually in the discretion ofMedical Capital Corporation’s board of directors.

 

**Committeesof the Board of Directors**

** **

***Audit Committee***.  Thecurrent members of the Audit Committee are Messrs. DioGuardi and Nielsen. TheAudit Committee makes recommendations concerning the engagement of independentpublic accountants, reviews with the independent public accountants the plansand results of the audit engagement, approves professional services provided bythe independent public accountants, reviews the independence of the independentpublic accountants, considers the range of audit and non-audit fees, reviewsour corporate compliance procedures and reviews the adequacy of our internalaccounting controls.

 

**SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE.**

 

TheCompany does not have any securities registered under the Exchange Act and isnot subject to Section 16(a).

 

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**Item 10.  Executive Compensation.**

 

**ExecutiveCompensation**

 

Wedo not pay any compensation to our officers nor do we directly reimburseMedical Capital Corporation for any portion of their salaries.  We pay fees to Medical Capital Corporationfor acting as our administrator, which fees have no relationship to thesalaries paid by Medical Capital Corporation. We do reimburse Medical Capital Corporation for compensation paid tosome of its non-officer employees for services provided to us by thoseemployees.  The following table setsforth the aggregate compensation awarded to, earned by, or paid to (1) ourChief Executive Officer, and (2) our other most highly compensated executiveofficers during 2002 and 2001 whose total annual compensation exceeded $100,000in 2002 (the “Named Executive Officers”), all during 2002 and 2001, our firsttwo years of operations.  Thecompensation included in the table is the total compensation paid to theseindividuals by our affiliate, Medical Capital Corporation, in their capacity asofficers of Medical Capital Corporation. These individuals do not receive any other compensation by any of thecompanies affiliated with the Medical Capital Holdings group of companies.  As of December 31, 2002, we did nothave any stock option plans in effect.

 

**SUMMARYCOMPENSATION TABLE**

 
| **Name and Principal Position**                             |   | **Year** |   | **Salary** |    | **Bonus/  Commissions** |   | **All Other  Compensation** |   |
|-------------------------------------------------------------|--------|----------|--------|------------|---------|-------------------------|--------|-----------------------------|--------|
| Sidney M. Field                                             |   | 2002     |   | $          | 144,000 |                    | $      | 0                           |   | $ | 26,145 | (1) |
| President, Chief Executive Officer and  Director            |   | 2001     |   | $          | 144,000 |                    | $      | 200,000                     |   | $ | 23,826 | (1) |
| Joseph J. Lampariello                                       |   | 2002     |   | $          | 275,000 |                    | $      | 385,827                     |   | $ | 3,600 | (2) |
| Chief Operating Officer, Secretary, Treasurer  and Director |   | 2001     |   | $          | 275,000 |                    | $      | 301,081                     |   | $ | 7,176 | (2) |
| Lawrence J. Edwards                                         |   | 2002     |   | $          | 75,000  |                    | $      | 65,395                      |   | $ | 13,900 | (4) |
| Director                                                    |   | 2001     |   | $          | 180,000 |                    | $      | 190,661                     |   | $ | 31,644 | (4) |
| Alan Meister                                                |   | 2002     |   | $          | 181,404 |                    | $      | 54,131                      |   | $ | 21,360 | (5) |
| Chief Accounting Officer                                    |   | 2001     |   | $          | 169,067 |                    | $      | 42,123                      |   | $ | 21,280 | (5) |

 

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(1)          Includes$18,945 in life insurance premiums and a $7,200 401(k) matching contributionpaid by Medical Capital Corporation for 2002. Includes $16,626 in life insurance premiums and a $7,200 401(k) matchingcontribution paid by Medical Capital Corporation for 2001.

(2)          Includes$3,600 in life insurance premiums paid by Medical Capital Corporation for2002.  Includes $7,176 in life insurancepremiums paid by Medical Capital Corporation for 2001.

(3)          Mr.Edwards retired as Executive Vice President and Treasurer of Medical CapitalManagement on May 31, 2002, and currently serves only as a director of MedicalCapital Management.

(4)          Includes$5,160 in life insurance premiums, a $3,750 401(k) matching contribution and a$5,000 auto allowance paid by Medical Capital Corporation for 2002.  Includes $15,644 in life insurance premiums,a $4,000 401(k) matching contribution and a $12,000 auto allowance paid byMedical Capital Corporation for 2001.

(5)          Includes$2,760 in life insurance premiums, a $6,600 401(k) matching contribution and a$12,000 auto allowance paid by Medical Capital Corporation for 2002.  Includes $2,680 in life insurance premiums,a $6,600 401(k) matching contribution and a $12,000 auto allowance paid byMedical Capital Corporation for 2001.

 

Theabove compensation table does not include fringe benefits made available on anondiscriminatory basis to all of Medical Capital Corporation’s employees likegroup health insurance, dental insurance, long-term disability insurance,vacation and sick-leave.  In addition,Medical Capital Corporation makes available non-monetary benefits to some ofits executive officers, with the aggregate

 

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valueof these benefits in the case of each executive officer listed in the abovetable being less than the lesser of (1) ten percent of the cash compensationpaid to each such executive officer, or (2) $50,000, and is not included in theabove table.

 

Inaddition to the above compensation, in 2002 Messrs. Edwards, Field andLampariello also received a grant of stock in Medical Capital Holdings of 1,000shares each valued at $3.00 per share.

 

**Compensationof Directors**

 

Eachnon-employee director serving on our board of directors receives an annual feeof $12,000, paid quarterly.  Inaddition, each director receives a fee of $2,000 for each board meetingattended by that director and $500 for each committee meeting attended by thatdirector.

 

# **Item11.  Security Ownership of CertainBeneficial Owners and Management.**

 

Thefollowing table contains information concerning the persons, including any“group”, who we know to be the beneficial owner of more than 5% of any class ofvoting securities of our parent, Medical Capital Holdings.  It also shows the voting securities of ourparent owned by our directors and executive officers individually, and by allof our directors and executive officers as a group.  Unless otherwise indicated in the footnotes, each person namedbelow has sole voting power and investment power over the sharesindicated.  All information is as ofMarch 15, 2003.  As of that date,13,554,746 shares of common stock of Medical Capital Holdings were issued andoutstanding.

 
| **Name of  Beneficial Owner**                                                                         |   | **Number of Shares** |   | **Percent of Class(1)** |   |
|-------------------------------------------------------------------------------------------------------|--------|----------------------|--------|-------------------------|--------|
| Sidney  M. Field  2100 South State College Blvd.  Anaheim, California 92806                           |   | 3,295,333            | (2)    | 24.3                    | %      |
| Lawrence  J. Edwards  2100 South State College Blvd.  Anaheim, California 92806                       |   | 3,087,858            | (3)    | 22.8                    | %      |
| Joseph  L. Lampariello  2100 South State College Blvd.  Anaheim, California 92806                     |   | 2,501,000            |   | 18.5                    | %      |
| Alan  J. Meister  2100 South State College Blvd.  Anaheim, California 92806                           |   | 101,000              |   | *                       |   |
| Joseph  J. DioGuardi  2100 South State College Blvd.  Anaheim, California 92806                       |   | 0                    |   | *                       |   |
| Gary  L. Nielsen  2100 South State College Blvd.  Anaheim, California 92806                           |   | 0                    |   | *                       |   |
| Robert  B. MacDonald  2100 South State College Blvd.  Anaheim, California 92806                       |   | 3,333,333            | (4)    | 24.6                    | %      |
| LAM  Irrevocable Trust  Private Trust Corporation Ltd., Charlotte  House, PO Box N65, Nassau, Bahamas |   | 3,333,333            | (4)    | 24.6                    | %      |
| Medical  Receivables Management Group, LLC  251 Jeanell Drive, No. 3, Carson City, Nevada  89703      |   | 1,170,222            |   | 8.6                     | %      |
| JEBAJ  Management Corp.  251 Jeanell Drive, No. 3, Carson City, Nevada  89703                         |   | 3,093,333            | (5)    | 22.8                    | %      |
| Directors  and Executive Officers as a Group  (7 persons)                                             |   | 12,318,524           |   | 90.9                    | %      |

 

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* Less than 1%.

 

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(1) Share amounts arerounded to the nearest whole number. All shares not outstanding but which may be acquired by a stockholderwithin 60 days by the exercise of any stock option or any other right, aredeemed outstanding for the purpose of calculating beneficial ownership andcomputing the percentage of the class beneficially owned by that shareholder,but not by any other shareholder.

(2) Includes 202,000shares owned directly by Mr. Field and 3,093,333 shares whichMr. Field holds the power to vote through an agreement with the owner ofthose shares, JEBAJ Management Corp.

(3) Includes 1,000 sharesowned directly by Mr. Edwards and 3,086,858 shares Owned by the Lawrence J.Edwards Revocable Living Trust for which Mr. Edwards is the trustee.

(4) Mr. MacDonald has thepower to vote these shares through a proxy from the LAM Irrevocable Trust.

(5) Mr. Field has the power to vote these shares.

 

# **Item12.  Certain Relationships and RelatedTransactions.**

 

Weare a wholly owned subsidiary of Medical Capital Holdings.  We rely on some of the other wholly ownedsubsidiaries of Medical Capital Holdings, like Medical Capital Corporation andMediTrak, to provide services to us.  Wepay fees to these affiliates for providing services to us, regardless ofwhether or not our business is profitable. Since we are under common control with these affiliates, the agreementsand arrangements under which they provide us services were not made throughindependent arm’s length negotiations. However, we believe the fees we pay for these services are no greaterthan those an independent third-party would charge for providing similarservices.

 

Somemembers of our management team also work for and are compensated by ouraffiliates, and are in some cases shareholders of our common corporate parent,Medical Capital Holdings.  Accordingly,their interests in the administrator and the servicer, or other of ouraffiliates, may conflict with their responsibilities to us.  We have an agreement among our parent andour other affiliates where we are charged a fee for the portion of the salariesof these individuals and overhead attributable to our operations.

 

Webelieve that our affiliates have sufficient experience in regard to the kindsand nature of the services they provide us so that our needs for these serviceswill be competently and adequately met. Further, we believe that the compensation the affiliates receive forrendering the services to us, whether from us or third parties, is reasonableand no more than the usual and customary amounts paid for those types ofservices by independent third parties. However, there can be no assurance that there are not now, or may in thefuture, be unrelated businesses that might be able to provide similar servicesto us in a more efficient, competent and less costly manner.  Also, there can be no assurance that ouraffiliates will be able to continue to provide services to us.  In the event that one of our affiliates isnot able to perform its services, there can be no assurance that a suitablereplacement can be located without incurring substantial expense or risking adeterioration in servicing the receivables.

 

MedicalCapital Corporation is our administrator for the receivables. For the yearended December 31, 2002, we incurred $1,272,960 in administrative servicefees to Medical Capital Corporation. For the year ended December 31, 2002, we paid Medical Capital Corporation$253,468 as reimbursement of compensation paid to employees of Medical CapitalCorporation for investor relations services provided on our behalf.

 

Theamount that the face value of a receivable is discounted when the receivable ispurchased will be determined by the administrator based on the underwritingcriteria it has established.  For theyear ended December 31, 2002, we incurred $126,000 in underwriting fees toMedical Capital Corporation.  We couldbe adversely affected if the administrator requires the seller’s receivables tobe discounted at higher rates than those the seller is accustomed toreceiving.  This could result in sellersbeing unwilling to sell, or discouraged from selling all, their receivables tous.  The administrator also underwritesreceivables that may be purchased by our affiliates.  The administrator attempts to allocate new sellers fairly amongits various affiliates, but the allocation may ultimately be unfair to us.

 

MediTrakis the servicer of our receivables.  Forthe year ended December 31, 2002, we incurred $276,846 in servicing feesto MediTrak.  MediTrak is compensatedfor its services by receiving a fee for each claim posted on its trackingsystem.  For some clients with a minimalnumber of monthly claims

 

36

----

 

beingposted, a minimum monthly servicing fee will be charged.  For a more detailed description of thefunctions of the administrator and the servicer, see the section entitled“BUSINESS” above.

 

OnAugust 29, 2001, the Company purchased healthcare receivables from ourparent, Medical Capital Holdings, with a book value of $5,386,309 for$4,546,861 in cash and $839,448 of unearned discount fees.  The book value of a receivable is equal tothe sum of the advance amount plus the discount fee, less unearned discountfees less any collections received, which we believe is an approximation offair market value of the receivable.  Asof December 31, 2002, these receivables had not been collected in fullthrough direct collections from third party payors.  On December 31, 2001, the Company purchased healthcarereceivables from Medical Capital Holdings with a book value of $1,701,892 for$1,541,189 in cash. As of December 31, 2002, these receivables had notbeen collected in full through direct collections from third party payors. Thepurchase price for these transactions was determined by Medical CapitalCorporation. The purchase price of receivables sold among affiliates in theMedical Capital Holdings group are generally sold at 85-90% of fair marketvalue.

 

OnApril 23, 2002, our board of directors approved a dividend on our commonstock totaling $1,250,000. The dividends distributed was paid from additionalpaid in capital of $250,000 and through a charge to accumulated deficit of$1,000,000, as of December 31, 2002. The reason for this dividend was to return funds to Medical CapitalHoldings that it had invested in our company in connection with our formation.  The amount paid as a dividend represented anover-capitalization of our company.  Itwas determined that the amount invested by Medical Capital Holdings was inexcess of the amount of initial capital we needed to conduct our operations,and was therefore returned to Medical Capital Holdings in the form of a dividendon our common stock, all of which is owned by Medical Capital Holdings.

 

# **Item13.  Exhibits and Reports on Form 8-K.**

 

(a)  The following is a completelist of exhibits filed as part of this Form 10-KSB.  Exhibit numbers correspond to the numbers in the Exhibit Table ofItem 601 of Regulation S-B.

 
| **EXHIBIT** |   | **DESCRIPTION**                                                                                                                                                                    |
|-------------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|        |   |                                                                                                                                                                               |
| 3.01        |   | Articles of Incorporation of Medical Capital Management, Inc. (1)                                                                                                                  |
|        |   |                                                                                                                                                                               |
| 3.02        |   | Bylaws of Medical Capital Management, Inc. (1)                                                                                                                                     |
|        |   |                                                                                                                                                                               |
| 4.01        |   | Amended and Restated Note Issuance and Security Agreement, dated  February 15, 2001, between Medical Capital Management, Inc. and Zions  First National Bank, as trustee. (2) |
|        |   |                                                                                                                                                                               |
| 10.01       |   | Master Service Agreement between Medical Capital Management, Inc. and  Medical Tracking Services, Inc.  (3)                                                                   |
|        |   |                                                                                                                                                                               |
| 10.02       |   | Administrative Services Agreement, dated August 4, 2000, between  Medical Capital Management, Inc. and Medical Capital Corporation.  (1)                                 |
|        |   |                                                                                                                                                                               |
| 31.1        |   | Rule 13a-14(a)/15d-14(a) Certification.                                                                                                                                            |
|        |   |                                                                                                                                                                               |
| 31.2        |   | Rule 13a-14(a)/15d-14(a) Certification.                                                                                                                                            |
|        |   |                                                                                                                                                                               |
| 31.3        |   | Rule 13a-14(a)/15d-14(a) Certification.                                                                                                                                            |
|        |   |                                                                                                                                                                               |
| 32.1        |   | Section 1350 Certification.                                                                                                                                                        |
|        |   |                                                                                                                                                                               |
| 32.2        |   | Section 1350 Certification.                                                                                                                                                        |
|        |   |                                                                                                                                                                               |
| 32.3        |   | Section 1350 Certification.                                                                                                                                                        |
|        |   |                                                                                                                                                                               |
| 99.01       |   | Deed of Trust Note in the amount of $3,000,000.  (4)                                                                                                                          |
|        |   |                                                                                                                                                                               |
| 99.02       |   | Deed of Trust Note in the amount of $745,000.  (4)                                                                                                                            |
|        |   |                                                                                                                                                                               |
| 99.03       |   | Deed of Trust Note in the amount of $300,000.  (4)                                                                                                                            |
|        |   |                                                                                                                                                                               |
| 99.04       |   | Amended and Restated Deed of Trust Note dated November 12,  2002.  (4)                                                                                                   |

 

37

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----

(1)          Incorporated by reference to the Registrant’sRegistration Statement on Form SB-2, Registration No. 333-45464.

(2)          Incorporated by reference to the Registrant’sCurrent Report on Form 8-K dated February 15, 2001.

(3)          Incorporated by reference to the Registrant’sRegistration Statement on Form SB-2, Registration No. 333-101772.

(4)          Incorporated by reference to the Registrant’sRegistration Statement on Form SB-2, Registration No. 333-101177.

 

(b) The Registrant did not file any reports on Form 8-K during the fourthquarter of fiscal year 2002.

 

# **Item14.  Controls and Proce**dures.

 

The Company’s principal executive officer and principal financial officer have evaluated the effectiveness of the Company’s “disclosure controls and procedures,” as that term is defined in Rule 15d-14(c) of the Securities Exchange Act of 1934 (the “Exchange Act”), within 90 days of the filing date of this Amendment to the Annual Report on Form 10-KSB.  Based on their evaluation, the principal executive officer and principal financial officer concluded that the Company’s disclosure controls and procedures are effective to ensure that information the Company is required to disclose in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and include controls and procedures designed to ensure that information required to be disclosed by the Company in those reports is accumulated and communicated to the Company’s management, including its principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.  During fiscal 2003, the Company became aware of circumstances, whereby the collections in certain lockboxes were not recorded for the benefit of the appropriate entity.  Management has reviewed substantially all customer related lockbox information and is in the process of establishing additional procedures to alleviate this identified matter.

 

There were no significant changes in the Company’s internal controls orin other factors that could significantly affect these controls subsequent tothe date of the evaluation.

 

38

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**SIGNATURES**

 

Inaccordance with the requirements of the Exchange Act, the registrant causedthis report to be signed on its behalf by the undersigned, thereunto dulyauthorized.

 
|                           |                           | MEDICAL CAPITAL MANAGEMENT, INC. |
|--------------------------------|--------------------------------|----------------------------------|
|                           |                           |
| Date:  March 8, 2004 | By                             | /s/ Sidney M. Field              |   |
|                           | Sidney M. Field, President and |
|                           | Chief Executive Officer        |

 

 

39

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**INDEX TO FINANCIAL STATEMENTS**

 

**Financialstatements for the periods ended December 31, 2002 and December 31,2001:**

 
| Independent Auditors’  Report       |   |
|------------------------------------------|--------|
| Balance Sheet                            |   |
| Statements  of Operations                |   |
| Statements  of Cash Flows                |   |
| Statement of  Stockholder’s Deficit |   |
| Notes to Financial  Statements           |   |

 

F-1

----

 

**INDEPENDENTAUDITORS’ REPORT**

 

Board of Directors

Medical Capital Management, Inc.

Anaheim, California

 

We have audited the accompanying balance sheet of Medical Capital Management, Inc., as of December 31, 2002 and the related statements of operations, stockholder’s deficit, and cash flows for the years ended December 31, 2002 and 2001. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

 

We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audits 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 financial statements referred to above present fairly, in all material respects, the financial position of Medical Capital Management, Inc. as of December 31,  2002, and the results of its operations and its cash flows for the years ended December 31, 2002 and 2001, in conformity with accounting principles generally accepted in the United States of America.

 

Theaccompanying financial statements have been prepared in conformity withaccounting principles generally accepted in the United States of America, whichcontemplate continuation of the Company as a going concern. TheCompany incurred net losses of $4,192,847 in 2002, used cash for operations of$29,302,913 in 2002 and at December 31, 2002, had an accumulated deficitof $6,162,534 and stockholder’s deficit of $6,162,514. In addition, themanagement of the Company has decided to wind down operations in 2004, aftercollecting or selling outstanding medical receivables and using such proceedsto settle all the Company’s obligations, including outstanding notes payable. These financial statements do not include anyadjustments relating to the recoverability and classification of recorded assetamounts, or amounts and classification of liabilities that might result fromthe outcome of managements decision to wind down operations.  As discussedin Note 12 to the financial statements, in 2002, the Company changed its methodof recording income from the interest accretion method to the cost recoverymethod.  Additionally, the Company’s 2002 and 2001 medical receivablesbalance, additional paid in capital, receivable from Parent and affiliates, revenuesand net loss were previously incorrectly reported.  These discoveries weremade subsequent to the issuance of the financial statements.  Thefinancial statements have been restated to reflect these corrections. 

 

 
| /s/ Stonefield Josephson, Inc.                                                        |   |
|---------------------------------------------------------------------------------------|--------|
| CERTIFIED PUBLIC ACCOUNTANTS                                                          |
| Santa Monica, California                                                              |
| March 18, 2003, except for Note 12, which is dated as of  November 26, 2003 |

 

F-2

----

 

**MEDICAL CAPITAL MANAGEMENT, INC.**

**BALANCE SHEET**

 
|                                                                                                 |   | **December 31,  2002  (Restated –  Note 12)** |       |
|------------------------------------------------------------------------------------------------------|--------|---------------------------------------------------------|------------|
|                                                                                                 |   |                                                    |       |
| ASSETS                                                                                               |   |                                                    |       |
| Current assets:                                                                                      |   |                                                    |       |
| Cash and cash equivalents                                                                            |   | $                                                       | 1,494,002  |   |
| Medical receivables, net of discount  reserves of $7,612,259                                         |   | 30,539,011                                              |       |
| Receivable from Parent and affiliates, net                                                           |   | 6,671,753                                               |       |
| Account receivables                                                                                  |   | 36,755                                                  |       |
| Prepaid trustee fee                                                                                  |   | 4,524                                                   |       |
| Notes receivable – short term                                                                   |   | 1,045,000                                               |       |
| Total current assets                                                                                 |   | 39,791,045                                              |       |
|                                                                                                 |   |                                                    |       |
| Notes receivable – long term, net of  deferred income on notes of $62,000                       |   | 4,232,127                                               |       |
| Total assets                                                                                         |   | $                                                       | 44,023,172 |   |
|                                                                                                 |   |                                                    |       |
| LIABILITIES AND STOCKHOLDER’S DEFICIT                                                           |   |                                                    |       |
|                                                                                                 |   |                                                    |       |
| Current liabilities:                                                                                 |   |                                                    |       |
| Accrued expenses – trade                                                                        |   | $                                                       | 108,193    |   |
| Due to medical providers                                                                             |   | 150,070                                                 |       |
| Interest payable, net                                                                                |   | 399,798                                                 |       |
| Notes payable – current                                                                         |   | 21,295,000                                              |       |
| Total current liabilities                                                                            |   | 21,953,061                                              |       |
|                                                                                                 |   |                                                    |       |
| Notes payable - long term, net of deferred offering costs of $94,109  And commissions of $2,587,266  |   | 28,232,625                                              |       |
| Total liabilities                                                                                    |   | 50,185,686                                              |       |
|                                                                                                 |   |                                                    |       |
| STOCKHOLDER’S DEFICIT                                                                           |   |                                                    |       |
| Preferred stock – par value $0.01 (10,000  shares authorized, no shares issued and outstanding) |   | —                                                  |       |
| Common stock – par value $0.01 (10,000  shares authorized, 2,000 shares issued and outstanding) |   | 20                                                      |       |
| Additional paid-in capital                                                                           |   | —                                                  |       |
| Accumulated deficit                                                                                  |   | (6,162,534                                              | )          |
| Total stockholder’s deficit                                                                     |   | (6,162,514                                              | )          |
| Total liabilities and stockholder’s deficit                                                     |   | $                                                       | 44,023,172 |   |

 

*The accompanying notes form an integral part of these financialstatements.*

 

F-3

----

 

**MEDICAL CAPITAL MANAGEMENT, INC.STATEMENTS OF OPERATIONS**

 
|                                                                                                             |   | **Year ended  December 31,  2002  Restated Note 12** |       | **Year ended  December 31,  2001  Restated Note 12** |   |
|------------------------------------------------------------------------------------------------------------------|--------|-----------------------------------------------------------|------------|-----------------------------------------------------------|--------|
| DISCOUNT REVENUES:                                                                                               |   |                                                      |       |                                                      |   |
| Discount fees, net of change in discount  reserves $5,802,164, including related party fees of $2,346,266 (2002) |   | $                                                         | 661,838    |                                                      | $      | 31,654 |   |
| Administrative income                                                                                            |   | 166,032                                                   |       | —                                                    |   |
| Total revenues                                                                                                   |   | 827,870                                                   |       | 31,654                                                    |   |
| COST OF REVENUES:                                                                                                |   |                                                      |       |                                                      |   |
| Administration expense, related party                                                                            |   | 1,272,960                                                 |       | 439,656                                                   |   |
| GROSS PROFIT (LOSS)                                                                                              |   | (445,090                                                  | )          | (408,002                                                  | )      |
|                                                                                                             |   |                                                      |       |                                                      |   |
| OPERATING EXPENSES:                                                                                              |   |                                                      |       |                                                      |   |
| Interest expense, net                                                                                            |   | 4,148,405                                                 |       | 635,437                                                   |   |
| Advertising                                                                                                      |   | 350,437                                                   |       | 207,618                                                   |   |
| Professional services                                                                                            |   | 321,298                                                   |       | 58,998                                                    |   |
| Service fees, related party                                                                                      |   | 276,846                                                   |       | 33,824                                                    |   |
| Legal expenses                                                                                                   |   | 227,131                                                   |       | 53,064                                                    |   |
| Investor relations fees, related party                                                                           |   | 215,152                                                   |       | —                                                    |   |
| Travel and entertainment                                                                                         |   | 178,343                                                   |       | 35,745                                                    |   |
| Sales commissions, related party                                                                                 |   | 127,930                                                   |       | —                                                    |   |
| Management fees, related party                                                                                   |   | 126,000                                                   |       | —                                                    |   |
| Trustee fees                                                                                                     |   | 49,768                                                    |       | 56,750                                                    |   |
| Directors’ fees                                                                                             |   | 44,000                                                    |       | 44,000                                                    |   |
| Bank charges                                                                                                     |   | 71,285                                                    |       | 1,919                                                     |   |
| Copying and printing                                                                                             |   | 43,646                                                    |       | 2,780                                                     |   |
| Occupancy                                                                                                        |   | 12,976                                                    |       | —                                                    |   |
| Other                                                                                                            |   | 17,006                                                    |       | 3,358                                                     |   |
| Total operating expenses                                                                                         |   | 6,210,223                                                 |       | 1,133,493                                                 |   |
|                                                                                                             |   |                                                      |       |                                                      |   |
| LOSS BEFORE TAXES                                                                                                |   | (6,655,313                                                | )          | (1,541,495                                                | )      |
|                                                                                                             |   |                                                      |       |                                                      |   |
| Benefit for income tax, related party                                                                            |   | (2,462,466                                                | )          | (571,808                                                  | )      |
| NET LOSS                                                                                                         |   | $                                                         | (4,192,847 | )                                                         | $      | (969,687 | ) |
| Weighted average number of common shares  outstanding – basic and diluted                                   |   | 2,000                                                     |       | 1,750                                                     |   |
| Net loss per common share – basic and  Diluted                                                              |   | $                                                         | (2,096.42  | )                                                         | $      | (554.11 | ) |

 

*The accompanying notes form an integral part of these financialstatements.*

 

F-4

----

 

**MEDICAL CAPITAL MANAGEMENT, INC.STATEMENTS OF CASH FLOWS**

 
|                                                                                          |   | **Year ended  December 31,  2002  Restated Note 12** |       | **Year ended  December 31,  2001  Restated Note 12** |   |
|-----------------------------------------------------------------------------------------------|--------|-----------------------------------------------------------|------------|-----------------------------------------------------------|--------|
|                                                                                          |   |                                                      |       |                                                      |   |
| Cash flows used for operating activities:                                                     |   |                                                      |       |                                                      |   |
| Net income (loss)                                                                             |   | $                                                         | (4,192,847 | )                                                         | $      | (969,687 | ) |
| Adjustments to reconcile net income to net  cash provided by (used for) operating activities: |   |                                                      |       |                                                      |   |
| Amortization of deferred offering costs and  Commissions                                      |   | 1,293,548                                                 |       | 289,477                                                   |   |
| Amortization of prepaid trustee fee                                                           |   | 49,768                                                    |       | —                                                    |   |
| Changes in assets and liabilities:                                                            |   |                                                      |       |                                                      |   |
| Decrease (increase) in medical receivables                                                    |   | (20,710,104                                               | )          | (9,828,907                                                | )      |
| Decrease (increase) in interest receivable                                                    |   | 39,136                                                    |       | (35,858                                                   | )      |
| Decrease (increase) in due from (to) Parent  and affiliates                                   |   | (6,148,952                                                | )          | (609,609                                                  | )      |
| Decrease (increase) in accounts receivable                                                    |   | (36,755                                                   | )          | —                                                    |   |
| Decrease (increase) in prepaid trustee fees                                                   |   | (54,292                                                   | )          | —                                                    |   |
| Increase in accrued expenses – trade                                                     |   | 50,065                                                    |       | 58,129                                                    |   |
| Increase in due to medical providers                                                          |   | 150,070                                                   |       | —                                                    |   |
| Increase in interest payable                                                                  |   | 257,450                                                   |       | 139,069                                                   |   |
| Net cash used for operations                                                                  |   | (29,302,913                                               | )          | (10,957,386                                               | )      |
|                                                                                          |   |                                                      |       |                                                      |   |
| Cash flows used for investing activities:                                                     |   |                                                      |       |                                                      |   |
| Increase in notes receivables                                                                 |   | (1,232,127                                                | )          | (4,045,000                                                | )      |
| Net cash used for investing activities                                                        |   | (1,232,127                                                | )          | (4,045,000                                                | )      |
|                                                                                          |   |                                                      |       |                                                      |   |
| Cash flows from financing activities:                                                         |   |                                                      |       |                                                      |   |
| Proceeds from issuance of debt, net                                                           |   | 33,992,000                                                |       | 18,217,000                                                |   |
| Payments on offering costs and commissions                                                    |   | (2,806,855                                                | )          | (1,370,737                                                | )      |
| Payment of dividend, related party                                                            |   | (1,250,000                                                | )          | —                                                    |   |
| Proceeds from sale of common stock                                                            |   | —                                                    |       | 249,920                                                   |   |
| Proceeds from paid–in capital                                                            |   | —                                                    |       | —                                                    |   |
| Net cash provided by financing activities                                                     |   | 29,935,145                                                |       | 17,096,183                                                |   |
| Net increase in cash and cash equivalents                                                     |   | (599,895                                                  | )          | 2,093,797                                                 |   |
| Cash and cash equivalents at beginning of  year                                               |   | 2,093,897                                                 |       | 100                                                       |   |
| Cash and cash equivalents at end of year                                                      |   | $                                                         | 1,494,002  |                                                      | $      |  2,093,897 |   |
| Supplemental disclosure of cash flow items:                                                   |   |                                                      |       |                                                      |   |
| Income taxes paid                                                                             |   | $                                                         | —     |                                                      | $      | — |   |
| Interest paid                                                                                 |   | $                                                         | 3,355,146  |                                                      | $      | 380,122 |   |

 

*The accompanying notes form an integral part of these financialstatements.*

 

F-5

----

 

**MEDICAL CAPITAL MANAGEMENT, INC.STATEMENT OF STOCKHOLDER’S DEFICIT(RESTATED)**

 

**FORTHE YEARS ENDED TO DECEMBER 31, 2002 AND 2001**

 
|                                                         |   |       |   | **Additional  paid-in  Capital** |   | **Accumulated  Deficit** |   | **Total  stockholder’s  deficit** |   |
|--------------------------------------------------------------|--------|------------|--------|----------------------------------|--------|--------------------------|--------|----------------------------------------|--------|
| **Common  stock**                                            |
| **Shares**                                                   |   | **Amount** |
| Balance - January 1, 2001                               |   | 1,000      |   | $                                | 10     |                     | $      | 90                                     |   | $ | — |   | $ | 100 |   |
| Sale of common stock to Parent on  March 31, 2001       |   | 1,000      |   | 10                               |   | 249,910                  |   | —                                 |   | 249,920 |   |
| Net loss for the twelve months ended  December 31, 2001 |   | —     |   | —                           |   | —                   |   | (969,687                               | )      | (969,687 | ) |
| Balance - December 31, 2001                             |   | 2,000      |   | 20                               |   | 250,000                  |   | (969,687                               | )      | (719,667 | ) |
| Payment of dividend, related party                           |   |       |   |                             |   | (250,000                 | )      | (1,000,000                             | )      | (1,250,000 | ) |
| Net loss for the twelve months ended  December 31, 2002 |   | —     |   | —                           |   | —                   |   | (4,192,847                             | )      | (4,192,847 | ) |
| Balance - December 31, 2002                             |   | 2,000      |   | $                                | 20     |                     | $      | —                                 |   | $ | (6,162,534 | ) | $ | (6,162,514 | ) |

 

*The accompanying notes form an integral part of these financialstatements.*

 

F-6

----

 

**MEDICAL CAPITAL MANAGEMENT, INC.NOTESTO FINANCIAL STATEMENTS**

 

**FOR THE YEARS ENDED DECEMBER 31, 2002AND DECEMBER 31, 2001**

 

**1. Operations of theCompany**

 

**Organization:**

 

Medical Capital Management, Inc. was incorporated in the state ofDelaware on August 4, 2000.  Itmaintains its corporate office in Anaheim, California.  The Company is wholly owned by MedicalCapital Holdings, Inc. (Parent).

 

**Business Activity:**

 

The Company was organized to purchase the insured portion of medicalreceivables from medical providers including physicians, clinics, hospitals,nursing homes and other providers of healthcare services throughout the UnitedStates.  The medical receivables arepurchased at a discount to the full amount of the claim.  The Company also seeks other investmentsthat will enhance its financial position.

 

**2. Summary ofSignificant Accounting Policies**

 

**Use of Estimates:**

 

The preparation of financial statements requires management to makeestimates and assumptions that affect certain reported amounts of assets andliabilities and disclosure of contingent assets and liabilities at the date ofthe financial statements and the reported amounts of revenues and expensesduring the reporting period.  Actualamounts could differ from those estimates.

 

Theaccompanying financial statements include all adjustments (consisting of only normal recurring  accruals) which are, in the opinion ofmanagement, necessary for a fair presentation of the results of operations forthe periods presented.

 

**Cash and CashEquivalents:**

 

For the purposes of the statement of cash flows, cash and cashequivalents include all highly liquid debt instruments with original maturitiesof three months or less that are not securing any corporate obligations.

 

The Company maintains its cash in bank deposit accounts, which attimes, may exceed the federally insured limits.  The Company has not experienced any losses in its accounts.

 

**Discounts Earned onMedical Receivables:**

 

The Company changed its method of recording income to the cost recoverymethod.  The cost recovery methodrelates to the income recognition on purchased receivables.  The cost recovery method requires that anyamounts received be applied first against the recorded amount of the advanceand when that amount has been reduced to zero, any additional amounts receivedcan be recognized as discount income.

 

Medical receivables are recorded at initial purchase amount, which isthe net amount advanced to the seller, plus discount fee less deferred unearnedincome, less any collections on the receivable.  This is the cost basis and equals the fair market value of thereceivable at the time of purchase. Medical receivables purchased from affiliates are generally purchasedfor 85%-100% of fair market value, which is determined as the gross advanceplus the gross discount less the gross collections of the receivables at

 

F-7

----

 

the time of purchase.  The faceamount of the receivables, or the amounts owed to the seller by the receivablepayor, are adjusted to an expected net receivable (the Company refers to thisas the “ENR” or Expected Net Receivable) amount through the Company’sunderwriting process, which represents the actual amount that the Companybelieves is collectible on the receivable. The Company determines its initial purchase amount, discount fee andreserve based on the ENR of the receivable.

 

Discounts on medical receivables represent a fee charged by the Companyto the seller on the purchase of receivables. All collections are first appliedto the net advance of each batch of receivables purchased and only if totalcollections exceed the net advances for all batches acquired in a fiscal quarter,the contractual discount fee is recognized as income. Discount fee pricing isbased on a historical analysis of the seller’s accounts receivable collectionperformance, risk criteria and the number of days the receivable is outstandingwhen purchased, in the aggregate.  Thediscount fee is calculated on a batch-by-batch basis based on this analysis asthe estimated collection period of the receivables in the batch.  Although the amount of the discount iscalculated at the beginning of each purchase transaction, the discount revenueis deferred until realized.

 

This discount revenue is deferred into a “discount reserve” that theCompany continually updates, and is recognized upon collection for amounts inexcess of the net advance on a per client basis. The Company anticipates thereceivables upon which these reserves are based to be fully collectable.Therefore, this reserve is considered a timing adjustment. As ofDecember 31, 2002 and 2001, this reserve was $7,612,259 and $1,810,095,respectively.

 

**Related Party Transactions:**

 

The Company’s Parent, Medical Capital Holdings Inc., has substantialexperience and success in identifying and evaluating healthcare providersdesiring to sell their healthcare receivables. The Company uses the services and expertise of Medical Capital Holdingsand its subsidiaries to purchase a portfolio of healthcare receivables.  It has entered into contracts with MCC andMTS, affiliated companies, to provide the appropriate system for purchasing andtracking its healthcare receivables. Reimbursement for these services approximates the costs to theseaffiliated entities which management believes equals the prevailing marketrates for comparable services of this nature.

 

As a normal course of business, initial purchase relationships mayoccur between the seller and Medical Capital Holdings and its affiliates.  Medical Capital Holdings has a revolvingcredit line with Comerica Bank, which allows Medical Capital Holdings topurchase accounts receivable from a seller. Then, once the Company has funds available, the receivables as well asthe rights, title and interest in the contractual relationship between theseller and parent are sold to the Company by Medical Capital Holdings.  For these inter-company sales, thereceivables are sold to the Company at a price generally equal to 85-95% thesum of the total amount advanced to the seller of the receivable plus thediscount fee, less unearned discount less any collections already received onthe receivable.  To the extent theCompany has sufficient funds available, the Company will purchase receivablesdirectly from a seller without first being purchased by Medical CapitalHoldings.  Medical Capital Corporationmakes the determination as to whether the Company purchases receivables fromthe Company’s affiliates or directly from the seller.  Medical Capital Corporation may also direct the sale ofreceivables from one of the Company’s affiliates to the Company, or from theCompany to one of its affiliates as a method of asset/liability management andto attempt to maintain diversification in the Company’s investmentportfolio.  When the Company purchasesreceivables from its affiliates, it purchases all rights, title and interest inthe receivable that the affiliate owned, including reserve amounts.  Therefore, the impact on reserves is nodifferent whether the Company purchases receivables from its affiliates ordirectly from the seller.

 

F-8

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**ProviderConcentration:**

 

As of December 31, 2002, medical receivables purchased by theCompany from four providers amounted to approximately 78% of the net balance ofthe total receivables due to the Company. MCM had no other relationships, contractual or otherwise, with theseproviders.

 

**Reserves:**

 

*Seller’s Reserve. *The amount of each receivable allocatedto each seller’s reserve account is equal to the ENR, minus the sum of theinitial purchase amount and the discount. This is the batch seller’s reserve for funds that could be returned tothe seller after claims are collected, if contractual terms are met by theseller.  This seller reserve is rolledup into the overall aggregate seller reserve on the entire pool of receivablespurchased from that seller.  Receivablesare posted on a receivable-by-receivable basis, and reported on a batchbasis.  The receivables are alsomonitored by tracking the entire pool of batches for a seller to determine theadequacy of the seller’s reserve account. The Company typically tries to maintain an overall seller reserve of10-25% of the ENR for each seller’s pool of receivables depending on variouscriteria determined through the underwriting process and collection experienceof the seller’s receivables.  If aseller’s reserve account is insufficient on a pool basis, an adjustment is madeto reduce the initial purchase amount on future batches of receivablespurchased from that seller, which increases the amount of each batch allocatedto the seller’s reserve account.  Althoughthe Company has the right under its purchase agreement with the seller toreduce the percent advanced on future purchases, the Company has not done sofor competitive reasons.  However, theCompany has withheld a portion of the advance on future purchases in order tooffset uncollected receivables, which has the effect of reducing the advanceamount percentage on future purchases. In addition, under the terms of the Company’s purchase agreement witheach seller, any amounts collected in excess of the ENR are allocated to thereserve account of the seller to increase that seller’s reserve balance.  If the seller is in compliance with theterms of the purchase agreement and all of its batches of receivables arecollected on time, the Company will return to the seller all collections forthe amounts allocated to the seller reserve account that exceed 25% of theoutstanding balance of the seller’s receivables, calculated on a monthlybasis.  In addition, if the Companyceases to purchase receivables from a seller, once that seller’s outstandingreceivables are collected in full, the Company will return any collections, aswell as all rights, title and interest in the receivables allocated to thereserve account to the seller.

 

Usually, within a period determined by the Company from the date ofpurchase (depending on the contractual terms in each seller’s agreement), ifthe full ENR of the receivable has not been fully collected, the batch ofreceivables and the individual open receivable are considered to have a valueof zero and/or replaced with a new receivable. At the same time the Company assigns a receivable a value of zero, itoffsets the uncollected portion against the seller reserve for that sellerand/or withholds a portion of the advance on the next purchase of receivablesfrom that seller.  Even though thereceivable is assigned a value of zero, the Company continues to track thereceivable and attempts to collect it. If the receivable is subsequently collected, the Company allocates thosecollections to the seller’s reserve account under the terms of its purchaseagreement with the seller.  As ofDecember 31, 2002, the amount collected (for all sellers) in excess oftheir respective reserve accounts was $150,070.

 

*Discount Reserve*.  This reserve is established by deferringdiscount income on medical receivables purchased from each seller andrecognizing the discount income upon collection of the receivables after thefull collection of the net advances. The Company anticipates the receivables on which these reserves arebased to be collectable, however, if the Company does not collect the purchasedreceivables in the contractual period (as established between the seller andthe Company) then the seller forfeits the deferred purchase price of theshort-collected batch of receivables to the Company.  Once a batch of receivables, grouped by a fiscal quarter, isfully collected to the ENR amount, the Company recognizes the seller’sforfeited deferred purchase price as part of its discount revenue.  As of December 31, 2002, the discountsreserve, excluding deferred purchase price, was $7,612,259 (restated).  

 

F-9

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*Bad Debt Reserve for Losses. *The bad debtreserve for losses on medical receivables is increased by provisions chargedagainst operations and reduced by receivables charged off, as determined bymanagement.  The reserve is maintainedat a level considered adequate to provide for potential losses on medicalreceivables based on management’s evaluation. Under the terms by which the medical receivables are purchased, theCompany has significant collateral, including substitution of receivablesexceeding the contractual period ranging from 90-270 days.  Accordingly, charge-offs are not expected tobe material to the Company’s financial position or results of operations.  During the twelve months endedDecember 31, 2002 and December 31, 2001, no reserves for losses wereneeded. 

 

**DelinquentReceivables:**

 

A delinquent receivable is determined as such when the contractedperiod (collection service life) has expired and there remains a balanceshortfall to the ENR amount of the batch of receivables.  The shortfall is determined on a batchbasis.  Once a batch is closed and it isdetermined that a shortfall exists, the value of the delinquent receivable isreduced to zero. The amount of the shortfall is either withheld from theseller’s next purchase advance, replaced by the seller with new receivables inan amount equal to the delinquent receivables or charged to the bad debtreserve of the seller.  Therefore, therewere no delinquent receivables on the Company’s books as of December 31,2002. After the batch is closed, the seller is charged back a withholding ofthe next purchase advance to make up the shortfall against the seller’s baddebt reserves or the seller substitutes a new receivable for the delinquentreceivable.  Since the seller isobligated to sell receivables on a forward moving basis (i.e. recurring) thereis sufficient offset capability to cover most of the risk to collectionshortfall.  If the seller no longeroffers or is not required to sell receivables to the Company and a shortfallexists for a batch of receivables, it is the Company’s policy to pursue allrelated collection activity to recover collections of the ENR amount.  When a seller substitutes a receivable, noadjustment is made to the discount fee. There were no substitutions ofreceivables during the year ended December 31, 2002.

 

**Commissions:**

 

Commissions paid to outside and related parties in connection with theorigination of medical receivables are expensed as incurred.  Commissions incurred on the acquisition ofinvestor funds (notes payable) are capitalized and amortized over the periodthe debt is outstanding using the interest method.  For the twelve months ended December 31, 2002 and 2001, theCompany capitalized commissions of $2,717,152 and $1,176,380, respectively, andamortized $1,166,403 and $189,463, respectively.

 

**Fair Value ofFinancial Instruments:**

 

Unless otherwise indicated, the fair value of all reported assets(except for cash and cash equivalents which approximate fair value) andliabilities which represent financial instruments, none of which are held fortrading purposes, approximate carrying values of such accounts.  

 

**IncomeTaxes:**

 

The Company uses the liability method of accounting for income taxespursuant to SFAS No. 109, “Accounting for Income Taxes.”  Deferred income tax assets or liabilitiesresult from temporary differences when certain income or expense amounts arerecognized or deducted for financial statement purposes in a differentreporting period than when they are recognized or deducted for income taxpurposes.  For Federal and state incometax purposes, the Company is consolidated with its Parent.  The Company is allocated its share of theconsolidated tax liability approximating the separate return method, estimatedat 37% of net income before taxes.  Forthe years ending December 2002 and 2001, the Company’s income tax benefitwas $2,462,466 and $571,808 respectively. As of December 31, 2002, the deferred tax asset arising primarilyfrom net operating loss carryforward and unearned discount revenue wasapproximately $3,034,274.  In theopinion of management, the Parent has adequate deferred tax liability to assurethe utilization of the Company’s deferred tax assets beyond a reasonabledoubt.  The

 

F-10

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Parent will pay (in cash) the Company for the entire benefit arisingfrom the utilization of the Company’s tax assets in the consolidated returns ofthe Parent.  Included in “Receivablefrom Parent and affiliates, net” is $3,032,819 for this tax receivable from theParent.  There were no other materialtemporary differences between book and tax bases of various liabilities andassets that would give rise to any material deferred tax assets or liabilities.

 

Areconciliation of the provision for income taxes at statutory rates to the provision reported in the consolidatedfinancial statements is as follows:

 
|                                                           |   | **2002** |   | **2001** |   |
|----------------------------------------------------------------|--------|----------|--------|----------|--------|
| Federal income tax (benefit) at statutory  rates               |   | (34      | )%     | (34      | )%     |
| State income taxes (benefit), less federal  income tax benefit |   | (6       | )      | (6       | )      |
| Total provision/(benefit)                                      |   | (40      | )      | (40      | )      |
| Loss for which no tax benefit is available                     |   | 3        |   | 3        |   |
| NOL utilized                                                   |   | —   |   | —   |   |
| Total provision (benefit)                                      |   | (37      | )%     | (37      | )%     |

 

Theincome tax provision (benefit) is comprised of the following:

 
|                      |   | **2002** |       | **2001** |   |
|---------------------------|--------|----------|------------|----------|--------|
| Current - federal         |   | $        | (2,462,466 | )        | $      | (571,808 | ) |
| Deferred - federal        |   | —   |       | —   |   |
|                      |   |     |       |     |   |
| Total provision (benefit) |   | $        | (2,462,466 | )        | $      | (571,808 | ) |

 

**Recent Accounting****Pronouncements**:

 

In October 2001, the FASB issued SFAS No. 143,“Accounting for Asset Retirement Obligations,” which requires companies torecord the fair value of a liability for asset retirement obligations in theperiod in which they are incurred.  Thestatement applies to a company’s legal obligations associated with theretirement of a tangible long-lived asset that results from the acquisition,construction, and development or through the normal operation of a long-livedasset.  When a liability is initiallyrecorded, the company would capitalize the cost, thereby increasing thecarrying amount of the related asset. The capitalized asset retirement cost is depreciated over the life ofthe respective asset while the liability is accreted to its present value.  Upon settlement of the liability, theobligation is settled at its recorded amount or the company incurs a gain orloss.  The statement is effective forfiscal years beginning after June 30, 2002.  The Company does not expect the adoption to have any impact tothe Company’s financial position or results of operations.

 

In October 2001, the FASB issued SFAS No. 144,“Accounting for the Impairment or Disposal of Long-Lived Assets.”  Statement 144 addresses the accounting andreporting for the impairment or disposal of long-lived assets.  The statement provides a single accountingmodel for long-lived assets to be disposed of. New criteria must be met to classify the asset as an assetheld-for-sale.  This statement alsofocuses on reporting the effects of a disposal of a segment of a business.  This statement is effective for fiscal yearsbeginning after December 15, 2001. The adoption of FASB 144 did not have any impact to the Company’sfinancial position or results of operations.

 

In April 2002, the FASB issued Statement No. 145,“Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB StatementNo. 13, and Technical Corrections.” This Statement rescinds FASB Statement No. 4, “Reporting Gains andLosses from Extinguishment of Debt”, and an amendment of that Statement, FASBStatement No. 64, “Extinguishments of Debt Made to Satisfy Sinking-FundRequirements” and FASB Statement No. 44, “Accounting for Intangible Assets ofMotor Carriers”.  This Statement amendsFASB Statement No. 13, “Accounting for Leases”, to eliminate an inconsistency

 

F-11

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between the required accounting for sale-leasebacktransactions and the required accounting for certain lease modifications thathave economic effects that are similar to sale-leaseback transactions. Theadoption of this Statement did not have a material impact to the Company’sfinancial position or results of operations as the Company has not engaged ineither of these activities.

 

In June 2002, the FASB issued Statement No. 146,“Accounting for Costs Associated with Exit or Disposal Activities.” ThisStatement addresses financial accounting and reporting for costs associatedwith exit or disposal activities and nullifies Emerging Issues Task Force(“EITF”) Issue No. 94-3, “Liability Recognition for Certain EmployeeTermination Benefits and Other Costs to Exit an Activity (including CertainCosts Incurred in a Restructuring).” The provisions of this Statement areeffective for exit or disposal activities that are initiated afterDecember 31, 2002, with early application encouraged.  The Company does not expect the adoption tohave a material impact to the Company’s financial position or results of operations.

 

In October 2002, the FASB issued Statement No.147, “Acquisitions of Certain Financial Institutions-an amendment of FASBStatements No. 72 and 144 and FASB Interpretation No. 9”, which removesacquisitions of financial institutions from the scope of both Statement 72 andInterpretation 9 and requires that those transactions be accounted for inaccordance with Statements No. 141, Business Combinations, and No. 142,Goodwill and Other Intangible Assets. In addition, this Statement amends SFAS No. 144, Accounting for theImpairment or Disposal of Long-Lived Assets, to include in its scope long-termcustomer-relationship intangible assets of financial institutions such asdepositor- and borrower-relationship intangible assets and credit cardholderintangible assets.  The requirementsrelating to acquisitions of financial institutions is effective foracquisitions for which the date of acquisition is on or after October 1,2002.  The provisions related toaccounting for the impairment or disposal of certain long-termcustomer-relationship intangible assets are effective on October 1, 2002.The adoption of this Statement did not have a material impact to the Company’sfinancial position or results of operations as the Company has not engaged ineither of these activities.

 

In December 2002, the FASB issued Statement No.148, “Accounting for Stock-Based Compensation-Transition and Disclosure”, whichamends FASB Statement No. 123, Accounting for Stock-Based Compensation, toprovide alternative methods of transition for a voluntary change to the fair valuebased method of accounting for stock-based employee compensation.  In addition, this Statement amends thedisclosure requirements of Statement 123 to require prominent disclosures inboth annual and interim financial statements about the method of accounting forstock-based employee compensation and the effect of the method used on reportedresults.  The transition guidance andannual disclosure provisions of Statement 148 are effective for fiscal yearsending after December 15, 2002, with earlier application permitted incertain circumstances.  The interimdisclosure provisions are effective for financial reports containing financialstatements for interim periods beginning after December 15, 2002.  The adoption of this statement did not havea material impact on the Company’s financial position or results of operationsas the Company has elected not to change to the fair value based method ofaccounting for stock-based employee compensation. There are no stock optionsissued or outstanding.

 

During April 2003, the FASB issued SFAS 149 - “Amendment ofStatement 133 on Derivative Instruments and Hedging Activities”, effective forcontracts entered into or modified after June 30, 2003, except as statedbelow and for hedging relationships designated after June 30, 2003. Inaddition, except as stated below, all provisions of this Statement should beapplied prospectively. The provisions of this Statement that relate toStatement 133 Implementation Issues that have been effective for fiscalquarters that began prior to June 15, 2003, should continue to be appliedin accordance with their respective effective dates. In addition, paragraphs7(a) and 23(a), which relate to forward purchases or sales of when-issuedsecurities or other securities that do not yet exist, should be applied to bothexisting contractsand new contracts entered into after June 30, 2003. TheCompany does not participate in such transactions, however, is evaluating theeffect of this new pronouncement, if any, and will adopt FASB 149 within theprescribed time.

 

F-12

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In May 2003, the FASB issued SFAS No. 150, “Accounting for CertainFinancial Instruments with Characteristics of both Liabilities and Equity”.This Statement establishes standards for how an issuer classifies and measurescertain financial instruments with characteristics of both liabilities andequity. It requires that an issuer classify a financial instrument that iswithin its scope as a liability (or an asset in some circumstances). Many ofthose instruments were previously classified as equity. Some of the provisionsof this Statement are consistent with the current definition of liabilities inFASB Concepts Statement No. 6, Elements of Financial Statements. The remainingprovisions of this Statement are consistent with the Board’s proposal to revisethat definition to encompass certain obligations that a reporting entity can ormust settle by issuing its own equity shares, depending on the nature of therelationship established between the holder and the issuer. While the Boardstill plans to revise that definition through an amendment to ConceptsStatement 6, the Board decided to defer issuing that amendment until it hasconcluded its deliberations on the next phase of this project. That next phasewill deal with certain compound financial instruments including puttableshares, convertible bonds, and dual-indexed financial instruments.

 

In November 2002, the Financial AccountingStandards Board (“FASB”) issued Interpretation No. (FIN) 45, “Guarantor’sAccounting and Disclosure requirements for Guarantees, Including IndirectGuarantees of Indebtedness of Others.” Among other things, the Interpretationrequires guarantors to recognize, at fair value, their obligations to standready to perform under certain guarantees. FIN 45 is effective for guaranteesissued or modified on or after January 1, 2003. The adoption of thisstatement did not have a material impact to the Company’s financial position orresults of operations.

 

In January 2003, theFASB issued Interpretation No. 46, “Consolidation of Variable InterestEntities.”  Interpretation 46 changesthe criteria by which one companyincludes another entity in its consolidated financial statements.  Previously, the criteria were based oncontrol through voting interest. Interpretation 46 requires a variable interest entity to be consolidatedby a company if that company is subject to a majority of the risk of loss fromthe variable interest entity’s activities or entitled to receive a majority ofthe entity’s residual returns or both. A company that consolidates a variable interest entity is called theprimary beneficiary of that entity.  Theconsolidation requirements of Interpretation 46 apply immediately to variableinterest entities created after January 31, 2003.  The consolidation requirements apply toolder entities in the first fiscal year or interim period beginning afterJune 15, 2003.  Certain of thedisclosure requirements apply in all financial statements issued after January 31,2003, regardless of when the variable interest entity was established.  The Company does not expect the adoption tohave a material impact to the Company’s financial position or results ofoperations.

 

**3. Notes Receivable**

 

The Company entered into agreements with three medical providerswhereby the Company provided cash loans, which are secured by realproperty.  These notes receivables areas follows:

 
|                                                                                       |   | **As of  December 31, 2002** |      |
|--------------------------------------------------------------------------------------------|--------|-----------------------------------|-----------|
| Physician-Client, 18%, interest only paid  monthly, due July 1, 2003(1)               |   | $                                 | 300,000   |   |
| Skilled Nursing Facility, 16%, interest  only paid monthly, due September 18, 2002(2) |   | 745,000                           |      |
| Medical Group, 16%, interest only paid  monthly, Various due dates(3)                      |   | 4,294,127                         |      |
| Gross short term and long notes receivable                                                 |   | 5,339,127                         |      |
| Less: deferred income on notes                                                             |   | 62,000                            |      |
| Net short term and long term notes  receivable                                             |   | $                                 | 5,277,127 |   |

 

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(1)           As of December 31, 2003, we havesuspended interest payments due to a restructuring this loan.

(2)           The client defaulted on the terms andconditions of its loan agreement and in September, 2003 the Company tookpossession of the property.  The Companyhas engaged a new operator for the facility and

 

F-13

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has subsequently engaged in a purchase agreement for accountsreceivable as well as a letter of intent by the new operator to purchase theproperty, at a price inclusive of all principal, fees and legal expensesincurred by the Company. This transaction is being accounted for as a troubleddebt restructuring.  On February 4,the property was sold and the Company realized its cost, including interest.

(3)           As of December 31, 2003, interestpayments were one month deliquent, and the mortgagee has informed us that he isin the process of refinancing. On November 15, 2002, the Company enteredinto a new loan agreement with the borrower. The new agreement, a troubled debtrestructuring, called for a $2,572,000 increase in the original loan amount of$3,000,000 to be disbursed in December 2002 and February 2003 inaccordance with the loan agreement. Principal is to be repaid in variousinstallments in accordance with the loan agreement with the balance of the loanpayable on December 31, 2005. The repayment schedule calls for annualprincipal payments of $675,000 in 2003 and 2004, and $4,222,000 in 2005.

 

**4. Deferred OfferingCosts**

 

Deferred Offering Costs consist of costs incurred for the Company’sregistration of debt securities on Form SB-2 as filed with the Securities andExchange Commission, which was declared effective February 6, 2001.  These costs are amortized over the weightedterm of the securities using the interest method. For the twelve months endedDecember 31, 2002 and 2001, the Company paid and capitalized deferredoffering costs of $49,130 and $272,138 respectively, and amortized $127,145 and$100,014, respectively. The amortization was included in the interest expenseduring the applicable period.

 

**5. Notes Payable**

 

The Company issues notes, secured by medical receivables, for cashthrough several broker-dealers as filed on its registration statement with theSecurities and Exchange Commission. These notes consist of the following:

 
|                                            |   | **Rate**   |   | **Maturity  Date**         |   | **December 31,  2002** |       |
|-------------------------------------------------|--------|------------|--------|----------------------------|--------|-----------------------------|------------|
| Class A                                         |   | 9.00       | %      | 1 year from issuance date  |   | $                           | 4,606,000  |   |
| Class A                                         |   | 8.00       | %      | 1 year from issuance date  |   | 12,429,000                  |       |
| Class B                                         |   | 9.75       | %      | 2 years from issuance date |   | 3,258,000                   |       |
| Class B                                         |   | 8.75       | %      | 2 years from issuance date |   | 8,443,000                   |       |
| Class C                                         |   | 10.25      | %      | 3 years from issuance date |   | 2,650,000                   |       |
| Class C                                         |   | 9.25       | %      | 3 years from issuance date |   | 5,007,000                   |       |
| Class D                                         |   | 10.75      | %      | 4 years from issuance date |   | 3,267,000                   |       |
| Class D                                         |   | 9.75       | %      | 4 years from issuance date |   | 12,549,000                  |       |
| Total face value of notes payable               |   | 52,209,000 |   |
| Less unamortized offering costs and commissions |   | (2,681,375 | )      |
|                                            |   |       |   |                       |   | 49,527,625                  |       |
| Less current maturities                         |   | 21,295,000 |   |
|                                            |   |       |   |                       |   | $                           | 28,232,625 |   |

 

The maturities of notes payable as of December 31, 2002 are asfollows:

 
| 2003   |   | $          | 21,295,000 |   |
|--------|--------|------------|------------|--------|
| 2004   |   | 10,832,000 |       |
| 2005   |   | 8,664,000  |       |
| 2006   |   | 11,418,000 |       |
|   |   | $          | 52,209,000 |   |

 

As of December 31, 2002, the Company’s notes were secured bymedical receivables with an expected net receivable outstanding balance of$43,363,579, by notes receivable of $5,277,127, by related

 

F-14

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party receivable of $3,869,011, and by cash and cash equivalents of$1,494,002, for a total collateral amount of $54,003,719.

 

**6. Interest toSecured Noteholders**

 

Interest on all secured notes is paid monthly in arrears on the tenthof the following month to the noteholder of record as of the last day of themonth preceding the month in which the interest payment date occurs.  Interest is paid without anycompounding.  Each class of notes has adifferent maturity date and accrues interest at different rates.  The Company’s current rates on its securednotes are as follows: Class A to 8.00%; Class B to 8.75%; Class C to 9.25%; andClass D to 9.75%.  The effectiveinterest rates approximate 4% higher than the stated rates due to theamortization of deferred offering costs and commissions treated as interestexpense.

 

**7. Stockholder’sDeficit**

 

On April 23, 2002, the Company’s Board of Directors approved andpaid a dividend of $1,250,000 to our stockholder and Parent, Medical CapitalHoldings, Inc. Thedividends distributed were paid from additional paid in capital of $250,000 andthrough a charge to accumulated deficit of $1,000,000, as of December 31,2002.

 

**8. MedicalReceivables**

 

The following table shows the expected net receivable amount of the Company’sreceivables purchased from third parties and purchased from affiliates duringthe year ended December 31, 2002.

 

**Expected Net Receivable**

 
|                                                   |   | **For the  year ended  December 31, 2002** |       |
|--------------------------------------------------------|--------|-------------------------------------------------|------------|
| Direct purchases from third parties during  the period |   | $                                               | 34,356,421 |   |
| Purchases from affiliates during the period            |   | 23,370,719                                      |       |
| Total purchases during the period                      |   | $                                               | 57,727,140 |   |

 

As of December 31, 2002, the Company hadan outstanding ENR balance, net of collections, of $43,259,580.  The following table reconciles the ENR amounts to themedical receivable outstanding on the balance sheet.

 
|                                            |   | **For the year ended  December 31, 2002** |       | **Inception to  December 31, 2002** |       |
|-------------------------------------------------|--------|------------------------------------------------|------------|------------------------------------------|------------|
| ENR purchased                                   |   | $                                              | 57,727,140 |                                     | $          | 73,989,527 |   |
| Less: total collections and withholdings        |   | 27,530,534                                     |       | 31,391,936                               |       |
| Plus: excess collections due and paid to seller |   | 444,931                                        |       | 661,989                                  |       |
| ENR balance                                     |   | 30,641,537                                     |       | 43,259,580                               |       |
| Less: deferred purchase price on purchases      |   | 4,129,270                                      |       | 5,108,310                                |       |
| Gross medical receivable                        |   | 26,512,267                                     |       | $                                        | 38,151,270 |   |
| Less: net change in discount reserve            |   | 5,802,164                                      |       | 7,612,259                                |       |
| Plus: beginning balance                         |   | 9,828,908                                      |       | 0                                        |       |
| Net medical receivable                          |   | $                                              | 30,539,011 |                                     | $          | 30,539,011 |   |

 

As of December 31, 2002, the Company’s medical receivablesincluded Medicare and Medicaid claims of $4,822,347, or 11.1% of the total ENRbalance of the receivables.

 

The following tableshows a roll-forward summary of the deferred seller’s reserve account frominception to December 31, 2002 and for the year ending December 31,2002.

 

F-15

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|                                      |   | **For the year ended  December 31, 2002** |    | **Inception to  December 31, 2002** |   |
|-------------------------------------------|--------|------------------------------------------------|---------|------------------------------------------|--------|
| Beginning Balance                         |   | $                                              | 191,146 |                                     | $      | 0 |   |
| Plus: deferred purchases                  |   | 4,129,270                                      |    | 5,108,310                                |   |
| Less: withholdings applied to collections |   | 348,927                                        |    | 685,727                                  |   |
| Less: unidentified collections applied    |   | 3,140,511                                      |    | 3,374,547                                |   |
| Less: collections remitted to seller      |   | 294,861                                        |    | 511,919                                  |   |
| Ending Balance                            |   | $                                              | 536,117 |                                     | $      | 536,117 |   |

 

From inception toDecember 31, 2002, $511,919 was remitted to the sellers from the seller reserveaccounts.  The amounts remitted were asfollows:

 
|                                                |   | **Amounts Remitted  to Sellers** |    |
|-----------------------------------------------------|--------|----------------------------------|---------|
| July 1, 2001 thought September 30, 2001   |   | $                                | 60,862  |   |
| October 1, 2001 though December 31, 2001  |   | 156,196                          |    |
| January 1, 2002 though March 31, 2002     |   | 20,509                           |    |
| April 1, 2002 though June 30, 2002        |   | 51,071                           |    |
| July 1, 2002 though September 30, 2002    |   | 157,231                          |    |
| October 1, 2002 through December 31, 2002 |   | 66,050                           |    |
| Total remitted to sellers                           |   | $                                | 511,919 |   |

 

As ofDecember 31, 2002, $150,070 was due to sellers from the seller’s reserveaccounts.

 

**9. Related Party Transactions**

 

For the twelve months ended December 31, 2002 and 2001, MedicalCapital Corporation was compensated for administration of our healthcarereceivables in the amount of $1,272,960 and $439,656, respectively.  For the twelve months ended December 31,2002 and 2001, we incurred management fees provided by Medical CapitalCorporation of $126,000 and $0, respectively. For the twelve months ended December 31, 2002 and 2001, MedicalTracking Services was compensated for servicing our receivables in the amountof $276,846 and $33,824, respectively. For the twelve months ended December 31, 2002 and 2001, we incurredsales commissions for telemarketing expenses provided by Medical CapitalCorporation in the amount of $127,930 and $0, respectively.

 

For the twelve months ended December 31, 2002 and 2001, wepurchased medical receivables of various providers from our parent andaffiliates with a book value of $15,212,372 and $7,088,200, respectively, forwhich we paid $12,866,106 and $6,078,564, respectively, in cash, with thebalance included in the calculation of discount revenue earned and reserved(deferred).  As of December 31,2002, the Company was owed $6,671,753 from its Parent and affiliates, whichincludes $3,034,274 of income tax benefit receivable, and accrued expensespayable of $466,532 to the Parent or affiliate and the remaining $4,104,011 ofmedical receivable cash collections which were misdirected to an affiliate(Note 12).

 

Forthe nine months ended September 30, 2003 and 2002 (unaudited), MCC wascompensated for administration of the healthcare receivables which the Companypurchased in the amounts of $609,754 and $780,453, respectively. For the ninemonths ended September 30, 2003 and 2002 (unaudited),  MTS was compensated for servicing theCompany’s receivables in the amounts of $129,783 and $207,713, respectively.

 

Forthe nine months ended September 30, 2003 and 2002 (unaudited), the Companypurchased medical receivables of various providers from its Parent andaffiliates with a book value of $1,239,904 and $10,289,012, respectively, forwhich it paid a consideration of $1,239,904 and $9,091,952, respectively, incash with the balance included in the calculation of discount revenue earnedand reserved

 

F-16

----

 

(deferred).  As part of managements plans to wind downthe Company’s operation, during the eleven months ended November 30, 2003(unaudited), the Company sold medical receivables of various providers to itsParent and affiliates with a book value of $17,320,570, for which it receivedconsideration of $17,929,382, respectively, in cash.

 

Asa normal course of business, initial purchase relationships may occur betweenthe seller and Medical Capital Holdings and its affiliates.  Medical Capital Holdings has a revolvingcredit line with a U.S. bank, which allows Medical Capital Holdings to purchaseaccounts receivable from a seller. Then, once we have funds available, the receivables, as well as the rights,title and interest in the contractual relationship between the seller andparent, are sold to us by Medical Capital Holdings.  For these inter-company sales, the receivables are sold to us ata price generally equal to 85-100% of the sum of the total amount advanced tothe seller of the receivable, plus the discount fee, less any collectionsalready received on the receivable. Medical Capital Holdings’ costs, including interest charges, areincluded in the purchase price.  To theextent we have sufficient funds available, we will purchase receivablesdirectly from a seller without first being purchased by Medical CapitalHoldings.  Medical Capital Corporationmakes the determination as to whether we purchase receivables from ouraffiliates or directly from the seller. Medical Capital Corporation may also direct the sale of receivables fromone of our affiliates to us, or from us to one of our affiliates as a method ofasset/liability management and to attempt to maintain diversification in ourinvestment portfolio.  When we purchasereceivables from our affiliates, we purchase all rights, title and interest inthe receivable that our affiliate owned, including reserve amounts.  Moreover, we purchase medical receivablesfrom direct sellers or our affiliates at fair value.  Consequently, we believe that our results of operations are notimpacted whether we purchase receivables directly from the seller or from oneof our affiliates.

 

**10. Earnings PerShare**

 

The Company computes net earnings per share following SFAS No. 128,“Earnings Per Share.” Under the provisions of SFAS No. 128, basic net incomeper share is computed by dividing the net income available to commonshareholders for the period by the weighted average number of common sharesoutstanding during the period.  Dilutednet income per share is computed by dividing the net income for the period bythe weighted average number of common equivalent shares outstanding during theperiod.  As of December 31, 2002,there were no common stock equivalents.

 

**11. SignificantAgreements**

 

The Company has entered into several broker-dealer agreements for thepurpose of offering, selling, and distributing certain secured notes of theCompany on a best efforts basis.  Theeffective term of each of the broker-dealer agreements is generally for oneyear.

 

**12. Restatement of Financial Statements**

 

These financial statements have been restated to reflect the correctionof errors for the years ended December 31, 2002 and 2001. The Companychanged its method of recording income to the cost recovery method.  The cost recovery method relates to theincome recognition on purchased receivables (Note 8). The cost recovery methodrequires that any amounts received be applied first against the recorded amountof the advance and when that amount has been reduced to zero, any additionalamounts received can be recognized as discount income.

 

For 2001, the Company originally reported a medicalreceivables balance, due from (payable to) Parent (accrued expenses and incometaxes), additional paid in capital, and retained earnings (accumulated deficit)of $15,443,166, $(74,475), $4,250,000, and $47,296, but should have been$9,828,907, $522,801, $250,000, and $(969,687), respectively. The impact ofthese changes upon stockholder’s deficit was $(5,016,983), and upon net income(loss) of the Company was $(1,016,983).

 

F-17

----

 

For 2002, the Company originally reported medical receivables balance, duefrom (payable to) Parent (for accrued expenses and income taxes), additionalpaid in capital, and accumulated deficit of $45,012,270, $211,127, $3,000,000,and $(1,149,901), but should have been $30,539,011, $6,671,753, $0, and$(6,162,534), respectively. The impact of these changes upon stockholder’sdeficit and net income (loss) was a decrease of $(8,012,633) and $(2,995,650),respectively, of which $(5,016,983) included in stockholder’s deficit relatedto the prior year 2001 (above). In 2002, the Company’s dividend of $1 millionwas first applied to additional paid in capital, and then to accumulateddeficit.

 

The effects of the accounting change on items as previously reportedfor December 31, 2002 and 2001 for the Balance Sheet and Statements ofIncome (Operations) are as follows:

 
| **December 31,  2002**                               |   | **As  Previously  Reported** |       | **As  Restated** |      |
|-----------------------------------------------------------|--------|------------------------------|------------|------------------|-----------|
|                                                      |   |                         |       |             |      |
| Balance Sheet Items:                                      |   |                         |       |             |      |
| Medical receivables, net of reserves                      |   | $                            | 45,012,270 |             | $         | 30,539,011 |   |
| Discount reserves                                         |   | $                            | 1,243,000  |             | $         | 7,612,259 |   |
| Receivable from Parent and affiliates, net                |   | 211,127                      |       | $                | 6,671,753 |   |
| Total current assets                                      |   | $                            | 47,803,678 |             | $         | 39,791,045 |   |
| Total assets                                              |   | $                            | 52,035,805 |             | $         | 44,023,172 |   |
| Additional Paid in Capital                                |   | $                            | 3,000,000  |             | $         | 0 |   |
| Accumulated Deficit                                       |   | $                            | (1,149,901 | )                | $         | (6,162,534 | ) |
| Total Stockholders Equity (Deficit)                       |   | $                            | 1,850,119  |             | $         | (6,162,514 | ) |
| Total liabilities and stockholder’s equity (deficit) |   | $                            | 52,035,805 |             | $         | 44,023,172 |   |
|                                                      |   |                         |       |             |      |
| Income Statement Items:                                   |   |                         |       |             |      |
| Discount fees, net                                        |   | $                            | 5,231,838  |             | $         | 661,838 |   |
| Discount reserves                                         |   | $                            | 1,047,164  |             | $         | 5,802,164 |   |
| Total revenues                                            |   | $                            | 5,397,870  |             | $         | 827,870 |   |
| Administration expense, related party                     |   | $                            | 1,087,960  |             | $         | 1,272,960 |   |
| Gross Profit (loss)                                       |   | $                            | 4,309,910  |             | $         | (445,090 | ) |
| Net loss before taxes                                     |   | $                            | (1,900,313 | )                | $         | (6,655,313 | ) |
| Benefit for income taxes                                  |   | $                            | (703,116   | )                | $         | (2,462,466 | ) |
| Net loss available to Common Stockholders                 |   | $                            | (1,197,197 | )                | $         | (4,192,847 | ) |
|                                                      |   |                         |       |             |      |
| Basic and diluted net loss per Common share               |   | $                            | (598.60    | )                | $         | (2,096.42 | ) |

 

F-18

----

 
| **December 31,  2001**                               |   | **As  Previously  Reported** |       | **As  Restated** |   |
|-----------------------------------------------------------|--------|------------------------------|------------|------------------|--------|
| Balance Sheet Items:                                      |   |                         |       |             |   |
| Medical receivables, net of reserves                      |   | $                            | 15,443,166 |             | $      | 9,828,907 |   |
| Insert: discount reserves                                 |   | $                            | 195,836    |             | $      | 1,810,095 |   |
| Receivable from (payable to) Parent and affiliates, net   |   | $                            | (74,475    | )                | $      | 522,801 |   |
| Total current assets                                      |   | $                            | 21,617,921 |             | $      | 16,490,605 |   |
| Total assets                                              |   | $                            | 21,617,921 |             | $      | 16,490,605 |   |
| Total current liabilities                                 |   | $                            | 7,046,673  |             | $      | 6,936,339 |   |
| Total liabilities                                         |   | $                            | 17,320,605 |             | $      | 17,210,272 |   |
| Additional Paid in Capital                                |   | $                            | 4,250,000  |             | $      | 250,000 |   |
| Retained earnings (accumulated deficit)                   |   | $                            | 47,296     |             | $      | (969,687 | ) |
| Total Stockholders Equity (Deficit)                       |   | $                            | 4,297,316  |             | $      | (719,667 | ) |
| Total liabilities and stockholder’s equity (deficit) |   | $                            | 21,617,921 |             | $      | 16,490,605 |   |
|                                                      |   |                         |       |             |   |
| Income Statement Items:                                   |   |                         |       |             |   |
| Discount fees, net                                        |   | $                            | 1,645,912  |             | $      | 31,654 |   |
| Total revenues                                            |   | $                            | 1,645,912  |             | $      | 31,654 |   |
| Gross Profit (loss)                                       |   | $                            | 1,206,256  |             | $      | (408,002 | ) |
| Net income (loss) before taxes                            |   | $                            | 72,764     |             | $      | (1,541,495 | ) |
| Provision (benefit) for income taxes                      |   | $                            | 25,468     |             | $      | (571,808 | ) |
| Net income (loss) available to Common Stockholders        |   | $                            | 47,296     |             | $      | (969,687 | ) |
|                                                      |   |                         |       |             |   |
| Basic and diluted net income (loss) - Common share        |   | $                            | 27.03      |             | $      | (554.11 | ) |

 

**Going Concern**

 

The accompanying financial statements have been prepared in conformitywith accounting principles generally accepted in the United States of America,which contemplate continuation of the Company as a going concern. The Companyincurred net losses of $4,192,847 in 2002, used cash for operations of$29,302,913 in 2002 and at December 31, 2002, had an accumulated deficitof $6,162,534 and stockholder’s deficit of $6,162,514. In addition, themanagement of the Company has decided to wind down operations during 2003 and2004, after collecting or selling outstanding medical receivables and usingsuch proceeds to settle all the Company’s obligations, including outstandingnotes payable.  These financial statements do not include any adjustmentsrelating to the recoverability and classification of recorded asset amounts, oramounts and classification of liabilities that might result from the outcome ofmanagements decision to wind down operations.

 

As part ofmanagements plans to wind down the Company’s operation, during the twelvemonths ended December 31, 2003, the Company sold medical receivables ofvarious providers to its Parent and affiliates with a book value of$21,817,912, for which it received consideration of $21,817,912, respectively,in cash (unaudited). Additionally, during the twelve months endedDecember 31, 2003, the Company repaid $19,195,000 of its outstanding notespayable, which had matured (unaudited). From inception toDecember 31, 2003, the Company had purchased medical receivables with anENR of $108.4 million, of which $81.4 million either was either collected orsold (unaudited).

 

F-19

----

 

**EXHIBIT INDEX**

 
| **EXHIBIT** |   | **DESCRIPTION**                                                                                                                                                                    |
|-------------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|        |   |                                                                                                                                                                               |
| 3.01        |   | Articles of Incorporation of Medical Capital Management, Inc. (1)                                                                                                                  |
|        |   |                                                                                                                                                                               |
| 3.02        |   | Bylaws of Medical Capital Management, Inc. (1)                                                                                                                                     |
|        |   |                                                                                                                                                                               |
| 4.01        |   | Amended and Restated Note Issuance and Security Agreement, dated  February 15, 2001, between Medical Capital Management, Inc. and Zions  First National Bank, as trustee. (2) |
|        |   |                                                                                                                                                                               |
| 10.01       |   | Master Service Agreement between Medical Capital Management, Inc. and  Medical Tracking Services, Inc.  (3)                                                                   |
|        |   |                                                                                                                                                                               |
| 10.02       |   | Administrative Services Agreement, dated August 4, 2000, between  Medical Capital Management, Inc. and Medical Capital Corporation.  (1)                                 |
|        |   |                                                                                                                                                                               |
| 31.1        |   | Rule 13a-14(a)/15d-14(a) Certification.                                                                                                                                            |
|        |   |                                                                                                                                                                               |
| 31.2        |   | Rule 13a-14(a)/15d-14(a) Certification.                                                                                                                                            |
|        |   |                                                                                                                                                                               |
| 31.3        |   | Rule 13a-14(a)/15d-14(a) Certification.                                                                                                                                            |
|        |   |                                                                                                                                                                               |
| 32.1        |   | Section 1350 Certification.                                                                                                                                                        |
|        |   |                                                                                                                                                                               |
| 32.2        |   | Section 1350 Certification.                                                                                                                                                        |
|        |   |                                                                                                                                                                               |
| 32.3        |   | Section 1350 Certification.                                                                                                                                                        |
|        |   |                                                                                                                                                                               |
| 99.01       |   | Deed of Trust Note in the amount of $3,000,000.  (4)                                                                                                                          |
|        |   |                                                                                                                                                                               |
| 99.02       |   | Deed of Trust Note in the amount of $745,000.  (4)                                                                                                                            |
|        |   |                                                                                                                                                                               |
| 99.03       |   | Deed of Trust Note in the amount of $300,000.  (4)                                                                                                                            |
|        |   |                                                                                                                                                                               |
| 99.04       |   | Amended and Restated Deed of Trust Note dated November 12,  2002.  (4)                                                                                                   |

 

----

(1)          Incorporated by reference to the Registrant’sRegistration Statement on Form SB-2, Registration No. 333-45464.

(2)          Incorporated by reference to the Registrant’sCurrent Report on Form 8-K dated February 15, 2001.

(3)          Incorporated by reference to the Registrant’sRegistration Statement on Form SB-2, Registration No. 333-101772.

(4)          Incorporated by reference to the Registrant’sRegistration Statement on Form SB-2, Registration No. 333-101177.

 

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