** **

**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

**FORM 10-Q**

 

**(Mark One)**

 

| **ý**                                                                                                                                                                                                                                                                      | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF  1934**  |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|-----------------------------------------------------------------------------------------------------|
|                                                                                                                                                                                                                                                                            |
| **For the quarterly period ended September 30, 2003**                                                                                                                                                                                                                      |
|                                                                                                                                                                                                                                                                            |
| **OR**                                                                                                                                                                                                                                                                          |
|                                                                                                                                                                                                                                                                            |
| **o**                                                                                                                                                                                                                                                                           | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF  1934** |
|                                                                                                                                                                                                                                                                            |
| **For the transition period from                       to                     .** |
|                                                                                                                                                                                                                                                                            |
| **Commission file number: 333-45464**                                                                                                                                                                                                                                           |
|                                                                                                                                                                                                                                                                            |
| **MEDICAL  CAPITAL MANAGEMENT, INC.**                                                                                                                                                                                                                                           |
| (Exact name of registrant as specified in  its charter)                                                                                                                                                                                                                         |

 

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

 

Indicate by checkmark whether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.

 
| Yes |   | ý |   | No |   | o |
|-----|--------|--------|--------|----|--------|---|

 

Indicate by checkmark whether the registrant is an accelerated filer (as defined in Rule 12b-2of the Exchange Act).

 
| Yes |   | o |   | No |   | ý |
|-----|--------|---|--------|----|--------|--------|

 

As ofOctober 31, 2003, there were 2,000 shares of the registrant’s sole classof common stock issued and outstanding.

 

 

----

 

Medical Capital Management, Inc.

Form 10-Q

Index

 
|           | PART I – FINANCIAL INFORMATION                                                           |   |
|----------------|-----------------------------------------------------------------------------------------------|--------|
|           |                                                                                          |   |
| Item 1.        | Financial Statements (unaudited)                                                              |   |
|           |                                                                                          |   |
|           | Balance  Sheets as of September 30, 2003 and December 31, 2002                      |   |
|           |                                                                                          |   |
|           | Statements of Income (Operations) for the  nine months ended September 30, 2003 and 2002 |   |
|           |                                                                                          |   |
|           | Statements of Cash Flows for the nine  months ended September 30, 2003 and 2002          |   |
|           |                                                                                          |   |
|           | Notes to Financial Statements                                                                 |   |
|           |                                                                                          |   |
| Item 2.        | Management’s  Discussion and Analysis of Financial Condition and Results of Operations   |   |
|           |                                                                                          |   |
| Item 3.        | Quantitative  and Qualitative Disclosures about Market Risk                                   |   |
|           |                                                                                          |   |
| Item 4.        | Controls  and Procedures                                                                      |   |
|           |                                                                                          |   |
|           | PART II – OTHER INFORMATION                                                              |   |
|           |                                                                                          |   |
| Item 6.        | Exhibits  and Reports on Form 8-K                                                             |   |
|           |                                                                                          |   |
| Signatures     |                                                                                          |
|           |                                                                                          |   |
| Certifications |                                                                                          |

 

1

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**MEDICALCAPITAL MANAGEMENT, INC.**

**BALANCE SHEETS**

 
|                                                                                                      |   | **September 30,  2003** |       | **December 31,  2002** |       |
|-----------------------------------------------------------------------------------------------------------|--------|------------------------------|------------|-----------------------------|------------|
|                                                                                                      |   | **(unaudited)**              |       |                        |       |
| ASSETS                                                                                                    |   |                         |       |                        |       |
| Current assets:                                                                                           |   |                         |       |                        |       |
| Cash and cash equivalents                                                                                 |   | $                            | 1,009,286  |                        | $          | 1,494,002 |   |
| Medical receivables, net of discount  reserves of $6,633,658                                              |   | 21,681,572                   |       | 30,539,011                  |       |
| Receivable from Parent and affiliates, net                                                                |   | 8,264,005                    |       | 6,671,753                   |       |
| Account receivables                                                                                       |   | —                       |       | 36,755                      |       |
| Prepaid trustee fee                                                                                       |   | 20,583                       |       | 4,524                       |       |
| Notes receivable – short term                                                                        |   | 1,045,000                    |       | 1,045,000                   |       |
| Total current assets                                                                                      |   | 32,020,446                   |       | 39,791,045                  |       |
|                                                                                                      |   |                         |       |                        |       |
| Notes receivable – long term, net of  deferred income on notes of $43,056                            |   | 5,529,302                    |       | 4,232,127                   |       |
| Total assets                                                                                              |   | $                            | 37,549,748 |                        | $          | 44,023,172 |   |
|                                                                                                      |   |                         |       |                        |       |
| LIABILITIES AND STOCKHOLDER’S DEFICIT                                                                |   |                         |       |                        |       |
|                                                                                                      |   |                         |       |                        |       |
| Current liabilities:                                                                                      |   |                         |       |                        |       |
| Accrued expenses – trade                                                                             |   | $                            | 202,374    |                        | $          | 108,193 |   |
| Due to medical providers                                                                                  |   | 23,884                       |       | 150,070                     |       |
| Interest payable, net                                                                                     |   | 193,834                      |       | 399,798                     |       |
| Notes payable – current                                                                              |   | 17,330,000                   |       | 21,295,000                  |       |
| Total current liabilities                                                                                 |   | 17,750,092                   |       | 21,953,061                  |       |
|                                                                                                      |   |                         |       |                        |       |
| Notes payable – long term, net of deferred  offering costs of $193,196 and commissions of $1,845,272 |   | 26,301,532                   |       | 28,232,625                  |       |
| Total liabilities                                                                                         |   | $                            | 44,051,624 |                        | 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                           |       | 20                          |       |
| Additional paid-in capital                                                                                |   | —                       |       | —                      |       |
| Accumulated deficit                                                                                       |   | (6,501,897                   | )          | (6,162,534                  | )          |
| Total stockholder’s deficit                                                                          |   | (6,501,877                   | )          | (6,162,514                  | )          |
| Total liabilities and stockholder’s deficit                                                          |   | $                            | 37,549,748 |                        | $          | 44,023,172 |   |

 

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

 

2

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**MEDICALCAPITAL MANAGEMENT, INC.**

**STATEMENTS OF INCOME(OPERATIONS)**

 
|                                                                                                  |   | **Nine  months ended September 30,** |      | **Three  months ended September 30,** |   |
|-------------------------------------------------------------------------------------------------------|--------|--------------------------------------|-----------|---------------------------------------|--------|
|                                                                                                  |   | **2003  (unaudited)**                |      | **2002  (unaudited)**                 |   | **2003  (unaudited)** |   | **2002  (unaudited)** |   |
| DISCOUNT REVENUES:                                                                                    |   |                                 |      |                                  |   |   |   |   |   |
| Discount fees, net of change in discount  reserves $978,601, including related party fees of $608,813 |   | $                                    | 5,337,749 |                                  | $      | 3,632,940 |   | $ | 2,359,166 |   | $ | 1,669,932 |   |
| Administrative income                                                                                 |   | 27,803                               |      | 9,120                                 |   | 3,454 |   | 9,120 |   |
| Total revenues                                                                                        |   | 5,365,552                            |      | 3,642,060                             |   | 2,362,620 |   | 1,679,052 |   |
| COST OF REVENUES:                                                                                     |   |                                 |      |                                  |   |   |   |   |   |
| Administration expense, related party                                                                 |   | 609,754                              |      | 780,453                               |   | 50,402 |   | 302,245 |   |
| GROSS PROFIT                                                                                          |   | 4,755,798                            |      | 2,861,607                             |   | 2,312,218 |   | 1,376,807 |   |
|                                                                                                  |   |                                 |      |                                  |   |   |   |   |   |
| OPERATING EXPENSES:                                                                                   |   |                                 |      |                                  |   |   |   |   |   |
| Interest expense, net                                                                                 |   | 4,365,784                            |      | 2,566,252                             |   | 1,082,956 |   | 1,107,894 |   |
| Professional services                                                                                 |   | 247,698                              |      | 241,671                               |   | 55,879 |   | 56,787 |   |
| Travel and entertainment                                                                              |   | 190,282                              |      | 124,320                               |   | 15,238 |   | 53,850 |   |
| Service fees, related party                                                                           |   | 129,783                              |      | 207,713                               |   | 27,878 |   | 72,425 |   |
| Legal expenses                                                                                        |   | 128,661                              |      | 135,833                               |   | 28,165 |   | 31,304 |   |
| Bank charges                                                                                          |   | 104,254                              |      | 40,343                                |   | 30,295 |   | 35,867 |   |
| Trustee fees                                                                                          |   | 45,771                               |      | 36,195                                |   | 15,518 |   | 13,573 |   |
| Advertising                                                                                           |   | 27,450                               |      | 284,539                               |   | 2,000 |   | 96,020 |   |
| Directors’ fees                                                                                  |   | 33,000                               |      | 33,000                                |   | 11,000 |   | 11,000 |   |
| Occupancy                                                                                             |   | 12,607                               |      | 8,157                                 |   | — |   | — |   |
| Copying and printing                                                                                  |   | 8,831                                |      | 40,786                                |   | 699 |   | 12,326 |   |
| Investor relations fees, related party                                                                |   | —                               |      | 142,591                               |   | — |   | 76,057 |   |
| Sales commissions, related party                                                                      |   | —                               |      | 102,108                               |   | — |   | 22,344 |   |
| Management fees, related party                                                                        |   | —                               |      | 126,000                               |   | — |   | — |   |
| Other                                                                                                 |   | 347                                  |      | 12,318                                |   | 311 |   | 7,767 |   |
| Total operating expenses                                                                              |   | 5,294,468                            |      | 4,101,826                             |   | 1,269,939 |   | 1,597,214 |   |
|                                                                                                  |   |                                 |      |                                  |   |   |   |   |   |
| INCOME (LOSS) BEFORE TAXES                                                                            |   | (538,670                             | )         | (1,240,219                            | )      | 1,042,279 |   | (220,407 | ) |
| Provision (benefit) for income tax, related  party                                                    |   | (199,307                             | )         | (25,468                               | )      | 385,644 |   | — |   |
| NET INCOME (LOSS)                                                                                     |   | $                                    | (339,363  | )                                     | $      | (1,214,751 | ) | $ | 656,635 |   | $ | (220,407 | ) |
| Weighted average number of common shares  outstanding — basic and diluted                        |   | 2,000                                |      | 2,000                                 |   | 2,000 |   | 2,000 |   |
|                                                                                                  |   |                                 |      |                                  |   |   |   |   |   |
| Net loss per common share — basic and  diluted                                                   |   | $                                    | (169.68   | )                                     | $      | (607.38 | ) | $ | (328.32 | ) | $ | (110.20 | ) |

 

*The accompanying notes form an integral partof these financial statements.*

 

3

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**MEDICALCAPITAL MANAGEMENT, INC.**

**STATEMENTS OF CASHFLOWS**

 
|                                                                                          |   | **Nine  months  ended  September 30,  2003** |      | **Nine  months  ended  September 30,  2002** |   |
|-----------------------------------------------------------------------------------------------|--------|---------------------------------------------------|-----------|---------------------------------------------------|--------|
|                                                                                          |   | **(unaudited)**                                   |      | **(unaudited)**                                   |   |
|                                                                                          |   |                                              |      |                                              |   |
| Cash flows used for operating activities:                                                     |   |                                              |      |                                              |   |
| Net income (loss)                                                                             |   | $                                                 | (339,363  | )                                                 | $      | (1,214,747 | ) |
| Adjustments to reconcile net income to net  cash provided by (used for) operating activities: |   |                                              |      |                                              |   |
| Amortization of deferred offering costs and  commissions                                      |   | 1,401,309                                         |      | 865,947                                           |   |
| Amortization of prepaid trustee fee                                                           |   | 45,771                                            |      | 36,195                                            |   |
| Changes in assets and liabilities:                                                            |   |                                              |      |                                              |   |
| Increase in medical receivables                                                               |   | 8,857,439                                         |      | (23,048,234                                       | )      |
| Increase in interest receivable                                                               |   | (165,840                                          | )         | 42,660                                            |   |
| Increase in due from (to) Parent and  affiliates                                              |   | (1,592,252                                        | )         | (127,136                                          | )      |
| Increase in accounts receivable                                                               |   | 36,755                                            |      | (15,605                                           | )      |
| Increase in prepaid trustee fees                                                              |   | (61,830                                           | )         | (54,292                                           | )      |
| Increase in accrued expenses – trade                                                     |   | 94,181                                            |      | (440                                              | )      |
| Increase in due to medical providers                                                          |   | (126,186                                          | )         | —                                            |   |
| Increase in interest payable                                                                  |   | (40,122                                           | )         | 192,893                                           |   |
| Net cash provided (used) for operations                                                       |   | 8,109,862                                         |      | (23,322,759                                       | )      |
|                                                                                          |   |                                              |      |                                              |   |
| Cash flows used for investing activities:                                                     |   |                                              |      |                                              |   |
| Increase in notes receivables                                                                 |   | (1,297,175                                        | )         | —                                            |   |
| Net cash provided (used) for investing  activities                                            |   | (1,297,175                                        | )         | —                                            |   |
|                                                                                          |   |                                              |      |                                              |   |
| Cash flows from financing activities:                                                         |   |                                              |      |                                              |   |
| Proceeds from issuance of debt, net                                                           |   | (6,339,000                                        | )         | 25,557,000                                        |   |
| Payments on offering costs and commissions                                                    |   | (938,402                                          | )         | (2,058,076                                        | )      |
| Payment of dividend, related party                                                            |   | —                                            |      | (1,250,000                                        | )      |
| Proceeds from sale of common stock                                                            |   | —                                            |      | —                                            |   |
| Proceeds from paid-in capital                                                                 |   | —                                            |      | —                                            |   |
| Net cash provided (used) by financing  activities                                             |   | (7,297,402                                        | )         | 22,248,924                                        |   |
| Net decrease in cash and cash equivalents                                                     |   | (484,715                                          | )         | (1,073,835                                        | )      |
| Cash and cash equivalents at beginning of  year                                               |   | 1,494,001                                         |      | 2,093,897                                         |   |
| Cash and cash equivalents at end of year                                                      |   | $                                                 | 1,009,286 |                                              | $      | 1,020,062 |   |
|                                                                                          |   |                                              |      |                                              |   |
| Supplemental disclosure of cash flow items:                                                   |   |                                              |      |                                              |   |
| Income taxes paid                                                                             |   | $                                                 | —    |                                              | $      | — |   |
| Interest paid                                                                                 |   | $                                                 | 3,739,638 |                                              | $      | 2,237,658 |   |

 

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

 

4

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**MEDICALCAPITAL MANAGEMENT, INC.**

 

**NOTES TO FINANCIAL STATEMENTS**

 

**September 30, 2003**

**(unaudited)**

 

**1. Operations of theCompany**

 

**Organization:**

 

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

 

**Business Activity:**

 

The Company was organized to purchase the insured portion of medicalreceivables from medical providers including physicians, clinics, hospitals,nursing homes and other providers of healthcare services throughout the UnitedStates. The medical receivables are purchased at a discount to the full amountof the claim. The Company also seeks other investments that will enhance itsfinancial position.

 

**2. Summary ofSignificant Accounting Policies**

 

**Use of Estimates:**

 

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

 

Theaccompanying 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.

 

**Cash and CashEquivalents:**

 

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

 

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

 

**Discounts Earned onMedical Receivables:**

 

The Company uses the cost recovery method of recording income. The costrecovery method relates to the income recognition on purchased receivables. Thecost recovery method requires that any amounts received be applied firstagainst the recorded amount of the advance and when that amount has beenreduced to zero, any additional amounts received can be recognized as discountincome.

 

5

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Medical receivables are recorded at initial purchase amount, which isthe net amount advanced to the seller, plus discount fee less deferred unearnedincome, less any collections on the receivable.  This is the cost basis and equals the fair market value of thereceivable at the time of purchase. Medical receivables purchased from affiliates are generally purchasedfor 85%-100% of fair market value, which is determined as the gross advanceplus the gross discount less the gross collections of the receivables at thetime of purchase.  The face amount ofthe receivables, 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 fee charged by the Companyto the seller on the purchase of receivables. All collections are first appliedto the net advance of each batch of receivables purchased and only if totalcollections exceed the net advances for all batches acquired in a fiscalquarter, the contractual discount fee is recognized as income. Discount feepricing is based on a historical analysis of the seller’s accounts receivablecollection performance, risk criteria and the number of days the receivable isoutstanding when purchased, in the aggregate. The discount fee is calculated on a batch-by-batch basis based on thisanalysis as the estimated collection period of the receivables in the batch.  Although the amount of the discount iscalculated at the beginning of each purchase transaction, the discount revenueis deferred until realized.

 

This discount revenue is deferred into a “discount reserve” that theCompany continually updates, and is recognized upon collection for amounts inexcess of the net advance on a per client basis. The Company anticipates thereceivables upon which these reserves are based to be fully collectable.Therefore, this reserve is considered a timing adjustment. As ofSeptember 30, 2003 and December 31, 2002, this reserve was $6,633,658and $7612,259, respectively.

 

**Related Party Transactions:**

 

The Company’s Parent, Medical Capital Holdings Inc., has substantialexperience and success in identifying and evaluating healthcare providersdesiring to sell their healthcare receivables. The Company uses the servicesand expertise of Medical Capital Holdings and its subsidiaries to purchase aportfolio of healthcare receivables. It has entered into contracts with MCC andMTS, affiliated companies, to provide the appropriate system for purchasing andtracking its healthcare receivables. Reimbursement for these 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 purchase relationships mayoccur between the seller and Medical Capital Holdings and its affiliates.Medical Capital Holdings has a revolving credit line with Comerica Bank, whichallows Medical Capital Holdings to purchase accounts receivable from aseller.  Then, once the Company hasfunds available, the receivables as well as the rights, title and interest inthe contractual relationship between the seller and parent are sold to the Companyby Medical Capital Holdings. For these inter-company sales, the receivables aresold to the Company at a price generally equal to 85-95% of the sum of thetotal amount advanced to the seller of the receivable plus the discount fee,less any collections already received on the receivable. To the extent theCompany has sufficient funds available, the Company will purchase receivablesdirectly from a seller without first being purchased by Medical CapitalHoldings. Medical Capital Corporation makes the determination as to whether theCompany purchases receivables from the Company’s affiliates or directly fromthe seller. Medical Capital Corporation may also direct the sale of receivablesfrom one of the Company’s affiliates to the Company, or from the Company to oneof its affiliates as a method of asset/liability management and to

 

6

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attempt to maintain diversification in the Company’s investmentportfolio. When the Company purchases receivables from its affiliates, itpurchases all rights, title and interest in the receivable that the affiliateowned, including reserve amounts. Therefore, the impact on reserves is nodifferent whether the Company purchases receivables from its affiliates ordirectly from the seller.

 

**ProviderConcentration:**

 

As of September 30, 2003 and December 31, 2002, medicalreceivables purchased by the Company from four providers amounted toapproximately 93.7% and 74%, respectively, of the outstanding balance of thetotal receivables due to the Company. MCM had no other relationships,contractual or otherwise, with these providers.

 

**Reserves:**

 

*Seller’s Reserve. *The amount of each receivable allocatedto each seller’s reserve account is equal to the ENR, minus the sum of theinitial purchase amount and the discount. This is the batch seller’s reserve for funds that could be returned tothe seller after claims are collected, if contractual terms are met by theseller.  This seller reserve is rolledup into the overall aggregate seller reserve on the entire pool of receivables purchasedfrom that seller.  Receivables areposted on a receivable-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 the seller’sreserve 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.  Inaddition, under the terms of the Company’s purchase agreement with each seller,any amounts collected in excess of the ENR are allocated to the reserve accountof the seller to increase that seller’s reserve balance. If the seller is incompliance with the terms of the purchase agreement and all of its batches ofreceivables are collected on time, the Company will return to the seller allcollections for the amounts allocated to the seller reserve account that exceed25% of the outstanding balance of the seller’s receivables, calculated on amonthly 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 Company from the date ofpurchase (depending on the contractual terms in each seller’s agreement), ifthe full ENR of the receivable has not been fully collected, the batch ofreceivables and the individual open receivable are considered to have a valueof zero and/or replaced with a new receivable. At the same time the Company assigns a receivable a value of zero, itoffsets the uncollected portion against the seller reserve for that sellerand/or withholds a portion of the advance on the next purchase of receivablesfrom that seller.  Even though thereceivable is assigned a value of zero, the Company continues to track thereceivable and attempts to collect it. If the receivable is subsequently collected, the Company allocates thosecollections to the seller’s reserve account under the terms of its purchaseagreement with the seller. As of September 30, 2003 and December 31,2002, the amount collected (for all sellers) in excess of their respectivereserve accounts was  $23,884 and$150,070, respectively.

 

7

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*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 onwhich these reserves are based to be collectable, however, if the Company doesnot collect the purchased receivables in the contractual period (as establishedbetween the seller and the Company) then the seller forfeits the deferredpurchase price of the short-collected batch of receivables to the Company. Oncea batch of receivables, grouped by a fiscal quarter, is fully collected to theENR amount, the Company recognizes the seller’s forfeited deferred purchaseprice as part of its discount revenue. As of September 30, 2003 andDecember 31, 2002, this reserve was $6,633,658, and $7,612,259,respectively.

 

*Bad Debt Reserve for Losses. *The bad debtreserve for losses on medical receivables is increased by provisions chargedagainst operations and reduced by receivables charged off, as determined bymanagement.  The reserve is maintainedat a level considered adequate to provide for potential losses on medicalreceivables based on management’s evaluation. Under the terms by which themedical receivables are purchased, the Company has significant collateral,including substitution of receivables exceeding the contractual period rangingfrom 90-270 days.  Accordingly,charge-offs are not expected to be material to the Company’s financial positionor results of operations. During the nine months ended September 30, 2003and 2002, no reserves for losses were needed.

 

**DelinquentReceivables:**

 

A delinquent receivable is determined as such when the contractedperiod (collection service life) has expired and there remains a balanceshortfall to the ENR amount of the batch of receivables.  The shortfall is determined on a batchbasis. Once a batch is closed and it is determined that a shortfall exists, thevalue of the delinquent receivable is reduced to zero. The amount of theshortfall is either withheld from the seller’s next purchase advance, replacedby the seller with new receivables in an amount equal to the delinquentreceivables or charged to the bad debt reserve of the seller. Therefore, therewere no delinquent receivables on the Company’s books as of September 30,2003 and December 31, 2002. After the batch is closed, the seller ischarged back a withholding of the next purchase advance to make up theshortfall against the seller’s bad debt reserves or the seller substitutes anew receivable for the delinquent receivable. Since the seller is obligated to sell receivables on a forward movingbasis (i.e. recurring) there is sufficient offset capability to cover most ofthe risk to collection shortfall.  Ifthe seller no longer offers or is not required to sell receivables to theCompany and a shortfall exists for a batch of receivables, it is the Company’spolicy to pursue all related collection activity to recover collections of theENR amount.  When a seller substitutes areceivable, no adjustment is made to the discount fee. There were nosubstitutions of receivables during the periods ended September 30, 2003,and December 31, 2002.

 

**Commissions:**

 

Commissions paid to outside and related parties in connection with theorigination of medical receivables are expensed as incurred. Commissionsincurred on the acquisition of investor funds (notes payable) are capitalizedand amortized over the period the debt is outstanding using the interestmethod. For the nine months ended September 30, 2003 and 2002, the Companycapitalized commissions of $592,361 and $2,717,152, respectively, and amortized$1,295,389 and $1,125,830 respectively.

 

8

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**Fair Value ofFinancial Instruments:**

 

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

 

**Income Taxes:**

 

The Company uses the liability method of accounting for income taxespursuant to SFAS No. 109, “Accounting for Income Taxes.” Deferred income taxassets or liabilities result from temporary differences when certain income orexpense amounts are recognized or deducted for financial statement purposes ina different reporting period than when they are recognized or deducted forincome tax purposes. For Federal and state income tax purposes, the Company isconsolidated 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. For the periods ending September 30,2003 and 2002, the Company’s income tax benefit was $199,307 and $25,468,respectively.  There were no temporarydifferences between book and tax bases of various liabilities and assets thatwould give rise to any material deferred tax assets or liabilities.

 

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

 
|                                                           |   | **2003** |   | **2002** |   |
|----------------------------------------------------------------|--------|----------|--------|----------|--------|
|                                                           |   |     |   |     |   |
| 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) iscomprised of the following:

 
|                      |   | **2003** |     | **2002** |     |
|---------------------------|--------|----------|----------|----------|----------|
|                      |   |     |     |     |     |
| Current - federal         |   | $        | (199,307 | )        | $        | (703,116 | ) |
| Deferred - federal        |   | —   |     | —   |     |
|                      |   |     |     |     |     |
| Total provision (benefit) |   | $        | (199,307 | )        | (703,116 | ) |
|                           |        |          |          |          |          |  |  |

 

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

 

InApril 2002, the FASB issued Statement No. 145, “Rescission of FASBStatements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and TechnicalCorrections.”  This Statement rescindsFASB Statement No. 4, “Reporting Gains and Losses from Extinguishment of Debt”,and an amendment of that Statement, FASB Statement No. 64, “Extinguishments ofDebt Made to Satisfy Sinking-Fund Requirements” and FASB Statement No. 44,“Accounting for Intangible Assets of Motor Carriers”. This Statement amendsFASB Statement No. 13, “Accounting for Leases”, to eliminate an inconsistencybetween the required accounting for sale-leaseback transactions and therequired accounting for certain lease modifications that have economic effectsthat are similar to sale-leaseback transactions. The

 

9

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Companydoes not expect the adoption of SFAS No. 145 to have a material impact on theCompany’s financial position or results of operations.

 

InJune 2002, the FASB issued Statement No. 146, “Accounting for CostsAssociated with Exit or Disposal Activities.” This Statement addressesfinancial accounting and reporting for costs associated with exit or disposalactivities and nullifies Emerging Issues Task Force (“EITF”) Issue No. 94-3,“Liability Recognition for Certain Employee Termination Benefits and OtherCosts to Exit an Activity (including Certain Costs Incurred in aRestructuring).” The provisions of this Statement are effective for exit ordisposal activities that are initiated after December 31, 2002, with earlyapplication encouraged. The Company does not expect the adoption to have amaterial impact to the Company’s financial position or results of operations.

 

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

 

InDecember 2002, the FASB issued Statement No. 148, “Accounting forStock-Based Compensation-Transition and Disclosure”, which amends FASBStatement No. 123, Accounting for Stock-Based Compensation, to providealternative methods of transition for a voluntary change to the fair valuebased method of accounting for stock-based employee compensation. In addition,this Statement amends the disclosure requirements of Statement 123 to requireprominent disclosures in both annual and interim financial statements about themethod of accounting for stock-based employee compensation and the effect ofthe method used on reported results. The transition guidance and annual disclosure provisions of Statement148 are effective for fiscal years ending after December 15, 2002, withearlier application permitted in certain circumstances. 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 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.

 

InJanuary 2003, the FASB issued Interpretation No. 46, “Consolidation ofVariable Interest Entities.” Interpretation 46 changes the criteria by whichone company includes another entity in its consolidated financialstatements.  Previously, the criteriawere based on control through voting interest. Interpretation 46 requires a variable interest entity to be consolidatedby a company if that company is subject to a majority of the risk of loss fromthe variable interest entity’s activities or entitled to receive a majority ofthe entity’s residual returns or both. A company that consolidates a variableinterest entity is called the primary beneficiary of that entity. Theconsolidation requirements of Interpretation 46 apply immediately to variableinterest entities created after January 31, 2003. The consolidationrequirements apply to older entities in the first fiscal year or interim periodbeginning after June 15, 2003. Certain of the disclosure requirementsapply in all financial statements issued after January 31, 2003,regardless of

 

10

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whenthe variable interest entity was established. The Company does not expect theadoption to have a material impact to the Company’s financial position orresults of operations.

 

**3. Notes Receivable**

 

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

 
|                                                                                       |   | **As of  September 30,  2003** |      | **As of  December 31,  2002** |   |
|--------------------------------------------------------------------------------------------|--------|-------------------------------------|-----------|------------------------------------|--------|
| Physician-Client, 18%, interest only paid  monthly, due July 1, 2003(1)               |   | $                                   | 300,000   |                               | $      | 300,000 |   |
| Skilled Nursing Facility, 16%, interest  only paid monthly, due September 18, 2002(2) |   | 745,000                             |      | 745,000                            |   |
| Medical Group, 16%, interest only paid  monthly, Various due dates(3)                      |   | 5,572,358                           |      | 4,294,127                          |   |
| Gross short term and long notes receivable                                                 |   | $                                   | 6,617,358 |                               | $      | 5,339,127 |   |
| Less: deferred income on notes                                                             |   | 43,056                              |      | 62,000                             |   |
| Net short term and long term notes  receivable                                             |   | $                                   | 6,574,302 |                               | $      | 5,277,127 |   |

 

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

(2)  The client defaulted on theterms and conditions of its loan agreement and in September, 2003 the Companytook possession of the property.  TheCompany has engaged a new operator for the facility and has subsequentlyengaged in a purchase agreement for accounts receivable as well as a letter ofintent by the new operator to purchase the property, at a price inclusive ofall principal, fees and legal expenses incurred by the Company. Thistransaction 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 payments were current. OnNovember 15, 2002, the Company entered into a new loan agreement with theborrower. The new agreement, a troubled debt restructuring, called for a$2,572,000 increase in the original loan amount of $3,000,000 to be disbursedin December 2002 and February 2003 in accordance with the loanagreement. Principal is to be repaid in various installments in accordance withthe loan agreement with the balance of the loan payable on December 31,2005. The repayment schedule calls for annual principal payments of $675,000in 2003 and 2004, and $4,222,000 in 2005. As of September 30, 2003,interest payments were current.

 

**4. Deferred OfferingCosts**

 

Deferred Offering Costs consist of costs incurred for the Company’sregistration of debt securities on Form SB-2 as filed with the Securities andExchange Commission, which was declared effective February 6, 2001. Thesecosts are amortized over the weighted term of the securities using the interestmethod. For the nine months ended September 30, 2003 and 2002, the Companypaid and capitalized deferred offering costs of $135,713 and $49,130,respectively, and amortized $36,626 and $127,145, respectively. Theamortization was included in the interest expense during the applicable period.

 

11

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**5. Notes Payable**

 

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

 
|                                             |   | **Rate**   |       | **Maturity  Date**         |   | **September 30,  2003** |    | **December 31,  2002** |   |
|--------------------------------------------------|--------|------------|------------|----------------------------|--------|------------------------------|---------|-----------------------------|--------|
| Class A                                          |   | 9.00       | %          | 1 year from issuance date  |   | $                            | 923,000 |                        | $      | 4,606,000 |   |
| Class A                                          |   | 8.00       | %          | 1 year from issuance date  |   | 7,698,000                    |    | 12,429,000                  |   |
| Class B                                          |   | 9.75       | %          | 2 years from issuance date |   | 820,000                      |    | 3,258,000                   |   |
| Class B                                          |   | 8.75       | %          | 2 years from issuance date |   | 9,774,000                    |    | 8,443,000                   |   |
| Class C                                          |   | 10.25      | %          | 3 years from issuance date |   | 2,650,000                    |    | 2,650,000                   |   |
| Class C                                          |   | 9.25       | %          | 3 years from issuance date |   | 8,189,000                    |    | 5,007,000                   |   |
| Class D                                          |   | 10.75      | %          | 4 years from issuance date |   | 3,247,000                    |    | 3,267,000                   |   |
| Class D                                          |   | 9.75       | %          | 4 years from issuance date |   | 12,247,000                   |    | 12,549,000                  |   |
| Total face value of notes  payable               |   | $          | 45,870,000 |                       | $      | 52,209,000                   |    |
| Less unamortized offering  costs and commissions |   | (2,238,468 | )          | (2,681,375                 | )      |
|                                             |   | 43,631,532 |       | 49,527,625                 |   |
| Less current maturities                          |   | 17,330,000 |       | 21,295,000                 |   |
|                                             |   | $          | 26,301,532 |                       | $      | 28,232,625                   |    |

 

The maturities of notes payable as ofSeptember 30, 2003 are as follows:

 

| 2003   |   | $          | 5,732,000  |   |
|--------|--------|------------|------------|--------|
| 2004   |   | 15,311,000 |       |
| 2005   |   | 10,077,000 |       |
| 2006   |   | 14,750,000 |       |
|   |   | $          | 45,870,000 |   |

 

As of September 30, 2003, the Company’s notes were secured bymedical receivables with an expected net receivable outstanding balance of$41,168,677, by gross notes receivable of $6,617,358, and by cash and cashequivalents of $1,009,286, for a total collateral amount of $48,795,321.

 

**6.Interest to Secured Noteholders**

 

Interest on all secured notes is paid monthly in arrears on the tenthof the following month to the noteholder of record as of the last day of themonth preceding the month in which the interest payment date occurs. Interestis paid without any compounding. Each class of notes has a different maturitydate and accrues interest at different rates. The Company’s current rates onits secured notes are as follows: Class A to 8.00%; Class B to 8.75%; Class Cto 9.25%; and Class D to 9.75%. The effective interest rates approximate 4%higher than the stated rates due to the amortization of deferred offering costsand commissions treated as interest expense.

 

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**7. MedicalReceivables**

 

The following table shows the expected netreceivable amount of the Company’s receivables purchased from third parties andpurchased from affiliates during the nine months ended September 30, 2003 and from inception to September 30, 2003.

 
|                                                   |   | **For the  nine  months ended  September 30,  2003** |       | **From inception  to  September 30,  2003** |   |
|--------------------------------------------------------|--------|-----------------------------------------------------------|------------|--------------------------------------------------|--------|
| Direct purchases from third parties during  the period |   | $                                                         | 20,883,750 |                                             | $      | 60,010,386 |   |
| Purchases from affiliates during the period            |   | 6,599,710                                                 |       | 48,815,146                                       |   |
| Total purchases during the period                      |   | $                                                         | 27,483,460 |                                             | $      | 108,825,532 |   |

 

As of September 30, 2003, the Companyhad an outstanding ENR balance, net of collections, of $41,168,677.The followingtable reconciles the ENR amounts to the medical receivable oustanding on thebalanc+e sheet.

 
|                                            |   | **For the six  months ended  September 30, 2003** |       | **From inception  to  September 30, 2003** |       |
|-------------------------------------------------|--------|--------------------------------------------------------|------------|-------------------------------------------------|------------|
| ENR purchased                                   |   | $                                                      | 30,839,363 |                                            | $          | 108,825,532 |   |
| Less: collections                               |   | 40,127,663                                             |       | 75,760,855                                      |       |
| Plus: excess collections due and paid to seller |   | 1,053,093                                              |       | 1,956,338                                       |       |
| ENR balance                                     |   | (8,235,207                                             | )          | 35,021,015                                      |       |
| Less: deferred purchase price on purchases      |   | 1,600,833                                              |       | 6,705,785                                       |       |
| Gross medical receivable                        |   | (9,836,040                                             | )          | $                                               | 28,315,230 |   |
| Less: net change in discount reserve            |   | (978,601                                               | )          | 6,633,658                                       |       |
| Plus: beginning balance                         |   | 30,539,011                                             |       | 0                                               |       |
| Net medical receivable                          |   | $                                                      | 21,681,572 |                                            | $          | 21,681,572 |   |

 

As of September 30, 2003 and December 31, 2002, the Company’smedical receivables included Medicare and Medicaid claims of $1,388,321 or3.8%, and  $4,822,347, or 8.9%,respectively of the total ENR balance of the receivables.

 

From inception to September 30, 2003, $1,960,096 wasremitted to the sellers from the seller reserve accounts. The amounts remittedwere as follows:

 

|                                                |   | **Amounts Remitted  to Sellers** |      |
|-----------------------------------------------------|--------|----------------------------------|-----------|
| July 1, 2001 though 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                           |      |
| January 1, 2003 through March 31, 2003    |   | 219,384                          |      |
| April 1, 2003 through June 30, 2003       |   | 652,816                          |      |
| July 1, 2003 through September 30, 2003   |   | 575,977                          |      |
| Total remitted to sellers                           |   | $                                | 1,960,096 |   |

 

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As of September 30, 2003 andDecember 31, 2002, $23,884 and $150,070, respectively, was due to sellersfrom the seller’s reserve accounts.

 

**8. Related PartyTransactions**

 

The Medical Capital Holdings Group has substantial experience andsuccess in identifying and evaluating healthcare providers desiring to selltheir healthcare receivables. The Company intends to use the services andexpertise of Medical Capital Holdings and its subsidiaries to purchase aportfolio of healthcare receivables. It has entered into contracts with MCC andMTS, affiliated companies, to provide the appropriate system for purchasing andtracking its healthcare receivables. Reimbursement for these servicesapproximates the costs to these affiliated entities which management believesequals the prevailing market rates for comparable services of this nature.

 

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

 

For the nine months ended September 30, 2003 and 2002, the Companypurchased medical receivables of various providers from its Parent andaffiliates with a book value of $1,239,904 and $10,289,012, respectively, forwhich it paid a consideration of $1,239,904 and $9,091,952, respectively, incash with the balance included in the calculation of discount revenue earnedand reserved (deferred).  For the ninemonths ended September 30, 2003 and 2002, the Company sold medicalreceivables of various providers from its Parent and affiliates with a bookvalue of $11,407,066 and $0, respectively, for which it received aconsideration of $12,035,879 and $0, respectively, in cash.

 

As a normal course of business, initial purchase relationships mayoccur between the seller and Medical Capital Holdings (“MCH”) and itsaffiliates. MCH has a revolving credit line with a U.S. bank, which allows MCHto purchase accounts receivable from a seller. Then, once the Company has fundsavailable, the receivables as well as the rights, title and interest in thecontractual relationship between the seller and parent are sold to the Companyby MCH. For these inter-company sales, the receivables are sold to the Companyat a price generally equal to 85-100% of the sum of the total amount advancedto the seller of the receivable plus the discount fee, less any collectionsalready received on the receivable. MCH’s costs, including interest charges areincluded in the purchase price. To the extent the Company has sufficient fundsavailable, the Company will purchase receivables directly from a seller withoutfirst being purchased by MCH. Medical Capital Corporation (“MCC”) makes thedetermination as to whether the Company purchases receivables from theCompany’s affiliates or directly from the seller. MCC may also direct the saleof receivables from one of the Company’s affiliates to the Company, or from theCompany to one of its affiliates as a method of asset/liability management andto attempt to maintain diversification in the Company’s investment portfolio.When the Company purchases receivables from its affiliates, it purchases allrights, title and interest in the receivable that the affiliate owned,including reserve amounts. Moreover, the Company purchases medical receivablesfrom direct sellers or affiliates of the Company at fair value.  Consequently, management believes that theCompany’s results of operations are not impacted whether the Company purchasesreceivables directly from the seller or from one of the Company’s affiliates.

 

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**9.Trustee Fees**

 

The Company pledges collateral to an independent bank trustee. Thepledged collateral secures all of the Company’s Series I notes, regardless ofwhen the collateral was acquired or when the notes were issued. The fees to thetrustee are prepaid on an annual basis and amortized monthly. For the ninemonths ended September 30, 2003 and 2002, the Company prepaid trustee feesof $61,830 and $54,292, respectively, and amortized trustee fees of $45,771 and$36,195, respectively.

 

**10. Earnings PerShare**

 

The Company computes net earnings per share following SFAS No. 128,“Earnings Per Share.” Under the provisions of SFAS No. 128, basic net incomeper share is computed by dividing the net income available to commonshareholders for the period by the weighted average number of common sharesoutstanding during the period. Diluted net income per share is computed bydividing the net income for the period by the weighted average number of commonequivalent shares outstanding during the period. As of September 30, 2003and December 31, 2002, there were no common stock equivalents.

 

**11. SignificantAgreements**

 

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

 

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**Item 2****.  Managements Discussion and Analysis ofFinancial Condition and Results of Operations**

**September 30,2003**

**(Unaudited)**

** **

Management’s discussion and analysis of the results of operations andfinancial condition of the Company should be read in conjunction with theFinancial Statements and related Notes thereto.

 

**Overview**

 

*Expected NetReceivable. *Through the Company’s underwriting process itdetermines an amount for each receivable that it expects to be collectable,which is referred to as the expected net receivable, or ENR.  This amount is often less than the statedface amount of the receivable and never more than the stated face amount.  All of the Company’s other calculationsrelated to receivables are based on the ENR of the receivable, not the faceamount of the receivable. The following are aging tables of theCompany’s healthcare receivables on the ENR basis as of March 31, 2003,and for December 31, 2002:

 
| **As  of September 30,****2003Aging In Days(1)** |   | **Receivables****In Open Batches(2a)** |       | **Uncollected  Receivables  (Assigned A Value  Of Zero)(3)** |   | **Total Receivables** |   |
|-------------------------------------------------------|--------|----------------------------------------|------------|--------------------------------------------------------------|--------|-----------------------|--------|
| 0-60                                                  |   | $                                      | 7,754,744  |                                                         | $      | 0                     |   | $ | 7,754,744 |   |
| 61-120                                                |   | 7,698,601                              |       | 0                                                            |   | 7,698,601             |   |
| 121-180                                               |   | 5,080,239                              |       | 0                                                            |   | 5,080,239             |   |
| 181-240                                               |   | 8,654,363                              |       | 1,204,985                                                    |   | 9,859,348             |   |
| 241-270                                               |   | 8,269,380                              |       | 771,663                                                      |   | 9,041,043             |   |
| 271-360                                               |   | 4,076,451                              |       | 2,001,540                                                    |   | 6,077,991             |   |
| Over 360                                              |   | 3,150,736                              |       | 505,730                                                      |   | 3,656,466             |   |
| Total ENR                                             |   | $                                      | 44,684,514 |                                                         | $      | 4,483,918             |   | $ | 49,168,432 |   |

 
| **As  of December 31,  2002****Aging In Days(1)** |   | **Receivables****In Open Batches(2b)** |       | **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 receivableis the number of days that have elapsed from the date of billing by theprovider as averaged at the time of the purchase of the batch of receivables.

(2a)  The table reflects reports as of thedetermination dates.  These reports donot reflect un-posted cash, interim purchases and interim collections, which amounted to $807,637on September 30, 2003.

(2b)  The table reflects reports as of thedetermination dates.  These reports donot reflect un-posted cash, interim purchases and interim collections, which amounted to $3,980,938on December 31, 2002.

(3) This represents accounts receivable in batches collected to Advanceplus Discount Fee and the balance of which is assigned a value of zero.

 

16

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*Seller’s Reserve. *The amount of each receivable allocatedto each seller’s reserve account is equal to the ENR, minus the sum of theinitial purchase amount and the discount. This is the batch seller’s reserve for funds that could be returned tothe seller after claims are collected, if contractual terms are met by theseller.  This seller reserve is rolledup into the overall aggregate seller reserve on the entire pool of receivablespurchased from that seller.  Receivablesare posted on a receivable-by-receivable basis, and reported on a 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 criteria determinedthrough the underwriting process and collection experience of the seller’sreceivables.  If a seller’s reserveaccount is insufficient on a pool basis, an adjustment is made to reduce theinitial purchase amount on future batches of receivables purchased from thatseller, which increases the amount of each batch allocated to the seller’sreserve 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.  Inaddition, under the terms of the Company’s purchase agreement with each seller,any amounts collected in excess of the ENR are allocated to the reserve accountof the seller to increase that seller’s reserve balance. If the seller is incompliance with the terms of the purchase agreement and all of its batches ofreceivables are collected on time, the Company will return to the seller allcollections for the amounts allocated to the seller reserve account that exceed25% of the outstanding balance of the seller’s receivables, calculated on amonthly 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 Company from the date ofpurchase (depending on the contractual terms in each seller’s agreement), ifthe full ENR of the receivable has not been fully collected, the batch ofreceivables and the individual open receivable are considered to have a valueof zero and/or replaced with a new receivable. At the same time the Company assigns a receivable a value of zero, itoffsets the uncollected portion against the seller reserve for that sellerand/or withholds a portion of the advance on the next purchase of receivablesfrom that seller.  Even though thereceivable is assigned a value of zero, the Company continues to track thereceivable and attempts to collect it. If the receivable is subsequently collected, the Company allocates thosecollections to the seller’s reserve account under the terms of its purchaseagreement with the seller. As of September 30, 2003 and December 31,2002, the amount collected (for all sellers) in excess of their respectivereserve accounts was  $23,884 and$150,070, respectively.

 

*Discount Reserve*.  This reserve is established by deferringdiscount income on medical receivables purchased from each seller and recognizingthe discount income upon collection of the receivables after the fullcollection of the net advances. The Company anticipates the receivables onwhich these reserves are based to be collectable, however, if the Company doesnot collect the purchased receivables in the contractual period (as establishedbetween the seller and the Company) then the seller forfeits the deferredpurchase price of the short-collected batch of receivables to the Company. Oncea batch of receivables, grouped by a fiscal quarter, is fully collected to theENR amount, the Company recognizes the seller’s forfeited deferred purchaseprice as part of its discount revenue. As of September 30, 2003 andDecember 31, 2002, this reserve was $6,633,658 and 7,612,259, respectively.

 

*Bad Debt Reserve for Losses. *The bad debtreserve for losses on medical receivables is increased by provisions chargedagainst operations and reduced by receivables charged off, as determined bymanagement.  The reserve is maintainedat a level considered adequate to provide for potential losses on

 

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medical receivables based on management’s evaluation. Under the termsby which the medical receivables are purchased, the Company has significantcollateral, including substitution of receivables exceeding the contractualperiod 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 nine monthsended September 30, 2003 and 2002, no reserves for losses were needed.

 

**Resultsof Operations for the Nine Months Ended September 30, 2003 and 2002.**

 

***Revenues***.  The Company formally began operations afterthe registration statement, relating to its public offering of secured notes,was declared effective by the Securities and Exchange Commission, onFebruary 6, 2001.  For the ninemonths ended September 30, 2003, the Company purchased medical receivablescarrying an estimated net realizable value (“ENR”) of $27,483,460 and earneddiscount fees on these purchases of $5,337,749, including related partydiscount fees of $608,813 from its Parent and affiliates. During the sameperiod, the Company also earned $27,803 in administration income.

 

For the nine months ended September 30, 2002, the Companypurchased medical receivables carrying an estimated net realizable value(“ENR”) of $38,961,969 and earned discount fees on these purchases of$3,632,940, including related party discount fees of $1,197,060 from its Parentand affiliates. During the same period, the Company did not earn anyadministration income.

 

As of September 30, 2003 the Company held $6,633,658 indiscount reserves which reduced its discount revenue. The Company anticipatesthe receivables upon which these reserves are based to be fully collectible andthe discount fee to be earned within the provider contract period.

 

***Gross Profit***.The gross profit during the nine months ended September 30, 2003 was$4,755,798, which arose from gross discount revenues of $4,359,148 less thechange in discount reserves of $(978,601), plus $27,803 in administrationincome, less the administration expense incurred of $609,754. Theadministration expense, related party, was 2.2% of the total ENR of purchases.

 

The gross profit during the nine months ended September 30, 2002was $2,861,607, which arose from gross discount revenues of $3,741,224, lessthe change in discount reserves of $99,164, and administration expense incurredof $780,453. The administration expense, related party, was 2.0% of the totalENR.

 

***Operating Expenses***.  The Company’s total operating expenses forthe nine months ended September 30, 2003, were $5,294,468. Expensesconsisted primarily of $4,365,784 in interest expense, which consists ofinterest expense of $3,651,144 plus amortized commissions of $1,361,190 andamortized deferred offering cost of $40,119 less interest earned of $686,669.Interest earned included $680,459 on the Company’s gross note receivables of$6,617,358 from various medical providers, and $6,210 on cash and cashequivalents. The Company also incurred professional services of $247,698,travel and entertainment expenses of $190,282, service fees of $129,783(related party), and legal fees of $128,661.

 

For the nine months ended September 30, 2002, the Company’s totaloperating expenses were $4,101,822. Expenses consisted primarily of $2,566,252in interest expense, which consists of interest expense of $2,207,059 plusamortized commissions of $769,417 and amortized deferred offering cost of $96,530less interest earned of $506,754. Interest earned included $481,952 on theCompany’s gross notes receivables of $4,045,000 from various medical providers,and $24,802 on cash and cash equivalents. The Company also incurred advertisingexpense of $284,539, which is expensed as incurred, professional services of$241,671 service fees of $207,713 (related party), and legal fees of $135,833.

 

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***Income Tax Benefit***.  For the nine months ended September 30,2003 and 2002, the benefit for income taxes was $199,307 and $25,468respectively. For Federal and state income taxes, the Company is consolidatedwith its Parent. The Company is allocated its share of the consolidated taxliability using the separate return method.

 

***Net Income or Loss***.  The Company had a net loss of $339,307 orbasic and diluted net loss per common share of $169.68 for the nine monthsended September 30, 2003. The net loss of the Company resulted primarilyfrom using a slower recognition of income method and delays in obtainingapproval of the Company’s new note offerings. The Company had anticipatedgreater year to date sales of its notes from its public offering, which theCompany was to offer at attractive interest rates, thereby being able topurchase more medical receivables and earn greater revenues.

 

For the nine months ended September 30, 2002, the Company had anet loss of $1,214,751 or basic and diluted net loss per common share of$607.38.

 

Due to numerous economic,competitive and regulatory risks, any or all of which may have a materialadverse impact upon the Company’s operations, there can be no assurance that itwill be able to successfully purchase healthcare receivables and/or acquire abusiness which generates significant revenues or achieves a level of profitswhich will permit the Company to pay the interest and principal payments onnotes when due.

 

**Liquidityand Capital Resources**

 

During the nine months ended September 30, 2003, the Companyreceived $6,941,000 in cash from the issuance of secured notes by the Companyon its public offering, and received collections on medical receivables of$40,127,663. During the same period, the Company used $21,523,479 of thesefunds to purchase medical receivables, $1,278,258 to fund secured loans tomedical providers, and had $13,280,000 in notes mature and not reinvest. As ofSeptember 30, 2003, the Company maintained $1,009,286 in cash and cashequivalents, which it seeks to utilize in purchasing additional medicalreceivables.

 

From the Company’s inception on August 4, 2000 toSeptember 30, 2003, the Company has received $60,836,000 from the sale ofits notes, and received $67,656,855 in collections on medical receivables. Overthe same period, the Company used $89,454,849 to purchase medical receivables,and made cash loans on secured property of $6,617,385 to medical providers. TheCompany has had $14,966,000 in notes that have matured and not reinvested sinceinception.

 

On July 7, 2003, the Company formally withdrew its pending registrationstatements from registration with the SEC. The registration statements werewithdrawn due to market conditions causing the offering of the notes to nolonger be economical to the Company. Therefore, the public offering of theCompany's notes will no longer be a source of liquidity for the Company.

 

The Company’s management consists of officersand employees employed by Medical Capital Corporation. Their salaries andbenefits are paid by Medical Capital Corporation.

 

**Related Party Transactions**

 

The Medical Capital Holdings Group has substantial experience andsuccess in identifying and evaluating healthcare providers desiring to selltheir healthcare receivables. The Company intends to use the services andexpertise of Medical Capital Holdings and its subsidiaries to purchase aportfolio of healthcare receivables. It has entered into contracts with MCC andMTS, affiliated companies, to provide the appropriate system for purchasing andtracking its healthcare receivables. Reimbursement for these servicesapproximates the costs to these affiliated entities which management believesequals the prevailing market rates for comparable services of this nature.

 

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

 

For the nine months ended September 30, 2003 and 2002, the Companypurchased medical receivables of various providers from its Parent andaffiliates with a book value of $1,239,904 and $10,289,012, respectively, forwhich it paid a consideration of $1,239,904 and $9,091,952, respectively, incash with the balance included in the calculation of discount revenue earnedand reserved (deferred).  For the ninemonths ended September 30, 2003 and 2002, the Company sold medicalreceivables of various providers from its Parent and affiliates with a bookvalue of $11,407,066 and $0, respectively, for which it received aconsideration of $12,035,879 and $0, respectively, in cash.

 

As a normal course of business, initial purchase relationships mayoccur between the seller and Medical Capital Holdings (“MCH”) and itsaffiliates. MCH has a revolving credit line with a U.S. bank, which allows MCHto purchase accounts receivable from a seller. Then, once the Company has fundsavailable, the receivables as well as the rights, title and interest in thecontractual relationship between the seller and parent are sold to the Companyby MCH. For these inter-company sales, the receivables are sold to the Companyat a price generally equal to 85-100% of the sum of the total amount advancedto the seller of the receivable plus the discount fee, less any collectionsalready received on the receivable. MCH’s costs, including interest charges areincluded in the purchase price. To the extent the Company has sufficient fundsavailable, the Company will purchase receivables directly from a seller withoutfirst being purchased by MCH. Medical Capital Corporation (“MCC”) makes thedetermination as to whether the Company purchases receivables from theCompany’s affiliates or directly from the seller. MCC may also direct the saleof receivables from one of the Company’s affiliates to the Company, or from theCompany to one of its affiliates as a method of asset/liability management andto attempt to maintain diversification in the Company’s investment portfolio.When the Company purchases receivables from its affiliates, it purchases allrights, title and interest in the receivable that the affiliate owned,including reserve amounts. Moreover, the Company purchases medical receivablesfrom direct sellers or affiliates of the Company at fair value.  Consequently, management believes that theCompany’s results of operations are not impacted whether the Company purchasesreceivables directly from the seller or from one of the Company’s affiliates.

 

**RecentAccounting Pronouncements**

 

InApril 2002, the FASB issued Statement No. 145, “Rescission of FASBStatements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and TechnicalCorrections.”  This Statement rescindsFASB Statement No. 4, “Reporting Gains and Losses from Extinguishment of Debt”,and an amendment of that Statement, FASB Statement No. 64, “Extinguishments ofDebt Made to Satisfy Sinking-Fund Requirements” and FASB Statement No. 44,“Accounting for Intangible Assets of Motor Carriers”. This Statement amendsFASB Statement No. 13, “Accounting for Leases”, to eliminate an inconsistencybetween the required accounting for sale-leaseback transactions and therequired accounting for certain lease modifications that have economic effectsthat are similar to sale-leaseback transactions. The Company does not expectthe adoption of SFAS No. 145 to have a material impact on the Company’sfinancial position or results of operations.

 

InJune 2002, the FASB issued Statement No. 146, “Accounting for CostsAssociated with Exit or Disposal Activities.” This Statement addressesfinancial accounting and reporting for costs associated with exit or disposalactivities and nullifies Emerging Issues Task Force (“EITF”) Issue No. 94-3,“Liability Recognition for Certain Employee Termination Benefits and OtherCosts to Exit an Activity

 

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(includingCertain Costs Incurred in a Restructuring).” The provisions of this Statementare effective for exit or disposal activities that are initiated afterDecember 31, 2002, with early application encouraged. The Company does notexpect the adoption to have a material impact to the Company’s financial positionor results of operations.

 

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

 

InDecember 2002, the FASB issued Statement No. 148, “Accounting forStock-Based Compensation-Transition and Disclosure”, which amends FASBStatement No. 123, Accounting for Stock-Based Compensation, to provide alternativemethods of transition for a voluntary change to the fair value based method ofaccounting for stock-based employee compensation. In addition, this Statementamends the disclosure requirements of Statement 123 to require prominentdisclosures in both annual and interim financial statements about the method ofaccounting for stock-based employee compensation and the effect of the methodused on reported results.  Thetransition guidance and annual disclosure provisions of Statement 148 areeffective for fiscal years ending after December 15, 2002, with earlierapplication permitted in certain circumstances. 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 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.

 

InJanuary 2003, the FASB issued Interpretation No. 46, “Consolidation ofVariable Interest Entities.” Interpretation 46 changes the criteria by whichone company includes another entity in its consolidated 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 variableinterest entity is called the primary beneficiary of that entity. Theconsolidation requirements of Interpretation 46 apply immediately to variable interestentities created after January 31, 2003. The consolidation requirementsapply to older entities in the first fiscal year or interim period beginningafter June 15, 2003. Certain of the disclosure requirements apply in allfinancial statements issued after January 31, 2003, regardless of when thevariable interest entity was established. The Company does not expect theadoption to have a material impact to the Company’s financial position orresults of operations.

 

**Critical Accounting Policy and Estimates**

 

Management’s Discussion and Analysis ofFinancial Condition and Results of Operations discusses the Company’sconsolidated financial statements, which have been prepared in accordance withgenerally

 

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accepted accounting principles in the UnitedStates of America.  The preparation ofthese financial statements requires the Company to make estimates andassumptions that affect the reported amounts of assets and liabilities at thedate of the financial statements and the reported amounts of revenues andexpenses during the reporting period. On an on-going basis, the Company evaluates its estimates and judgments,including those related to revenue recognition, financing operations andcontingencies and litigation.  TheCompany bases its estimates and judgments on historical experience and onvarious other factors that are believed to be reasonable under thecircumstances, the results of which form the basis for making judgments aboutthe carrying value of assets and liabilities that are not readily apparent fromother sources.  Actual results may differ from theseestimates under different assumptions or conditions.  The most significant accounting estimates inherent in thepreparation of the Company’s financial statements include estimates as to theappropriate carrying value of specific assets and liabilities which are notreadily apparent from other sources, primarily allowance for doubtful medicalreceivables, accruals for other costs, and the classification of net operatingloss and tax credit carryforwards between current and long-term assets. Risks are involved in calculating thediscount fee reserve based on judgments made by the underwriting team indetermining the average discount fee (approximately 8.0%) to be charged to themedical provider and information obtained and analyzed to assess the financialrisk involved in purchasing that medical provider’s receivables based onrelevant operating, historical and financial data.  The Company also evaluate trends in healthcare and other relevantsub-markets, past-due accounts, historical charge-off and recovery rates,credit risk indicators, economic conditions, on-going credit evaluations,overall portfolio size, average seller balances, reserve account balances andreal estate collateral valuations, if any. A significant variation,particularly longer periods from the contractual service and collection period,would impact the ability to recognize deferred revenues and hence impact ourresults of operations. In addition, any changes in the subjective estimateditems mentioned above may impact our results of operations significantly. Theseaccounting policies are described at relevant sections in this discussion andanalysis and in the notes to the consolidated financial statements included inthis report.

 

**ForwardLooking Statements**

 

This report contains forward looking statements within the meaning ofthe Private Securities Litigation Reform Act of 1995.  Forward looking statements can be identified by the use of wordslike “believes,” “could,” “possibly,” “anticipates,” “estimates,” “projects,”“expects,” “may,” “will,” “should,” “intend,” “plan,” “consider” or thenegative of these expressions or other variations, or by discussions ofstrategies that involve risks and uncertainties.  The Company based these forward looking statements on its currentexpectations and projections about future events and information currentlyavailable to it.  Although the Companybelieves that the assumptions for these forward looking statements arereasonable, any of the assumptions could prove to be inaccurate.  The Company’s actual results could differmaterially from those anticipated in the forward looking statements due to risks,uncertainties or actual events differing from the assumptions underlying thesestatements.

 

**Item3****.  Quantitative and Qualitative DisclosuresAbout Market Risk.**

 

The Companyhas no market risk sensitive instruments.

 

**Item4****. Controls andProcedures**.

 

Our principal executive officer, principal financial officer, and principal operating officer have evaluated the effectiveness of our “disclosure controls and procedures,” as that term is defined in Rule 15d-14(c) of the Securities Exchange Act of 1934 (the “Exchange Act”), within 90 days of the filing date of this Quarterly Report on Form 10-Q. Based on their evaluation, the principal executive officer, principal

 

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financial officer, and principal operating officer concluded that our disclosure controls and procedures are effective to ensure that information we are required to disclose in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and include controls and procedures designed to ensure that information required to be disclosed by us in those reports is accumulated and communicated to our management, including our principal executive officer, principal financial officer, and principal operating officer as appropriate to allow timely decisions regarding required disclosure.

 

There were no significant changes in our internal controls or in other factors that could significantly affect these controls subsequent to the date of the evaluation.

 

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**PART II – OTHERINFORMATION**

 

**Item 6****.  Exhibits and Reports on Form 8-K.**

** **

(a)           Exhibits.

 

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.

 

(b)           Reports on Form 8-K.

 

Theregistrant did not file any reports on Form 8-K for the quarter endedJune 30, 2003.

 

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**SIGNATURES**

 

Pursuant to the requirements of theSecurities Exchange Act of 1934, the registrant has duly caused this report tobe signed on its behalf by the undersigned thereunto duly authorized.

 
|                            |   |   | MEDICAL CAPITAL MANAGEMENT, INC.                                  |
|---------------------------------|--------|--------|-------------------------------------------------------------------|
|                            |   |   |
|                            |   |   |
| Date:  March 29, 2004 |   | By     | /s/  Sidney M. Field                                              |
|                            |   |   | Sidney M. Field, President, Chief Executive  Officer and Director |
|                            |   |   |
|                            |   |   |
| Date:  March 29, 2004 |   | By     | /s/  Alan Meister                                                 |
|                            |   |   | Alan Meister, Chief Accounting Officer and  Treasurer             |
|                            |   |   | (Chief Financial Officer)                                         |

 

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Exhibit Index

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.

 

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