** **

**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 March 31, 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 ofApril 30, 2003, there were 2,000 shares of the registrant’s sole class ofcommon stock issued and outstanding.

 

 

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Medical Capital Management, Inc.

Form 10-Q

Index

 
| PART I – FINANCIAL INFORMATION |                                                                                        |
|-------------------------------------|---------------------------------------------------------------------------------------------|
|                                |                                                                                        |   |
| Item 1.                             | Financial Statements (unaudited)                                                            |   |
|                                |                                                                                        |   |
|                                | Balance  Sheets as of March 31, 2003 and December 31, 2002                        |   |
|                                |                                                                                        |   |
|                                | Statements of Income (Operations) for the  three months ended March 31, 2003 and 2002  |   |
|                                |                                                                                        |   |
|                                | Statements of Cash Flows for the three  months ended March 31, 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

----

 

**MEDICALCAPITAL MANAGEMENT, INC.**

**BALANCE SHEETS**

 
|                                                                                                 |   | **March 31,  2003** |       | **December 31,  2002** |       |
|------------------------------------------------------------------------------------------------------|--------|--------------------------|------------|-----------------------------|------------|
|                                                                                                 |   | **(unaudited)**          |       |                        |       |
| ASSETS                                                                                               |   |                     |       |                        |       |
| Current assets:                                                                                      |   |                     |       |                        |       |
| Cash and cash equivalents                                                                            |   | $                        | 1,734,961  |                        | $          | 1,494,002 |   |
| Medical receivables, net of discount  reserves of $7,342,559                                         |   | 33,001,665               |       | 30,539,011                  |       |
| Receivable from Parent and affiliates, net                                                           |   | 7,340,377                |       | 6,671,753                   |       |
| Account receivables                                                                                  |   | 49,162                   |       | 36,755                      |       |
| Prepaid trustee fee                                                                                  |   | 51,458                   |       | 4,524                       |       |
| Notes receivable – short term                                                                   |   | 1,045,000                |       | 1,045,000                   |       |
| Total current assets                                                                                 |   | 43,222,623               |       | 39,791,045                  |       |
|                                                                                                 |   |                     |       |                        |       |
| Notes receivable – long term, net of  deferred income on notes of $53,389                       |   | 5,518,996                |       | 4,232,127                   |       |
| Total assets                                                                                         |   | $                        | 48,741,619 |                        | $          | 44,023,172 |   |
|                                                                                                 |   |                     |       |                        |       |
| LIABILITIES AND STOCKHOLDER’S DEFICIT                                                           |   |                     |       |                        |       |
|                                                                                                 |   |                     |       |                        |       |
| Current liabilities:                                                                                 |   |                     |       |                        |       |
| Accrued expenses – trade                                                                        |   | $                        | 210,359    |                        | $          | 108,193 |   |
| Due to medical providers                                                                             |   | 68,822                   |       | 150,070                     |       |
| Interest payable, net                                                                                |   | 360,517                  |       | 399,798                     |       |
| Notes payable – current                                                                         |   | 23,651,000               |       | 21,295,000                  |       |
| Total current liabilities                                                                            |   | 24,290,698               |       | 21,953,061                  |       |
|                                                                                                 |   |                     |       |                        |       |
| Notes payable - long term, net of deferred  offering costs of $119,319 and commissions of $2,651,980 |   | 31,234,701               |       | 28,232,625                  |       |
| Total liabilities                                                                                    |   | $                        | 55,525,399 |                        | 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                                                                                  |   | (6,783,800               | )          | (6,162,534                  | )          |
| Total stockholder’s deficit                                                                     |   | (6,783,780               | )          | (6,162,514                  | )          |
| Total liabilities and stockholder’s deficit                                                     |   | $                        | 48,741,619 |                        | $          | 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)**

 
|                                                                                              |   | **Three  months  ended  March 31, 2003** |      | **Three  months  ended  March 31, 2002** |   |
|---------------------------------------------------------------------------------------------------|--------|-----------------------------------------------|-----------|-----------------------------------------------|--------|
|                                                                                              |   | **(unaudited)**                               |      | **(unaudited)**                               |   |
| DISCOUNT REVENUES:                                                                                |   |                                          |      |                                          |   |
| Discount fees, net of change in discount  reserves $(269,700), including related party fees of $0 |   | $                                             | 1,421,561 |                                          | $      | 902,243 |   |
| Administrative income                                                                             |   | 14,998                                        |      | —                                        |   |
| Total revenues                                                                                    |   | 1,436,559                                     |      | 902,243                                       |   |
| COST OF REVENUES:                                                                                 |   |                                          |      |                                          |   |
| Administration expense, related party                                                             |   | 263,253                                       |      | 407,124                                       |   |
| GROSS PROFIT                                                                                      |   | 1,173,306                                     |      | 495,119                                       |   |
|                                                                                              |   |                                          |      |                                          |   |
| OPERATING EXPENSES:                                                                               |   |                                          |      |                                          |   |
| Interest expense, net                                                                             |   | 1,752,258                                     |      | 596,173                                       |   |
| Advertising                                                                                       |   | 14,188                                        |      | 88,731                                        |   |
| Professional services                                                                             |   | 51,720                                        |      | 60,647                                        |   |
| Service fees, related party                                                                       |   | 54,094                                        |      | 25,524                                        |   |
| Legal expenses                                                                                    |   | 58,552                                        |      | 21,023                                        |   |
| Investor relations fees, related party                                                            |   | —                                        |      | —                                        |   |
| Travel and entertainment                                                                          |   | 153,093                                       |      | 18,173                                        |   |
| Sales commissions, related party                                                                  |   | —                                        |      | —                                        |   |
| Management fees, related party                                                                    |   | —                                        |      | —                                        |   |
| Trustee fees                                                                                      |   | 14,816                                        |      | 9,049                                         |   |
| Directors’ fees                                                                              |   | 11,000                                        |      | 11,000                                        |   |
| Bank charges                                                                                      |   | 36,579                                        |      | 2,460                                         |   |
| Copying and printing                                                                              |   | 5,878                                         |      | 1,181                                         |   |
| Occupancy                                                                                         |   | 5,385                                         |      | —                                        |   |
| Other                                                                                             |   | 1,880                                         |      | 2,534                                         |   |
| Total operating expenses                                                                          |   | 2,159,443                                     |      | 836,495                                       |   |
|                                                                                              |   |                                          |      |                                          |   |
| INCOME (LOSS) BEFORE TAXES                                                                        |   | (986,137                                      | )         | (341,376                                      | )      |
| Provision (benefit) for income tax, related  party                                                |   | (364,871                                      | )         | (25,468                                       | )      |
| NET INCOME (LOSS)                                                                                 |   | $                                             | (621,266  | )                                             | $      | (315,908 | ) |
| Weighted average number of common shares  outstanding – basic and diluted                    |   | 2,000                                         |      | 2,000                                         |   |
|                                                                                              |   |                                          |      |                                          |   |
| Net loss per common share – basic and  diluted                                               |   | $                                             | (310.63   | )                                             | $      | (157.95 | ) |

 

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

 

3

----

 

**MEDICALCAPITAL MANAGEMENT, INC.**

**STATEMENTS OF CASHFLOWS**

 
|                                                                                          |   | **Three  months  ended  March 31, 2003** |      | **Three  months  ended  March 31, 2002** |   |
|-----------------------------------------------------------------------------------------------|--------|-----------------------------------------------|-----------|-----------------------------------------------|--------|
|                                                                                          |   | **(unaudited)**                               |      | **(audited)**                                 |   |
|                                                                                          |   |                                          |      |                                          |   |
| Cash flows used for operating activities:                                                     |   |                                          |      |                                          |   |
| Net income (loss)                                                                             |   | $                                             | (621,266  | )                                             | $      | (315,908 | ) |
| Adjustments to reconcile net income to net  cash provided by (used for) operating activities: |   |                                          |      |                                          |   |
| Amortization of deferred offering costs and  commissions                                      |   | 527,226                                       |      | 223,588                                       |   |
| Amortization of prepaid trustee fee                                                           |   | 14,816                                        |      | 9,049                                         |   |
| Changes in assets and liabilities:                                                            |   |                                          |      |                                          |   |
| Increase in medical receivables                                                               |   | (2,462,654                                    | )         | (5,483,520                                    | )      |
| Increase in interest receivable                                                               |   | (79,240                                       | )         | 6,410                                         |   |
| Increase in due from (to) Parent and  affiliates                                              |   | (668,624                                      | )         | (77,389                                       | )      |
| Increase in accounts receivable                                                               |   | (12,407                                       | )         | —                                        |   |
| Increase in prepaid trustee fees                                                              |   | (61,750                                       | )         | (54,292                                       | )      |
| Increase in accrued expenses – trade                                                     |   | 102,166                                       |      | 32,829                                        |   |
| Increase in due to medical providers                                                          |   | (81,248                                       | )         | —                                        |   |
| Increase in interest payable                                                                  |   | 39,960                                        |      | 66,216                                        |   |
| Net cash used for operations                                                                  |   | (3,303,021                                    | )         | (5,593,017                                    | )      |
|                                                                                          |   |                                          |      |                                          |   |
| Cash flows used for investing activities:                                                     |   |                                          |      |                                          |   |
| Increase in notes receivables                                                                 |   | (1,286,869                                    | )         | —                                        |   |
| Net cash used for investing activities                                                        |   | (1,286,869                                    | )         | —                                        |   |
|                                                                                          |   |                                          |      |                                          |   |
| Cash flows from financing activities:                                                         |   |                                          |      |                                          |   |
| Proceeds from issuance of debt, net                                                           |   | 5,448,000                                     |      | 8,853,000                                     |   |
| Payments on offering costs and commissions                                                    |   | (617,150                                      | )         | (669,826                                      | )      |
| Payment of dividend, related party                                                            |   | —                                        |      | (1,250,000                                    | )      |
| Proceeds from sale of common stock                                                            |   | —                                        |      | —                                        |   |
| Proceeds from paid-in capital                                                                 |   | —                                        |      | —                                        |   |
| Net cash provided by financing activities                                                     |   | 4,830,850                                     |      | 6,933,174                                     |   |
| Net increase in cash and cash equivalents                                                     |   | 240,960                                       |      | 1,340,157                                     |   |
| Cash and cash equivalents at beginning of  year                                               |   | 1,494,001                                     |      | 2,093,897                                     |   |
| Cash and cash equivalents at end of year                                                      |   | $                                             | 1,734,961 |                                          | $      | 3,434,054 |   |
|                                                                                          |   |                                          |      |                                          |   |
| Supplemental disclosure of cash flow items:                                                   |   |                                          |      |                                          |   |
| Income taxes paid                                                                             |   | $                                             | —    |                                          | $      | — |   |
| Interest paid                                                                                 |   | $                                             | 1,319,996 |                                          | $      | 546,246 |   |

 

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

 

4

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**MEDICALCAPITAL MANAGEMENT, INC.**

 

**NOTES TO FINANCIAL STATEMENTS**

 

**March 31, 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, whichrepresents the actual amount that the Company believes is collectible on thereceivable.  The Company determines itsinitial 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 fiscal quarter,the contractual discount fee is recognized as income. Discount fee pricing isbased on a historical analysis of the seller’s accounts receivable collectionperformance, risk criteria and the number of days the receivable is outstandingwhen purchased, in the aggregate.  Thediscount fee is calculated on a batch-by-batch basis based on this analysis asthe estimated collection period of the receivables in the batch.  Although the amount of the discount iscalculated at the beginning of each purchase transaction, the discount revenueis deferred until realized.

 

This discount revenue is deferred into a “discount reserve” that theCompany continually updates, and is recognized upon collection for amounts inexcess of the net advance on a per client basis. The Company anticipates thereceivables upon which these reserves are based to be fully collectable.Therefore, this reserve is considered a timing adjustment. As of March 31,2003 and December 31, 2002, this reserve was $7,342,559 and $7,612,259,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 a seller.  Then, once the Company has funds available,the receivables as well as the rights, title and interest in the contractualrelationship between the seller and parent are sold to the Company by MedicalCapital Holdings. For these inter-company sales, the receivables are sold tothe Company at a price generally equal to 85-95% of the sum of the total amountadvanced to the seller of the receivable plus the discount fee, less anycollections already received on the receivable. To the extent the Company hassufficient funds available, the Company will purchase receivables directly froma seller without first being purchased by Medical Capital Holdings. MedicalCapital Corporation makes the determination as to whether the Company purchasesreceivables from the Company’s affiliates or directly from the seller. MedicalCapital Corporation may also direct the sale of receivables from one of theCompany’s affiliates to the Company, or from the Company to one of itsaffiliates 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 March 31, 2003 and December 31, 2002, medicalreceivables purchased by the Company from four providers amounted toapproximately 77.5% and 78%, 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 receivablespurchased from that seller.  Receivablesare posted on a receivable-by-receivable basis, and reported on a batchbasis.  The receivables are alsomonitored by tracking the entire pool of batches for a seller to determine theadequacy of the seller’s reserve account. The Company typically tries to maintain an overall seller reserve of10-25% of the ENR for each seller’s pool of receivables depending on variouscriteria determined through the underwriting process and collection experienceof the seller’s receivables.  If aseller’s reserve account is insufficient on a pool basis, an adjustment is madeto reduce the initial purchase amount on future batches of receivablespurchased from that seller, which increases the amount of each batch allocatedto the seller’s reserve account. Although the Company has the right under itspurchase agreement with the seller to reduce the percent advanced on futurepurchases, the Company has not done so for competitive reasons. However, theCompany has withheld a portion of the advance on future purchases in order tooffset uncollected receivables, which has the effect of reducing the advanceamount percentage on future purchases. In addition, under the terms of the Company’s purchase agreement witheach seller, any amounts collected in excess of the ENR are allocated to thereserve account of the seller to increase that seller’s reserve balance. If theseller is in compliance with the terms of the purchase agreement and all of itsbatches of receivables are collected on time, the Company will return to theseller all collections for the amounts allocated to the seller reserve accountthat exceed 25% of the outstanding balance of the seller’s receivables,calculated on a monthly basis.  Inaddition, if the Company ceases to purchase receivables from a seller, once thatseller’s outstanding receivables are collected in full, the Company will returnany collections, 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 March 31, 2003 and December 31,2002, the amount collected (for all sellers) in excess of their respectivereserve accounts was  $68,822 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 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 March  31, 2003 andDecember 31, 2002, this reserve was $7,342,559, 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 three months ended March  31,2003  and 2002, no reserves for losseswere 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 March 31, 2003and December 31, 2002. After the batch is closed, the seller is chargedback a withholding of the next purchase advance to make up the shortfallagainst the seller’s bad debt reserves or the seller substitutes a newreceivable 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 March 31, 2003, andDecember 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 three months ended March 31, 2003 and 2002, the Companycapitalized commissions of $574,686 and $1,505, respectively, and amortized$471,091 and $87, 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 March 31, 2003and 2002, the Company’s income tax benefit was $364,871 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) is comprised of the following:

 
|                      |   | **2003** |     | **2002** | ** ** |
|---------------------------|--------|----------|----------|----------|------------|
|                      |   |     |     |     |       |
| Current - federal         |   | $        | (364,871 | )        | $          | (703,116 | ) |
| Deferred - federal        |   | —   |     | —   |       |
| Total provision (benefit) |   | $        | (364,871 | )        | (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

 

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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

 

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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  March 31,  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)                      |   | 5,572,385                       |      | 4,294,127                          |   |
| Gross short term and long notes receivable                                                 |   | $                               | 6,617,385 |                               | $      | 5,339,127 |   |
| Less: deferred income on notes                                                             |   | 53,389                          |      | 62,000                             |   |
| Net short term and long term notes  receivable                                             |   | $                               | 6,563,996 |                               | $      | 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. On November 15, 2002, the Companyentered into a new loan agreement with the borrower. The new agreement, atroubled debt restructuring, called for a $2,572,000 increase in the originalloan amount of $3,000,000 to be disbursed in December 2002 andFebruary 2003 in accordance with the loan agreement. Principal is to berepaid in various installments in accordance with the loan agreement with thebalance of the loan payable on December 31, 2005. The repaymentschedule calls for annual principal payments of $675,000 in 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 three months ended March 31, 2003 and 2002, the Companypaid and capitalized deferred offering costs of $54,978 and $10,250,respectively, and amortized $29,768 and $31,397, respectively. The amortizationwas included in the interest expense during the applicable period.

 

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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**         |   | **March 31,  2003** |       | **December 31,  2002** |   |
|-------------------------------------------------|--------|------------|------------|----------------------------|--------|--------------------------|------------|-----------------------------|--------|
| Class A                                         |   | 9.00       | %          | 1 year from issuance date  |   | $                        | 4,584,000  |                        | $      | 4,606,000 |   |
| Class A                                         |   | 8.00       | %          | 1 year from issuance date  |   | 13,481,000               |       | 12,429,000                  |   |
| Class B                                         |   | 9.75       | %          | 2 years from issuance date |   | 3,163,000                |       | 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 |   | 12,569,000               |       | 12,549,000                  |   |
| Total face value of notes payable               |   | $          | 57,657,000 |                       | $      | 52,209,000               |       |
| Less unamortized offering costs and commissions |   | (2,771,299 | )          | (2,681,375                 | )      |
|                                            |   |       |       |                       |   | 54,885,701               |       | 49,527,625                  |   |
| Less current maturities                         |   | 23,651,000 |       | 21,295,000                 |   |
|                                            |   |       |       |                       |   | $                        | 31,234,701 |                        | $      | 28,232,625 |   |

 

The maturities of notes payable as ofMarch 31, 2003 are as follows:

 
|   |   |   |   | 2003   |   | $          | 17,934,000 |   |   |   |
|--------|--------|--------|--------|--------|--------|------------|------------|--------|--------|--------|
|   |   |   |   | 2004   |   | 15,128,000 |       |   |   |
|   |   |   |   | 2005   |   | 9,885,000  |       |   |   |
|   |   |   |   | 2006   |   | 14,710,000 |       |   |   |
|   |   |   |   |   |   | $          | 57,657,000 |   |   |   |

 

As of March 31, 2003, the Company’s notes were secured by medicalreceivables with an expected net receivable outstanding balance of $54,310,379,by notes receivable of $6,617,385, and by cash and cash equivalents of$1,734,961, for a total collateral amount of $62,662,725.

 

**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 three months ended March 31, 2003 andfrom inception to March 31, 2003.

 

 
|                                                   |   | **For the  three  months ended  March 31, 2003** |       | **From inception  to  March 31, 2003** |   |
|--------------------------------------------------------|--------|-------------------------------------------------------|------------|---------------------------------------------|--------|
| Direct purchases from third parties during  the period |   | $                                                     | 6,221,107  |                                        | $      | 41,991,840 |   |
| Purchases from affiliates during the period            |   | 6,599,710                                             |       | 48,815,146                                  |   |
| Total purchases during the period                      |   | $                                                     | 12,820,817 |                                        | $      | 90,806,986 |   |

 

As of March 31, 2003, the Company had anoutstanding ENR balance, net of collections, of $55,110,504. The following tablereconciles the ENR amounts to the medical receivable oustanding on the balancesheet.

 
|                                            |   | **For the three  months ended  March 31, 2003** |       | **From inception  to  March 31, 2003** |       |
|-------------------------------------------------|--------|------------------------------------------------------|------------|---------------------------------------------|------------|
| ENR purchased                                   |   | $                                                    | 12,820,817 |                                        | $          | 90,806,986 |   |
| Less: collections                               |   | 9,630,025                                            |       | 44,331,012                                  |       |
| Plus: excess collections due and paid to seller |   | 138,136                                              |       | 800,126                                     |       |
| ENR balance                                     |   | 3,328,928                                            |       | 47,276,204                                  |       |
| Less: deferred purchase price on purchases      |   | 1,135,974                                            |       | 6,662,280                                   |       |
| Gross medical receivable                        |   | 2,192,954                                            |       | $                                           | 40,613,924 |   |
| Less: net change in discount reserve            |   | (269,700                                             | )          | 7,612,259                                   |       |
| Plus: beginning balance                         |   | 30,539,011                                           |       | 0                                           |       |
| Net medical receivable                          |   | $                                                    | 33,001,665 |                                        | $          | 33,001,665 |   |

 

As of March 31, 2003 and December 31, 2002, the Company’smedical receivables included Medicare and Medicaid claims of $2,763,366 or5.0%, and  $4,822,347, or 8.9%,respectively of the total ENR balance of the receivables.

 

The following tableshows a roll-forward summary of the deferred seller’s reserve account frominception to March 31, 2003 and for the three months ending March 31,2003.

 
|                                      |   | **For the three  months ended  March 31, 2003** |    | **From inception  to  March 31, 2003** |   |
|-------------------------------------------|--------|------------------------------------------------------|---------|---------------------------------------------|--------|
| Beginning Balance                         |   | $                                                    | 536,117 |                                        | $      | 0 |   |
| Plus: deferred purchases                  |   | 1,557,317                                            |    | 6,662,280                                   |   |
| Less: withholdings applied to collections |   | 307,875                                              |    | 990,255                                     |   |
| Less: unidentified collections applied    |   | 1,028,164                                            |    | 4,402,711                                   |   |
| Less: collections remitted to seller      |   | 219,384                                              |    | 731,303                                     |   |
| Ending Balance                            |   | $                                                    | 538,011 |                                        | $      | 538,011 |   |

 

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From inception toMarch 31, 2003, $731,303 was remitted to the sellers from the sellerreserve accounts. The amounts remitted were 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                          |    |
| Total remitted to sellers                           |   | $                                | 731,303 |   |

 

As ofMarch 31, 2003 and December 31, 2002, $69,822 and $150,070,respectively, was due to sellers from 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 three months ended March 31, 2003 and 2002, MCC wascompensated for administration of the healthcare receivables which the Companypurchased in the amounts of $263,253 and $407,124, respectively. For the threemonths ended March 31, 2003 and 2002, MTS was compensated for servicing the Company’s receivables in theamounts of $54,094 and $25,524, respectively.

 

For the three months ended March 31, 2003 and 2002, the Companypurchased medical receivables of various providers from its Parent andaffiliates with a book value of $1,239,904 and $3,354,365, respectively, forwhich it paid a consideration of $1,239,904 and $3,015,141, respectively, incash with the balance included in the calculation of discount revenue earnedand reserved (deferred).

 

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 85-95% of the sum of the total amount advanced tothe 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 the Company’saffiliates or directly from the seller. MCC may also direct the sale ofreceivables from one of the Company’s affiliates to the Company, or from theCompany to one of its affiliates as a method of asset/liability management andto attempt to maintain

 

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diversification in the Company’s investment portfolio. When the Companypurchases receivables from its affiliates, it purchases all rights, title andinterest in the receivable that the affiliate owned, including reserve amounts.Moreover, the Company purchases medical receivables from direct sellers oraffiliates of the Company at fair value. Consequently, management believes that the Company’s results of operationsare not impacted whether the Company purchases receivables directly from theseller or from one of the Company’s affiliates.

 

**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 threemonths ended March 31, 2003 and 2002, the Company prepaid trustee fees of$0 and $54,292, respectively, and amortized trustee fees of $14,816 and$14,188, 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 March 31, 2003 andDecember 31, 2002, there were no common stock equivalents.

 

**11. SignificantAgreements**

 

The Company has entered into several broker-dealer agreements for the purposeof offering, selling, and distributing certain secured notes of the Company ona best efforts basis. The effective term of each of the broker-dealeragreements is generally for one year.

 

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**Item2.  Managements Discussion and Analysisof Financial Condition and Results of Operations**

**March 31,2003**

**(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 calculations relatedto receivables are based on the ENR of the receivable, not the face amount ofthe receivable. The following are aging tables of the Company’shealthcare receivables on the ENR basis as of March 31, 2003, and forDecember 31, 2002:

 
| **As  of March 31,  2003****Aging In Days(1)** |   | **Receivables****In Open Batches(2a)** |       | **Uncollected****Receivables  (Assigned A Value  Of Zero)(3)** |   | **Total Receivables** |   |
|-----------------------------------------------------|--------|----------------------------------------|------------|----------------------------------------------------------------|--------|-----------------------|--------|
| 0-60                                                |   | $                                      | 11,950,298 |                                                           | $      | 0                     |   | $ | 11,950,298 |   |
| 61-120                                              |   | 13,859,849                             |       | 0                                                              |   | 13,859,849            |   |
| 121-180                                             |   | 7,681,183                              |       | 133,887                                                        |   | 7,815,070             |   |
| 181-240                                             |   | 9,132,530                              |       | 260,001                                                        |   | 9,392,531             |   |
| 241-270                                             |   | 3,164,520                              |       | 116,866                                                        |   | 3,284,386             |   |
| 271-360                                             |   | 4,232,627                              |       | 379,094                                                        |   | 4,611,721             |   |
| Over 360                                            |   | 1,320,154                              |       | 2803,030                                                       |   | 4,123,184             |   |
| Total ENR                                           |   | $                                      | 51,341,161 |                                                           | $      | 3,692,878             |   | $ | 55,037,039 |   |

 
| **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 $3,769,343on March 31, 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.  Subsequent cash collections of thesereceivables during the period of January 1, 2003 to March 31, 2003was $ 1,306,586.76 of which $1,208,163.55 was applied to close batches ofpurchased receivables.

 

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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 the initialpurchase amount and the discount.  Thisis the batch seller’s reserve for funds that could be returned to the sellerafter claims are collected, if contractual terms are met by the seller.  This seller reserve is rolled up into theoverall 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 theseller’s reserve account.  Although theCompany has the right under its purchase agreement with the seller to reducethe percent advanced on future purchases, the Company has not done so forcompetitive reasons.  However, theCompany has withheld a portion of the advance on future purchases in order tooffset uncollected receivables, which has the effect of reducing the advanceamount percentage on future purchases. In addition, under the terms of the Company’s purchase agreement witheach seller, any amounts collected in excess of the ENR are allocated to thereserve account of the seller to increase that seller’s reserve balance.  If the seller is in compliance with theterms of the purchase agreement and all of its batches of receivables arecollected on time, the Company will return to the seller all collections forthe amounts allocated to the seller reserve account that exceed 25% of theoutstanding balance of the seller’s receivables, calculated on a monthlybasis.  In addition, if the Companyceases to purchase receivables from a seller, once that seller’s outstandingreceivables are collected in full, the Company will return any collections, aswell as all rights, title and interest in the receivables allocated to thereserve account to the seller.

 

Usually, within a period determined by the 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 the receivableand attempts to collect it.  If thereceivable is subsequently collected, the Company allocates those collectionsto the seller’s reserve account under the terms of its purchase agreement withthe seller. As of March 31, 2003 and December 31, 2002, the amountcollected (for all sellers) in excess of their respective reserve accountswas  $68,822 and $150,070, respectively.

 

*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 the ENRamount, the Company recognizes the seller’s forfeited deferred purchase priceas part of its discount revenue. As of March  31, 2003 andDecember 31, 2002, this reserve was $7,342,559 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 three monthsended March  31, 2003  and 2002, noreserves for losses were needed.

 

**Resultsof Operations for the Three Months Ended March 31, 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 threemonths ended March 31, 2003, the Company purchased medical receivablescarrying an estimated net realizable value (“ENR”) of $12,820,817 and earneddiscount fees on these purchases of $1,151,861, including related partydiscount fees of $0 from its Parent and affiliates. During the same period, theCompany also earned $14,998 in administration income.

 

For the three months ended March 31, 2002, the Company purchasedmedical receivables carrying an estimated net realizable value (“ENR”) of$8,432,415 and earned discount fees on these purchases of $902,243, includingrelated party discount fees of $479,555 from its Parent and affiliates. Duringthe same period, the Company did not earn any administration income.

 

As of March 31, 2003 the Company held $7,342,559 in discountreserves which reduced its discount revenue. The Company anticipates the receivables upon which these reserves arebased to be fully collectible and the discount fee to be earned within theprovider contract period. A summary of the changes in the discount reserve forthe company from inception to March 31, 2003, on a gross basis is asfollows:

 
|                            |   | **For three****months  endedMarch 31,  2003** |      | **For three****months  ended**

**March 31, 2002** |   | **Inception to****March 31,  2003** |   |
|---------------------------------|--------|----------------------------------------------------|-----------|---------------------------------------------------------|--------|------------------------------------------|--------|
| Beginning Balance               |   | $                                                  | 1,243,000 |                                                    | $      | 195,836                                  |   | $ | 0 |   |
| Deferred income on purchases    |   | 802,252                                            |      | 422,688                                                 |   | 8,923,002                                |   |
| Less: amortized deferred income |   | 1,071,952                                          |      | 353,524                                                 |   | 7,949,702                                |   |
| Ending Balance                  |   | $                                                  | 973,300   |                                                    | $      | 265,000                                  |   | $ | 973,300 |   |

 

***Gross Profit***.The gross profit during the three months ended March 31, 2003 was$1,173,306, which arose from gross discount revenues of $1,151,861 less thechange in discount reserves of $(269,700), plus $14,998 in administrationincome, less the administration expense incurred of $263,253. Theadministration expense, related party, was 2.1% of the total ENR of purchases.

 

The gross profit during the three months ended March 31, 2002 was$495,119, which arose from gross discount revenues of $971,407, less the changein discount reserves of $69,164, and administration expense incurred of$407,124. The administration expense, related party, was 4.8% of the total ENR.

 

***Operating Expenses***.  The Company’s total operating expenses forthe three months ended March 31, 2003, were $2,159,443. Expenses consistedprimarily of $1,752,258 in interest expense, which consists of interest expenseof $1,444,347 plus amortized commissions of $497,458 and amortized deferredoffering cost of $29,768 less interest earned of $219,315. Interest earnedincluded $214,527 on the Company’s gross receivables of $6,117,385 from variousmedical providers, and $4,788 on cash and

 

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cash equivalents. The Company also incurred $153,093 in travel andentertainment expenses, professional services of $51,720, service fees of$54,094 (related party), and legal fees of $58,552.

 

For the three months ended March 31, 2002, the Company’s totaloperating expenses were $836,495. Expenses consisted primarily of $596,173 ininterest expense, which consists of interest expense of $547,065 plus amortizedcommissions of $192,191 and amortized deferred offering cost of $31,391 lessinterest earned of $174,480. Interest earned included $163,301 on the Company’snotes receivables of $4,045,000 from various medical providers, and $11,179 oncash and cash equivalents. The Company also incurred $88,731 in advertisingexpense, which is expensed as incurred, professional services of $69,647,service fees of $25,524 (related party), and legal fees of $21,023.

 

***Income Tax Benefit***.  For the three months ended March 31,2003 and 2002, the benefit for income taxes was $364,871 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 $621,266 orbasic and diluted net loss per common share of $310.63 for the three monthsended March 31, 2003. The net loss of the Company resulted primarily fromgross profit of $1,173,306 on the purchase of medical receivables being lessthan administration and operating expenses. The Company had anticipated greateryear to date sales of its notes from its public offering, which the Companyoffered at attractive interest rates, thereby being able to purchase moremedical receivables and earn greater revenues. The Company anticipates greatersales of its notes in 2003 and expects revenues and profit margin to rise in2003.

 

For the three months ended March 31, 2002, the Company had a netloss of $315,908 or basic and diluted net loss per common share of $157.95.

 

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**

 

Duringthe three months ended March 31, 2003, the Company received $6,941,000 incash from the issuance of secured notes by the Company on its public offering,and received collections on medical receivables of $9,630,025. During the sameperiod, the Company used $10,837,962 of these funds to purchase medicalreceivables, $1,278,258 to fund secured loans to medical providers, and had $1,493,000in notes mature and not reinvest. As of March 31, 2003, the Companymaintained $1,734,961 in cash and cash equivalents, which it seeks to utilizein purchasing additional medical receivables and in the acquisition of otherpossible investments.

 

From the Company’s inception on August 4, 2000 to March 31,2003, the Company has received $60,836,000 from the sale of its notes, andreceived $36,496,608 in collections on medical receivables. Over the sameperiod, the Company used $78,769,332 to purchase medical receivables, and madecash loans on secured property of $6,617,385 to medical providers. The Companyhas had $3,179,000 in notes that have matured and not reinvested sinceinception.

 

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

 

**RelatedParty Transactions**

 

The Medical Capital Holdings Group has substantial experience andsuccess in identifying and evaluating healthcare providers desiring to selltheir healthcare receivables. The Company uses the services and expertise ofMedical Capital Holdings and its subsidiaries to purchase healthcarereceivables. It has entered into contracts with MCC and MTS, affiliatedcompanies, to provide the appropriate system for purchasing and tracking itshealthcare receivables. Reimbursement for these services approximates the coststo these affiliated entities which management believes equals the prevailingmarket rates for comparable services of this nature.

 

For the three months ended March 31, 2003 and 2002, MCC wascompensated for administration of the healthcare receivables which the Companypurchased of $263,253 and $407,124, respectively. For the three months endedMarch 31, 2003 and 2002, and MTS was compensated for servicing theCompany’s receivables of $54,094 and $25,524, respectively.

 

For the three months ended March 31, 2003 and 2002, the Companypurchased medical receivables of various providers from its Parent andaffiliates with a book value of $1,239,904 and $3,354,365, respectively, forwhich it paid a consideration of $1,239,904 and $3,015,141, respectively, incash with the balance included in the calculation of discount revenue earnedand reserved (deferred).

 

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 85-95% of the sum of the total amount advanced tothe 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

 

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Statementamends FASB Statement No. 13, “Accounting for Leases”, to eliminate aninconsistency between the required accounting for sale-leaseback transactionsand the required accounting for certain lease modifications that have economiceffects that are similar to sale-leaseback transactions. The Company does notexpect the 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 (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’s financialposition or results of operations as the Company has not engaged in either ofthese 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

 

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immediatelyto variable interest entities created after January 31, 2003. Theconsolidation requirements apply to older entities in the first fiscal year orinterim period beginning after June 15, 2003. Certain of the disclosurerequirements apply in all financial statements issued after January 31,2003, regardless of when the variable interest entity was established. TheCompany does not expect the adoption to have a material impact to the Company’sfinancial position or results 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 accepted accounting principles in the United States of America.  The preparation of these financialstatements requires the Company to make estimates and assumptions that affectthe reported amounts of assets and liabilities at the date of the financialstatements and the reported amounts of revenues and expenses during thereporting period.  On an on-going basis,the Company evaluates its estimates and judgments, including those related torevenue recognition, financing operations and contingencies andlitigation.  The Company bases itsestimates and judgments on historical experience and on various other factorsthat are believed to bereasonable under the circumstances, the results of which form the basis formaking judgments about the carrying value of assets and liabilities that arenot readily apparent from other sources. Actual results may differ from these estimates under differentassumptions or conditions.  The mostsignificant accounting estimates inherent in the preparation of the Company’sfinancial statements include estimates as to the appropriate carrying value ofspecific assets and liabilities which are not readily apparent from othersources, primarily allowance for doubtful medical receivables, accruals forother costs, and the classification of net operating loss and tax creditcarryforwards 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 7.5%) 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, overallportfolio size, average seller balances, reserve account balances and realestate collateral valuations, if any. A significant variation, particularlylonger periods from the contractual service and collection period, would impactthe ability to recognize deferred revenues and hence impact our results ofoperations. In addition, any changes in the subjective estimated itemsmentioned 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 torisks, uncertainties or actual events differing from the assumptions underlyingthese statements.

 

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**Item 3. Quantitative and Qualitative Disclosures About Market Risk.**

 

The Companyhas no market risk sensitive instruments.

 

**Item 4. Controls and Procedures**.

 

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 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 otherfactors that could significantly affect these controls subsequent to the dateof the evaluation.

 

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**PART II – OTHERINFORMATION**

 

**Item6.  Exhibits and Reports on Form 8-K.**

 

                (a)           Exhibits.

 

                                31.1         Rule13a-14(a)/15d-14(a) Certification.

                                31.2         Rule13a-14(a)/15d-14(a) Certification.

                                31.3         Rule13a-14(a)/15d-14(a) Certification.

                                32.1         Section1350 Certification.

                                32.2         Section1350 Certification.

                                32.3         Section1350 Certification.

 

                (b)           Reportson Form 8-K.

 

Theregistrant did not file any reports on Form 8-K for the quarter endedMarch 31, 2003.

 

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**SIGNATURES**

 

Pursuant to the requirements of the Securities Exchange Act of 1934,the registrant has duly caused this report to be signed on its behalf by theundersigned 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         Rule13a-14(a)/15d-14(a) Certification.

                31.2         Rule13a-14(a)/15d-14(a) Certification.

                31.3         Rule13a-14(a)/15d-14(a) Certification.

                32.1         Section1350 Certification.

                32.2         Section1350 Certification.

                32.3         Section1350 Certification.

 

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