**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

**AmendmentNo. 1 to**

**FORM 10-KSB/A**

 

| **(Mark  One)** |
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|            |   |
| **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**          |
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| **o**           | **TRANSITION  REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT** |
|            |   |
|            | **For  the transition period from                   to                 .** |

 

**Commission file number: 333-45464**

 

**MEDICAL CAPITAL MANAGEMENT, INC.**

(Name of small business issuer in its charter)

 

| **Delaware**                                                     |   | **88-0473359**                     |
|------------------------------------------------------------------|--------|------------------------------------|
| (State or other  jurisdiction of  incorporation or organization) |   | (IRS Employer  Identification No.) |

 

**3770Howard Hughes Parkway, Las Vegas, Nevada 89109**

(Address of principal executive offices)(Zip Code)

 

Issuer’s telephone number: **(800)824-3700**

 

Securities registeredunder Section 12(b) of the Exchange Act: **None**

 

Securities registeredunder Section 12(g) of the Exchange Act: **None**

 

Check whether the issuer(1) filed all reports required to be filed by Section 13 or 15(d) of theExchange Act during the 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days. Yes  ý  No  o

 

Check if disclosure ofdelinquent filers pursuant to Item 405 of Regulation S-B is not contained inthis form, and no disclosure will be contained, to the best of registrant’sknowledge, in definitive proxy or information statements incorporated byreference in Part III of this Form 10-KSB or any amendment to this Form10-KSB.  ý.

 

State issuer’s revenuesas restated for its most recent fiscal year: **$827,870**

 

All of the registrant’scommon equity is held by its parent company, Medical Capital Holdings,Inc.  There is no public market for the registrant’scommon equity.

 

As of December 1,2003, there were 2,000 shares of the registrant’s sole class of common stockissued and outstanding.

 

**Transitional Small BusinessDisclosure Format****                          Yes  ****o      No  ****ý**

 

 

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We are hereby amending our Form 10-KSB for the fiscal year endedDecember 31, 2002 because we changed our method of recording income to thecost recovery method as it was deemed to be more preferable and conservative.See Note 12 to the audited financial statements.

 

**PART I**

 

**Item 1.  Description of Business.**

 

**Overview**

 

Our primary business plan isto purchase healthcare provider accounts receivables at a discount to the faceamount of the receivable.  We thenattempt to collect 100% of the account balance.  The receivables generally are purchased from healthcare sellersand other businesses, which we refer to in this prospectus as our“sellers.”  In addition, to a lesserextent, we may also purchase general business receivables not related to thehealthcare industry.  We rely on ouraffiliates to provide us the services required for the purchase, monitoring andadministration of the receivables, like servicing, underwriting and acquisitionservices.

 

Our receivable purchasesgenerally 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 aninsurance carrier means that the carrier has an excellent to superior abilityto meet its obligations when due. A.M. Best publishes both a financial strength rating and a financialperformance rating on more than 6,000 health, property and casualty insurancecompanies.  A.M. Best’s financialstrength ratings range from A++ (Superior) to F (In Liquidation) and include 15separate ratings (not including the S rating for “Suspended”).  Our receivables purchases from insurancecarriers are generally limited to those with an “A” or better rating because webelieve insurance carriers with an “A” or better rating are more likely to paya healthcare receivable on time.  A.M.Best’s “A” rating is its third highest rating.

 

We only purchase accountsreceivable that are payable by commercial payors.  These are obligations owed by one business to another businessfor goods and services already provided or rendered.  For healthcare receivables, we will only purchase the insuredportion of an account receivable generated from patient services rendered byhealthcare providers that meet the financial requirements and underwritingstandards established by Medical Capital Corporation.  The insured portion of a healthcare receivable represents anobligation of third-party insurance companies, large corporations, state orfederal

 

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government agencies, preferred providerorganizations or health maintenance organizations.  Medical Capital Corporation has been using and continuallyrefining these underwriting standards for over eight years.

 

The underwriting departmentof Medical Capital Corporation uses credit criteria which is similar to thatused by other similar lending institutions. The relevant operating, historical and financial data of prospectivesellers are reviewed to assess the financial risk involved in purchasing thatprospective seller’s receivables.  Wewill not purchase any portion of receivables that are owed by individuals orthat are “self-pay.”  Self-pay relatesto the portion of a healthcare receivable to be paid by an individual patientor other individual that is financially responsible for the patient.

 

When Medical Capital Corporationidentifies investment opportunities, it determines which one of our affiliateswill fund the purchase of receivables from a given seller based on variousfactors including transaction size relative to size of the purchasing affiliateand amounts currently committed by each affiliate versus each affiliate’s fundsavailable for the purchase of receivables. Another criteria includes maintaining diversification within eachaffiliate’s portfolio.  From time totime, in order to attempt to maintain diversification of each affiliate’sportfolio, these constraints may cause Medical Capital Corporation to directthe sale of receivables from one affiliate to another.  Sales of receivables among affiliates aregenerally sold at 85-100% of fair market value.  Fair market value is determined as equal to the sum of the totalamount advanced to the seller of the receivable plus the discount fee, less anycollections already received on the receivable.

 

We may also provide loanssecured by equipment and real property to healthcare businesses that we believeto be financially viable and of low risk. Through December 31, 2002, we have made three loans secured by realestate totaling $5,339,127.  These loanswere made to healthcare providers who have entered into receivable purchaseagreements with us.  We do not have anyspecific plans to provide any additional loans secured by real estate in thenext 12 months, but may do so as opportunities arise.

 

From time to time, we mayalso purchase or invest in healthcare related businesses, like HMOs, preferredprovider organizations, medical bill review companies and third-partyadministrators.  We have not engaged inany 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.

 

**The Medical Capital Holdings Group**

 

We are a wholly ownedsubsidiary of Medical Capital Holdings, Inc. In addition to our company, Medical Capital Holdings has other activeoperating subsidiaries engaged in healthcare related businesses.  We often refer to these companiescollectively as the Medical Capital Holdings group.  Medical Capital Holdings also has another operating subsidiary, TheStirling Bridge Group, Inc., which is an Internet Web-Site development andhosting company.  The following chartshows the organization of Medical Capital Holdings and its active operatingsubsidiaries that are engaged in healthcare related businesses:

 

 

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*MedicalCapital 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.

 

*MedicalCapital Corporation*.  Medical Capital Corporation acts as theadministrator for all of our receivable purchases and other lendingtransactions.  Medical Capital Corporationessentially runs our business by administering our day to day operations,underwriting and originating our purchases of healthcare receivables andperforming marketing, sales and client support functions.  Medical Capital Corporation primarily providesservices to companies within the Medical Capital Holdings group.  We compensate Medical Capital Corporationfor underwriting and administering the healthcare receivables that we purchase.

 

Medical Capital Corporationhas provided services as an administrator since 1994 and is experienced inpurchasing and monitoring healthcare receivables generated by all types ofhealthcare sellers.  As of the date ofthis prospectus, Medical Capital Corporation had purchased over $1,000,000,000in face amount of receivables on behalf of companies in the Medical CapitalHoldings group.  Medical CapitalCorporation’s business is operated as a closely held company.  Medical Capital Corporation generallycharges companies in the Medical Capital Holdings group fees for its servicesthat represent the approximate cost to Medical Capital Corporation of providingthose services.  We believe that thefees Medical Capital Corporation charges to companies within the MedicalCapital Holdings group are similar to those that non-affiliated third partieswould charge for providing the same services.

 

Medical Capital Corporationmaintains 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 from sellersthat 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.

 

*MedicalCapital 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.

 

*MedicalTracking 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.

 

MediTrak has beenfacilitating the manual and electronic tracking of healthcare receivables since1997.  MediTrak’s business is operatedas a closely held company.  MediTrakgenerally charges companies in the Medical Capital Holdings group fees for itsservices that represent the approximate cost to MediTrak for providing thoseservices.  We believe the fees MediTrakcharges to companies within the Medical Capital Holdings group are equal to orlower than those non-affiliated third parties would charge for providingsimilar services.  For services providedto companies outside the Medical Capital Holdings group, MediTrak generallycharges higher rates.

 

*NationalHealth Benefits Corporation*.  NHBC provides medicalhealthcare claims processing, preferred provider organization (PPO) re-pricingand negotiated claims settlement services to insurance companies, third-partymedical claims administrators and to companies that self-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.

 

**Medical Industry Background**

 

According to news articlespublished daily and trade publications, the United States healthcare industryis undergoing rapid change.  Due to theaging of the population, there is an increasing need for medicalinstitutions.  In recent years,according to reports issued by the U.S. Department of Health and HumanServices, healthcare expenditures have increased at a rate approximately twicethat of inflation.  Due to the pressurefrom health insurance companies, corporations and government agencies tocontrol 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.

 

As discussed in articles inHealthcare Financial Management Association magazine, the ever increasingcomplex reimbursement procedures require employees with sophisticated knowledgeof the billing and payment procedures of the United States government and eachof the hundreds of different insurance carriers.  For example, the average 300 bed hospital in the United Statesattempts to process approximately 4,000 claims, payments and eligibilityinquiries on any given day.  Many ofthese cases will be processed on paper, over the phone or not at all.  As a result, the average collection time formost healthcare receivables is 60 to 90 days, which presents financial problemsfor many of the hospitals. Consequently, healthcare sellers experience a substantially increasedneed for immediate cash flow to support not only daily operational expenses,but the additional expense required for billing and collection services.  These billing statistics are published byHealthcare Financial Management Association on a monthly basis.

 

In order to improvecollection efficiency, hospitals and other healthcare providers are forced toeither out-source billings and collections or hire a number of highly skilledemployees solely for this purpose. Despite these efforts, many sellers often incur a significant loss dueto their inability to effectively process large amounts of claim information ina timely manner.  With payorreimbursement arrangements requiring increasingly more complex and lengthyprocedures, the provider’s revenue collection departments have become less ableto timely process the claims due to their limited capacity.  Improperly or incompletely submittedinformation will result in payment delays.

 

Consequently, we believe aserious administrative and cash flow management problem exists for manyhealthcare providers.  They are facedwith 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.

 

Businesses generally utilizeworking capital or accounts receivable financing to bridge the shortfallbetween the turnover of current assets and the maturity of currentliabilities.  A business will oftenexperience this shortfall during periods of revenue growth because cash flowfrom new revenues lags behind cash outlays required to produce newrevenues.  For example, a growing laborintensive business will often need to fund payroll obligations before payments arereceived 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.

 

As a result of thesedevelopments, we believe financing or sale of healthcare receivables has becomea more efficient solution to meet the cash flow needs of today’s healthcareproviders.  We believe that there areseveral distinct trends that will continue to fuel the demand for and thedollar value of healthcare services in the United States and the demand for ourservices, 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.

 

**Commercial Receivables**

 

We may use a portion of theproceeds of the sale of our notes to purchase non-healthcare commercialreceivables.  We have not identified anyspecific non-healthcare related receivables for purchase.  We do not anticipate that non-healthcare relatedcommercial receivables will constitute more than 20.0% of our pledged collateralat any time.  While our administratorhas developed a set of criteria for the selection of prospective healthcarereceivable sellers and guidelines for the healthcare receivables that qualifyfor purchase, our administrator has not had significant experience in assessingprospective non-healthcare receivable sellers or applying guidelines for thequalification of non-healthcare receivables. If our administrator does not correctly assess the non-healthcare receivablesellers and non-healthcare receivables that we may purchase, our collections onthose receivables could be less than we anticipate, which could adverselyaffect our profitability.

 

**Business Strategy**

 

Financial groups and varioussmaller financing companies provide financing through the purchase ofreceivables.  However, most of theseinstitutions have a minimum lending threshold of $5,000,000 in receivables whenoffering financing to seller groups.  Asa general matter, we believe these lenders typically have been less willing toprovide financing to healthcare and other sellers of the types we serve becausethese lenders have not developed the healthcare and other industry expertiseneeded to underwrite receivables generated by smaller sellers.  These lenders also lack specialized systemsnecessary for tracking and monitoring healthcare receivables transactions,which are different from traditional accounts receivable finance transactions.

 

***Target Healthcare Sellers***.  Weoffer financing to medium and smaller hospitals, other healthcare providers anddurable medical equipment distributors that generally do not producereceivables at a high enough level to attract large financial institutions, bypurchasing their receivables. Currently, our primary marketing strategy is to focus on the purchase ofreceivables 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 insurancecompanies based on medical fee schedules established by the insuranceindustry.  These healthcare practitionersusually have two to six practitioners in one office.  We believe their billing is relatively easy to monitor andpurchase, and believe 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***.  Wetarget both metropolitan and rural markets for the purchase ofreceivables.  Generally, we do notexpend substantial marketing efforts on the large metropolitan areas likeNew York, Chicago, Los Angeles, San Francisco, etc.  We believe the middle tier of metropolitanstatistical areas contain the size and type of prospective clients that bestsuit our lending criteria.  This segmentof the national market consists of a majority of fee-for-service practitionersand other healthcare and non-healthcare businesses.  These metropolitan areas would consist of cities like San Diego,California, Des Moines, Iowa and Little Rock, Arkansas.

 

***Products Offered***.  Inaddition to accounts receivable financing, small to middle market healthcareproviders often require additional financing products like loans secured byequipment or real estate to facilitate the growth or restructuring of theirbusinesses.  Facility-based healthcareproviders grow through the acquisition of additional facilities.  Facility-based healthcare providersgenerally are hospitals, skilled nursing facilities and clinics.  These providers can often acquire additionalfacilities at attractive valuations. This happens when some facilities need to be sold for a variety ofreasons.  Some of these reasons caninclude:

 

•                  the death of an owner of the facility;

•                  a healthcare chain may decide to withdrawfrom a geographical market and sell its facilities;

•                  some healthcare chains may decide to sell afacility to use the funds to purchase different or other types of facilities orto purchase facilities in other geographical markets; or

•                  when smaller healthcare chains declarebankruptcy due to poor management, their facilities can be bought throughbankruptcy 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***.  Weexpect the trends described above under “– Medical Industry Background” tocontinue, 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:

 

•                                                                 Targetsub-markets within the healthcare industry that have favorable characteristicsfor working capital financing, like fragmented sub-markets experiencing growth,consolidation or restructuring.  Ourinitial focus is on the purchase of healthcare receivables in thesesub-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.

 

With respect to banks and financialinstitutions, some of our officers and those of our affiliates have existingrelationships with several financial institutions throughout the country.  Banks are continually approached by medicaland other groups looking for financing. In addition, trust departments, brokerage firms and investment advisersare regularly asked by their clients where financing might be obtained.  These banks and institutions refer sellersto our affiliates from time to time.

 

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We believe a rapidly growingcommunity of independent brokers exists that arranges financing specific to thehealthcare industry.  These brokersrefer sellers to different lending institutions for a fee.  These brokers assist in locating receivablesavailable for purchase from smaller sellers that typically cannot findtraditional financing because of their small size.  These brokers often refer sellers to us.  If we purchase receivables from the referredseller, we pay a pre-arranged fee to the broker.

 

Our affiliates also have anetwork of contacts in the healthcare provider and healthcare insuranceindustries.  The healthcare insuranceindustry consists of healthcare insurers that pay medical claims to healthcareproviders.  It also includes companiesproviding services to healthcare providers like medical coding reviews, medicalnecessity determination reviews, billing system efficiency reviews and otherhealthcare insurance payment and billing services.  These contacts have been developed over the past years throughour affiliates’ marketing and hiring efforts. In addition, many of our affiliates’ officers and employees havepreviously worked in the healthcare provider and healthcare insurance industries.  Also, through daily marketing efforts, ouraffiliates are constantly enlarging their sales and referral base ofindependent brokers, the customers of which include many practitioner andfacility-based providers.

 

In addition to the abovesources of obtaining new sellers, Medical Capital Corporation maintains anInternet website at http://www.medicalcapital.com.  Medical Capital Corporation uses this website as a marketing tooland solicits the purchase of healthcare receivables from potential sellers throughthe website.  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 the healthcarereceivables we purchase, some of our purchases of receivables may be made fromsellers 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.

 

**Receivables Acquisition 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 on behalf of its clients.

 

For the year ended December 31,2002, we purchased receivables with an ENR of $57,727,140, of which $23,370,719or 40.5% was purchased from our parent, Medical Capital Holdings, with theremainder purchased from independent third parties.  As a normal course of business, initial purchase relationshipsmay occur between the seller and Medical Capital Holdings.  Medical Capital Holdings has a revolvingcredit line with Comerica Bank, which allows Medical Capital Holdings topurchase 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 equal to the sum of the total amountadvanced 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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When we identify ahealthcare seller or other seller from whom we may purchase receivables, weenter into a receivables purchase agreement with that seller.  This agreement gives us the right of firstrefusal to purchase all receivables from that seller either weekly, bi-weekly,semi-monthly or monthly, generally for a period of one year.  The terms of the agreement vary from sellerto seller.  Each week Medical CapitalCorporation reviews all receivables purchased in the preceding week and decideswhich receivables it will purchase on our behalf within the next seven to10 days.  We refer to each set ofreceivables so purchased as a “batch.” Medical Capital Corporation has the sole discretion as to whichreceivables it will purchase.

 

***Approval of Providers and OtherSellers***.  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 CapitalCorporation focuses on healthcare and other businesses that have sales of atleast $10,000 per week.  Currently, atypical seller generates receivables between $10,000 to $50,000 per week.  A prospective seller generally will have togenerate invoices averaging at least $150.00 per service incident.  Medical Capital Corporation has found thatsmaller receivables, those under $50.00, do not generate sufficient profit whenpurchased.

 

***Underwriting Policies***.  Allof our underwriting procedures are carried out on our behalf by Medical CapitalCorporation.  Medical CapitalCorporation employs five people in its underwriting department with over fiftyyears of combined experience in underwriting healthcare accountsreceivables.  The underwriting policiesof Medical Capital Corporation require a due diligence review of theprospective seller of receivables, its principals, its financial condition andstrategic position, including a review of all available financial statementsand other financial information, legal documentation and operationalmatters.  Medical Capital Corporation’sdue diligence review also includes a detailed examination of the seller’saccounts receivable, accounts payable, billing and collection policies andpractices, management information systems and real and personal property andother collateral.  Records and data ofthe seller for the prior 24-month period are reviewed and evaluated for consistency,reliability and adequacy of performance. While past collection records of a seller’s receivables are often are agood predictor of likely future results, past results may not reflect actualfuture results.  Therefore, it ispossible that the historical performance of receivables approved for purchaseunder our administrator’s program will be different from future collections onthe receivables, which could adversely affect our profitability.

 

Medical Capital Corporationalso 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, past receivablesfinancing history, bank references, financial statements, accounting firmcomments and UCC-1 searches; and

 

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

 

•                       to pledge all of its receivables, existing and future, as additionalcollateral;

 

•                       to execute a guarantee ensuring payment on all receivables purchased;and

 

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•                       to establish up to a 25% reserve account for the portion of thepurchase price of the receivables that will be withheld from the seller.

 

***Credit Risk Management***.  Thehealthcare receivables or portions of healthcare receivables that we acquiregenerally represent obligations of third parties to pay for healthcare servicesto patients of healthcare providers. Our healthcare receivables are paid by third-party payors, like healthmaintenance organizations, managed care concerns and other insurers, largecorporations that may be self-insured, other healthcare sellers and governmentagencies.  Because we purchase thesetypes of receivables, we rely on prompt payments from these third-party payorsfor collections.  We do not purchase anyhealthcare receivables or portions of healthcare receivables that are payableby individuals.

 

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***.  Ourpurchase agreement with a seller requires that we have the first right ofrefusal on all of the seller’s receivables on a regular-interval basis,generally for one year.  However, ourtotal investment in receivables from a seller under a receivables purchaseagreement generally is made on a specified “commitment” amount.  We do not make “one-time” purchases ofreceivables.  For the first purchasefrom a seller, we review and offer to purchase all of the receivables of thatseller, depending on the above detailed analysis of the receivables.  After the first purchase, we analyze allreceivables from the preceding week and decide which additional receivables wewill purchase within the next seven to 10 days.

 

***Purchase Agreement***.  Ourpurchase agreement with our seller governs our relationship with the seller foreach receivable we purchase from the seller. The purchase agreement requires that the seller offer all itsreceivables produced to us for our consideration to purchase.  The purchase agreement gives us the right topurchase all, or part of, the seller’s receivables.  However, even if we only purchase a portion of the seller’sreceivables, we still have all the seller’s receivables serving as collateralagainst 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 competitivereasons.  We have, however, withheldportions of the advance amount in order to offset uncollected receivables,which has the effect of 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 a specificbatch of receivables, or if the seller is chronically not compliant, theforfeiture 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.

 

When acquiring receivables, weonly purchase receivables that are to be paid by:

 

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

 

•                  an approved HMO;

 

•                  an approved government agency;

 

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•                  an approved institutional facility;

 

•                  a self-insured employer; or

 

•                  an other entity which meets our financialstandards.

 

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 and agreed to the requirements,Medical Capital Corporation begins the process of selecting and pricing thereceivables for purchase.  One of themost important aspects of the selection process, and the due diligence procedureperformed on prospective sellers, involves an analysis of a seller’sreceivables and collections to evaluate the receivables likely to be paidwithin a defined collection period.  Theanalysis covers a period of not less than the prior 24 months.  Using this data, Medical Capital Corporationdevelops ratios and other data which include the following information:

 

•                  the monthly total receivable balance;

•                  the amounts billed to and collected from thevarious payors;

•                  the amount of claims paid;

•                  the amount of claims not paid, and why;

•                  a review of claims files and related medicaland billing records;

•                  the average payment turnaround time;

•                  the average response time of the prospectiveseller to return payor requests for information;

•                  the classification of claims between insuredand uninsured;

•                  the amount and number of worker’scompensation and personal injury claims;

•                  the ratio of total monthly billed to totalmonthly collected receivables; and

•                  review of historical collections from thethird-party payor of the receivables, including a listing of and aging of thereceivables by the payor with corresponding financial status rating of each.

 

From the above data, MedicalCapital Corporation calculates an average receivable amount, receivable turntime, and the payment trend analysis on each major payor.  We also verify the existing outstandingreceivables by randomly selecting individual billing files and contacting theapplicable third-party payor to determine whether the claim has been submittedfor payment and will be paid as anticipated. Prior to a receivable being deemed eligible for purchase by us, one ofour required conditions is that there be an established payment history by thepayor of the receivable reimbursing an amount at least equal to the expectednet receivable generally within 60 to 90 days of the date the claim issubmitted.  Finally, we interview theprospective client’s administrative, accounting and billing personnel todocument and review the integrity of internal controls and follow-up billingand collections procedures.

 

Our purchase price paid forhealthcare and other receivables is based on a percentage of the face value ofthe receivable.  To determine thepurchase price, the face value is reduced first by the amount of any patientco-payment and any amounts in excess of what the payor has historically paidfor the procedure giving rise to the receivable.  The resulting amount is then further reduced by considering otherfactors that influence the amount which is likely to be collected under thereceivable, including the historical collection experience of the seller.  The resulting number is the estimate of thenet collectible value of the receivable, 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 newer receivablesacquired from the seller.

 

To further explain thereserve account, each receivable can be separated into several segmentsincluding: the face amount, the expected net receivable amount, the initialpurchase 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 ended December 31,2002, the initial purchase amount as a percentage of ENR was approximately80.0% on all receivable purchases from unaffiliated third parties.  Although we have the right under ourpurchase agreement with the seller to reduce the percent advanced on futurepurchases, 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. Because less than 25% of the ENR is allocated to the seller’s bad debtreserve at the time of initial purchase from a new seller, the amount advancedto the seller on future purchases may be less than 80% of the ENR, with thedifference being allocated to the seller’s bad debt reserve.  When this occurs, we generally leave theadvance percentage at 80%, but withhold a portion of the advance, which has theeffect of reducing the advance percentage. In addition, under the terms of our purchase agreement with the seller,any amounts collected in excess of the ENR are allocated to the bad debtreserve of the seller.

 

The purpose for establishinga reserve account is to have protection against losses due to uncollectedreceivables.  Withholding a portion ofthe purchase price is easier to exercise than attempting to require thereplacement of an uncollected receivable or otherwise seeking enforcement ofthe

 

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receivables purchase agreement.  If a purchased receivable becomesoutstanding for over the contract period, we may, at our option:

 

•                  offset the amount actually paid to the sellerfor the receivable against the seller’s reserve account;

 

•                  offset the amounts due to the seller from thepurchase of other batches of receivables;

 

•                  require the seller to replace the uncollectedreceivables with additional receivables; or

 

•                  exercise our rights under a guarantee fromthe seller, if any.

 

If a receivable is collectedat a later date, the reserve account is credited by the amount of thecollection 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.

 

An adjustment may be made ifthe seller’s reserve account balance falls below 5% of the outstandinguncollected receivables balance for that seller.  The adjustment is typically made to the initial advance amountpaid to the seller on future purchases of receivables.  This adjustment effectively reduces thepercentage of cash immediately paid to the seller when future receivables arepurchased.  For example, a seller may beinitially paid 80% of the ENR immediately when a receivable is purchased fromthat seller.  If that seller’s reserveaccount balance falls below 5% of the outstanding receivables balance andrequires an adjustment, the seller may only be paid 75% of the ENR at the timeof purchase for future receivable purchases. In this example, in addition to the normal allocation to the reserveaccount, an additional 5% of the ENR would be allocated to the reserve accountfor all future purchases until the reserve account balance reaches apre-determined level.  This adjustment,in effect, increases the amount allocated to the reserve account on each futurepurchase.  We have the right under ourpurchase agreement to adjust the advance percentage, the advance amount and theENR for a seller at our sole discretion. We have not adjusted the advance percentage for any seller to date, butmay do so as conditions warrant. However, we have withheld a portion of the advance on future purchasesof receivables to offset uncollected receivables, which has the effect ofreducing the advance amount percentage.

 

The amount of the reserveaccount generally ranges from 10% to 25% of the ENR.  A seller is paid the amount allocated to its reserve account onlywhen the amount exceeds a negotiated percentage, usually 25%, of all of thereceivables purchased from the seller that are outstanding at any onetime.  From time to time a reserveaccounting 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***.  Wehave entered into an administrative services agreement with Medical CapitalCorporation, one of our affiliates. Under the terms of the administrative services agreement, MedicalCapital Corporation has agreed to serve as the exclusive provider of managementservices to us and as the administrator for the receivables.  As the administrator, Medical CapitalCorporation is responsible for providing us the general and administrativeservices to facilitate the underwriting evaluation of receivables and otherassets to be purchased or used as collateral for a loan.  It also provides the personnel and computersystems that are necessary to ensure the collateral is safeguarded and performsas anticipated.  It also ensures theadequate 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.

 

Medical Capital Corporationis also responsible for providing management and underwriting services andmaking available to us its offices, personnel, facilities, equipment andservices, as are determined to be reasonably necessary for the proper andefficient operation of our business. These services include:

 

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

•                  marketing and public relations;

•                  maintaining a network of account consultantsto develop and maintain our relationships with receivable sellers; and

•                  opening, maintaining and directing bankaccounts for our benefit.

 

Under the administrativeservices agreement, we pay Medical Capital Corporation fees for providing theabove services to us.  The fees for thevarious services they provide are equal to the lesser of (1) 2% of the ENRbalance of the receivables owned by us, or (2) 25.0% of the discount feecharged on the purchase of the receivables. The administrative fee is calculated monthly.  For the year ended December 31, 2002, we incurred $1,272,960in administrative service fees to Medical Capital Corporation.  In addition to this fee, we also reimburseMedical Capital Corporation for compensation paid to its investor relationsdepartment for services rendered to us by that department.  For the year ended December 31, 2002,we paid Medical Capital Corporation $253,468 as reimbursement of compensationpaid to employees of Medical Capital Corporation for investor relationsservices provided on our behalf.  Wealso reimburse Medical Capital Corporation for out-of-pocket expenses paid onour behalf.  We believe the above feesare competitive with fees charged by independent third parties for providingsimilar 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 are beingpurchased.  The notice instructs the payorsto 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.

 

Separate lock box accountsare established for each seller. Receivables due and owing from government programs are subject to lawsand regulations not applicable to commercial payors.  Except in limited cases, Medicare and Medicaid laws andregulations provide that payments for services rendered under governmentprograms can only be made to the healthcare provider that has rendered theservices.  Therefore, each seller has alock box for non-government collections and a separate lock box for governmentcollections, like Medicare, Medicaid, CHAMPUS, etc.  However, if a governmental agency refuses to pay a healthcarereceivable, we cannot force collection directly from the government agenciesthat are obligated to pay the healthcare receivables owed to us unless we firstsuccessfully obtain a court order.  Thisinability to force collection directly from the government agency without acourt order could adversely affect our business.

 

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When we purchase areceivable, we purchase all right, title and interest in the receivable.  However, at the time of purchase, we appointthe seller as the collection agent for the receivable and the seller remainsobligated to collect the receivable. Our purchase agreement with the seller gives us the right to take overthe collection process if necessary. Although we believe our staff has the necessary experience to collectreceivables, we do not perform day-to-day collection activities.  Collection remains the obligation of theseller, 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 days from the purchasedate, the batch is “closed.”  The closedbatch is reconciled and reviewed to determine if the collections are adequateto achieve the expected performance of the purchased receivables.  This process is used to constantly evaluatethe expected net receivable rates used for each seller.  If any one batch of purchased receivablesdoes not perform as expected and falls short of the expected net receivable,the seller is required to supplement the shortfall by substituting thereceivable 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.

 

Weekly reports of purchasedreceivables are generated on a seller by seller basis.  These reports provide currently updatedaccounts receivable agings and other valuable portfolio information, includingclaim denial trends and collections performance.  Copies of these weekly reports are sent to our executive officesand the payment and aging update reports are sent to each seller.

 

***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.

 

MediTrak processes allreceivables we purchase and reports related data on a batch by batchbasis.  The payor’s explanations ofbenefits 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.

 

MediTrak inputs thisinformation into its system and posts the proper credits to each seller’saccount, on an account-by-account basis. It then transmits a report electronically to us giving details of allamounts received.  MediTrak then sendscopies of all payment documents and other accompanying documents to the seller.

 

Under the servicingagreement, MediTrak is compensated for its services by receiving a fee for eachclaim 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.** **For the year endedDecember 31, 2002, we incurred $276,846 in servicing fees toMediTrak.  We believe the fees MediTrakcharges to companies within the Medical Capital Holdings group are equal to orlower than those non-affiliated third parties would charge for providingsimilar services.

 

**Credit Loss Policy and Experience**

 

We regularly review ouroutstanding receivables to determine the adequacy of our bad debt reserve forlosses on receivables.  We expect tomaintain the bad debt reserve for losses on receivables at an amount estimatedto be sufficient to absorb future losses, net of recoveries, inherent in thereceivables.  In evaluating the adequacyof the allowance, we expect to consider factors like trends in healthcare and

 

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other relevant sub-markets, past-dueaccounts, historical charge-off and recovery rates, credit risk indicators,economic conditions, on-going credit evaluations, overall portfolio size,average seller balances, reserve account balances, real estate collateral valuations,if any, and underwriting policies. However, many of these considerations involve the significant use ofestimates and are subject to rapid changes which may be unforeseen and couldresult in immediate increased losses and material adjustments to the allowanceor actual losses.

 

To the extent that we maydeem specific receivables to be wholly or partially uncollectable, we willestablish a bad debt loss reserve equal to that amount.  As of December 31, 2002, we had notincurred any losses and did not have any bad debt reserve or allowance forlosses established.  Historically,companies in the Medical Capital Holdings group have used a guideline forcredit loss allowances of 2% of outstanding debt at the time of reporting.  However, this guideline is adjusted toreflect the performance of each individual client.  As a result, the credit loss allowances have often been less thanthe 2% guideline.

 

Because we are likely tocollect more than the amount initially paid to the seller of the receivable,the portion of the purchase price that has been withheld represents a reserve,or additional security, for the collection of the amounts due under all of thereceivables from that seller.  Theamount of the holdback of a portion of the receivables’ purchase price thatdoes not represent a yield to us upon collection of the receivable is allocatedto the reserve account of that seller. Under the terms of our purchase agreement with the seller, if the selleris in compliance with the agreement and all of its batches of receivables arecollected on time, we will return to the seller all amounts allocated to theseller reserve account that exceed 25% of the outstanding balance of theseller’s receivables, calculated on a monthly basis.  In addition, if we cease to purchase receivables from a seller,once that seller’s outstanding receivables are collected in full, we willreturn all amounts allocated to the reserve account to the seller.  If a receivable is in default, we will takemeasures to recover the purchase price. These measures include reducing the seller’s balance in its reserveaccount, seeking replacement of the receivable from the seller, or enforcingcorporate or personal guarantees given by the seller, if any.

 

**Title to Receivables**

 

We believe that thereceivables purchase transactions we enter into are “true sales” and thepurchased 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.

 

Although we pledgereceivables to the trustee under the note agreement, we recognize that somereceivables may prove to be non-assignable. For example, the assignment of some Medicare and Medicaid accountsreceivables may be prohibited by federal law. However, it is common in the medical receivables lending industry totake other measures to secure the receipts from Medicare and Medicaid accountsreceivables.  We make every effort toensure that the accounts receivables purchased are assignable.  If a receivable turns out to in fact benon-assignable, it is possible that neither the trustee nor we will havereceived title to the receivable, or even a security interest in it.  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.

 

In a few cases, assignmentof a receivable or any security interest in a nursing home has been found torequire the recording of a mortgage. This is a practice we attempt to avoid and do not currently intend tofollow.  In the event of a default onthese receivables by the payor, we could be at risk to the extent of thepurchase price advanced with respect to the receivables.

 

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**Competition**

 

We encounter significantcompetition in our healthcare finance business from numerous commercial banks,diversified finance companies, secured lenders and specialty healthcare financecompanies.  Many of these competitorshave greater financial and other resources than us and may have significantlylower cost of funds because they have greater access to insured deposits or thecapital markets.  Moreover, some ofthese competitors have significant cash reserves and can better fund shortfallsin collections that might have a more pronounced impact on companies such asours.  They also have greater marketshare.  In addition, receivable sellersoften seek alternative sources of financing from a number of sources, includingventure capital firms, small business investment companies, suppliers andindividuals.  As a result, we competewith a significant number of local and regional sources of financing andseveral large national competitors.

 

Competition can take manyforms, including the pricing of the financing, transaction structuring, likethe use of securitization vs. portfolio lending, timeliness and responsivenessin processing a client’s financing application and customer service.  Some of our competitors may offer betterpricing for receivables, be more timely and responsive in processing receivablepurchases and have better customer service than we do.  Some of these companies may also havegreater 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 onlarge hospitals and clinics and generally prefer to buy receivables inmulti-million dollar denominations, typically with a lower profit margin, thesecompetitors could enter our target markets more aggressively in thefuture.  If we are unable tosuccessfully compete with these companies, our business could be adverselyaffected.

 

**Government Regulation**

 

Our healthcare financebusiness is subject to federal and state regulation and supervision.  Currently, there are no regulations thatrequire us to obtain specific licenses or approvals, other than thoseapplicable to businesses in general, to be able to purchase receivables in anystate.  We continually research andmonitor regulations and intend to apply for the appropriate licenses ifregulations change and require us to be licensed to perform our business in anyparticular state in which we operate.

 

Governments at both thefederal and state levels have continued in their efforts to reduce, or at leastlimit the growth of, spending for healthcare services.  On August 5, 1997, President Clintonsigned into 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.

 

In place of the BorenAmendment, the BBA requires only that, for services and items furnished on orafter October l, 1997, a state Medicaid program must provide for a publicprocess for determination of Medicaid rates of payment for nursing facilityservices.  Under these proposed rates,the methodologies underlying the establishment of the rates and justificationfor the proposed rates are published. This gives sellers, beneficiaries and other concerned state residents areasonable opportunity for review and comment on the proposed rates, methodologiesand justifications.

 

States are actively seekingways to reduce Medicaid spending for healthcare by methods like capitatedpayments 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 thefirst cost reporting period beginning on or after July 1, 1998.  The BBA also contains several new anti-fraudprovisions.  We are unable to predictthe long-term impact of the BBA and continuing changes in state Medicaidreimbursement methodologies on the revenues of our sellers.

 

Our business may be affectedby our inability to directly collect receivables under government programs andthe right of payors under these programs to offset against unrelatedreceivables.  Our healthcare receivablespurchase business may also be indirectly affected by healthcare regulation tothe extent that any of our sellers’ failures to comply with the applicableregulations affects our ability to collect their receivables.  The most significant healthcare regulationsthat could potentially affect us are: (1) certificate of need regulation,which many states require upon the provision of new health services, particularlyfor long-term care and home healthcare companies; (2) Medicare-Medicaidfraud and abuse statutes, which prohibit, among other things, the offering,payment, solicitation or receipt of remuneration, directly or indirectly, as aninducement to refer patients to facilities owned by physicians if thefacilities receive reimbursement from Medicare or Medicaid; and (3) otherprohibitions of physician self-referral that have been promulgated by variousstates.

 

***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.

 

In 1988, legislationentitled the “Ethics in Patient Referrals Act” (H.R. 5198) was introduced whichwould have prohibited Medicare payments for all patient services performed byan entity which a patient’s referring physician had an investmentinterest.  As enacted, the lawprohibited only Medicare payments for patient services performed by a clinicallaboratory.  The Comprehensive PhysicianOwnership and Referral Act (H.R. 345), which was enacted by Congress in 1993 aspart of the Deficit Reduction Package, is more comprehensive than H.R.5198.  This act covers additionalmedical services including medical imaging radiation therapy, physicalrehabilitation and other healthcare services.

 

A variety of existing andpending state laws prohibit or limit a physician from referring patients to afacility in which that physician has a proprietary or ownership interest.  Many states also have laws similar to theMedicare fraud and abuse statute which are designed to prevent the receipt orpayment of

 

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compensation in connection with the referralof a patient.  Healthcare receivablesresulting from a referral in violation of these laws could be denied paymentwhich could adversely affect both us and our sellers.

 

**Changesin HMO and Insurance Company Payment and Reimbursement Practices**

 

In addition to governmentalinitiatives, private reform efforts have been instituted throughout thehealthcare industry, including the capitation of some healthcareexpenditures.  Capitation is theprepayment 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 theprimary source of our business and cash flow. There is a risk that this practice will grow as HMOs expand.

 

Other possible changes inprivate healthcare delivery and payment systems could adversely affect ourbusiness.  These include employerinitiatives like creating purchasing cooperatives and seller initiatives tointegrate hospitals and physicians into comprehensive delivery systems.  Also, management and billing services may beconsolidated by integrated healthcare delivery systems.  This consolidation may result in a decreasein the willingness of providers to sell healthcare receivables and reduce demandfor related billing and collection services.

 

**Employees**

 

As of December 1, 2003,we employed no full-time employees. However, we make partial use of approximately 85 employees of ouraffiliates, for which we pay fees under the administrative services agreement.

 

**Item 2.  Description of Property.**

 

The principal executiveoffices of the Company are located at 3770 Howard Hughes Parkway in Las Vegas,Nevada. Its office space is leased by its parent, Medical Capital Holdings,from a non-affiliated landlord. The Company believes that its existing facilitiesare adequate for its current needs and that suitable additional space will beavailable as needed.

 

**Item 3.  Legal Proceedings.**

 

The Company is not awareof any pending or threatened legal proceedings that, if adversely determined,would have a material affect on its operations.

 

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

 

None

 

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**PART II**

 

## **Item 5.  Marketfor Common Equity and Related Stockholder Matters.**

## ** **

All of theCompany’s common equity is held by its parent, Medical Capital Holdings,Inc.  There is no public market for theCompany’s equity securities.

 

The informationrequired by Item 701 of Regulation S-B has been previously reported.

 

## **Item 6. Management’sDiscussion and Analysis of Financial Condition and Results of Operations.**

 

Management’s discussion andanalysis of the results of operations and financial condition should be read inconjunction with the Financial Statements and related Notes.

 

**Overview**

 

The accompanying consolidatedfinancial statements have been prepared in conformity with accountingprinciples generally accepted in the United States of America, whichcontemplate continuation of the Company as a going concern. The Company incurred net losses of$5,209,830 in 2002, used cash for operations of $29,302,913 in 2002 and atDecember 31, 2002, had an accumulated deficit of $6,162,534. In addition,the management of the Company has decided to wind down operations during 2003and 2004, after collecting or selling outstanding medical receivables and usingsuch proceeds to settle all the Company’s obligations, including outstandingnotes payable. The consolidated financial statements do not include anyadjustments that might result from the outcome of this decision. Asdiscussed in Note 12 to the financial statements, our 2002 and 2001 medicalreceivables balance, additional paid in capital and receivable from Parent andaffiliates, net were previously incorrectly reported. These discoveries weremade subsequent to the issuance of the financial statements. The financialstatements have been restated to reflect these corrections.

 

Our December 31, 2002 and 2001 medical receivablebalance and additional paid in capital were overstated by $4,000,000.  In addition, during 2002, $4,104,011 of theamount of medical receivable previously reported should have been included inthe amount due from Parent and affiliates. These discoveries were made subsequent to the issuance of the financialstatements and the financial statements have been restated to reflect thesecorrections.

 

*Expected Net Receivable. *Through our underwriting process we determinean amount for each receivable that we expect to be collectable, which isreferred to as the expected net receivable, or ENR.  This amount is often less than the stated face amount of thereceivable and never more than the stated face amount.  All of our other calculations related toreceivables are based on the ENR of the receivable, not the face amount of thereceivable.  The following is antable of our healthcare receivables on the ENR basis as of December 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 numberof days that have elapsed from the date of billing by the provider as averagedat the time of the purchase of the batch of receivables.

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

(3) This representsaccounts receivable in batches collected to Advance plus Discount Fee and thebalance of which is assigned a value of zero. Subsequent cash collections of these receivables during the period ofJanuary 1, 2003 to March 31, 2003 was $ 1,306,586.76 of which$1,208,163.55 was applied to close batches of purchased receivables.

 

**Reserves:**

 

*Seller’s Reserve. *The amount of eachreceivable allocated to each seller’s reserve account is equal to the ENR,minus the sum of the initial purchase amount and the discount.  This is the batch seller’s reserve for fundsthat could be returned to the seller after claims are collected, if contractualterms are met by the seller.  Thisseller reserve is rolled up into the overall aggregate seller reserve on theentire pool of receivables purchased from that seller. Receivables are postedon a receivable-by-receivable basis, and reported on a batch basis. Thereceivables are also monitored by tracking the entire pool of batches for aseller to determine 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.

 

Usually, within a period determined by the Companyfrom the date of purchase (depending on the contractual terms in each seller’sagreement), if the full ENR of the receivable has not been fully collected, thebatch of receivables and the individual open receivable are considered to havea value of zero and/or replaced with a new receivable.  At the same time the Company assigns areceivable a value of zero, it offsets the uncollected portion against theseller reserve for that seller or withholds a portion of the advance on thenext purchase of receivables from that seller. Even though the receivable is assigned a value of zero, the Companycontinues to track the receivable and attempts to collect it.  If the receivable is subsequently collected,the Company allocates those collections to the seller’s reserve account underthe terms of its purchase agreement with the 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

 

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recognizes theseller’s forfeited 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 debt reserve forlosses on medical receivables is increased by provisions charged againstoperations and reduced by receivables charged off, as determined by management.  The reserve is maintained at a levelconsidered adequate to provide for potential losses on medical receivablesbased on management’s evaluation.  Underthe terms by which the medical receivables are purchased, the Company hassignificant collateral, including substitution of receivables exceeding thecontractual period ranging from 90-270 days. Accordingly, charge-offs are not expected to be material to theCompany’s financial position or results of operations.  During the twelve months ended December 31,2002 and December 31, 2001, no reserves for losses were needed.

 

**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 ended December 31, 2002, we purchasedmedical receivables carrying an ENR value of $57,727,140, and earned discountfees on these purchases of $661,838, including related party discount fees of$2,346,266 (earned and unearned) from our parent and affiliates, and anincrease in discount reserves which reduced our total revenue. We anticipatethe receivables on which these reserves are based to be fully collectible andthe discount fee to be earned upon collection of the net advance andcontractual discount fee. During the same period, we also earned $166,032 inadministration fee.

 

For the twelve months endedDecember 31, 2001, we purchased medical receivables carrying an ENR valueof $16,262,386 and earned discount fees on these purchases of $1,645,912,including earned and unearned discount fees of $1,009,637 from our parent andaffiliates, and an increase of $195,837 in discount reserves which reduced ourtotal revenue. We anticipate the receivables on which these reserves are basedto be fully collectible and the discount fee to be earned upon collection ofthe net advance and contractual discount fee. During the same period, we did not earn any administration income.

 

As of December 31, 2002 the Company held$7,612,259 in discount reserves, which reduced its discount revenue.  The Company anticipates the receivables uponwhich these reserves are based to be fully collectible and recognizing thediscount income upon collection of the receivables after the full collection ofthe net advances.  A summary of thechanges in the discount reserve for the company from inception toDecember 31, 2002, on a gross basis is as follows:

 
|                             |   | **For the  year ended  December 31, 2002** |      | **For the  year ended  December 31, 2001** |   | **Inception  to  December 31, 2002** |   |
|----------------------------------|--------|-------------------------------------------------|-----------|-------------------------------------------------|--------|-------------------------------------------|--------|
| Beginning  Balance               |   | $                                               | 195,837   |                                            | $      | 0                                         |   | $ | 0 |   |
| Deferred  income on purchases    |   | 6,464,002                                       |      | 1,841,749                                       |   | 8,305,751                                 |   |
| Less:  income recognized         |   | (661,838                                        | )         | (1,645,912                                      | )      | (2,307,750                                | )      |
| Plus: accounting change for 2001 |   | 1,614,258                                       |      | —                                          |   | 1,614,258                                 |   |
| Ending Balance                   |   | $                                               | 7,612,259 |                                            | $      | 195,837                                   |   | $ | 7,612,259 |   |

 

***Gross Profit***.  Ourgross profit (loss) during the twelve months ended December 31, 2002 was$(445,090), which arose from gross discount revenues of $6,464,002, less thechange in discount reserves of $5,802,164, plus $166,032 in administrationincome, less our administration expense incurred of $1,272,960. Ouradministration expense, related party, was 1.9% of the total ENR of purchases.

 

Our gross profit (loss)during the twelve months ended December 31, 2001 was $1,206,256, whicharose from gross discount revenues of $1,841,749, less the change in discountreserves of

 

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$(195,837) and administration expenseincurred of $439,656. Our administration expense, related party, was 2.2% ofthe total ENR.

 

***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.

 

For the twelve months endedDecember 31, 2001, our total operating expenses were $1,133,492.  Expenses consisted primarily of $635,437 ininterest expense, which consists of interest expense of $519,191, plusamortized commissions of $189,463, and amortized deferred offering cost of$100,014 less interest earned of $173,231. Interest earned included $136,791 onour notes receivables of $4,045,000 from various medical providers, and $36,440on cash and cash equivalents.  We alsoincurred $207,618 in advertising expense, which is expensed as incurred,professional services of $58,998, service fees of $33,824 (related party), andlegal fees of $53,064.

 

***Income Tax Expense or Benefit***.  Forthe twelve months ended December 31, 2002 and 2001, our benefit(provision) for income taxes of $2,462,466 and $(25,468), 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.

 

***Cumulative Effect of Change in Accounting Principle.***  As discussed in Note 12 to the financialstatements, in 2002, we changed our method of recording income from theinterest accretion method to the cost recovery method as we deemed it to bemore preferable and conservative. 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. Assuming this change in principle is applied retroactively, the requiredpro forma information for the years ended December 31, 2002 and 2001 arepresented in Note 12. During 2002 and 2001, the cumulative effect of change inaccounting principle, net of tax, on net loss amounted to $1,016,983 and $0,respectively.

 

***Net Income or Loss***.  Wehad a net loss of $5,209,830 or basic and diluted net loss per common share of$2,605, for the twelve months ended December 31, 2002. Our net lossresulted primarily from the increase in discount reserves of $5,802,164 for2002 and $1,614,258 for 2001, which is accounted for as a cumulative effect ofchange in accounting principle in 2002 for prior year effect. 

 

For the twelve months endedDecember 31, 2001, we had net income of $47,296 or basic and diluted netincome per common share of $27.  Our netloss resulted primarily from the increase in discount reserves of $195,837.

 

**Liquidityand Capital Resources**

 

During the twelve monthsended December 31, 2002, we received $35,678,000 in cash from the issuanceof our secured notes in our public offering, and received collections onmedical receivables of $27,530,534. During the same period, we used $49,480,134of these funds to purchase medical receivables, and had $1,686,000 in notesmature and not reinvest. As of December 31, 2002, we maintained $1,494,002in cash and cash equivalents, which we seek to utilize in purchasing additionalmedical receivables and in the acquisition of other possible investments.

 

From our inception onAugust 4, 2000 to December 31, 2002, we have received $53,895,000from the sale of our notes, and received $31,971,936 in collections on medicalreceivables. Over the same

 

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period, we used $67,931,370 to purchasemedical receivables, and made cash loans of $5,339,127 to providers. We have had$1,686,000 in notes that have matured and not reinvested since inception.

 

For 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.

 

We believe currentconditions of the stock exchanges and financial markets will have some impacton the issuance of our secured notes, yet due to the favorable and fixedinterest rates we believe we offer on the notes, we believe this impact willnot be significant.  We do not believethat inflation has had a significant impact on our operations.

 

Our management consists ofofficers and employees employed by Medical Capital Corporation.  Their salaries and benefits are paid byMedical Capital Corporation. Our operating expenses will be reimbursed from thenet offering proceeds of the offering of our notes to the public or from cashflow generated from our operations. Over the next 12 months, we believe cash generated by our operationswill be sufficient to fund all of our general and administrative expenses.  However, if we are unable to sell asufficient amount of notes, we may be unable to pay the principal on maturingnotes when due.  If this occurs, we mayhave to sell receivables to pay our obligations on maturing notes.  The amount we receive for sellingreceivables may be insufficient to pay our obligations on our notes in full.

 

**Related Party Transactions**

 

The Medical Capital HoldingsGroup has substantial experience and success in identifying and evaluatinghealthcare providers desiring to sell their healthcare receivables.  We use the services and expertise of MedicalCapital Holdings and its subsidiaries to purchase a portfolio of healthcarereceivables.  We have entered intocontracts with Medical Capital Corporation and Medical Tracking Services,affiliated companies, to provide the appropriate system for purchasing andtracking our healthcare receivables. Reimbursement for these services approximates the costs to theseaffiliated entities which we believe equals the prevailing market rates forcomparable services of this nature.

 

For the twelve months endedDecember 31, 2002 and 2001, Medical Capital Corporation was compensatedfor administration of our healthcare receivables in the amount of $1,272,960and $439,656, respectively. For the twelve months ended December 31, 2002and 2001, we incurred management fees provided by Medical Capital Corporationof $126,000 and $0, respectively. For the twelve months ended December 31,2002 and 2001, Medical Tracking Services was compensated for servicing ourreceivables in the amount of $276,846 and $33,824, respectively. For the twelvemonths ended December 31, 2002 and 2001, we incurred sales commissions fortelemarketing expenses provided by Medical Capital Corporation in the amount of$127,930 and $0, respectively.

 

For the twelve months ended December 31, 2002 and2001, we purchased 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 Companywas owed $6,671,753 from its Parent and affiliates, which includes $3,034,274of income tax benefit receivable, and accrued expenses payable of $466,532 tothe Parent or affiliate and the remaining $4,104,011 of medical receivable cashcollections which were misdirected to an affiliate (Note 12).

 

For the nine months endedSeptember 30, 2003 and 2002 (unaudited), MCC was compensated foradministration of the healthcare receivables, which the Company purchased inthe amounts of $609,754 and $780,453, respectively. For the nine months endedSeptember 30, 2003 and 2002 (unaudited), MTS was compensated for servicingthe Company’s receivables in the amounts of $129,783 and $207,713,respectively.  For the nine months endedSeptember 30, 2003 and 2002 (unaudited), the Company

 

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purchased medical receivables of variousproviders from its Parent and affiliates with a book value of $1,239,904 and$10,289,012, respectively, for which it paid a consideration of $1,239,904 and$9,091,952, respectively, in cash with the balance included in the calculationof discount revenue earned and reserved (deferred).  For the nine months ended September 30, 2003 and 2002(unaudited), the Company sold medical receivables of various providers to itsParent 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 eleven months ended November 30, 2003(unaudited), the Company purchased medical receivables of various providersfrom its Parent and affiliates with a book value of $1,239,904, for which itpaid a consideration of $1,239,904, respectively, in cash with the balanceincluded in the calculation of discount revenue earned and reserved (deferred).For the eleven months ended November 30, 2003 (unaudited), the Companysold medical receivables of various providers to its Parent and affiliates witha book value of $17,320,570, for which it received a consideration of$17,929,382, 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 a revolving credit line with a U.S. bank,which allows Medical Capital Holdings to purchase accounts receivable from aseller.  Then, once we have fundsavailable, the receivables, as well as the rights, title and interest in thecontractual relationship between the seller and parent, are sold to us byMedical Capital Holdings.  For theseinter-company sales, the receivables are sold to us at a price generally equalto 85-100% of the sum of the total amount advanced to the seller of the receivable,plus the discount fee, less any collections already received on thereceivable.  Medical Capital Holdings’costs, including interest charges, are included in the purchase price.  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 makes the determination as to whether wepurchase receivables 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**

 

In October 2001, theFASB issued SFAS No. 143, “Accounting for Asset Retirement Obligations,” whichrequires companies to record the fair value of a liability for asset retirementobligations in the period in which they are incurred.  The statement applies to a company’s legal obligations associatedwith the retirement 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.  We do not expect the adoption to have any impact on our financialposition or results of operations.

 

In October 2001, theFASB issued SFAS No. 144, “Accounting for the Impairment or Disposal ofLong-Lived Assets”.  Statement 144addresses the accounting and reporting for the impairment or disposal oflong-lived assets.  The statementprovides a single accounting model for long-lived assets to be disposedof.  New criteria must be met toclassify the asset as an asset held-for-sale. This statement also focuses on reporting the effects of a disposal of asegment of a business.  This statementis effective

 

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for fiscal years beginning afterDecember 15, 2001.  The adoption ofFASB 144 did not have any impact on our financial position or results ofoperations.

 

In April 2002, the FASBissued Statement No. 145, “Rescission of FASB Statements No. 4, 44, and 64,Amendment of FASB Statement No. 13, and Technical Corrections.”  This statement rescinds FASB Statement No.4, “Reporting Gains and Losses from Extinguishment of Debt”, and an amendmentof that Statement, FASB Statement No. 64, “Extinguishments of Debt Made toSatisfy Sinking-Fund Requirements” and FASB Statement No. 44, “Accounting forIntangible Assets of Motor Carriers”. This statement amends FASB Statement No. 13, “Accounting for Leases”, toeliminate an inconsistency 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 on our financialposition or results of operations as we have not engaged in either of theseactivities.

 

In June 2002, the FASBissued Statement No. 146, “Accounting for Costs Associated with Exit orDisposal Activities.” This statement addresses financial accounting andreporting for costs associated with exit or disposal activities and nullifiesEmerging Issues Task Force (“EITF”) Issue No. 94-3, “Liability Recognition forCertain Employee Termination Benefits and Other Costs to Exit an Activity(including Certain Costs Incurred in a Restructuring).” The provisions of thisstatement are effective for exit or disposal activities that are initiatedafter December 31, 2002, with early application encouraged.  We do not expect the adoption to have amaterial impact on our financial position or results of operations.

 

In October 2002, theFASB issued Statement No. 147, “Acquisitions of Certain FinancialInstitutions-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.

 

In December 2002, theFASB issued Statement No. 148, “Accounting for Stock-BasedCompensation-Transition and Disclosure”, which amends FASB Statement No. 123,Accounting for Stock-Based Compensation, to provide alternative methods oftransition for a voluntary change to the fair value based method of accountingfor stock-based employee compensation. In addition, this statement amends the disclosure requirements ofStatement 123 to require prominent disclosures in both annual and interimfinancial statements about the method of accounting for stock-based employeecompensation and the effect of the method used on reported results.  The transition guidance and annualdisclosure provisions of Statement 148 are effective for fiscal years endingafter December 15, 2002, with earlier application permitted in certaincircumstances.  The interim disclosureprovisions are effective for financial reports containing financial statementsfor 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.

 

During April 2003,the FASB issued SFAS 149 - “Amendment of Statement 133 on DerivativeInstruments and Hedging Activities”, effective for contracts entered into ormodified after June 30, 2003, except as stated below and for hedgingrelationships designated after June 30, 2003. In addition, except asstated below, all provisions of this Statement should be applied prospectively.The provisions of this

 

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Statement that relate to Statement 133 Implementation Issues that havebeen effective for fiscal quarters that began prior to June 15, 2003,should continue to be applied in accordance with their respective effectivedates. In addition, paragraphs 7(a) and 23(a), which relate to forwardpurchases or sales of when-issued securities or other securities that do notyet exist, should be applied to both existing contracts and new contractsentered into after June 30, 2003. The Company does not participate in suchtransactions, however, is evaluating the effect of this new pronouncement, ifany, and will adopt FASB 149 within the prescribed time.

 

In May 2003, theFASB issued SFAS No. 150, “Accounting for Certain Financial Instruments withCharacteristics of both Liabilities and Equity”. This Statement establishesstandards for how an issuer classifies and measures certain financialinstruments with characteristics of both liabilities and equity. It requiresthat an issuer classify a financial instrument that is within its scope as aliability (or an asset in some circumstances). Many of those instruments werepreviously classified as equity. Some of the provisions of this Statement areconsistent with the current definition of liabilities in FASB ConceptsStatement No. 6, Elements of Financial Statements. The remaining provisions ofthis Statement are consistent with the Board’s proposal to revise thatdefinition to encompass certain obligations that a reporting entity can or mustsettle 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 Accounting Standards Board (“FASB”) issued Interpretation No. (FIN)45, “Guarantor’s Accounting and Disclosure requirements for Guarantees,Including Indirect Guarantees of Indebtedness of Others.” Among other things,the Interpretation requires guarantors to recognize, at fair value, theirobligations to stand ready to perform under certain guarantees. FIN 45 iseffective for guarantees issued or modified on or after January 1, 2003.The adoption of this statement did not have a material impact to the Company’sfinancial position or results of operations.

 

In January 2003, theFASB issued Interpretation No. 46, “Consolidation of Variable InterestEntities.” Interpretation 46 changes the criteria by which one company includesanother 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.  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’s Discussion andAnalysis of Financial Condition and Results of Operations discusses ourfinancial statements, which have been prepared in accordance with generallyaccepted accounting principles in the United States of America.  The preparation of these financial statementsrequires us to make estimates and assumptions that affect the reported amountsof assets and liabilities at the date of the financial statements and thereported amounts of revenues and expenses during the 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 be reasonableunder the circumstances, the results of which form the basis for makingjudgments about the carrying value of

 

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assets and liabilities that are not readilyapparent from other sources.  Actualresults may differ from these estimates under different assumptions orconditions.  The most significantaccounting estimates inherent in the preparation of our financial statementsinclude estimates as to the appropriate carrying value of specific assets and liabilitieswhich are not readily apparent from other sources, primarily allowance fordoubtful medical receivables, accruals for other costs, and the classificationof net operating loss and tax credit carryforwards between current andlong-term assets.  Risks are involved incalculating the discount fee reserve based on judgments made by theunderwriting team in determining the average discount fee, which wasapproximately 7.5%, to be charged to the medical provider and informationobtained and analyzed to assess the financial risk involved in purchasing thatmedical provider’s receivables based on relevant operating, historical andfinancial data.  We also evaluate trendsin healthcare and other relevant sub-markets, past-due accounts, historicalcharge-off and recovery rates, credit risk indicators, economic conditions,on-going credit evaluations, overall portfolio size, average seller balances,reserve account balances and real estate collateral valuations, if any.  A significant variation, particularly longerperiods from the contractual service and collection period, would impact theability to recognize deferred revenues and hence impact our results ofoperations.  In addition, any changes inthe subjective estimated items mentioned above may impact our results ofoperations significantly.  Theseaccounting policies are described at relevant sections in this discussion andanalysis and in the notes to the consolidated financial statements included inthis prospectus.

 

**Forward Looking Statements**

 

This report contains forward looking statements withinthe meaning of the Private Securities Litigation Reform Act of 1995.  Forward looking statements can be identifiedby the use of words like “believes,” “could,” “possibly,” “anticipates,”“estimates,” “projects,” “expects,” “may,” “will,” “should,” “intend,” “plan,”“consider” or the negative of these expressions or other variations, or bydiscussions of strategies that involve risks and uncertainties.  The Company based these forward lookingstatements on its current expectations and projections about future events andinformation currently available to it. Although the Company believes that the assumptions for these forwardlooking statements are reasonable, any of the assumptions could prove to beinaccurate.  The Company’s actualresults could differ materially from those anticipated in the forward lookingstatements due to risks, uncertainties or actual events differing from theassumptions underlying these statements.

 

# **Item 7. Financial Statements.**

 

The informationrequired by this item appears beginning on page F-1.

 

**Item 8.  Changes in and Disagreements with Accountants on Accounting andFinancial 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.**

 

**Directors and Executive Officers**

 

The following is the name,age and position of our current directors and executive officers:

 
| **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                                                    |

 

The following is the name,age and position of the directors and executive officers of our parent, MedicalCapital 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                                                    |

 

All directors currently holdoffice until the next annual meeting of stockholders or until their successorshave been elected and qualified.  All ofour executive officers are elected annually by our board of directors and serveat the discretion of the board and until their successors are elected andqualified.  There are no familyrelationships between any of our directors or executive officers.

 

The following describes thebusiness experience during the past five years of our directors and executiveofficers:

 

*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 of MedicalCapital Holdings and other of its subsidiaries for the past six years.  Prior to joining us, Mr. Field was thefounder, past President and Chairman of FGS, one of the largest insurancebrokers in the United States with annual sales of over $200,000,000.  Mr. Field sold his interest in thatfirm in 1990.  In 1971, he founded FieldGroup Services, a firm specializing in the placement and services of groupmedical insurance for medium size employers. Mr. Field has also been a principal in Delcom Inc., an advertisingagency specializing in radio and television. Mr. Field earned his Bachelor of Arts degree at California StateUniversity at Long Beach with a major in Mathematics.

 

*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 experiencein medical practice management includes development of a proprietary UNIXplatform databases for medical billing and collections.  Mr. Lampariello has served as aspecialist collector and receiver for LA County Superior Court and theU.S. Bankruptcy Court.  He holds adegree in Biomedical Engineering from 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 CapitalCorporation, Mr. Meister was the Vice President and Chief FinancialOfficer of American Express Educational Loans/UBL Financial Corporation, andserved in that position since January of 1994.  Prior to that, Mr. Meister was the Controller of FHPHealthsare, Inc., and served in that position since 1990.  Mr. Meister holds a bachelors degree inAccounting from Northeastern 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 toDecember 1999.  Prior to that hewas the Vice President of Finance and Chief Financial Officer of Best WesternInternational, Inc. and served in that position from May 1996.  From October 1986 to May 1996,Mr. Nielsen was Vice President and Treasurer of Giant Industries,Inc.  Mr. Nielsen holds a degree inAccounting from Arizona State University and is a certified public accountant.

 

**Employment Agreements**

 

Medical Capital Corporationhas employment agreements with Mr. Sidney Field, its President, Chief ExecutiveOfficer and Director, Mr. Joseph J. Lampariello, its Chief Operating Officer,and Mr. Alan Meister, its Chief Financial Officer.

 

Mr. Field’s employmentagreement is for a perpetual term until terminated by Mr. Field or MedicalCapital Corporation.  Mr. Field mayterminate the agreement for any reason by giving 30 day’s advance notice toMedical Capital Corporation.  MedicalCapital Corporation may terminate the agreement with cause by giving five day’sadvance notice to Mr. Field or without cause by giving 120 day’s advance noticeto Mr. Field.  If Mr. Field isterminated by Medical Capital Corporation without cause he is entitled toreceive 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 during the term of the agreement,his spouse or his estate will receive his base salary for six months.  Mr. Field’s employment agreement alsocontains a non-compete provision that expires one year after the termination ofhis employment with Medical Capital Corporation.

 

Mr. Lampariello’s employmentagreement is for a perpetual term until terminated by Mr. Lampariello orMedical Capital Corporation.  Mr.Lampariello 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. Lampariello or without cause by giving120 day’s advance notice to Mr. Lampariello. If Mr. Lampariello 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 $250,000, which may be increased by Medical CapitalCorporation’s board of directors.  Theagreement also provides Mr. Lampariello with $2,000,000 of life insurancecoverage and an auto allowance.  If Mr.Lampariello dies or becomes disabled during the term of the agreement, hisspouse or his estate will receive his base salary for six months.  Mr. Lampariello’s employment agreement alsocontains a non-compete provision that expires one year after the termination ofhis employment with Medical Capital Corporation.

 

Mr. Meister’s employmentagreement is for a perpetual term until terminated by Mr. Meister or MedicalCapital Corporation.  Mr. Meister mayterminate the agreement for any reason by giving 30 day’s advance notice toMedical Capital Corporation.  MedicalCapital Corporation may terminate the agreement with cause by giving five day’sadvance notice to Mr. Meister or without cause by giving 90 day’s advancenotice to Mr. Meister.  If Mr. Meisteris terminated by Medical Capital Corporation without cause he is entitled toreceive one year’s compensation and benefits as a severance.  The agreement provides for a base salary of$120,000, which may be increased by Medical Capital Corporation’s board ofdirectors.  Under the terms of theagreement, for the first five years Mr. Meister is employed by Medical CapitalCorporation, he was granted 20,000 shares of common stock of Medical CapitalHoldings, Inc. on each yearly anniversary of his employment.  The agreement also provides Mr. Meister withan auto allowance.  If Mr. Meister diesor becomes disabled during the term of the agreement, his spouse or his estatewill receive his base salary for six months. Mr. Meister’s employment agreement also contains a non-compete provisionthat expires one year after the termination of his employment with MedicalCapital Corporation.

 

All of Medical CapitalCorporation’s executive officers are entitled to participate in a bonus pool,which is paid quarterly.  The amount thepool is funded and the percentage of the pool each participant is entitled toreceive changes annually in the discretion of Medical Capital Corporation’sboard of directors.

 

**Committees of the Board of Directors**

 

***Audit Committee***.  Thecurrent members of the Audit Committee are Messrs. DioGuardi and Nielsen.  The Audit Committee makes recommendationsconcerning the engagement of independent public accountants, reviews with theindependent public accountants the plans and results of the audit engagement,approves professional services provided by the independent public accountants,reviews the independence of the independent public accountants, considers therange of audit and non-audit fees, reviews our corporate compliance proceduresand reviews the adequacy of our internal accounting 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).

 

**Item 10.  Executive Compensation.**

 

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**Executive Compensation**

 

We do not pay anycompensation to our officers nor do we directly reimburse Medical CapitalCorporation for any portion of their salaries. We pay fees to Medical Capital Corporation for acting as ouradministrator, which fees have no relationship to the salaries paid by MedicalCapital Corporation.  We do reimburseMedical Capital Corporation for compensation paid to some of its non-officeremployees for services provided to us by those employees.  The following table sets forth the aggregatecompensation awarded to, earned by, or paid to (1) our Chief Executive Officer,and (2) our other most highly compensated executive officers during 2002 and2001 whose total annual compensation exceeded $100,000 in 2002 (the “NamedExecutive Officers”), all during 2002 and 2001, our first two years ofoperations.  The compensation includedin the table is the total compensation paid to these individuals by our affiliate,Medical Capital Corporation, in their capacity as officers of Medical CapitalCorporation.  These individuals do notreceive any other compensation by any of the companies affiliated with theMedical Capital Holdings group of companies. As of December 31, 2002, we did not have any stock option plans ineffect.

 

**SUMMARY COMPENSATION 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 contribution paid by Medical Capital Corporation for 2002.  Includes $16,626 in life insurance premiumsand a $7,200 401(k) matching contribution paid by Medical Capital Corporationfor 2001.

(2)   Includes $3,600 in life insurance premiums paid by Medical CapitalCorporation for 2002.  Includes $7,176in life insurance premiums paid by Medical Capital Corporation for 2001.

(3)   Mr. Edwards retired as Executive Vice President and Treasurer ofMedical Capital Management on May 31, 2002, and currently serves only as adirector of Medical Capital Management.

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

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

 

The above compensation tabledoes not include fringe benefits made available on a nondiscriminatory basis toall of Medical Capital Corporation’s employees like group health insurance,dental insurance, long-term disability insurance, vacation and sick-leave.  In addition, Medical Capital Corporationmakes available non-monetary benefits to some of its executive officers, withthe aggregate

 

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value of these benefits in the case of eachexecutive officer listed in the above table being less than the lesser of (1)ten percent of the cash compensation paid to each such executive officer, or(2) $50,000, and is not included in the above table.

 

In addition to the abovecompensation, in 2002 Messrs. Edwards, Field and Lampariello also received agrant of stock in Medical Capital Holdings of 1,000 shares each valued at $3.00per share.

 

**Compensation of Directors**

 

Each non-employee directorserving on our board of directors receives an annual fee of $12,000, paidquarterly.  In addition, each directorreceives a fee of $2,000 for each board meeting attended by that director and$500 for each committee meeting attended by that director.

 

**Item 11.  Security Ownership of Certain Beneficial Owners and Management.**

 

The following table containsinformation concerning the persons, including any “group”, who we know to bethe beneficial owner of more than 5% of any class of voting securities of ourparent, Medical Capital Holdings.  Italso shows the voting securities of our parent owned by our directors andexecutive officers individually, and by all of our directors and executiveofficers as a group.  Unless otherwiseindicated in the footnotes, each person named below has sole voting power andinvestment power over the shares indicated. All information is as of March 15, 2003.  As of that date, 13,554,746 shares of common stock of MedicalCapital Holdings were issued and outstanding.

 
| **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 which Mr. Fieldholds the power to vote through an agreement with the owner of those 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 hasthe power to vote these shares.

 

**Item 12.  Certain Relationships and Related Transactions.**

 

We are a wholly owned subsidiaryof Medical Capital Holdings.  We rely onsome of the other wholly owned subsidiaries of Medical Capital Holdings, likeMedical Capital Corporation and MediTrak, to provide services to us.  We pay fees to these affiliates forproviding services to us, regardless of whether or not our business isprofitable.  Since we are under commoncontrol with these affiliates, the agreements and arrangements under which theyprovide us services were not made through independent arm’s lengthnegotiations.  However, we believe thefees we pay for these services are no greater than those an independentthird-party would charge for providing similar services.

 

Some members of ourmanagement team also work for and are compensated by our affiliates, and are insome cases shareholders of our common corporate parent, Medical CapitalHoldings.  Accordingly, their interestsin the administrator and the servicer, or other of our affiliates, may conflictwith their responsibilities to us.  Wehave an agreement among our parent and our other affiliates where we arecharged a fee for the portion of the salaries of these individuals and overheadattributable to our operations.

 

We believe that ouraffiliates have sufficient experience in regard to the kinds and nature of theservices they provide us so that our needs for these services will becompetently 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.

 

Medical Capital Corporationis our administrator for the receivables. For the year ended December 31, 2002, we incurred $1,272,960 inadministrative service fees to Medical Capital Corporation.  For the year ended December 31, 2002,we paid Medical Capital Corporation $253,468 as reimbursement of compensationpaid to employees of Medical Capital Corporation for investor relationsservices provided on our behalf.

 

The amount that the facevalue of a receivable is discounted when the receivable is purchased will bedetermined by the administrator based on the underwriting criteria it hasestablished.  For the year endedDecember 31, 2002, we incurred $126,000 in underwriting fees to MedicalCapital Corporation.  We could beadversely affected if the administrator requires the seller’s receivables to bediscounted 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.

 

MediTrak is the servicer ofour receivables.  For the year endedDecember 31, 2002, we incurred $276,846 in servicing fees toMediTrak.  MediTrak is compensated forits services by receiving a fee for each claim posted on its trackingsystem.  For some clients with a minimalnumber of monthly claims

 

36

----

 

being posted, a minimum monthly servicing feewill be charged.  For a more detaileddescription of the functions of the administrator and the servicer, see thesection entitled “BUSINESS” above.

 

On August 29, 2001, wepurchased healthcare receivables from our parent, Medical Capital Holdings,with a book value of $5,386,309 for $4,546,861 in cash and $839,448 of unearneddiscount fees.  The book value of areceivable is equal to the sum of the advance amount plus the discount fee,less unearned discount fees less any collections received, which we believe isan approximation of fair market value of the receivable.  As of December 31, 2002, thesereceivables had not been collected in full through direct collections fromthird party payors.  OnDecember 31, 2001, we purchased healthcare receivables from MedicalCapital Holdings with a book value of $1,701,892 for $1,541,189 in cash.  As of December 31, 2002, thesereceivables had not been collected in full through direct collections fromthird party payors.  The purchase pricefor these transactions was determined by Medical Capital Corporation.  The purchase price of receivables sold amongaffiliates in the Medical Capital Holdings group are generally sold at 85-90%of fair market value.

 

On April 23, 2002, ourboard of directors approved a dividend on our common stock totaling$1,250,000.  The dividends distributedwas paid from additional paid in capital of $250,000 and through a charge toaccumulated deficit of $1,000,000, as of December 31, 2002.  The reason for this dividend was to returnfunds to Medical Capital Holdings that it had invested in our company inconnection with our formation.  Theamount paid as a dividend represented an over-capitalization of ourcompany.  It was determined that theamount invested by Medical Capital Holdings was in excess of the amount ofinitial capital we needed to conduct our operations, and was therefore returnedto Medical Capital Holdings in the form of a dividend on our common stock, allof which is owned by Medical Capital Holdings.

 

**Item 13.  Exhibits and Reports on Form 8-K.**

 

(a)  Thefollowing is a complete list of exhibits filed as part of this Form10-KSB.  Exhibit numbers correspond tothe numbers in the Exhibit Table of Item 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)                                |
|        |   |                                                                                                                                                                                |
| 11.01       |   | Statement regarding  computation of per share earnings.                                                                                                                             |
|        |   |                                                                                                                                                                                |
| 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

----

 

----

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

(2)  Incorporated by reference to theRegistrant’s Current Report on Form 8-K dated February 15, 2001.

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

(4) Incorporated byreference to the Registrant’s Registration Statement on Form SB-2, RegistrationNo. 333-101177.

 

(b)  The Registrant did not file any reports onForm 8-K during the fourth quarter of fiscal year 2002.

 

**Item 14.  Controls and Procedures.**

 

The Company’s principal executive officer and principal financialofficer have evaluated the effectiveness of the Company’s “disclosure controlsand procedures,” as that term is defined in Rule 15d-14(c) of the SecuritiesExchange Act of 1934 (the “Exchange Act”), within 90 days of the filing date ofthis Amendment to the Annual Report on Form 10-KSB.  Based on their evaluation, the principal executive officer andprincipal financial officer concluded that the Company’s disclosure controlsand procedures are effective to ensure that information the Company is requiredto disclose in the reports it files or submits under the Exchange Act isrecorded, processed, summarized and reported within the time periods specifiedin the SEC’s rules and forms, and include controls and procedures designed toensure that information required to be disclosed by the Company in thosereports is accumulated and communicated to the Company’s management, includingits principal executive officer and principal financial officer, as appropriateto allow timely decisions regarding required disclosure.  During fiscal 2003, the Company became awareof circumstances, whereby the collections in certain lockboxes were notrecorded for the benefit of the appropriate entity.  Management has reviewed substantially all customer relatedlockbox information and is in the process of establishing additional proceduresto alleviate this identified matter.

 

There were no significantchanges in the Company’s internal controls or in other factors that couldsignificantly affect these controls subsequent to the date of the evaluation.

 

38

----

 

**SIGNATURES**

 

In accordance with the requirements of the ExchangeAct, the registrant caused this amendment number one to its Form 10-KSB to besigned on its behalf by the undersigned, thereunto duly authorized.

 
|                              |   | MEDICAL CAPITAL  MANAGEMENT, INC.                        |
|-----------------------------------|--------|----------------------------------------------------------|
|                              |   |                                                     |
|                              |   |                                                     |
| Date:  December 3, 2003 | By     | /s/ Sidney M. Field                                      |   |
|                              |   | Sidney M. Field,  President and  Chief Executive Officer |

 

39

----

 

**INDEX TO FINANCIAL STATEMENTS**

 

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

 
| Independent Auditors’  Report       | F-2 |
|------------------------------------------|-----|
| Balance Sheet                            | F-3 |
| Statements of  Operations                | F-4 |
| Statements of Cash Flows                 | F-5 |
| Statement  of Stockholder’s Deficit | F-6 |
| Notes to Financial  Statements           | F-7 |

 

F-1

----

 

**INDEPENDENT AUDITORS’ REPORT**

 

Board of Directors

Medical CapitalManagement, Inc.

Anaheim, California

 

We have audited theaccompanying balance sheet of Medical Capital Management, Inc., as ofDecember 31, 2002 and the related statements of operations, stockholder’sdeficit, 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 basedon our audits.

 

We conducted our auditsin accordance with auditing standards generally accepted in the United Statesof America. Those standards require that we plan and perform the audits toobtain reasonable assurance about whether the financial statements are free ofmaterial misstatement. An audit includes examining, on a test basis, evidencesupporting the amounts and disclosures in the financial statements. An auditalso includes assessing the accounting principles used and significantestimates made by management, as well as evaluating the overall financialstatement presentation. We believe that our audits provide a reasonable basisfor our opinion.

 

In our opinion, thefinancial statements referred to above present fairly, in all materialrespects, the financial position of Medical Capital Management, Inc. as ofDecember 31, 2002, and the results of its operations and its cash flowsfor the years ended December 31, 2002 and 2001, in conformity withaccounting principles generally accepted in the United States of America.

 

The accompanying financial statements have beenprepared in conformity with accounting principles generally accepted in theUnited States of America, which contemplate continuation of the Company as agoing concern. TheCompany incurred net losses of $5,209,830 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 financialstatements do not include any adjustments relating to the recoverabilityand classification of recorded asset amounts, or amounts and classification ofliabilities that might resultfrom the outcome of managements decision to wind down operations.  As discussed in Note 12 to the financialstatements, in 2002, the Company changed its method of recording income fromthe interest accretion method to the cost recovery method.  As discussed in Note 12 to the financialstatements, the Company’s 2002 and 2001 medical receivables balance, additionalpaid in capital and receivable from Parent and affiliates were previouslyincorrectly reported.  These discoverieswere made subsequent to the issuance of the financial statements.  The financial statements have been restatedto 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.**

**BALANCESHEET**

 
|                                                                                                  |   | **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 |   |

 

*Theaccompanying notes form an integral part of these financial statements.*

 

F-3

----

 

**MEDICAL CAPITAL MANAGEMENT, INC.**

**STATEMENTS OF INCOME (OPERATIONS)**

 
|                                                                                                       |   | **Year ended  December 31,  2002** |       | **Year ended  December 31,  2001** |   |
|------------------------------------------------------------------------------------------------------------|--------|-----------------------------------------|------------|-----------------------------------------|--------|
|                                                                                                       |   | **(Restated  –  Note 12)**         |       | **(See Note  12)**                      |   |
| DISCOUNT  REVENUE:                                                                                         |   |                                    |       |                                    |   |
| Discount  fees, net of change in discount reserves $5,802,164, including related party  fees of $2,346,266 |   | $                                       | 661,838    |                                    | $      | 1,645,912 |   |
| Administrative  income                                                                                     |   | 166,032                                 |       | —                                  |   |
| Total  revenue                                                                                             |   | 827,870                                 |       | 1,645,912                               |   |
| COST  OF REVENUE:                                                                                          |   |                                    |       |                                    |   |
| Administration  expense, related party                                                                     |   | 1,272,960                               |       | 439,656                                 |   |
| GROSS  PROFIT                                                                                              |   | (445,090                                | )          | 1,206,256                               |   |
|                                                                                                       |   |                                    |       |                                    |   |
| 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  and other                                                                                       |   | 29,982                                  |       | 3,357                                   |   |
| Total  operating expenses                                                                                  |   | 6,210,223                               |       | 1,133,492                               |   |
| INCOME  (LOSS) BEFORE TAXES                                                                                |   | (6,655,313                              | )          | 72,764                                  |   |
| Provision  (benefit) for income tax, related                                                               |   | (2,462,466                              | )          | 25,468                                  |   |
| NET  INCOME (LOSS) before cumulative effect of a change in accounting principle                            |   | (4,192,847                              | )          | 47,296                                  |   |
| Cumulative  effect on prior years change in accounting principle, net of $597,276 of tax  effect (Note 12) |   | (1,016,983                              | )          | —                                  |   |
| NET  INCOME (LOSS)                                                                                         |   | $                                       | (5,209,830 | )                                       | $      | 47,296 |   |
| Weighted  average number of common shares outstanding – basic                                         |   | 2,000                                   |       | 1,750                                   |   |
| Net  loss per common share – basic                                                                    |   | $                                       | (2,605     | )                                       | $      | (27 | ) |

 

*Theaccompanying notes form an integral part of these financial statements.*

 

F-4

----

 

**MEDICAL CAPITAL MANAGEMENT, INC.**

**STATEMENTS OF CASH FLOWS**

 
|                                                                                                  |   | **Year ended  December 31,  2002** |       | **Year ended  December 31,  2001** |   |
|-------------------------------------------------------------------------------------------------------|--------|-----------------------------------------|------------|-----------------------------------------|--------|
|                                                                                                  |   | **(Restated  –  Note 12)**         |       | **(Restated  –  Note 12)**         |   |
|                                                                                                  |   |                                    |       |                                    |   |
| Cash  flows used for operating activities:                                                            |   |                                    |       |                                    |   |
| Net  income (loss)                                                                                    |   | $                                       | (5,209,830 | )                                       | $      | 47,296 |   |
| Adjustments  to reconcile net income (loss) 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                                                           |   | (19,095,845                             | )          | (11,443,166                             | )      |
| Decrease  (Increase) in interest receivable                                                           |   | 39,136                                  |       | (35,858                                 | )      |
| (Increase)  in due from (to) Parent and affiliates                                                    |   | (6,746,228                              | )          | (12,333                                 | )      |
| Decrease  (Increase) in accounts receivable                                                           |   | (36,755                                 | )          | —                                  |   |
| Decrease  (Increase) in prepaid trustee fees                                                          |   | (54,292                                 | )          | —                                  |   |
| (Decrease)  Increase in accrued expenses – trade                                                 |   | 50,065                                  |       | 58,129                                  |   |
| (Decrease)  Increase in due to medical providers                                                      |   | 150,070                                 |       | —                                  |   |
| (Decrease)  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                                 |   |
| 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 |   |

 

*Theaccompanying notes form an integral part of these financial statements.*

 

F-5

----

 

**MEDICALCAPITAL MANAGEMENT, INC.**

**STATEMENTOF 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                                |       |
| Capital  Contribution                                        |   |       |   |   |   | 4,000,000                        |   |                     |   | 4,000,000                              |       |
| Net  loss for the twelve months ended December 31, 2001 |   | —     |   | — |   | —                           |   | 47,296                   |   | 47,296                                 |       |
| Balance - December 31, 2001, as previously  presented   |   | 2,000      |   | 20     |   | 4,250,000                        |   | 47,296                   |   | 4,297,316                              |       |
| Prior period adjustment (Note 12)                            |   |       |   |   |   | (4,000,000                       | )      |                     |   | (4,000,000                             | )          |
| Balance - December 31, 2001, as restated                     |   |       |   |   |   | 250,000                          |   |                     |   | 297,316                                |       |
| Payment  of dividend, related party                          |   |       |   |   |   | (250,000                         | )      | (1,000,000               | )      | (1,250,000                             | )          |
| Net  loss for the twelve months ended December 31, 2002 |   | —     |   | — |   | —                           |   | (5,209,830               | )      | (5,209,830                             | )          |
| Balance - December 31, 2002                             |   | 2,000      |   | $      | 20     |                             | $      | —                   |   | $                                      | (6,162,534 | ) | $ | (6,162,514 | ) |
|                                                              |        |            |        |        |        |                                  |        |                          |        |                                        |            |  |  |  |  |

 

*Theaccompanying notes form an integral part of these financial statements.*

 

F-6

----

 

**MEDICAL CAPITAL MANAGEMENT, INC.**

**NOTES TO FINANCIAL STATEMENTS**

 

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

 

**1.Operations of the Company**

 

**Organization:**

 

Medical Capital Management, Inc. was incorporated inthe state of Delaware on August 4, 2000. It maintains its corporate office in Anaheim, California.  The Company is wholly owned by MedicalCapital Holdings, Inc. (Parent).

 

**BusinessActivity:**

 

The Company was organized to purchase the insuredportion of medical receivables from medical providers including physicians,clinics, hospitals, nursing homes and other providers of healthcare servicesthroughout the United States.  Themedical receivables are purchased at a discount to the full amount of theclaim.  The Company also seeks otherinvestments that will enhance its financial position.

 

**2.Summary of Significant Accounting Policies**

 

**Useof Estimates:**

 

The preparation of financial statements requiresmanagement to make estimates and assumptions that affect certain reportedamounts of assets and liabilities and disclosure of contingent assets andliabilities at the date of the financial statements and the reported amounts ofrevenues and expenses during the reporting period.  Actual amounts could differ from those estimates.

 

The accompanying financial statements include all adjustments (consisting of onlynormal recurring accruals) which are, in the opinion of management, necessaryfor a fair presentation of the results of operations for the periods presented.

 

**Cashand Cash Equivalents:**

 

For the purposes of the statement of cash flows, cashand cash equivalents include all highly liquid debt instruments with originalmaturities of three months or less that are not securing any corporateobligations.

 

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

 

**DiscountsEarned on Medical Receivables:**

 

The Company changed its method of recording income tothe cost recovery method.  The cost recoverymethod relates 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 purchaseamount, which is the net amount advanced to the seller, plus discount fee lessdeferred unearned income, less any collections on the receivable.  This is the cost basis and equals the fairmarket value of the receivable at the time of purchase.  Medical receivables purchased fromaffiliates are generally purchased for 85%-100% of fair market value, which isdetermined as the gross advance plus the gross discount less the grosscollections of the receivables at

 

F-7

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the time ofpurchase.  The face amount of thereceivables, or the amounts owed to the seller by the receivable payor, areadjusted to an expected net receivable (the Company refers to this as the “ENR”or Expected Net Receivable) amount through the Company’s underwriting process,which represents the actual amount that the Company believes is collectible onthe receivable.  The Company determinesits initial purchase amount, discount fee and reserve based on the ENR of thereceivable.

 

Discounts on medical receivables represent a feecharged by the Company to the seller on the purchase of receivables. Allcollections are first applied to the net advance of each batch of receivablespurchased and only if total collections exceed the net advances for all batchesacquired in a fiscal quarter, the contractual discount fee is recognized asincome. Discount fee pricing is based on a historical analysis of the seller’saccounts receivable collection performance, risk criteria and the number ofdays the receivable is outstanding when purchased, in the aggregate.  The discount fee is calculated on abatch-by-batch basis based on this analysis as the estimated collection periodof the receivables in the batch. Although the amount of the discount is calculated at the beginning ofeach purchase transaction, the discount revenue is deferred until realized.

 

This discount revenue is deferred into a “discountreserve” that the Company continually updates, and is recognized uponcollection for amounts in excess of the net advance on a per client basis. TheCompany anticipates the receivables upon which these reserves are based to befully collectable. Therefore, this reserve is considered a timing adjustment.As of December 31, 2002 and 2001, this reserve was $7,612,259 and$195,837, respectively.

 

**RelatedParty Transactions:**

 

The Company’s Parent, Medical Capital Holdings Inc.,has substantial experience and success in identifying and evaluating healthcareproviders desiring to sell their healthcare receivables.  The Company uses the services and expertiseof Medical Capital Holdings and its subsidiaries to purchase a portfolio ofhealthcare receivables.  It has enteredinto contracts with MCC and MTS, affiliated companies, to provide theappropriate system for purchasing and tracking its healthcare receivables.  Reimbursement for these servicesapproximates the costs to these affiliated entities which management believesequals the prevailing market rates for comparable services of this nature.

 

As a normal course of business, initial purchaserelationships may occur between the seller and Medical Capital Holdings and itsaffiliates.  Medical Capital Holdings hasa revolving credit line with Comerica Bank, which allows Medical CapitalHoldings to purchase accounts receivable from a seller.  Then, once the Company has funds available,the receivables as well as the rights, title and interest in the contractualrelationship between the seller and parent are sold to the Company by MedicalCapital Holdings.  For theseinter-company sales, the receivables are sold to the Company at a pricegenerally equal to 85-95% the sum of the total amount advanced to the seller ofthe receivable plus the discount fee, less unearned discount less anycollections already received on the receivable.  To the extent the Company has sufficient funds available, theCompany will purchase receivables directly from a seller without first beingpurchased by Medical Capital Holdings. Medical Capital Corporation makes the determination as to whether theCompany purchases receivables from the Company’s affiliates or directly fromthe seller.  Medical Capital Corporationmay also direct the sale of receivables from one of the Company’s affiliates tothe Company, or from the Company to one of its affiliates as a method ofasset/liability management and to attempt to maintain diversification in theCompany’s investment portfolio.  Whenthe Company purchases receivables from its affiliates, it purchases all rights,title and interest in the receivable that the affiliate owned, includingreserve amounts.  Therefore, the impacton reserves is no different whether the Company purchases receivables from itsaffiliates or directly from the seller.

 

F-8

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**Provider Concentration:**

 

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

 

**Reserves:**

 

*Seller’s Reserve. *The amount of eachreceivable allocated to each seller’s reserve account is equal to the ENR, minusthe sum of the initial purchase amount and the discount.  This is the batch seller’s reserve for fundsthat could be returned to the seller after claims are collected, if contractualterms are met by the seller.  Thisseller reserve is rolled up into the overall aggregate seller reserve on theentire pool of receivables purchased from that seller.  Receivables are posted on areceivable-by-receivable basis, and reported on a batch basis.  The receivables are also monitored bytracking the entire pool of batches for a seller to determine the adequacy ofthe seller’s reserve account.  TheCompany typically tries to maintain an overall seller reserve of 10-25% of theENR for each seller’s pool of receivables depending on various criteriadetermined through the underwriting process and collection experience of theseller’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 theCompany has the right under its purchase agreement with the seller to reducethe percent advanced on future purchases, the Company has not done so forcompetitive 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 Companyfrom the date of purchase (depending on the contractual terms in each seller’sagreement), if the full ENR of the receivable has not been fully collected, thebatch of receivables and the individual open receivable are considered to havea value of zero and/or replaced with a new receivable.  At the same time the Company assigns areceivable a value of zero, it offsets the uncollected portion against theseller reserve for that seller and/or withholds a portion of the advance on thenext purchase of receivables from that seller. Even though the receivable is assigned a value of zero, the Company continuesto track the receivable and attempts to collect it.  If the receivable is subsequently collected, the Companyallocates those collections to the seller’s reserve account under the terms ofits purchase agreement with the seller. As of December 31, 2002, the amount collected (for all sellers) inexcess 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, is fullycollected to the ENR amount, the Company recognizes the seller’s forfeiteddeferred 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 debt reserve forlosses on medical receivables is increased by provisions charged againstoperations 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 thecontracted period (collection service life) has expired and there remains abalance shortfall 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 of receivablesduring the year ended December 31, 2002.

 

**Commissions:**

 

Commissions paid to outside and related parties inconnection with the origination of medical receivables are expensed asincurred.  Commissions incurred on theacquisition of investor funds (notes payable) are capitalized and amortizedover the period the debt is outstanding using the interest method.  For the twelve months endedDecember 31, 2002 and 2001, the Company capitalized commissions of $2,717,152and $1,176,380, respectively, and amortized $1,166,403 and $189,463,respectively.

 

**FairValue of Financial Instruments:**

 

Unless otherwise indicated, the fair value of allreported assets (except for cash and cash equivalents which approximate fairvalue) and liabilities which represent financial instruments, none of which areheld for trading purposes, approximate carrying values of such accounts.

 

**IncomeTaxes:**

 

The Company uses the liability method of accountingfor income taxes pursuant 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 benefit(expense), arising from net operating loss carryforward, was $3,059,742(including amounts included in cumulative effect change in accounting principleof $597,276) and $(25,468), respectively. As of December 31, 2002, the deferred tax asset arising primarilyfrom net operating loss carryforward and unearned discount revenue was$3,034,274.  In the

 

F-10

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opinion ofmanagement, the Parent has adequate deferred tax liability to assure theutilization of the Company’s deferred tax assets beyond a reasonabledoubt.  The Parent will pay (in cash)the Company for the entire benefit arising from the utilization of theCompany’s tax assets in the consolidated returns of the Parent.  Included in “Receivable from Parent andaffiliates, net” is $3,034,274 for this tax receivable from the Parent.  There were no other material temporarydifferences between book and tax bases of various liabilities and assets thatwould give rise to any material deferred tax assets or liabilities.

 

A reconciliation of theprovision for incometaxes 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      | )%     |

 

The income tax provision(benefit) is comprised of the following:

 
|                      |   | **2002** |       | **2001** |   |
|---------------------------|--------|----------|------------|----------|--------|
| Current - federal         |   | $        | (2,462,466 | )        | $      | 25,468 |   |
| Deferred - federal        |   | —   |       | —   |   |
|                      |   |     |       |     |   |
| Total provision (benefit) |   | $        | (2,462,466 | )        | $      | 25,468 |   |

 

In addition, the Company recognized a tax benefit of$597,276 in 2002, which is included in the cumulative effect on change inaccounting principle on the accompanying statement of operations.

 

**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 FASBissued Statement No. 145, “Rescission of FASB Statements No. 4, 44, and 64,Amendment of FASB Statement No. 13, and Technical Corrections.”  This Statement rescinds

 

F-11

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FASB Statement No. 4, “Reporting Gains and Losses from Extinguishment ofDebt”, and an amendment of that Statement, FASB Statement No. 64,“Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements” and FASBStatement No. 44, “Accounting for Intangible Assets of Motor Carriers”.  This Statement amends FASB Statement No. 13,“Accounting for Leases”, to eliminate an inconsistency between the requiredaccounting for sale-leaseback transactions and the required accounting forcertain lease modifications that have economic effects that are similar tosale-leaseback transactions. The adoption of this Statement did not have amaterial impact to the Company’s financial position or results of operations asthe Company has not engaged in either of these activities.

 

In June 2002, the FASBissued Statement No. 146, “Accounting for Costs Associated with Exit orDisposal Activities.” This Statement addresses financial accounting andreporting for costs associated with exit or disposal activities and nullifiesEmerging Issues Task Force (“EITF”) Issue No. 94-3, “Liability Recognition forCertain Employee Termination Benefits and Other Costs to Exit an Activity(including Certain Costs Incurred in a Restructuring).” The provisions of thisStatement are effective for exit or disposal activities that are initiatedafter December 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 ofoperations.

 

In October 2002, theFASB issued Statement No. 147, “Acquisitions of Certain FinancialInstitutions-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 to the Company’sfinancial position or results of operations as the Company has not engaged ineither of these activities.

 

In December 2002, theFASB issued Statement No. 148, “Accounting for Stock-BasedCompensation-Transition and Disclosure”, which amends FASB Statement No. 123,Accounting for Stock-Based Compensation, to provide 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 of Statement 133 on Derivative Instruments and Hedging Activities”,effective for contracts entered into or modified after June 30, 2003,except as stated below and for hedging relationships designated afterJune 30, 2003. In addition, except as stated below, all provisions of thisStatement should be applied prospectively. The provisions of this Statementthat relate to Statement 133 Implementation Issues that have been effective forfiscal quarters that began prior to June 15, 2003, should continue to beapplied in accordance with their respective effective dates. In addition,paragraphs 7(a) and 23(a), which relate to forward purchases or sales ofwhen-issued securities or other securities that do not yet exist, should beapplied to both existing contracts

 

F-12

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and new contracts enteredinto after June 30, 2003. The Company does not participate in suchtransactions, however, is evaluating the effect of this new pronouncement, ifany, and will adopt FASB 149 within the prescribed time.

 

In May 2003, the FASB issued SFAS No. 150,“Accounting for Certain Financial Instruments with Characteristics of bothLiabilities and Equity”. This Statement establishes standards for how an issuerclassifies and measures certain financial instruments with characteristics ofboth liabilities and equity. It requires that an issuer classify a financialinstrument that is within its scope as a liability (or an asset in somecircumstances). Many of those instruments were previously classified as equity.Some of the provisions of this Statement are consistent with the currentdefinition of liabilities in FASB Concepts Statement No. 6, Elements ofFinancial Statements. The remaining provisions of this Statement are consistentwith the Board’s proposal to revise that definition to encompass certainobligations that a reporting entity can or must settle by issuing its ownequity shares, depending on the nature of the relationship established betweenthe holder and the issuer. While the Board still plans to revise thatdefinition through an amendment to Concepts Statement 6, the Board decided todefer issuing that amendment until it has concluded its deliberations on thenext phase of this project. That next phase will deal with certain compoundfinancial instruments including puttable shares, convertible bonds, anddual-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 onecompany includes 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 medicalproviders whereby 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                         |      |

 

F-13

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(1)    As ofSeptember 30, 2003, interest payments were current.

 

(2)  The clientdefaulted on the terms and conditions of its loan agreement and in September,2003 the Company took possession of the property.  The Company has engaged a new operator for the facility and hassubsequently engaged in a purchase agreement for accounts receivable as well asa letter of intent by the new operator to purchase the property, at a priceinclusive of all principal, fees and legal expenses incurred by the Company.This transaction is being accounted for as a troubled debt restructuring.  It is anticipated that the Company willconsummate the sale of the property by December 31, 2003 and realize itscost, including interest.

 

(3) As of September 30, 2003, interest paymentswere current. On November 15, 2002, the Company entered into a new loanagreement with the borrower. The new agreement, a troubled debt restructuring,called for a $2,572,000 increase in the original loan amount of $3,000,000 tobe disbursed in December 2002 and February 2003 in accordance withthe loan agreement. Principal is to be repaid in various installments inaccordance with the loan agreement with the balance of the loan payable onDecember 31, 2005. The repayment schedule calls for annual principalpayments of $675,000 in 2003 and 2004, and $4,222,000 in 2005. As ofSeptember 30, 2003, interest payments were current.

 

**4.Deferred Offering Costs**

 

Deferred Offering Costs consist of costs incurred forthe Company’s registration of debt securities on Form SB-2 as filed with theSecurities and Exchange Commission, which was declared effectiveFebruary 6, 2001.  These costs areamortized over the weighted term of the securities using the interestmethod.  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.  Theamortization was included in the interest expense during the applicable period.

 

**5.Notes Payable**

 

The Company issues notes, secured by medicalreceivables, for cash through several broker-dealers as filed on itsregistration statement with the Securities 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 ofDecember 31, 2002 are as follows:

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

 

F-14

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As of December 31, 2002, the Company’s notes weresecured by medical receivables with an expected net receivable outstandingbalance of $43,363,579, by notes receivable of $5,277,127, by related partyreceivable of $3,869,011, and by cash and cash equivalents of $1,494,002, for atotal collateral amount of $54,003,719.

 

**6.Interest to Secured Noteholders**

 

Interest on all secured notes is paid monthly inarrears on the tenth of the following month to the noteholder of record as ofthe last day of the month preceding the month in which the interest paymentdate occurs.  Interest is paid withoutany compounding.  Each class of noteshas a different 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’s Deficit**

 

On April 23, 2002, the Company’s Board ofDirectors approved and paid a dividend of $1,250,000 to our stockholder andParent, Medical Capital Holdings, Inc.

 

**8.Medical Receivables**

 

The following table showsthe expected net receivableamount of the Company’s receivables purchased from third parties and purchasedfrom affiliates during the 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 had an 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 medicalreceivables included Medicare and Medicaid claims of $4,822,347, or 11.1% ofthe total ENR balance of the receivables.

 

F-15

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Thefollowing table shows a roll-forward summary of the deferred seller’s reserveaccount inception to December 31, 2002 and for the year endingDecember 31, 2002.

 
|                                       |   | **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 |   |

 

Frominception to December 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 endedDecember 31, 2002 and 2001, Medical Capital Corporation was compensatedfor administration of our healthcare receivables in the amount of $1,272,960and $439,656, respectively.  For thetwelve months ended December 31, 2002 and 2001, we incurred managementfees provided by Medical Capital Corporation of $126,000 and $0,respectively.  For the twelve monthsended December 31, 2002 and 2001, Medical Tracking Services was compensatedfor servicing our receivables in the amount of $276,846 and $33,824,respectively.  For the twelve monthsended December 31, 2002 and 2001, we incurred sales commissions fortelemarketing expenses provided by Medical Capital Corporation in the amount of$127,930 and $0, respectively.

 

For the twelve months ended December 31, 2002 and2001, we purchased 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 Companywas owed $6,671,753 from its Parent and affiliates, which includes $3,034,274of income tax benefit receivable, and accrued expenses payable of $466,532 tothe Parent or affiliate and the remaining $4,104,011 of medical receivable cashcollections which were misdirected to an affiliate (Note 12).

 

For the nine months ended September 30, 2003 and2002 (unaudited), MCC was compensated for administration of the healthcarereceivables which the Company purchased in the amounts of $609,754 and$780,453, respectively. For the nine months ended September 30, 2003 and 2002(unaudited), MTS was compensated for servicing the Company’s receivables in theamounts of $129,783 and $207,713, respectively.

 

F-16

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For the nine months endedSeptember 30, 2003 and 2002 (unaudited), the Company purchased medicalreceivables of various providers from its Parent and affiliates with a bookvalue of $1,239,904 and $10,289,012, respectively, for which it paid aconsideration of $1,239,904 and $9,091,952, respectively, in cash with thebalance included in the calculation of discount revenue earned and reserved(deferred).  As part of managementsplans to wind down the Company’s operation, during the eleven months endedNovember 30, 2003 (unaudited), the Company sold medical receivables ofvarious providers to its Parent and affiliates with a book value of$17,320,570, for which it received consideration 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 Per Share**

 

The Company computes net earnings per share followingSFAS No. 128, “Earnings Per Share.” Under the provisions of SFAS No. 128, basicnet income per 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.Significant Agreements**

 

The Company has entered into several broker-dealeragreements for the purpose of offering, selling, and distributing certainsecured notes of the Company on a best efforts basis.  The effective term of each of the broker-dealer agreements isgenerally for one year.

 

**12. Changein Accounting Principle and Restatement of Financial Statements**

 

The Company changed its method of recording income tothe cost recovery method as management deemed it to be preferable because it ismore conservative.  The cost recoverymethod relates to the income recognition on purchased receivables (Note8).  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. Assuming this change in principle is applied retroactively, the requiredpro forma information for the years ended December 31, 2002 and 2001 areas follows:

 

F-17

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|                                     |   | **2002** |       | **2001** |   |
|------------------------------------------|--------|----------|------------|----------|--------|
| Loss before extraordinary item           |   | $        | (4,192,847 | )        | $      | (969,687 | ) |
| Net loss                                 |   | $        | (4,192,847 | )        | $      | (969,687 | ) |
|                                     |   |     |       |     |   |
| Loss per share before extraordinary item |   | $        | (2,096     | )        | $      | (554 | ) |
| Net loss per share – basic          |   | $        | (2.096     | )        | $      | (554 | ) |

 

The Company’s December 31, 2002 and 2001 medicalreceivable balance and additional paid in capital were overstated by$4,000,000.  In addition, during 2002,$4,104,011 of the amount of medical receivable previously reported should havebeen included in the amount due from Parent and affiliates.  These discoveries were made subsequent tothe issuance of the financial statements and the financial statements have beenrestated to reflect these corrections.

 

 

**Going Concern**

 

The accompanying financial statements have beenprepared in conformity with accounting principles generally accepted in theUnited States of America, which contemplate continuation of the Company as agoing concern. TheCompany incurred net losses of $5,209,830 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 financialstatements do not include any adjustments relating to the recoverabilityand classification of recorded asset amounts, or amounts and classification ofliabilities that might resultfrom the outcome of managements decision to wind down operations.  As part of managements plans to wind downthe Company’s operation, during the eleven months ended November 30, 2003,the Company sold medical receivables of various providers to its Parent andaffiliates with a book value of $17,320,570, for which it receivedconsideration of $17,929,382, respectively, in cash. During the nine monthsended September 30, 2003, the Company repaid $13,280,000 of itsoutstanding notes payable, which had matured (unaudited).

 

F-18

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