As filed with the Securities and Exchange Commission on January 18, 2001
Registration No. 333-45464
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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PRE-EFFECTIVE AMENDMENT NO. 2
TO
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
MEDICAL CAPITAL MANAGEMENT, INC.
(Name of Registrant as Specified in its Charter)
DELAWARE 6153 88-0473359
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
5190 NEIL ROAD
RENO, NEVADA 89502
(775) 825-8822
(Address and telephone number of principal executive offices
and principal place of business)
SIDNEY M. FIELD, PRESIDENT AND CHIEF EXECUTIVE OFFICER
MEDICAL CAPITAL MANAGEMENT, INC.
2100 SOUTH STATE COLLEGE BLVD.
ANAHEIM, CALIFORNIA 92806
(714) 935-3100
(Name, address, and telephone number of agent for service)
With copies to:
Robert J. Ahrenholz, Esq.
Michael T. Lambert, Esq.
Kutak Rock LLP
717 Seventeenth Street, Suite 2900
Denver, Colorado 80202
(303) 297-2400
Approximate date of commencement of proposed sale to the public: From time
to time as soon as practicable after the effective date of this Registration
Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(d) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THIS REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION ACTING PURSUANT TO SAID
SECTION 8(a) MAY DETERMINE.
================================================================================
<PAGE>
SUBJECT TO COMPLETION DATED JANUARY 18, 2001.
PROSPECTUS
Up to $75,000,000
MEDICAL CAPITAL MANAGEMENT, INC.
REDEEMABLE SECURED NOTES, SERIES I
$1,000 PER NOTE
We are selling $75,000,000 in aggregate principal amount of the redeemable
secured notes, series I, described in this prospectus. There is no minimum
amount of notes that must be sold before we use any of the proceeds. Proceeds
will not be returned to investors if we sell less than all of the $75,000,000 in
notes being offered. The proceeds from the sales of the notes will be paid
directly to us promptly following each sale and will not be placed in an escrow
account. The minimum purchase amount is five notes, which is $5,000 in principal
amount of notes, per investor. This is the initial public offering of the notes
which will be sold in four classes and will have the following terms:
ANNUAL
CLASS STATED MATURITY INTEREST RATE
----- --------------- -------------
Class A 1 year from the date of issuance 9.00%
Class B 2 years from the date of issuance 9.75%
Class C 3 years from the date of issuance 10.25%
Class D 4 years from the date of issuance 10.75%
PER NOTE (1) TOTAL IF ALL NOTES ARE SOLD
------------ ---------------------------
Public offering price $1,000 $75,000,000
Sales commissions (2) $ 75 $ 5,625,000
Maximum proceeds to Medical Capital
Management before expenses $ 925 $69,375,000
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(1) Minimum investment is $5,000. Notes will be issued in denominations of
$1,000.
(2) Assumes an average sales commission of 7.5%. Sales commissions will range
from 3.5% to 9.5% depending on the class of note sold. You will not incur a
direct sales commission because the notes earn interest without deduction
for sales commissions or other expenses.
YOU SHOULD CAREFULLY CONSIDER THE RISK FACTORS BEGINNING ON
PAGE 8 OF THIS PROSPECTUS.
* The notes are secured debt instruments currently senior only to our
outstanding equity securities.
* The notes may be prepaid by us at any time.
* The notes will be automatically renewed at maturity unless you request
payment in cash by giving us notice prior to maturity.
* There currently is no trading market for the notes, we do not anticipate
listing the notes on a national securities exchange and we can not assure
you that a public market for the notes will develop.
* We intend to engage several NASD member broker-dealers to sell the notes.
These broker-dealers will sell the notes on a continuous, best efforts
basis and will receive sales commissions from us ranging from 3.5% to 9.5%
of the principal amount of notes they sell.
* We are a development stage company. Therefore, on the date of this
prospectus we had minimal assets, no revenues and no operating history.
* You may not purchase notes under this prospectus after February 28, 2002.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THE PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The date of this prospectus is ______, 2001.
<PAGE>
PROSPECTUS SUMMARY
THIS SUMMARY HIGHLIGHTS THE KEY INFORMATION CONTAINED IN THIS PROSPECTUS.
BECAUSE IT IS A SUMMARY, IT DOES NOT CONTAIN ALL OF THE INFORMATION YOU SHOULD
CONSIDER BEFORE MAKING YOUR INVESTMENT DECISION. YOU SHOULD READ THE ENTIRE
PROSPECTUS CAREFULLY, INCLUDING THE SECTION TITLED "RISK FACTORS" AND THE
FINANCIAL STATEMENTS AND THE NOTES RELATING TO THOSE STATEMENTS.
MEDICAL CAPITAL MANAGEMENT, INC.
BACKGROUND
We were formed on August 4, 2000. All of our operations to date have been
related to the formation of our business and organization of this offering. We
currently have minimal asets, no revenues and no operating history. Our ability
to commence operations and successfully implement our business plan depends on
us obtaining adequate financial resources through this offering.
OUR COMPANY
We were formed to acquire healthcare receivables. An example of a
healthcare receivable would be the accounts receivable of a doctor's office, or
amounts owed to a doctor's office by its patients and their insurance companies
for medical services performed by the doctors. We intend to acquire these
healthcare receivables at a discount to the face amount of the receivable, or an
amount that is less than what we believe to be the fully collectable amount of
the receivable. We will then attempt to collect the full face amount of the
receivable and retain any profit resulting from the difference, or a
predetermined rate of profit. We also intend to expand our business into areas
related to the healthcare industry.
The objective of our company is to successfully operate a healthcare
financing business for a profit. If this goal is achieved, it will allow us to
provide to you interest income and a return of the capital that you load to us
in order to expand our business. However, we can not assure you that we will
achieve these these objectives.
USE OF NOTE PROCEEDS
The proceeds from the sale of our notes will be used to:
* purchase healthcare receivables;
* provide other forms of lending products secured by assets;
* purchase businesses related to the healthcare industry;
* expand our business; and
* provide funds for general operating purposes, including debt service.
OUR AFFILIATES
While we are a newly incorporated business with no operating history, we do
have several experienced affiliates that have completed offerings of debt
securities backed by healthcare receivables. Our affiliates have sold over
$102,000,000 in debt securities backed by healthcare receivables in the past
five years. In addition, our affiliates will provide underwriting services to us
in connection with our purchase of healthcare receivables. One of our affiliates
will also act as the servicer for the healthcare receivables we purchase and
will track the payments made on the receivables. These affiliates will receive
compensation from us for providing those services. From time to time throughout
this prospectus, the term "we" may also include references to actions performed
on our behalf by these affiliates as the context requires.
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THE MEDICAL CAPITAL HOLDINGS GROUP
We are a wholly owned subsidiary of Medical Capital Holdings, Inc. In
addition to our company, Medical Capital Holdings has other active operating
subsidiaries. We often refer to these companies collectively as the Medical
Capital Holdings group. The following chart shows the organization of Medical
Capital Holdings and its active operating subsidiaries:
<TABLE>
<S> <C>
Individual Medical Capital Holdings, Inc.
Investors / (parent entity)
| / |
0.03% Equity Ownership 99.97% Equity Ownership | 100% Equity Ownership
| / |
| / ------------------------------------------------
| / | | |
| / | | |
Medical Capital Medical Capital Medical Tracking Carlmont Capital
Corporation Management, Inc. Services, Inc. Group, Inc.
(Administrator) (Servicer) d/b/a NHBC
</TABLE>
MEDICAL CAPITAL HOLDINGS, INC. Medical Capital Holdings is our parent
entity and acts as a holding company for its four major operating subsidiaries.
Medical Capital Holdings has been in business since 1996. In addition to the
active operating subsidiaries described above, Medical Capital Holdings owns
various special purpose corporations that were formed for the specific purpose
of acquiring various groups or pools of assets. These special purpose
corporations do not have active business operations, other than holding those
assets.
MEDICAL CAPITAL CORPORATION. Medical Capital Corporation will act as the
administrator for all of our receivable purchases and other lending
transactions. Medical Capital Corporation will essentially run our business by
administering our day to day operations, underwriting and originating our
purchases of healthcare receivables, and performing marketing, sales and client
support functions. Medical Capital Corporation primarily provides services to
companies within the Medical Capital Holdings group. We will compensate Medical
Capital Corporation for underwriting and administering the healthcare
receivables that we purchase.
Medical Capital Corporation has provided services as an administrator since
1994 and is experienced in purchasing and monitoring healthcare receivables
generated by all types of healthcare providers. To date, Medical Capital
Corporation has purchased over $495,000,000 in face amount of receivables on
behalf of companies in the Medical Capital Holdings group. Medical Capital
Corporation's business is operated as a closely held company. Medical Capital
Corporation generally charges companies in the Medical Capital Holdings group
fees for its services that represent the approximate cost to Medical Capital
Corporation of providing those services.
Medical Capital Corporation maintains an Internet website at
http://www.medicalcapital.com. Medical Capital Corporation uses this website as
a marketing tool and solicits the purchase of healthcare receivables from
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potential providers through the website. Because Medical Capital Corporation
will underwrite the healthcare receivables we purchase, some of our purchases of
receivables may be made from providers that Medical Capital Corporation solicits
through its website. Medical Capital Corporation also underwrites purchases of
healthcare receivables for other companies in the Medical Capital Holdings
group, and to a limited extent, for companies outside the Medical Capital
Holdings group. Medical Capital Corporation's website is not part of this
prospectus.
MEDICAL CAPITAL MANAGEMENT, INC. We were formed on August 4, 2000, for the
primary purpose of acquiring healthcare receivables. The address of our
principal executive offices is: 5190 Neil Road, Reno, Nevada 89502. Our
telephone number is: (775) 825-8822.
MEDICAL TRACKING SERVICES, INC. MediTrak will act as the servicer for all
of our accounts receivable transaction data. MediTrak will monitor, track and
post all asset purchases and collections. We will compensate MediTrak for
performing these services for us. MediTrak primarily provides services to
companies within the Medical Capital Holdings group.
MediTrak has been facilitating the manual and electronic tracking of
healthcare receivables since 1997. MediTrak's business is operated as a closely
held company. MediTrak generally charges companies in the Medical Capital
Holdings group fees for its services that represent the approximate cost to
MediTrak of providing those services. We believe the fees MediTrak charges to
companies within the Medical Capital Holdings group are lower than those
non-affiliated third parties would charge for providing similar services. For
services provided to companies outside the Medical Capital Holdings group,
MediTrak generally charges higher rates.
CARLMONT CAPITAL GROUP, INC. NHBC provides medical healthcare claims
processing, PPO re-pricing and negotiated claims settlement services to
insurance companies, third party medical claims administrators and to companies
that self-insure their medical claims. NHBC has been in business since 1987.
NHBC does not actively purchase healthcare receivables and we do not anticipate
that it will provide any services to us.
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SUMMARY OF THE TERMS OF THE OFFERING
NOTES We are offering up to $75,000,000 in principal amount of our
redeemable secured notes, series I. You must purchase at
least $5,000 in principal amount of notes. We will sell the
notes in incremental denominations of $1,000 on a continuous
basis. The notes will be issued in book-entry form only
without physical certificates or coupons.
INTEREST PAYMENTS We will pay interest only on the notes monthly on the tenth
day of the month to the holder of record as of the first day
of the month preceding the month in which the payment date
occurs. Interest will be paid without any compounding. Each
class of notes has a different maturity date and accrues
interest at different rates as shown on the cover page of
this prospectus. We will pay interest on the notes primarily
from proceeds of the healthcare receivables pledged as
collateral as they are collected.
PRINCIPAL In order to receive the principal balance due on a note in
PAYMENTS cash at maturity, you must give notice to us at least 90 but
no more than 120 days prior to maturity. If we do not receive
proper notice, we will renew your note and issue you an
identical note to the one maturing, with the same interest
rate and maturity term as the note that is maturing.
PREPAYMENT We may prepay the outstanding principal balance and accrued
and unpaid interest of any or all of the notes in whole or in
part at any time without any penalty or premium.
COLLATERAL The notes will be secured by the assets that we acquire using
the proceeds from this offering. The notes will also be
secured by the proceeds of the healthcare receivables
previously pledged that are paid before the maturity of the
notes. We will also pledge other amounts as collateral for
the notes, including amounts held from time to time by Zions
First National Bank, the trustee, in various accounts under
the note agreement and our rights under the agreements we use
to acquire healthcare receivables.
The collateral will be pledged to the trustee for your
benefit. The value of the pledged collateral can fluctuate
and may at times be less than 100% of the outstanding
principal amount of the notes. Because we may pledge assets
other than healthcare receivables as collateral, the
percentage of the collateral that consists of healthcare
receivables can change over time.
We can issue additional series of notes in the future under
the note agreement and can also issue securities senior in
right of payment to the notes. For a more detailed
description of the collateral, and how other securities we
may issue can affect the collateral, see the section entitled
"DESCRIPTION OF THE NOTES" in this prospectus.
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USE OF PROCEEDS We currently intend to use the proceeds from the sale of the
notes to purchase healthcare receivables. We may also use the
note proceeds to acquire or originate other receivables
related to healthcare services, like medical equipment loans,
and to make investments in companies and assets that are
related to the healthcare industry. We may also use some of
the proceeds of this offering for general corporate purposes,
including debt service and other general operating expenses.
PLAN OF The notes will be sold on a continuous best efforts basis by
DISTRIBUTION various broker-dealers registered with the National
Association of Securities Dealers, Inc. Each note will be
issued as soon as practicable after each sale. We can not
give you any assurance as to the amount of notes that will be
sold. The notes will be sold at their face value, $1,000 per
note.
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RISK FACTORS
YOUR INVESTMENT IN THE NOTES INVOLVES A HIGH DEGREE OF RISK. IN ADDITION TO
THE OTHER INFORMATION IN THIS PROSPECTUS, YOU SHOULD CAREFULLY CONSIDER THE
FOLLOWING FACTORS IN EVALUATING US AND OUR BUSINESS BEFORE PURCHASING THE NOTES.
RISKS RELATED TO OUR COMPANY
WE ARE NEWLY FORMED AND HAVE NO OPERATING HISTORY, WHICH COULD MAKE IT
DIFFICULT FOR YOU TO EVALUATE OUR BUSINESS.
We were originally organized August 4, 2000. Although some of our
affiliates have been engaged in the acquisition and administration of healthcare
receivables for up to seven years, we have no operating history. As a result, we
may not be able to successfully achieve profitability. The likelihood of our
success must be considered in light of the problems, expenses, and complications
frequently encountered in connection with the development of a new business and
the competitive environment where we operate. Accordingly, our lack of an
operating history makes an effective evaluation of our potential success
difficult. Our viability and continued operations depend upon future
profitability, our ability to generate cash flow from the healthcare receivables
financing industry, and our profitable development of other business
opportunities. We can not assure you that we can successfully implement our
business plan or that it will be profitable once implemented.
OUR LACK OF DIVERSIFIED OPERATIONS AND INVESTMENTS INCREASES OUR EXPOSURE
TO ADVERSE EVENTS OCCURRING IN THE HEALTHCARE INDUSTRY OR WITH ANY ONE PROVIDER.
During at least our first year of operations we anticipate that the
majority of our investments will be made in, and a majority of our income will
be derived from, purchasing healthcare receivables. This lack of diversification
in our operations increases our exposure to the risks of this industry. In
addition, our initial portfolio will be concentrated in receivables purchased
from a limited number of providers. As we sell additional notes and raise
additional proceeds, we will attempt to diversify our portfolio to increase the
number of providers from which we purchase receivables. However, if we are
unable to raise sufficient funds to increase our investments, we may be unable
to achieve an acceptable diversification of our receivables portfolio. This lack
of diversification in the portfolio increases our dependence upon the
performance of any one provider. This increases the risk that inadequate
performance by a provider will materially affect our profitability and our
ability to make principal and interest payments on the notes.
WE COULD BE ADVERSELY AFFECTED BY AN INABILITY TO IMPLEMENT OUR GROWTH
STRATEGY.
Our growth strategy principally depends upon our ability to increase our
purchases of healthcare receivables and other assets related to the healthcare
industry that generate sufficient income and meet our underwriting standards.
This strategy depends, in part, on our ability to attract and retain new
healthcare providers meeting our quality standards in a competitive market. Our
growth also depends on the growth of the businesses of the healthcare providers
from which we purchase receivables, which may be affected by a number of factors
outside our control. If demand for financing in any of the healthcare markets we
will serve declines, we may not be able to attract new providers meeting our
underwriting standards.
IF THE NOTES ARE CHARACTERIZED AS EQUITY INSTEAD OF DEBT, IT WOULD HAVE AN
ADVERSE AFFECT ON OUR BUSINESS.
We believe the notes are structured in a way to constitute debt. Based on
current federal tax laws and various aspects of our company and the notes,
including the fact that securities senior to the notes can be issued without
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substantial limitation, there is a possibility that the IRS could challenge our
characterization of the notes as debt and deem the notes to be equity. If the
notes were characterized as equity, we would not be able to deduct the interest
payments we make on the notes from our taxable income. If we operate our
business at a profit, this would result in an increase in our federal income tax
liability and expense, which would have an adverse affect on our business. For a
description of the federal tax considerations relating to the notes, see the
section entitled "MATERIAL FEDERAL INCOME TAX CONSIDERATIONS" in this
prospectus.
IF A PROVIDER'S BUSINESS FAILS AND THE PROVIDER DECLARES BANKRUPTCY, WE MAY
BE UNABLE TO COLLECT SOME OR ALL OF THAT PROVIDER'S HEALTHCARE RECEIVABLES.
In the past, our affiliates focused their receivable business on small and
middle market healthcare providers. Some of these providers may be unable to
obtain financing from more traditional credit sources or otherwise have limited
financial resources. If one of these providers were to declare bankruptcy, the
bankruptcy trustee might not deem the security interest of Medical Capital
Management to be legally binding on the receivables. While we and our affiliates
will use underwriting criteria and monitoring procedures to attempt to reduce
the higher risks inherent in purchases of receivables from some providers, we
can not assure you that the criteria or procedures we will use will offer
adequate protection against the risk of possible financial instability of a
provider. As a result, collection of amounts due under the healthcare
receivables could be less than we anticipate.
IF ALL OF THE REMEDIES FOR RECOVERING A DEFAULTED HEALTHCARE RECEIVABLE ARE
INADEQUATE, WE MAY NOT HAVE SUFFICIENT FUNDS AVAILABLE TO PAY THE NOTES AS THEY
BECOME DUE.
We may fail to collect funds from the patients' insurance companies,
government agencies or other payors required to pay the receivable. Our ability
to fully recover amounts due under the healthcare receivables may be adversely
affected by, among other things:
* the financial failure of the healthcare providers or the patient's
insurance company;
* the purchase of fraudulent receivables from a provider,
misrepresentations of a provider or a conversion of account proceeds
by providers;
* third-party payor disputes; and
* third-party claims with respect to security interests.
Any of these events could force us to reduce the reserve account balance we
maintain for each seller or seek enforcement of a seller's guarantee, both of
which could prove to be inadequate to fully collect the receivables. Therefore,
there is no assurance that we will not experience losses on healthcare
receivables in the future. These potential future losses may be significant, may
vary from current reserve estimates and could exceed the amount of the balance
allocated to a seller's reserve account. We do not maintain insurance covering
credit losses. In addition, the amount of provisions for losses and the withheld
purchase price on healthcare receivables may be either greater or less than
actual future charge-offs of the healthcare receivables relating to these
provisions. If all of the remedies for recovering a defaulted healthcare
receivable are inadequate, we may not have sufficient funds available to pay the
notes as they become due.
OUR ASSESSMENT OF THE QUALITY OF THE HEALTHCARE RECEIVABLES WE ACQUIRE MAY
BE INACCURATE.
Before we purchase healthcare receivables from a seller, our administrator
will perform an evaluation of the historical collection time and other
characteristics of a group or "batch" of receivables in order to determine
whether they are eligible for purchase under its program. While past collection
records often are a good predictor of likely future results, there is no
guarantee that the initial analysis of the receivables will reflect actual
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future results. There is the risk that the historical performance of healthcare
receivables approved for purchase under our administrator's program will be
different from future collections on the healthcare receivables.
WE WILL HAVE LIMITED OBLIGATIONS TO IDENTIFY DEFECTIVE COLLATERAL AND MAY
NOT BE ABLE TO SUCCESSFULLY REPLACE THE COLLATERAL IF IT IS FOUND TO BE
DEFECTIVE.
We will make representations and warranties to the trustee about the
characteristics of the healthcare receivables pledged to secure the notes.
However, we are under no obligation to attempt to verify whether the collateral
becomes defective once pledged. After the notes are issued, if the trustee
determines that any collateral is defective, we will be required, at our
expense, to replace the pledged receivables that are found not to meet the
representations or warranties. Replacement of these pledged receivables could
result in a loss to us.
We will attempt to limit our exposure to replacement risks through quality
control review of healthcare receivables before they are purchased. Also, the
parties from which we will acquire the healthcare receivables generally will
make representation and warranties about the receivables to us. Although we will
pledge our rights in these agreements to the trustee for the notes, there can be
no assurance that the trustee will be able to successfully enforce any of the
rights under the agreements that we pledge, including any obligation to cure a
breach of representations or warranties or to replace any defective receivables
not meeting the representations and warranties.
COLLECTIONS ON OUR HEALTHCARE RECEIVABLES COULD BE DELAYED.
The portion of the healthcare receivables that we acquire represents
obligations of third parties to pay for healthcare services to patients of
healthcare providers. Our healthcare receivables are paid by third-party payors,
like health maintenance organizations, managed care concerns and other insurers,
large corporations that may be self-insured, other healthcare providers and
government agencies. Because we purchase these types of receivables, we rely on
prompt payments from third-party payors for collections. The healthcare industry
is experiencing a trend toward cost containment, as government and other
third-party payors seek to impose lower reimbursement and utilization rates and
negotiate reduced payment schedules with healthcare providers. These cost
containment efforts could adversely affect the providers' ability to generate
healthcare receivables and our ability to collect those receivables on a timely
basis.
LEGAL RESTRICTIONS MAY PREVENT US FROM COLLECTING RECEIVABLES DIRECTLY FROM
MEDICARE AND MEDICAID.
Federal law generally prohibits payment of amounts owed to healthcare
providers under the Medicare or Medicaid programs to any entity other than the
healthcare provider who is owed the amounts due. Accordingly, as in the case of
non-governmental payors of the receivables, we require that Medicare and
Medicaid proceeds be paid to a segregated lock box account under the control of
the provider and Medical Capital Management. Lock box accounts are deposit
accounts where insurance payments on the healthcare receivables are sent by the
healthcare providers or third parties required to pay the receivables directly
for deposit. However, if a governmental agency refuses to pay a healthcare
receivable, we cannot force collection directly from the government agencies
that are obligated to pay the healthcare receivables owed to us, unless we first
successfully obtain a court order.
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WE ARE DEPENDENT ON KEY PERSONNEL AND MAY BE REQUIRED TO HIRE ADDITIONAL
EMPLOYEES.
We are dependent on a few key individuals, who may not perform their duties
as we expect, or who may leave our company. In addition, our continued expansion
may require us to hire qualified individuals with backgrounds in the healthcare,
finance, securities and insurance industries. It may be difficult to find and
hire these individuals, or retain these employees once hired. We do not maintain
key man life insurance on any officers.
WE ARE IN A HIGHLY COMPETITIVE MARKET WHICH COULD RESULT IN REDUCED
PROFITABILITY.
We compete with numerous commercial banks, diversified finance companies,
secured lenders and specialty healthcare finance companies. Many of these
competitors have greater financial and other resources than us and may have
significantly lower cost of funds because they have greater access to insured
deposits or the capital markets. Moreover, some of these competitors have
significant cash reserves and can better fund shortfalls in collections that
might have a more pronounced impact on companies such as ours. They also have
greater market share.
Some of our competitors may offer better pricing for receivables, be more
timely and responsive in processing healthcare receivable purchases and have
better customer service than we will. Some of our competitors target the same
type of healthcare providers as we will and generally have operated in the
markets we intend to service for a longer period of time. Some of these
companies may also have greater experience and more efficient collection methods
than we might develop. If we are unable to successfully compete with these
companies, our business could be adversely affected.
WE ARE UNDER COMMON CONTROL WITH AFFILIATED COMPANIES WHICH COULD RESULT IN
A CONFLICT OF INTERESTS.
A common management group directs the activities of the companies in the
affiliated group that provides services to us. These companies have also engaged
in financing transactions similar to the sale of the notes. As a result of these
affiliated relationships, conflicts of interests may exist or may arise in the
future. In addition, some of our business transactions with these affiliates
were not negotiated through independent arm's-length negotiations. There can be
no assurance that any conflicts which arise will be resolved in our best
interests or the best interests of the note holders. In addition, there can be
no assurance that there are not now, or may in the future, be unrelated
businesses that might be able to provide similar services to us in a more
efficient, competent and less costly manner, or that our affiliates will be able
to continue to provide services to us. In the event that one of our affiliates
is not able to perform its services, there can be no assurance that a suitable
replacement can be located without incurring substantial expense, or that any
replacement will provide an acceptable quality of services to us.
WE COULD BE ADVERSELY AFFECTED IF WE FAIL TO COMPLY WITH GOVERNMENT
REGULATIONS.
Our healthcare finance business and the businesses and assets that we may
acquire in the future are subject to numerous federal and state laws and
regulations. These restrictions may (1) require us to obtain and maintain
licenses and qualifications, (2) limit the interest rates, fees and other
charges that we are allowed to collect, (3) limit or prescribe other terms of
our receivables arrangements with healthcare providers, and (4) subject us to
potential claims, defenses and rights of offset.
Although we believe that we are currently in compliance with statutes and
regulations applicable to our business, there can be no assurance that we will
be able to maintain compliance without incurring significant expense. The
failure to comply with any current or subsequently enacted statutes and
regulations could have a material adverse effect on us. Furthermore, the
adoption of additional statutes and regulations, changes in the interpretation
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and enforcement of current statutes and regulations, or the expansion of our
business into jurisdictions that have adopted more stringent regulatory
requirements than those in which we currently conduct business could have a
material adverse effect on us.
RISKS RELATED TO THE HEALTHCARE INDUSTRY
CHANGES IN GOVERNMENT HEALTHCARE POLICY, LAW AND REGULATIONS COULD
ADVERSELY AFFECT OUR ABILITY TO COLLECT RECEIVABLES OR REDUCE THE AVAILABILITY
OF RECEIVABLES FOR PURCHASE.
The healthcare industry is subject to evolving political and economic
regulatory constraints that may affect the operations of healthcare
organizations and their profitability. These include proposed regulations and/or
legislation periodically advanced by the state legislatures and Congress, and
regulations issued by federal and state regulatory agencies.
It is not clear at this time what legislation or regulations, if any, will
be adopted or, if adopted, what effect they would have on our business. Some of
these regulations could significantly limit reimbursement under government
healthcare programs and increase the involvement of government agencies and
regulation in the healthcare industry. They could result in changes that include
cutbacks in government healthcare programs, containment of healthcare costs on
an interim basis, including a short-term freeze on prices for healthcare
services, a restructuring of the way Medicare pays for some services, and
greater state flexibility permitted in the administration of Medicaid. These
proposed regulations, or any other changes in the administration or
interpretation of government healthcare programs, could have an adverse effect
on our business or operations.
EXISTING GOVERNMENT REGULATION MAY RESTRICT OUR ABILITY TO COLLECT THE FULL
AMOUNT OF OUR HEALTHCARE RECEIVABLES.
Existing government regulation can adversely affect us through the
potential to reduce the amount of reimbursement paid to the healthcare providers
that sell us receivables. During the past decade, federal and state governments
have implemented legislation designed to control the increase in healthcare
costs and it is anticipated that these legislative initiatives will continue.
Federal regulation of reimbursement rates for medical services has increased. In
addition, the requirements and procedures for Medicaid reimbursement, as
implemented by state Medicaid program administrators, differ from state to
state. We may also be subject to applicable federal and state billing and credit
collection agency laws and regulations. Also, the laws and regulations
pertaining to Medicare and Medicaid reimbursement impose substantial criminal
and civil penalties for the submission of inaccurate or false claims for
billing, for which our sellers may be held liable. There can be no assurance
that current or future government regulations or healthcare reform measures will
not have a material adverse effect on our ability to collect our receivables or
the timing of our collections.
CHANGES IN HMO AND INSURANCE COMPANY PAYMENT AND REIMBURSEMENT PRACTICES
COULD REDUCE THE AVAILABILITY OF RECEIVABLES FOR PURCHASE AND THE DEMAND FOR
RELATED SERVICES.
In addition to governmental initiatives, private reform efforts have been
instituted throughout the healthcare industry, including the capitation of some
healthcare expenditures. Capitation is the pre-payment of a predetermined
monthly fee to healthcare providers for some costs by third-party payors,
typically HMOs and other managed healthcare concerns. The capitation fee is
based on the aggregate number of patients under a healthcare provider's care.
This fee does not vary, regardless of how much time the patient requires, the
number of visits, or the nature of the illness. The healthcare provider then
provides healthcare to these patients when and as needed, and assumes the risk
of whether the capitation fee will cover its costs and provide a profit for all
of the healthcare services it renders. Because some capitation eliminates
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patient billing, it can reduce the provider's healthcare receivables and risk of
collection of fees that are the primary source of our business and cash flow.
There is a risk that this practice will grow, as HMOs expand.
Other possible changes in private healthcare delivery and payment systems
could adversely affect our business. These include employer initiatives like
creating purchasing cooperatives and provider initiatives to integrate hospitals
and physicians into comprehensive delivery systems. Also, management and billing
services may be consolidated by integrated healthcare delivery systems. This
consolidation may result in a decrease in the willingness of providers to sell
healthcare receivables and reduce demand for related billing and collection
services.
RISKS OF AN INVESTMENT IN THE NOTES
OUR ABILITY TO GENERATE CASH TO SERVICE OUR DEBT DEPENDS ON MANY OF THE
FACTORS DISCUSSED ABOVE AS WELL AS OTHERS, MANY OF WHICH ARE BEYOND OUR CONTROL.
Our ability to make payments on and to refinance our debt and to fund other
possible acquisitions of businesses and assets will depend on our ability to
generate cash in the future. This, to some extent, depends on general economic,
financial, competitive, legislative, regulatory and other factors that are
beyond our control. The risks to which our business is subject become more acute
during an economic slowdown or recession because fewer healthcare receivables
may be generated by healthcare providers. In addition, the financial ability of
third parties required to pay the healthcare receivables may be impaired,
resulting in increased credit losses. Further, some of the healthcare providers
for our healthcare receivables are startup or less mature businesses that may be
more susceptible to economic slowdowns or recessions.
We cannot assure you that our business will generate sufficient cash flow
from operations or that future borrowings will be available to us in an amount
sufficient to enable us to service our debt or to fund our other liquidity
needs. In order to pay the principal amount of the notes at maturity, we may
need to refinance all or a portion of our debt, including the notes. We cannot
assure you that we will be able to refinance any of our debt, including the
notes, on commercially reasonable terms or at all.
WE HAVE NO RESTRICTION ON OUR ABILITY TO INCUR ADDITIONAL DEBT.
The note agreement governing your and our rights and obligations relating
to the notes does not restrict our ability to issue additional notes or to incur
other debt. This additional debt may be senior or junior in right of payment to
the notes and may be secured by the collateral that secures the notes as well as
other collateral. Further, we do not have any limitation on the amount or
percentage of indebtedness that we may incur. We expect to continue to purchase
healthcare receivables using the proceeds of debt offerings, like the notes. In
addition, because we intend to expand our business and to acquire or originate
other receivables related to the healthcare industry, we may require additional
capital or other funds for the expansion of our operations. We may obtain these
funds through the sale of the notes or additional debt securities on terms we
can not now predict.
IF THE COLLATERAL SECURING THE NOTES IS INSUFFICIENT AND WE ARE IN DEFAULT
UNDER OUR OBLIGATIONS, SENIOR DEBT HOLDERS WOULD BE ENTITLED TO PAYMENT IN FULL
OUT OF THE GENERAL FUNDS OF THE COMPANY BEFORE WE MAKE ANY ADDITIONAL PAYMENTS
ON THE NOTES, WHICH COULD RESULT IN YOUR NOT BEING PAID THE FULL AMOUNTS DUE ON
THE NOTES.
The note agreement does not restrict our ability to issue additional debt
that is senior in right of payment to the notes. If we issue senior debt and our
business is not successful or we default in payment, the senior debt holders may
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be entitled to payment in full in liquidation of our company before full payment
is made to you. Although the note holders have a first priority claim to the
receivables and other assets pledged to the trustee to the extent those assets
and receivables are acquired solely with the proceeds of the notes, if these
assets and the general funds of the company are insufficient to pay all debt
holders of the company, you may not receive repayment of the full principal
amount owed to you on the notes.
OUR USE OF A HIGH AMOUNT OF DEBT COULD ADVERSELY AFFECT OUR OPERATIONS AND
ABILITY TO PAY PRINCIPAL AND INTEREST ON THE NOTES WHEN DUE.
Our use of a high amount of debt could have important consequences to you.
For example, substantial debt could:
* make it more difficult for us to satisfy our obligations to pay
principal and interest on the notes;
* make it more difficult for us to acquire receivables to replace those
pledged to the note holders as they are paid;
* increase our vulnerability to general adverse economic and industry
conditions;
* limit our ability to obtain additional financing for future working
capital, capital expenditures, acquisition of healthcare financing
businesses and healthcare receivables and other general corporate
requirements;
* increase our vulnerability to interest rate increases if future debt
must be incurred at higher rates of interest than currently exist;
* require us to dedicate a substantial portion of our cash flow to
payments on our debt, which will reduce the availability of cash flow
for operations, new investment and other purposes;
* limit our flexibility in planning for, or reacting to, changes in our
business and the industry in which we operate; and
* limit our ability to repay the balance in the seller's reserve account
if that should be required.
THE LACK OF A SINKING FUND OR THE REQUIREMENT TO MAINTAIN FINANCIAL RATIOS
INCREASES THE RISK THAT WE WILL BE UNABLE TO REPAY THE PRINCIPAL AND INTEREST ON
THE NOTES WHEN DUE.
The note issuance and security agreement does not require us to maintain a
sinking fund for payment of the notes or that we maintain any specified
financial ratios. Generally, a sinking fund would be a separate account that
would be funded on a regular basis in order to ensure that sufficient funds
would be available to pay the notes at maturity. The lack of a sinking fund
increases the risk that we will not have sufficient cash on hand to pay the
principal amount of the notes due at maturity. Since there is no sinking fund
for the notes, we will be required to use available cash flow, sell assets or
borrow additional funds to pay the principal due on the notes at maturity. The
lack of a requirement to maintain any specified financial ratios allows us to
operate our business in an unrestricted manner. This increases the risk that our
method of operation could turn out to be financially imprudent and could result
in our being unable to repay our obligations on the notes when due.
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YOU COULD LOSE YOUR ENTIRE INVESTMENT IF WE ARE UNABLE TO SELL A SUFFICIENT
AMOUNT OF NOTES.
There is no minimum amount of notes that we have to sell before issuing any
notes and using the proceeds from those sales. There is no minimum amount of
notes that we have to sell before terminating the offering. The notes are being
sold on a best efforts basis and we may not be able to sell the entire
$75,000,000 in notes we are offering in this prospectus. If we are unable to
sell a sufficient amount of notes, we may have insufficient funds to
successfully implement our business plan. If this occurs, you could lose your
entire investment in the notes. This risk is further heightened because you must
purchase at least $5,000 in notes.
THE ASSETS SECURING THE NOTES HAVE DIFFERENT MATURITY DATES THAN THE NOTES
AND WE MAY NOT HAVE SUFFICIENT CASH AVAILABLE TO MAKE PAYMENTS ON THE NOTES WHEN
DUE.
The maturity of the collateral does not match the maturity dates of the
notes. Interest and principal payments due on the notes will be made principally
from the proceeds of the collateral that is pledged to secure the notes. We may
purchase assets that have no maturity date or date fixed for repayment of the
investment and may also purchase assets that mature after the initial maturity
date of the notes. Because we may invest in assets without maturity dates or
with maturity dates that do not match the interest payment dates or maturity
dates of the notes, we may not have sufficient cash and liquid assets available
to make these payments when due. If this were to occur, we will be required to
fund these payments from our other assets or through borrowings or capital
raised from outside sources.
This risk is further emphasized since the entire principal due on the notes
will be payable at their maturity, and we are not obligated to create a sinking
fund to pay the notes. This need for a potentially large amount of funds on that
date may require the sale of some assets prior to their stated maturity or the
refinancing of the notes. If the collateral pledged to secure the notes has to
be sold to fully pay the notes when due, the sale may not result in proceeds
sufficient to fully pay the notes at maturity. Our ability to obtain refinancing
of the balance due on the notes at maturity will depend on market factors at
that time. An increase in interest rates or other economic conditions may have
an adverse effect on our ability to obtain refinancing to pay the notes.
THE VALUE AND TYPE OF THE COLLATERAL SECURING THE NOTES MAY CHANGE OVER
TIME WHICH WILL MAKE IT DIFFICULT TO EVALUATE THE RISK OF INVESTING IN THE
NOTES.
When additional notes are issued from time to time, new healthcare
receivables or other assets will be purchased and pledged as collateral. All of
the collateral securing the previously issued notes, plus the collateral added
as a result of the issuance of additional notes, will secure both the additional
notes and the previously issued notes. Some of the collateral will be repaid
before the notes mature. When this collateral is repaid, we will use the
proceeds to acquire and pledge additional assets. Because our underwriting
standards and the types of assets we may purchase may change over time, the
additional assets may be different than the initial assets we purchase.
Therefore, the composition, quality and type of the healthcare receivables and
other assets securing the notes may change over time. This change in assets over
time makes it difficult to evaluate the risk in investing in the notes because
the collateral securing the notes may change. Moreover, the additional assets
acquired may be more likely to fluctuate in value over time which could result
in the value of the collateral securing the notes being less than the
outstanding balance on the notes.
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OVER TIME, THE BALANCE IN THE SELLER'S RESERVE ACCOUNT CAN BE REDUCED WHICH
COULD LIMIT OUR CASH AVAILABLE TO PAY THE NOTES.
We generally set the purchase price for healthcare receivables at a
specified percentage of the amount we estimate that we can collect on the
receivable. A portion of the full face value of the receivable is allocated to a
reserve account for each seller to be used in cases of receivables that are not
fully collected. When the receivables are not fully collected, the balance in
the seller's reserve account is reduced. This reduction increases the risk that
we will be unable to recover all of the amounts paid to the seller for its
receivables. A reduction in a seller's reserve account occurs with respect to
most, if not all, sellers.
Federal and state government agencies, in accordance with Medicare and
Medicaid statutes and regulations, have broad rights to audit a healthcare
provider and offset any amounts it determines were overpaid to that provider on
any claims against payments due on other current, unrelated claims. For this
reason, the reduction in the reserve account balance may be more significant
with respect to Medicare and Medicaid receivables. Historically, the reserve
account balances held by our affiliates for any single seller have never been
exhausted. Although Medical Capital Corporation monitors receivable collections
on a daily basis, it may not be able to react quickly enough to reduction of a
seller's reserve account balance to cover resulting losses through collections
on newer receivables acquired from the seller.
YOU MAY NOT BE ABLE TO SELL YOUR NOTES DUE TO THE ABSENCE OF AN ESTABLISHED
TRADING MARKET.
We do not anticipate listing the notes for trading on a securities
exchange. There is no trading market for the notes and it is not anticipated
that an active market will develop. We are not obligated to redeem your notes
until they mature. Because you may be unable to sell your notes prior to the
maturity date, you should consider your need to be able to liquidate your
investment before investing in the notes and you should be prepared to hold any
notes purchased in this offering until their maturity.
THE ISSUANCE OF NOTES IN BOOK-ENTRY FORM MAY LIMIT THE MARKET FOR THE NOTES
AND MAY DELAY YOUR RECEIPT OF PAYMENTS.
Our use of book-entry notes rather than issuing notes in definitive form
with physical certificates in this offering could limit the markets for these
securities, prevent a secondary market from forming and could delay payments to
you. The absence of physical certificates for the notes may prevent a secondary
market from developing because investors may be unwilling to invest in
securities if they cannot obtain delivery of physical certificates. The use of
book-entry notes may delay payments to you because distributions on the notes
will first be sent to the brokers in whose name the notes are registered, and
then will be forwarded by the broker to you.
FORWARD-LOOKING STATEMENTS
Some of the statements in this prospectus that are not historical facts are
"forward-looking" statements." Forward-looking statements can be identified by
the use of words like "believes," "could," "possibly," "probably,"
"anticipates," "estimates," "projects," "expects," "may," "will," "should,"
"intend," "plan," "consider" or the negative of these expressions or other
variations, or by discussions of strategy that involve risks and uncertainties.
We based these forward-looking statements on our current expectations and
projections about future events and information currently available to us.
Although we believe that the assumptions for these forward-looking statements
are reasonable, any of the assumptions could prove to be inaccurate. Some of the
risks, uncertainties and assumptions are identified in the risk factors
discussed above.
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We wish to caution you that the forward-looking statements in this
prospectus are only estimates and predictions. Our actual results could differ
materially from those anticipated in the forward-looking statements due to
risks, uncertainties or actual events differing from the assumptions underlying
these statements. These risks, uncertainties and assumptions include, but are
not limited to, those discussed in this prospectus.
USE OF PROCEEDS
If all of the notes that we are offering in this prospectus are sold, we
expect proceeds to total $75,000,000 before deducting sales commissions and
other expenses, like organizational and administrative fees. There can be no
assurance, however, that any or all of the notes can or will be sold. Offering
expenses are estimated to be approximately $235,000 and sales commissions will
not exceed 9.5% of the principal amount of the notes sold.
INTENDED USE OF PROCEEDS
We currently intend to use the proceeds received from the sale of notes in
the following order of priority:
* First, to provide funds for purchases of healthcare receivables; and
* Second, to acquire or originate other receivables related to medical
services, like medical equipment loans, and to make other investments
in companies and assets that relate to the healthcare industry. The
other investments may include commencing new business ventures or
acquiring other companies or business assets related to the healthcare
industry.
We do not have any commitments or agreements for material acquisitions or
the commencement of new business ventures. However, we will continue to evaluate
possible acquisition candidates. Proceeds of this offering may also be used for
general corporate purposes, including debt service and other general operating
expenses. We anticipate that some of the proceeds from this offering will be
invested in money market funds, bank repurchase agreements, commercial paper,
U.S. Treasury Bills and similar securities investments while awaiting use as
described above.
Since we do not know the total principal amount of notes that will be sold,
we are unable to accurately forecast the total net proceeds generated by this
offering. Therefore, we have not allocated specific amounts for any of the above
purposes.
RESTRICTIONS ON USE OF PROCEEDS
We will not use any proceeds from the sales of notes to pay administrative
fees to Medical Capital Corporation for the services they provide as
administrator or to pay servicing fees to MediTrak as the servicer of the
receivables. The fees relating to these services are contained in the
administrative services agreement and the master servicer agreement and are paid
out of amounts collected from the healthcare receivables.
The formation of our company and the expenses of this offering have been
funded by our parent company, Medical Capital Holdings. These organizational and
offering expenses will be repaid by us over an unspecified time period and will
be paid out of available profits of our company. These expenses will not be paid
out of the proceeds of sales of the notes.
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CHANGES IN INTENDED USE OF PROCEEDS
We do not anticipate any material changes to our planned use or priority of
use of proceeds from those described above if we sell less than $75,000,000 in
notes. While the above represents our present intention with respect to the use
of the offering proceeds, a change in capital requirements or business
opportunities could cause us to elect to use the proceeds for other purposes not
contemplated at this time. We have the discretion to use the proceeds in any
manner we deem appropriate.
PLAN OF DISTRIBUTION
OFFERING OF NOTES
We are offering up to $75,000,000 in principal amount of notes directly to
the public on a continuous best efforts basis. The notes will be sold at their
face value, $1,000 per note. You must purchase at least $5,000 in principal
amount of notes. Additional amounts may be purchased in increments of $1,000.
Depending upon market and financial conditions, our board of directors, without
approval of the noteholders, may increase or decrease the minimum purchase
requirement at any time. There is no minimum amount of notes that must be sold
before we use the proceeds. Proceeds will not be returned to investors if we
sell less than all of the $75,000,000 in notes being offered in this prospectus.
The proceeds from the sales of the notes will be paid directly to us promptly
following each sale and will not be placed in an escrow account.
MARKETING ARRANGEMENTS
We intend to retain from time to time broker-dealers that are members of
the NASD, to consult with and advise us and to assist in the distribution of
notes in the offering on a continuous best efforts basis. The broker-dealers
will have no obligation to take or purchase any notes. A broker-dealer is
expected to assist us in the offering as follows: (1) in conducting
informational meetings for subscribers and other potential purchasers; (2) in
keeping records of all subscriptions; and (3) in training and educating our
employees regarding the mechanics and regulatory requirements of the offering
process. These broker-dealers will receive a negotiated financial advisory fee
and sales fee of up to 9.5% of the aggregate principal amount of the notes it
sells in the offering. Depending upon market conditions, the notes may be
offered for sale in the offering on a continuous best efforts basis by a selling
group of selected broker-dealers agreed upon by a broker-dealer and us. In
addition, we may reimburse the broker-dealers for reasonable out-of-pocket
expenses actually incurred, including expenses related to attorneys' fees and
costs, not to exceed $50,000. We expect to agree to indemnify one or more
broker-dealers against some liabilities, including liabilities under the
Securities Act, and to contribute to payments they may be required to make in
respect of those liabilities.
PLAN OF OPERATION
Our primary focus over the course of the next twelve months will be
concentrated on building a portfolio of healthcare receivables purchased from
healthcare providers. Generally, we will limit our purchase of healthcare
receivables to obligations of commercial insurance carriers and debts guaranteed
by a state or the United States government, including Medicare and Medicaid. We
will purchase the receivables from our affiliated companies and other third
parties. In addition, we will also attempt to identify a prospective "target"
businesses for acquisition, with an emphasis on businesses in the healthcare
industry located in the United States. While we may, under some circumstances,
seek to make business combinations with more than one target business, as a
result of our limited resources, we will likely have the ability to acquire only
a single business over the next year. We have not identified a target business
but remain open to identifying and selecting a prospective target business.
However, we will only acquire another business if it satisfies our fair market
value tests and strategically fits with our long-term growth plan.
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We were recently formed to initiate the process of raising funds to start
our proposed business. All activity to date has been related to our formation
and the development of our proposed financing. All of these costs have been
funded by our parent corporation, Medical Capital Holdings. Our ability to
commence operations depends upon our obtaining adequate financial resources
through this offering. As of September 30, 2000, we had not incurred any
material costs or expenses other than those associated with the formation of our
company.
Medical Capital Holdings and its affiliates have over seven years of
experience in purchasing healthcare receivables. The officers of Medical Capital
Corporation will provide daily management of our company, the administrator, the
servicer and Medical Capital Holdings' other subsidiaries to ensure that their
operations are run efficiently. We have entered into an administrative services
agreement with Medical Capital Corporation, a subsidiary of Medical Capital
Holdings. As the administrator, Medical Capital Corporation will essentially run
our business by providing us the general and administrative services to
facilitate the underwriting and evaluation of the receivables we purchase.
Medical Capital Corporation will also provide the personnel and computer systems
that are necessary to ensure the collateral securing the notes is safeguarded
and performs as anticipated.
Our management will primarily be the officers and employees of Medical
Capital Corporation. Therefore, the respective salaries and benefits of these
individuals will be paid by Medical Capital Corporation and will be allocated to
and paid by us on a pro-rata share based upon their time devoted to our
business. In addition, we will sub-lease office space from Medical Capital
Corporation and use their facilities and equipment in our operations. We expect
our operating expenses will be minimal each month and will be reimbursed from
cash flows generated from collections on receivables. The non-employee directors
serving on our board of directors will be paid annual retainer fees and
quarterly meeting fees, which we believe to be at minimal costs to us.
Medical Capital Holdings and its subsidiaries have substantial experience
in identifying and evaluating healthcare providers desiring to sell their
healthcare receivables. The officers of Medical Capital Holdings have many years
of experience in loan underwriting, healthcare operations, and healthcare
billing. We intend to use the services and expertise of Medical Capital Holdings
and its subsidiaries to purchase our portfolio of healthcare receivables. To
date, Medical Capital Corporation has purchased over $495,000,000 in face amount
of receivables on behalf of companies in the Medical Capital Holdings group.
We have entered into contracts with Medical Capital Corporation and
MediTrak to provide services related to purchasing and tracking our healthcare
receivables. MediTrak has developed the process and electronic programs to
monitor and report on all healthcare receivables purchased. This system tracks
purchased receivables on a bill-by-bill basis, within each healthcare provider.
Reporting is done daily, weekly, and monthly by MediTrak to Medical Capital
Corporation. We believe the fees we will pay for these services are below
prevailing market rates and will be no greater than those that would be charged
by unaffiliated third parties for providing similar services to us.
Our future performance and growth potential will be impacted by our ability
to identify, evaluate and successfully acquire a business in the healthcare
industry. It is highly likely that we will not have the resources to consummate
more than one business acquisition over the next twelve months. Therefore, the
lack of diversification in our operations may subject us to numerous economic,
competitive and regulatory developments, any or all of which may have a material
adverse impact upon our operations.
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There can be no assurance that we will be able to successfully purchase
healthcare receivables and/or acquire a business which generates significant
revenues or achieves a level of profit which will permit us to pay the interest
and principal payments on the notes when due. We believe that the general and
administrative expenses of our operations will be minimal and the cash available
from the collections on the receivables will be sufficient to fund these
expenses. We believe additional sources of cash may be required to acquire a
business. We do not currently have any commitments for the acquisition of a
business nor any commitments to provide the cash necessary to make any
acquisitions.
BUSINESS
OVERVIEW
Our primary business plan is to purchase healthcare provider accounts
receivables at a discount to the face amount of the receivable. We will then
attempt to collect 100% of the account balance. The receivables generally will
be purchased from healthcare providers and other similar businesses, which we
refer to in this prospectus as our "sellers" or "providers." We will rely on our
affiliates to provide us the services required for the purchase, monitoring and
administration of the receivables, like servicing, underwriting and acquisition
services.
Our receivable purchases will generally be limited to those having payors
like:
* Medicare;
* Medicaid;
* other governmental agencies like Civilian Health and Medical Program
of the Uniform Services ("CHAMPUS");
* commercial insurance companies with an established credit quality
rating of "A" or better from A.M. Best or an equivalent rating by
another recognized rating agency, like Standard & Poor's;
* casualty insurers;
* other solvent payors, like managed care providers, preferred provider
organizations and self-insured companies; and
* other businesses that we determine on a case by case basis through the
underwriting process to be of low risk.
An "A" credit rating for an insurance carrier means that the carrier has an
excellent to superior ability to meet its obligations when due. A.M. Best
publishes both a financial strength rating and a credit rating on more than
6,000 health, property and casualty insurance companies. Our receivables
purchases from insurance carriers will be limited to those with an "A" or better
credit rating because we believe insurance carriers with an "A" or better credit
rating are more likely to pay a healthcare receivable on time.
We will only purchase the insured portion of an account receivable
generated from patient services rendered by healthcare providers that meet the
financial requirements and underwriting standards established by Medical Capital
Corporation. Medical Capital Corporation has been using and continually refining
these underwriting standards for over seven years. This process has been
successful in purchasing receivables that are profitable since none of the
companies in the Medical Capital Holdings group has experienced a net loss on
the purchase of receivables from any one provider.
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The underwriting department of Medical Capital Corporation uses credit
criteria which is similar to that used by other similar lending institutions.
The relevant operating, historical and financial data of prospective providers
are reviewed to assess the financial risk involved in purchasing that
prospective providers healthcare receivables. The insured portion represents an
obligation of third party insurance companies, large corporations, state or
federal government agencies, preferred provider organizations or health
maintenance organizations. We will not purchase any portion of receivables that
are "self-pay." Self-pay relates to the portion of the receivable to be paid by
an individual patient or other financially responsible individual.
We may also provide loans secured by equipment and real property to
healthcare businesses that we believe to be financially viable and of low risk.
From time to time, we may also purchase or invest in healthcare related
businesses, like HMOs, preferred provider organizations, medical bill review
companies and third party administrators.
MEDICAL INDUSTRY BACKGROUND
According to news articles published daily and trade publications, the
United States healthcare industry is undergoing rapid change. Due to the aging
of the population, there is an increasing need for medical institutions. In
recent years, according to reports issued by the U.S. Department of Health and
Human Services, healthcare expenditures have increased at a rate approximately
twice that of inflation. Due to the pressure from health insurance companies,
corporations and government agencies to control these rising costs, a trend
toward managed care has emerged. We believe the shift to managed care, coupled
with the increasingly complicated reimbursement procedures implemented by payors
of healthcare receivables, has made billing collection more difficult.
As discussed in recent articles in Healthcare Financial Management
Association magazine, the ever increasing complex reimbursement procedures
require employees with sophisticated knowledge of the billing and payment
procedures of the United States government and each of the hundreds of different
insurance companies. For example, the average 300 bed hospital in the United
States attempts to process approximately 4,000 claims, payments and eligibility
inquiries on any given day. Many of these cases will be processed on paper, over
the phone or not at all. As a result, the average collection time for most
healthcare receivables is 60 to 90 days, which presents financial problems for
many of the hospitals. Consequently, healthcare providers experience a
substantially increased need for immediate cash flow to support not only daily
operational expenses, but the additional billing and collection services
expense. These billing statistics are published by Healthcare Financial
Management Association on a monthly basis.
In order to improve collection efficiency, hospitals and other healthcare
providers are forced to either out-source billing and collection or hire a
number of highly skilled employees solely for these tasks. Despite these
efforts, many providers often incur a significant loss due to their inability to
effectively process large amounts of claim information in a timely manner. With
payor reimbursement arrangements requiring increasingly more complex and lengthy
procedures, the providers' revenue collection departments have become less able
to timely process the claims due to their limited capacity. Improperly or
incompletely submitted information results in payment delays.
Consequently, we believe a serious administrative and cash flow management
problem exists for many healthcare providers. They are faced with numerous
expenses ranging from equipment and facility costs to payroll and liability
insurance fees. In the new managed care environment, healthcare providers are
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forced to become more efficient business operators in order to remain
profitable. The consequences of a provider's inability or unwillingness to adapt
to these changes by using more sophisticated revenue collection systems causes a
shift in financial risk for providing healthcare from the payor to the provider.
We believe these providers have an increased need for predictable cash flow.
Businesses generally utilize working capital or accounts receivable
financing to bridge the shortfall between the turnover of current assets and the
maturity of current liabilities. A business will often experience this shortfall
during periods of revenue growth because cash flow from new revenues lags behind
cash outlays required to produce new revenues. For example, a growing labor
intensive business will often need to fund payroll obligations before payments
are received on new services provided or products produced. We believe that many
healthcare providers have rapidly expanding businesses, and therefore require
accounts receivable financing to fund their growth.
As a result of these developments, we believe financing or sale of
healthcare receivables has become a more efficient solution to meet the cash
flow needs of today's healthcare providers. We believe that there are several
distinct trends that will continue to fuel the demand for and the dollar value
of healthcare services in the United States and the demand for our services,
including:
* dramatic change driven by governmental and market forces which have put
pressure on healthcare providers to reduce healthcare delivery costs and
increase efficiency, often resulting in short-term working capital needs by
these providers as their businesses grow;
* favorable demographic trends, including both the general increase in the
U.S. population and the aging of the U.S. population, which should increase
the size of our principal target markets;
* growth, consolidation and restructuring of fragmented sub-markets of the
healthcare industry, including long-term care, home healthcare and
physician services; and
* advances in medical technology which have increased demand for healthcare
services by expanding the types of diseases that can be effectively treated
and by extending the population's life expectancy.
BUSINESS STRATEGY
Financial groups and various smaller financing companies provide financing
through the purchase of receivables. However, most of these institutions have a
minimum lending threshold of $5,000,000 in receivables when offering financing
to provider groups. As a general matter, we believe these lenders typically have
been less willing to provide financing to healthcare providers of the types we
intend to serve because these lenders have not developed the healthcare industry
expertise needed to underwrite receivables generated by smaller healthcare
providers. These lenders also lack specialized systems necessary for tracking
and monitoring healthcare receivables transactions, which are different from
traditional accounts receivable finance transactions.
TARGET PROVIDERS. We intend to offer financing to medium and smaller
hospitals, other healthcare providers and durable medical equipment distributors
that generally do not produce receivables at a high enough level to attract
large financial institutions, by purchasing their receivables. Initially, our
primary marketing strategy will focus on the purchase of receivables from:
* hospitals;
* skilled nursing and assisted care facilities;
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* physician groups consisting of two to six doctors;
* home healthcare facilities;
* durable medical equipment distributors;
* medical staffing companies;
* radiology and diagnostic medical facilities;
* medical testing facilities; and
* other healthcare businesses and related businesses which we determine
through the underwriting process to have low risk.
We intend to target those providers with billings of $20,000 to $200,000
per month. We believe fee-for-service practitioners are a good type of client
due to the relatively small nature of their business and the manner in which
they are paid. Fee-for-service practitioners are practitioners that bill for
healthcare services using a retail billing rate for the services provided. They
are then paid by the insurance companies based on medical fee schedules
established by the insurance industry. These healthcare practitioners usually
have two to six practitioners in one office. We believe their billing is
relatively easy to monitor and purchase, and believe their payment pattern will
be best suited for our business. The other healthcare businesses with which we
intend to deal are primarily small hospitals, skilled nursing facilities, home
health agencies, and medical clinics.
TARGET GEOGRAPHICAL AREAS. We intend to target both metropolitan and rural
markets for the purchase of healthcare receivables. Generally, we will not
expend substantial marketing efforts on the large metropolitan areas like New
York, Chicago, Los Angeles, San Francisco, etc. We believe the middle tier of
metropolitan statistical areas contain the size and type of prospective clients
that will best suit our lending criteria. This segment of the national market
consists of a majority of fee-for-service practitioners and other healthcare
businesses. These metropolitan areas would consist of cities like San Diego,
California, Des Moines, Iowa and Little Rock, Arkansas.
PRODUCTS OFFERED. In addition to accounts receivable financing, small to
middle market healthcare providers often require additional financing products
like loans secured by equipment or real estate to facilitate the growth or
restructuring of their businesses. Facility-based healthcare providers grow
through the acquisition of additional facilities. Facility-based healthcare
providers generally are hospitals, skilled nursing facilities and clinics. These
providers can often acquire additional facilities at attractive valuations. This
happens when some facilities need to be sold for a variety of reasons. Some of
these reasons can include:
* The death of an owner of the facility;
* A healthcare chain may decide to withdraw from a geographical market
and sell its facilities;
* Some healthcare chains may decide to sell a facility to use the funds
to purchase different or other types of facilities or to purchase
facilities in other geographical markets; or
* When smaller healthcare chains declare bankruptcy due to poor
management, their facilities can be bought through bankruptcy
proceedings.
In order to purchase facilities at a reasonable price, quick financing is
often necessary so that the provider can complete the intended acquisition
before other providers out bid them. Medical Capital Management believes that
when facilities become available for purchase, the successful bidder is often
the first buyer to make an offer that has the necessary funds to complete the
purchase in a short period of time.
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Many of our affiliate's current healthcare providers and prospective
providers have a need for loans as their businesses grow. Loans secured by the
assets owned by the providers are used in order to support the providers'
expanding infrastructure requirements like information systems, enhanced
professional management and marketing and business development costs. We also
plan to provide, in the future, various financing options to providers like
loans secured by equipment and real estate. We intend to provide customized
financing solutions specifically tailored to meet the needs of each individual
provider.
GROWTH. We expect the trends described above under "Medical Industry
Background" to continue, providing us with long-term growth opportunities. We
plan to increase the number of financial products that we will offer to the
providers and other sellers from which we intend to purchase healthcare
receivables. These financial products may include leasing medical and diagnostic
equipment, real estate first and junior lien mortgages, revolving credit lines
and acquisitions of companies in the healthcare industry. Our strategy for
growth generally is based on the following key elements:
* Target sub-markets within the healthcare industry that have favorable
characteristics for working capital financing, like fragmented
sub-markets experiencing growth, consolidation or restructuring. Our
initial focus will be on the purchase of healthcare receivables in
these sub-markets.
* Focus on healthcare providers with financing needs of between $100,000
and $10,000,000, a market that we believe has been under-served by
commercial banks, diversified finance companies, traditional secured
lenders and other competitors of ours. Most commercial banks,
diversified finance companies and traditional secured lenders have
typically focused on providing financing to companies with borrowing
needs in excess of $5,000,000. We believe that our target market for
transactions is much larger, in terms of the number of available
financing opportunities, and is less competitive than the market
servicing larger borrowing needs, thereby producing growth
opportunities at attractive rates.
* Become the primary source for all healthcare financing needs of
providers by introducing new financial products to leverage our and
our affiliates' existing expertise in healthcare finance, and
providing other services within our target markets. We expect to
selectively introduce new products to existing and new sellers,
depending upon their needs, general economic conditions, our resources
and other relevant factors. In some cases, we anticipate that new
products may be introduced as part of cooperative arrangements with
other companies.
* Seek to make strategic acquisitions of and investments in businesses
that are engaged in the same or similar business as we are or that are
engaged in lines of business in the healthcare industry complementary
to our business. These businesses may include healthcare service
businesses that are involved in financial services, receivables
management, outsourcing, financial and administrative infrastructure
services, HMOs, preferred provider organizations and third party
administrators. We believe that businesses in these areas are
synergistic with our proposed core business of purchasing healthcare
receivables and could allow us to leverage our and our affiliates'
expertise in healthcare to meet the needs of our target customer base.
We will also seek to take advantage of appropriate opportunities to
invest in or acquire companies in the same or similar lines of
business as we operate.
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OBTAINING NEW PROVIDERS. We generally will have four potential sources for
developing and locating the healthcare provider base from which we will acquire
receivables: (1) referrals from banks and other financial institutions, (2)
referrals from independent financing brokers and insurance agents, (3) our
affiliates' network of companies that are in healthcare services businesses with
which our affiliates have informal cross referral arrangements, and (4) our
affiliates' sales and marketing personnel. Medical Capital Corporation uses a
network of sales representatives who call on new and existing sellers in their
territory on a regular basis. The primary responsibility of the sales
representatives is to develop and maintain relationships with sellers. Most
sales representatives have a healthcare industry background and have received
specialized training from Medical Capital Corporation.
With respect to banks and financial institutions, some of our officers and
those of our affiliates have existing relationships with several financial
institutions throughout the country. Banks are continually approached by medical
groups for financing. In addition, trust departments, brokerage firms and
investment advisers are regularly asked by their provider clients where
financing might be obtained. These banks and institutions refer providers to our
affiliates from time to time.
We believe a rapidly growing community of independent brokers exists that
arrange financing specific to the healthcare industry. These brokers refer
providers to different lending institutions for a fee. These brokers assist in
locating receivables available for purchase from smaller providers that
typically cannot find traditional financing because of their small size.
Our affiliates also have a network of contacts in the healthcare provider
and healthcare insurance industries. The healthcare insurance industry consists
of healthcare insurers that pay medical claims to healthcare providers. It also
includes companies providing services to healthcare providers like medical
coding reviews, medical necessity determination reviews, billing system
efficiency reviews and other healthcare insurance payment and billing services.
These contacts have been developed over the past years through our affiliates'
marketing and hiring efforts. In addition, many of our affiliate's officers and
employees have previously worked in the healthcare provider and healthcare
insurance industries. Also, through daily marketing efforts, our affiliates are
constantly enlarging their sales and referral base of independent brokers, the
customers of which include many practitioner and facility-based providers.
In addition to the above sources of obtaining new providers, Medical
Capital Corporation maintains an Internet website at
http://www.medicalcapital.com. Medical Capital Corporation uses this website as
a marketing tool and solicits the purchase of healthcare receivables from
potential providers through the website. The website describes the business of
Medical Capital Corporation, the receivables financing process and Medical
Capital's program for financing. The website also contains a short application
that providers can complete to apply to have Medical Capital Corporation
evaluate the provider's business and receivables to determine their eligibility
to participate in the receivables purchase program. The website will not
specifically refer to Medical Capital Management. However, because Medical
Capital Corporation underwrites the healthcare receivables we purchase, some of
our purchases of receivables may be made from providers Medical Capital
Corporation solicits through its website. Medical Capital Corporation also
underwrites purchases of healthcare receivables for other companies in the
Medical Capital Holdings group, and to a limited extent, for companies outside
the Medical Capital Holdings group. Medical Capital Corporation's website is not
part of this prospectus.
RECEIVABLES ACQUISITION PROCESS
GENERAL. The acquisition process used by Medical Capital Corporation has
been in use for over seven years. To date, Medical Capital Corporation has
purchased over $495,000,000 in face amount of receivables on behalf of companies
in the Medical Capital Holdings group. The effectiveness of this process is
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supported by the fact that none of the Medical Capital Holdings subsidiaries has
had any net losses resulting from the purchase of receivables from any one
provider.
When we identify a healthcare provider or other seller who we may purchase
receivables from, we will enter into a receivables purchase agreement with that
provider. This agreement will give us the right of first refusal to purchase all
receivables from that seller either weekly, bi-weekly, semi-monthly or monthly,
generally for a period of one year. The terms of these agreements will vary from
seller to seller. Each week Medical Capital Corporation will review all
receivables purchased in the preceding week and decide which receivables it will
purchase on our behalf within the next seven to ten days. We refer to each set
of receivables so purchased as a "batch." Medical Capital Corporation will have
the sole discretion as to which receivables it will purchase.
APPROVAL OF PROVIDERS AND OTHER SELLERS. Generally, we will purchase
healthcare and other receivables directly from the seller after the seller and
the receivables have been underwritten by Medical Capital Corporation. Medical
Capital Corporation has developed a set of criteria for the selection of the
prospective sellers and guidelines for the receivables that will qualify for
purchase.
Generally, Medical Capital Corporation focuses on healthcare and similar
businesses that have sales of at least $10,000 per week. Currently, a typical
seller generates receivables between $10,000 to $50,000 per week. A prospective
seller generally will have to generate invoices averaging at least $150.00 per
service incident. Medical Capital Corporation has found that smaller
receivables, those under $50.00, do not generate sufficient profit when
purchased.
UNDERWRITING POLICIES. The underwriting policies of Medical Capital
Corporation require a due diligence review of the prospective seller of
receivables, its principals, its financial condition and strategic position,
including a review of all available financial statements and other financial
information, legal documentation and operational matters. Medical Capital
Corporation's due diligence review also includes a detailed examination of the
seller's accounts receivable, accounts payable, billing and collection policies
and practices, management information systems and real and personal property and
other collateral. Records and data of the provider for the prior 24 month period
are reviewed and evaluated for consistency, reliability and adequate
performance.
Medical Capital Corporation also requires that:
* the healthcare provider, each of the individual physicians and any medical
personnel be properly licensed to practice and there are no unresolved
legal or medical issues regarding their practice or any unusual amounts of
malpractice litigation, or litigation matters that were not disclosed by
the healthcare provider;
* the healthcare provider to have been in business in its community for a
minimum of eighteen months;
* the healthcare provider group demonstrate credit-worthiness as determined
by assessments of credit reports, past receivables financing history, bank
references, financial statements, accounting firm comments and UCC-1
searches; and
* the seller agree to some or all of the following terms:
-- pledge all of its receivables, existing and future, as additional
collateral;
-- execute a guarantee ensuring payment on all receivables purchased; and
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-- establish up to a 25% reserve account for the portion of the purchase
price of the receivables that will be withheld from the seller.
CREDIT RISK MANAGEMENT. The possible insolvency or loss of funding of an
individual third party payor is a significant risk to our business. In order to
minimize this risk, we will impose restrictions on the amount of receivables
that can be purchased from any individual third party payor, within each
provider and within the total loan portfolio. We will constantly review industry
rating agency reports and industry journals and articles in order to gain any
foreknowledge of possible financial problems of any third party payors. Medical
Capital Corporation will independently confirm various matters with respect to
the prospective provider's business and the collectibility of its accounts
receivable and any other collateral by conducting public record searches, and,
where appropriate, by contacting third-party payors about the prospective
provider's receivables.
A credit report will be obtained from an appropriate credit agency on each
prospective provider and its principals and any medical personnel with any
ownership interest. The provider must be creditworthy, and any negative credit
comments must be explained and documented to our satisfaction or the
satisfaction of Medical Capital Corporation. Special attention will be given to
any past receivable financing history. If the provider finances any equipment,
the applicable equipment leasing companies will be contacted for a credit
history and reference. Prospective providers will be required to provide
favorable bank references. A UCC-1 Financing Statement search will be performed
to determine that there are no present liens against the receivables of the
prospective provider. If any receivable liens do exist, the lien must be paid
off before, or as part of, the initial purchasing or funding of any receivables.
PURCHASE OF RECEIVABLES. Our purchase agreement with a provider will
require that we have the first right of refusal on all of the provider's
receivables on a regular-interval basis, generally for one year. However, our
total investment in receivables from a seller under a receivables purchase
agreement generally is made on a specified "commitment" amount. We usually
refrain from making "one-time" purchases of receivables. For the first purchase
from a provider, we will review and offer to purchase all of the receivables of
that provider, depending on the above detailed analysis of the receivables.
After the first purchase, we will analyze all receivables from the preceding
week and decide which additional receivables we will purchase within the next
seven to ten days.
RECEIVABLES CHARACTERISTICS. In some cases, we may purchase receivables
that are more than 90 days old, depending on the analysis of the receivable. The
age for any receivable is the number of days elapsed since its billing date to
the payor of the receivable. We will buy receivables with the goal that the
average age of receivables in our portfolio generally will not exceed 180 days.
We will have the sole discretion as to which receivables we will purchase. We
will reserve the right to disqualify some categories, or some payors, of
receivables for purchase at our discretion.
When acquiring receivables, we will only purchase receivables that are to
be paid by:
* an insurance carrier with at least an "A" credit rating from a
recognized rating agency like A.M. Best or Standard & Poors;
* an approved HMO;
* an approved government agency;
* an approved institutional facility;
* a self insured employer; or
* an other entity which meets our financial standards.
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Except for government agencies, we will limit the portion of our portfolio
of receivables that are payable by a single payor to 15%. We also will ensure
that at any given time no more than 50% of our total outstanding investment
portfolio of receivables, in the aggregate, will be from Medicare and Medicaid
payors. Because Medicare and Medicaid claims are submitted electronically, the
turnaround time for payment is about 30 days. It is for this reason we will
accept higher amounts of these receivables than from traditional commercial
insurance carriers.
PRICING RECEIVABLES FOR PURCHASE. Once a seller has met the criteria and
agreed to the requirements, Medical Capital Corporation will begin the process
of selecting and pricing the receivables for purchase. One of the most important
aspects of the selection process, and the due diligence procedure performed on
prospective providers, involves an analysis of a provider's receivables and
collections to evaluate the receivables likely to be paid within a defined
collection period. The analysis covers a period of not less than the prior 24
months. Using this data, Medical Capital Corporation develops ratios and other
data which include the following information:
* the monthly total receivable balance;
* the amounts billed to and collected from the various payors;
* the amount of claims paid;
* the amount of claims not paid, and why;
* a review of claims files and related medical and billing records;
* the average payment turnaround time;
* the average response time of the prospective seller to return payor
requests for information;
* the classification of claims between insured and uninsured;
* the amount and number of worker's compensation and personal injury
claims;
* the ratio of total monthly billed to total monthly collected
receivables; and
* review of historical collections from the third-party payor of the
receivables, including a listing of and aging of the receivables by
the payor with corresponding financial status rating of each.
From the above data, Medical Capital Corporation will calculate an average
receivable amount, receivable turn time, and the payment trend analysis on each
major payor. We also verify the existing outstanding receivables by randomly
selecting individual billing files and contacting the applicable third party
payor to determine whether the claim has been submitted for payment and will be
paid as anticipated. Prior to a receivable being deemed eligible for purchase by
us, one of our required conditions is that there be an established payment
history by the payor of the receivable reimbursing an amount at least equal to
the estimated net receivable generally within 60 to 90 days of the date the
claim is submitted. Finally, we interview the prospective client's
administrative, accounting and billing personnel to document and review the
integrity of internal controls and follow-up billing and collections procedures.
Our purchase price paid for healthcare and other receivables will be based
on a percentage of the face value of the receivable. To determine the purchase
price, the face value will be reduced first by the amount of any patient
co-payment and any amounts in excess of what the payor has historically paid for
the procedure giving rise to the receivable. The resulting amount will then be
further reduced by considering other factors that influence the amount which is
likely to be collected under the receivable, including the historical collection
experience of the provider. The resulting number will be the estimate of the net
collectible value of the receivable, or the estimated net receivable.
RESERVE ACCOUNT. We will purchase the receivables at a price equal to the
estimated net receivable. Only a portion of the purchase price, not exceeding
90% of the estimated net receivable, will be paid to the seller immediately. A
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portion of the purchase price not immediately paid will be allocated to a
reserve account for that provider. We will retain the remainder of the unpaid
purchase price as our fee.
The purpose for establishing a reserve account is to have protection
against losses due to uncollected receivables. Withholding a portion of the
purchase price is easier to exercise than attempting to require the replacement
of an uncollected receivable or otherwise seeking enforcement of the receivables
purchase agreement. If a purchased receivable becomes outstanding for over 180
days, we may, at our option:
* offset the amount actually paid to the seller for the receivable
against the seller's reserve account;
* offset the amounts due to the seller from the purchase of other
batches of receivables;
* require the seller to replace the uncollected receivables with
additional receivables;
* or exercise our rights under a guarantee from the seller, if any.
If a receivable is collected at a later date, the reserve account will be
credited by the amount of the collection up to the amount that was previously
offset. Any time the amount collected with respect to a receivable is less than
the amount invoiced, the difference will be offset against the reserve account.
If the receivables purchase agreement is terminated, any remaining balance in a
seller's reserve account will be returned to the seller after the payment of any
advances made by us, and any interest and fees due have been paid.
The amount of the reserve account will generally range from 10% to 25% of
the estimated net receivable. A seller is paid the amount allocated to its
reserve account only when the amount exceeds a negotiated percentage, usually
25%, of all of the receivables purchased from the seller that are outstanding at
any one time. From time to time a reserve accounting will be made to the seller.
When warranted by this accounting, any excess in the reserve account will be
paid to the seller within fifteen days of the accounting. Any amount paid on a
batch of receivables in excess of the estimated net receivable is allocated as a
credit to the seller's reserve account.
An adjustment may be made if the seller's reserve account balance falls
below 5% of the outstanding uncollected receivables balance for that seller. The
adjustment is typically made to the estimated net receivable percentage. This
adjustment effectively reduces the percentage of cash immediately paid to the
provider when future receivables are purchased. For example, a provider may be
initially paid 85% of the estimated net receivable immediately when a receivable
is purchased from that provider. If that seller's reserve account balance falls
below 5% of the outstanding receivables balance and requires an adjustment, the
provider may only be paid 80% of the estimated net receivable at the time of
purchase for future receivable purchases. In this example, in addition to the
normal allocation to the reserve account, an additional 5% of the estimated net
receivable would be allocated to the reserve account for all future purchases.
This adjustment, in effect, increases the amount allocated to the reserve
account on each future purchase.
ADMINISTRATION AND SERVICING OF RECEIVABLES
ADMINISTRATION OF OPERATIONS. We have entered into an administrative
services agreement with Medical Capital Corporation, one of our affiliates.
Under the terms of the administrative services agreement, Medical Capital
Corporation has agreed to serve as the exclusive provider of management services
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to us and as the administrator for the receivables. As the administrator,
Medical Capital Corporation will be responsible for providing us the general and
administrative services to facilitate the underwriting evaluation of receivables
and other assets to be purchased or used as collateral for a loan. It will also
provide the personnel and computer systems that are necessary to ensure the
collateral is safeguarded and performs as anticipated. It will also ensure the
adequate processing and reporting of the assets in the portfolio. Once the
receivables are identified for purchase, we will enter into purchase agreements
to acquire the receivables.
Medical Capital Corporation will also be responsible for providing
management and underwriting services and making available to us its offices,
personnel, facilities, equipment and services, as are determined to be
reasonably necessary for the proper and efficient operation of our business.
These services will include:
* bookkeeping, payroll and accounting services, including administration
of all promissory notes and interest payments;
* marketing and public relations;
* maintaining a network of account consultants to develop and maintain
our relationships with healthcare providers; and
* opening, maintaining and directing bank accounts for our benefit.
Under the administrative services agreement, we will pay Medical Capital
Corporation fees for providing the above services to us. The fees for the
various services they provide will be included on a schedule to the
administrative services agreement, which is filed with the SEC as an exhibit to
the registration statement relating to this prospectus.
LOCK BOX & COLLECTIONS. As required under the receivables purchase
agreement, all proceeds from the collection of the purchased receivables are
required to be paid to a lock box account. A lock box account is a post office
box, called a lock box, established by the bank that processes the payments.
Payments are sent directly to these lock boxes. Therefore, the third party payor
payments of receivables will not go to the seller, but rather will be sent to
the appropriate lock box. When a seller enters into a receivables purchase
agreement, a notice of change in mailing address is sent to all payors of the
receivables that are being purchased. The notice will instruct the payors to
deliver all payments to the appropriate lock box account. Each lock box is
established and functions solely to receive payments. When payments are sent to
the lock box, the lock box processing bank deposits the payment into a lock box
account with that bank. The trustee will periodically transfer the amounts in
the lock box accounts to an account maintained by the trustee.
Separate lock box accounts will be established for each seller. Receivables
due and owing from government programs are subject to laws and regulations not
applicable to commercial payors. Except in limited cases, Medicare and Medicaid
laws and regulations provide that payments for services rendered under
government programs can only be made to the healthcare provider that has
rendered the services. Therefore, each seller will have a lock box for
non-government collections and a separate lock box for government collections,
like Medicare, Medicaid, CHAMPUS, etc. The lock box account will be in the name
of the seller and Medical Capital Corporation for the government collections,
and will be in the name of Medical Capital Corporation for the non-government
collections. The bank lock box proceeds are maintained in a zero balance account
which will be swept daily to the cash concentration account that is under the
control of the trustee.
TRACKING RECEIVABLES BY BATCH. Generally, once a batch of receivables
reaches the age of 180 days from the purchase date, the batch is "closed." The
closed batch is reconciled and reviewed to determine if the collections are
adequate to achieve the expected performance of the purchased receivables. This
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process is used to constantly evaluate the estimated net receivable rates used
for each seller. If any one batch of purchased receivables does not perform as
expected and falls short of the estimated net receivable, the seller is required
to supplement the shortfall by substituting the receivable with another eligible
receivable, or through recovering the shortfall from the reserve account, or by
paying the appropriate sum to Medical Capital Corporation. If the batch collects
more than the applicable estimated net receivable, the excess is allocated to
the seller's reserve account.
Weekly reports of purchased receivables are generated on a seller by seller
basis. These reports provide currently updated accounts receivable agings and
other valuable portfolio information, including claim denial trends and
collections performance. Copies of these weekly reports are sent to our
executive offices and the payment and aging update reports are sent to each
seller.
SERVICING OF RECEIVABLES. We have a servicing agreement with our affiliated
company, Medical Tracking Services, or MediTrak, which is headquartered in Reno,
Nevada. The servicing agreement provides that MediTrak will service the
receivables and provide other support in connection with the processing,
collection and valuation of receivables. MediTrak will service all receivable
batches that we purchase from our sellers. MediTrak will also prepare analysis
reports of receivables that are submitted for purchase, but ultimately
disqualified and not purchased.
MediTrak will process all receivables we purchase and will report related
data on a batch by batch basis. The payor's explanations of benefits and
payments, which shows how the payments on each receivable were calculated, its
remittance advices and warrants from government agencies, and all other
payments, are sent directly to the bank that is performing the lock box
processing. Copies of these documents will be forwarded by the bank to MediTrak
for posting. MediTrak also will be provided with a report from the lock box
processing bank of deposits into the lockbox accounts.
MediTrak will input this information into its system and post the proper
credits to each seller's account, on an account by account basis. It will then
transmit a report electronically to us giving details of all amounts received.
MediTrak then sends copies of all payment documents and other accompanying
documents to the provider.
CREDIT LOSS POLICY AND EXPERIENCE
We will regularly review our outstanding healthcare receivables to
determine the adequacy of our allowance for losses on receivables. To date, none
of our affiliates has experienced any net credit losses on the pools of
receivables they hold. We expect to maintain the allowance for losses on
receivables at an amount estimated to be sufficient to absorb future losses, net
of recoveries, inherent in the healthcare receivables. In evaluating the
adequacy of the allowance, we expect to consider factors like trends in
healthcare sub-markets, past-due accounts, historical charge-off and recovery
rates, credit risk indicators, economic conditions, on-going credit evaluations,
overall portfolio size, average seller balances, reserve account balances, real
estate collateral valuations, if any, and underwriting policies. However, many
of these considerations involve the significant use of estimates and are subject
to rapid changes which may be unforeseen and could result in immediate increased
losses and material adjustments to the allowance or actual losses.
To the extent that we may deem specific healthcare receivables to be wholly
or partially un-collectable, we will establish a specific loss reserve equal to
that amount. We have not established an allowance for losses because we are a
newly formed company. There can be no assurance that any allowance established
in the future will be adequate to cover any losses we may experience.
Historically, companies in the Medical Capital Holdings group have used a
guideline for credit loss allowances of 2% of outstanding debt at the time of
reporting. However, this guideline is adjusted to reflect the performance of
each individual client. As a result, the credit loss allowances have at times
been less than the 2% guideline.
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Because we are likely to collect more than the amount initially paid to the
seller of the receivable, the portion of the purchase price that has been
withheld represents a reserve, or additional security, for the collection of the
amounts due under all of the receivables from that seller. The amount of the
holdback of a portion of the receivables' purchase price that does not represent
a yield to us upon collection of the receivable is allocated to the reserve
account of that seller. In some cases, some or all of the balance of a reserve
account can be returned to the seller. If a receivable is in default, we will
take measures to recover the purchase price. These measures include reducing the
sellers balance in its reserve account, seeking replacement of the receivable
from the seller, or enforcing corporate or personal guarantees given by the
seller, if any.
TITLE TO RECEIVABLES
We believe that the receivables purchase transactions we will enter into
will be "true sales" and the purchased receivables will be owned by us. However,
the purchase of a receivable might be characterized as a secured financing, or a
loan secured by the receivables. Therefore, we will also take a security
interest in each receivable purchased and will file a UCC-1 financing statement
covering the receivables. If it is determined that a true sale of the receivable
has not occurred, we may still be able to foreclose on the receivable or the
proceeds of the receivable as security for the amount paid for the receivable.
Although we will pledge receivables to the trustee, we recognize that some
receivables may prove to be non-assignable. For example, the assignment of some
Medicare and Medicaid accounts receivables may be prohibited by federal law.
However, it is common in the medial receivables lending industry to take other
measures to secure the receipts from Medicare and Medicaid accounts receivables.
We will make every effort to ensure that the accounts receivables purchased will
be assignable. If a receivable turns out to in fact be non-assignable, it is
possible that neither the trustee nor we will have received title to the
receivable, or even a security interest in it. This problem is addressed by
taking additional collateral as security from the provider or its owners. Other
steps may also be taken by our underwriting department to ensure that the loan
is fully secured.
In a few cases, assignment of a receivable or any security interest in a
nursing home has been found to require the recording of a mortgage. This is a
practice we attempt to avoid and do not currently intend to follow. In the event
of a default on these receivables by the payor, we could be at risk to the
extent of the purchase price advanced with respect to the receivables.
COMPETITION
We will encounter significant competition in our healthcare finance
business from numerous commercial banks, diversified finance companies, secured
lenders and specialty healthcare finance companies. In addition, healthcare
providers often seek alternative sources of financing from a number of sources,
including venture capital firms, small business investment companies, suppliers
and individuals. As a result, we will compete with a significant number of local
and regional sources of financing and several large national competitors. Many
of these competitors have greater financial and other resources than we do and
may have significantly lower costs of funds. Competition can take many forms,
including the pricing of the financing, transaction structuring, like the use of
securitization vs. portfolio lending, timeliness and responsiveness in
processing a client's financing application and customer service. Although many
of our competitors have focused their business on large hospitals and clinics
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and generally prefer to buy receivables in multi-million dollar denominations,
typically with a lower profit margin, these competitors could enter our target
markets more aggressively in the future.
GOVERNMENT REGULATION
Our healthcare finance business will be subject to federal and state
regulation and supervision. Currently, there are no regulations that require us
to obtain specific licenses or approvals, other than those applicable to
businesses in general, to be able to purchase receivables in any state. We will
continually research and monitor regulations and will apply for the appropriate
licenses if regulations change and require us to be licensed to perform our
business in any particular state in which we operate.
Governments at both the federal and state levels have continued in their
efforts to reduce, or at least limit the growth of, spending for healthcare
services. On August 5, 1997, President Clinton signed into law The Balanced
Budget Act of 1997, or the BBA. The BBA contains numerous Medicare and Medicaid
cost-saving measures. Section 4711 of the BBA, entitled "Flexibility in Payment
Methods for Hospital, Nursing Facility, ICF/MR, and Home Health Services,"
repealed the Boren Amendment. The Boren Amendment had required that state
Medicaid programs pay to nursing home providers amounts reasonable and adequate
to meet various costs. These costs were those that must be incurred by
efficiently and economically operated facilities in order to provide care and
services in conformity with applicable state and federal laws, regulations and
quality and safety standards and to assure access to hospital services. The
Boren Amendment was previously the foundation of litigation by healthcare
facilities seeking rate increases.
In place of the Boren Amendment, the BBA requires only that, for services
and items furnished on or after October 1, 1997, a state Medicaid program must
provide for a public process for determination of Medicaid rates of payment for
nursing facility services. Under these proposed rates, the methodologies
underlying the establishment of the rates and justification for the proposed
rates are published. This gives providers, beneficiaries and other concerned
state residents a reasonable opportunity for review and comment on the proposed
rates, methodologies and justifications.
States are actively seeking ways to reduce Medicaid spending for healthcare
by methods like capitated payments and substantial reductions in reimbursement
rates. The BBA also requires that nursing homes transition to a prospective
payment system under the Medicare program during a three-year "transition
period" commencing with the first cost reporting period beginning on or after
July 1, 1998. The BBA also contains several new antifraud provisions. We are
unable to predict the long-term impact of the BBA and continuing changes in
state Medicaid reimbursement methodologies on the revenues of our sellers.
Our business will be affected by our inability to directly collect
receivables under government programs and the right of payors under these
programs to offset against unrelated receivables. Our healthcare receivables
purchase business will also be indirectly affected by healthcare regulation to
the extent that any of our sellers' failure to comply with the applicable
regulations affects our ability to collect their receivables. The most
significant healthcare regulations that could potentially affect us are: (1)
certificate of need regulation, which many states require upon the provision of
new health services, particularly for long-term care and home healthcare
companies; (2) Medicare-Medicaid fraud and abuse statutes, which prohibit, among
other things, the offering, payment, solicitation, or receipt of remuneration,
directly or indirectly, as an inducement to refer patients to facilities owned
by physicians if the facilities receive reimbursement from Medicare or Medicaid;
and (3) other prohibitions of physician self-referral that have been promulgated
by various states.
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CERTIFICATE OF NEED REGULATION. Various states regulate the provision of
new healthcare service or acquisition of healthcare equipment through
certificate of need or similar programs. These states require health care
providers to enter into a time consuming certificate of need application process
to be granted licenses and permits to open or expand health care services. Most
states have removed certificate of need regulations from their state laws and
have replaced them with more streamlined licensing processes. We believe these
requirements will have a limited effect on our business. However, there can be
no assurance that future changes in those laws will not adversely affect us.
Repeal of existing regulations of this type could also adversely affect us since
sellers could face increased competition absent regulation. There is no
assurance that our proposed healthcare financing business within the nursing
home and home care industries will not be increasingly affected by regulations
of this type as well.
MEDICARE-MEDICAID FRAUD AND ABUSE STATUTES. The U.S. Department of Health
and Human Services, or "HHS," the U.S. Department of Justice and state fraud
enforcement agencies have increased their enforcement efforts under the
Medicare-Medicaid fraud and abuse statutes. Since we often rely on prompt
payment on our healthcare receivables, reduced or denied payments under
government programs could have an adverse effect on our business.
REGULATION OF PHYSICIAN SELF-REFERRAL. These statutes prohibit the
offering, payment, solicitation or receipt of compensation, directly or
indirectly, as an inducement to refer patients for services reimbursable in
whole or in part by the Medicare-Medicaid programs. HHS believes that
distributions of profits from corporations or partnerships to physician
investors who refer patients to the entity for a procedure reimbursable under
Medicare or Medicaid may be prohibited by the statute. In addition, regulatory
attention has been directed toward physician-owned healthcare facilities and
other arrangements where physicians are compensated, directly or indirectly, for
referring patients to those healthcare facilities.
In 1988, legislation entitled the "Ethics in Patient Referrals Act" (H.R.
5198) was introduced which would have prohibited Medicare payments for all
patient services performed by an entity which a patient's referring physician
had an investment interest. As enacted, the law prohibited only Medicare
payments for patient services performed by a clinical laboratory. The
Comprehensive Physician Ownership and Referral Act (H.R. 345), which was enacted
by Congress in 1993 as part of the Deficit Reduction Package, is more
comprehensive than H.R. 5198. This act covers additional medical services
including medical imaging radiation therapy, physical rehabilitation and others.
A variety of existing and pending state laws prohibit or limit a physician
from referring patients to a facility in which that physician has a proprietary
or ownership interest. Many states also have laws similar to the Medicare fraud
and abuse statute which are designed to prevent the receipt or payment of
compensation in connection with the referral of a patient. Healthcare
receivables resulting from a referral in violation of these laws could be denied
payment which could adversely affect both us and our sellers.
EMPLOYEES
As of October 31, 2000, we employed no full-time employees. However, we
will make partial use of approximately 70 employees of our affiliates, for which
we will pay fees under the administrative services agreement.
PROPERTIES
Our principal executive offices are located at 5190 Neil Road in Reno,
Nevada. Our office space is leased by our parent, Medical Capital Holdings, from
a non-affiliated landlord. We believe that our existing facilities are adequate
for our current needs and that suitable additional space will be available as
needed.
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LEGAL PROCEEDINGS
We are not aware of any pending or threatened legal proceedings that, if
adversely determined, would have a material affect on our operations.
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following is the name, age and position of our current directors and
executive officers:
NAME AGE POSITION(S)
---- --- -----------
Sidney M. Field 54 President, Chief Executive Officer and Director
Lawrence J. Edwards 55 Vice President and Director
Joseph J. Lampariello 47 Chief Operating Officer, Secretary and Director
Alan J. Meister 51 Treasurer and Chief Accounting Officer
Joseph J. DioGuardi 59 Director
Gary L. Nielsen 57 Director
The following is the name, age and position of the directors and executive
officers of our parent, Medical Capital Holdings:
NAME AGE POSITION(S)
---- --- -----------
Sidney M. Field 54 President, Chief Executive Officer and Director
Lawrence J. Edwards 55 Vice President, Treasurer and Director
Joseph J. Lampariello 47 Chief Operating Officer, Secretary and Director
Alan J. Meister 51 Chief Accounting Officer
Robert B. MacDonald 68 Director
All directors currently hold office until the next annual meeting of
stockholders or until their successors have been elected and qualified. All
executive officers are elected annual by the board of directors and serve at the
discretion of the board and until their successors are elected and qualified.
There are no family relationships between any of our directors or executive
officers.
The following describes the business experience during the past five years
of our directors and executive officers:
SIDNEY M. FIELD joined Medical Capital Management in 2000 as President,
Chief Executive Officer and Director. Mr. Field has also served as President,
Chief Executive Officer and Director of Medical Capital Holdings and other of
its subsidiaries for the past five years. Prior to joining us, Mr. Field was the
founder, past President and Chairman of FGS, one of the largest insurance
brokers in the United States with annual sales of over $200,000,000. Mr. Field
sold his interest in that firm in 1990. In 1971, he founded Field Group
Services, a firm specializing in the placement and services of group medical
insurance for medium size employers. Mr. Field has also been a principal in
Delcom Inc., an advertising agency specializing in radio and television. Mr.
Field earned his Bachelor of Arts degree at California State University at Long
Beach with a major in Mathematics.
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LAWRENCE J. EDWARDS joined Medical Capital Management in 2000 as Vice
President and Director. Mr. Edwards has also served as Executive Vice President
of Medical Capital Corporation since January 1994. A founder, Mr. Edwards has
founded and operated various specialty sales and investment organizations,
including Newport Aircraft Sales and various real estate investment and property
companies. Mr. Edwards has also been engaged in recovery and work-out of medical
groups and partnerships. Mr. Edwards holds a technical degree from Orange Coast
College.
JOSEPH J. LAMPARIELLO joined Medical Capital Management in 2000 as Chief
Operating Officer, Secretary and Director. Mr. Lampariello has been the Chief
Operating Officer of Medical Capital Holdings and its subsidiaries for the past
four years and is responsible for the day-today operations of Medical Capital
Corporation, the administrator. This responsibility includes funding,
underwriting, collections and all computer information services. Prior to
joining us, Mr. Lampariello was the President of Medical Management &
Acquisitions, Inc., which specialized in recovery, dissolution and collections
of medical claims of medical groups, physician practices and medical companies
in southern California. Mr. Lampariello's extensive experience in medical
practice management includes development of proprietary UNIX platform databases
for medical billing and collections. Mr. Lampariello has served as specialist
collector and receiver for LA County Superior Court and the U.S. Bankruptcy
Court. He holds a degree in Biomedical Engineering from New York Institute of
Technology.
ALAN J. MEISTER joined Medical Capital Management in 2000 as Treasurer and
Chief Accounting Officer. Mr. Meister has also been the Vice President of
Finance of Medical Capital Corporation since September of 1997. Prior to joining
us, Mr. Meister was the Vice President and Chief Financial Officer of American
Express Educational Loans/UBL Financial Corporation, and served in that position
since January of 1994. Prior to that, Mr. Meister was the Controller of FHP
Healthcare, Inc., and served in that position since 1990. Mr. Meister holds a
bachelors degree in Accounting from Northeastern University and an MBA from
Suffolk University.
JOSEPH J. DIOGUARDI joined Medical Capital Management in 2000 as a
Director. After practicing for twenty-two years as a certified public accountant
with the accounting firm of Arthur Andersen & Co., Mr. DioGuardi served as a
member of the United States House of Representatives from 1985 to 1989. Since
leaving Congress, Mr. DioGuardi has engaged in numerous human rights activities,
and he has become a distinguished author and public speaker. Mr. DioGuardi has
also served as a member of the board of directors of Safety Components
International, Inc. since 1994, and served as a member of the board of directors
of NeuroCorp, Ltd. from 1996 to 1998. Mr. DioGuardi holds a B.S. degree from
Fordham University, where he was an accounting major and graduated with honors
in 1962.
GARY L. NIELSEN joined Medical Capital Management in 2000 as a Director.
Mr. Nielsen was a Director of Healthstar Corp. from June 1997 through April,
2000. Mr. Nielsen was the Chief Financial Officer of Granite Golf Corporation
from March 1999 to December 1999. Prior to that he was the Vice President of
Finance and Chief Financial Officer of Best Western International, Inc. and
served in that position from May 1996. From October 1986 to May 1996, Mr.
Nielsen was Vice President and Treasurer of Giant Industries, Inc. Mr. Nielsen
holds a degree in Accounting from Arizona State University and is a certified
public accountant.
COMMITTEES OF THE BOARD OF DIRECTORS
AUDIT COMMITTEE. The current members of the Audit Committee are Messrs.
DioGuardi and Nielsen. The Audit Committee makes recommendations concerning the
engagement of independent public accountants, reviews with the independent
public accountants the plans and results of the audit engagement, approves
professional services provided by the independent public accountants, reviews
the independence of the independent public accountants, considers the range of
audit and non-audit fees, reviews our corporate compliance procedures and
reviews the adequacy of our internal accounting controls.
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COMPENSATION
We were formed on August 4, 2000, and therefore have not paid compensation
to our officers and directors for any previous years. We do not have employment
agreements or consulting agreements with any of our officers or directors. We do
not have a stock option plan or incentive plan based on our performance or stock
value, and have not granted any stock options or rights to acquire our stock to
any person. Each non-employee director serving on our board of directors will
receive an annual fee of $12,000, paid quarterly. In addition, each non-employee
director will receive a fee of $2,000 for each board meeting attended by that
director and $500 for each committee meeting attended by that director.
LIMITATION OF LIABILITY AND INDEMNIFICATION OF DIRECTORS AND EXECUTIVE OFFICERS
Our certificate of incorporation includes a provision that eliminates the
personal liability of our directors for monetary damages for breach of fiduciary
duty as a director, except for liability:
* for any breach of the director's duty of loyalty to us or our
stockholders;
* for acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law;
* under section 174 of the Delaware General Corporation Law regarding
unlawful dividends and stock purchases; or
* for any transaction from which the director derived an improper
personal benefit.
These provisions are permitted under Delaware law.
Our bylaws provide that:
* we must indemnify our directors, officers, employees and agents to the
fullest extent permitted by Delaware law, subject to very limited
exceptions; and
* we must advance expenses, as incurred, to our directors and executive
officers in connection with a legal proceeding to the fullest extent
permitted by Delaware law, subject to very limited exceptions.
We intend to purchase directors and officers liability insurance in order
to limit our exposure to liability for indemnification of directors and
officers, including liabilities under the Securities Act of 1933.
The limitation of liability and indemnification provisions in our
certificate of incorporation and bylaws may discourage stockholders from
bringing a lawsuit against directors for breach of their fiduciary duty. They
may also have the effect of reducing the likelihood of derivative litigation
against directors and officers, even though such an action, if successful, might
otherwise benefit us and our stockholders. Furthermore, a security-holder's
investment may be adversely affected to the extent we pay the costs of
settlement and damage awards against directors and officers under these
indemnification provisions.
There is no pending litigation or proceeding involving any of our
directors, officers or employees regarding which indemnification is sought, nor
are we aware of any threatened litigation that may result in claims for
indemnification.
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Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to our directors, officers, and controlling persons
under the foregoing provisions, or otherwise, we have been advised that in the
opinion of the SEC this indemnification is against public policy as expressed in
the Securities Act of 1933 and is, therefore, unenforceable.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
We are a wholly owned subsidiary of Medical Capital Holdings. We will rely
on some of the other wholly owned subsidiaries of Medical Capital Holdings, like
Medical Capital Corporation and MediTrak, to provide services to us. We will pay
fees to these affiliates for providing services to us, regardless of whether or
not our business is profitable. Since we are under common control with these
affiliates, the agreements and arrangements under which they provide us services
were not made through independent arm's length negotiations. However, we believe
the fees we will pay for these services are no greater than those an independent
third party would charge for providing similar services.
Some members of our management team also work for and are compensated by
our affiliates, and are in some cases shareholders of our common corporate
parent, Medical Capital Holdings. Accordingly, their interests in the
administrator and the servicer, or other of our affiliates, may conflict with
their responsibilities to us. We have an agreement among our parent and our
other affiliates where we will be charged a fee for the portion of the salaries
of these individuals and overhead attributable to our operations.
We believe that our affiliates have sufficient experience in regard to the
kinds and nature of the services they will be providing to us so that our needs
for these services will be competently and adequately met. Further, we believe
that the compensation the affiliates will receive for rendering the services to
us, whether from us or third parties, is reasonable and no more than the usual
and customary amounts paid for those types of services by independent third
parties. However, there can be no assurance that there are not now, or may in
the future, be unrelated businesses that might be able to provide similar
services to us in a more efficient, competent and less costly manner. Also,
there can be no assurance that our affiliates will be able to continue to
provide services to us. In the event that one of our affiliates was not able to
perform its services, there can be no assurance that a suitable replacement can
be located without incurring substantial expense and risk of servicing
deterioration for the receivables.
Medical Capital Corporation will be the administrator for the receivables.
The amount that the face value of a receivable is discounted when the receivable
is purchased will be determined by the administrator based on the underwriting
criteria it has established. We could be adversely affected if the administrator
requires the provider's receivables to be discounted at higher rates than those
the provider is accustomed to receiving. This could result in providers being
unwilling to sell, or discouraged from selling all, their receivables to us. The
administrator also underwrites receivables that may be purchased by our
affiliates. The administrator will attempt to allocate new providers fairly
among its various affiliates, but there can be no assurance that the allocation
may not ultimately be determined unfair to us.
MediTrak will be the servicer of the receivables. MediTrak will be
compensated for its services by receiving a fee for each claim posted on its
tracking system. For some clients with a minimal number of monthly claims being
posted, a minimum monthly servicing fee will be charged. For a more detailed
description of the functions of the administrator and the servicer, see the
section entitled "BUSINESS" above.
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PRINCIPAL STOCKHOLDERS
The following table contains information concerning the persons, including
any "group", who we know to be the beneficial owner of more than five percent of
any class of voting securities of our parent, Medical Capital Holdings. It also
shows the voting securities of our parent owned by our directors and executive
officers individually, and by all of our directors and executive officers as a
group. Unless otherwise indicated in the footnotes, each person named below has
sole voting power and investment power over the shares indicated.
All information is as of October 31, 2000. As of that date, 12,742,222
shares of common stock of Medical Capital Holdings were issued and outstanding.
<TABLE>
<CAPTION>
Percent
Name of Beneficial Owner Number of Shares of Class(1)
------------------------ ---------------- -----------
<S> <C> <C>
Sidney M. Field
2100 South State College Blvd.
Anaheim, California 92806............................ 3,334,333(2) 26.2%
Lawrence J. Edwards
2100 South State College Blvd.
Anaheim, California 92806............................ 3,333,334(3) 26.2%
Joseph L. Lampariello
2100 South State College Blvd.
Anaheim, California 92806............................ 1,500,000 11.8%
Alan J. Meister
2100 South State College Blvd.
Anaheim, California 92806............................ 40,000 *
Joseph J. DioGuardi
2100 South State College Blvd.
Anaheim, California 92806............................ 0 *
Gary L. Nielsen
2100 South State College Blvd.
Anaheim, California 92806............................ 0 *
LAM Irrevocable Trust
Private Trust Corporation Ltd., Charlotte House,
PO Box N65, Nassau, Bahamas........................... 3,333,333(4) 26.2%
Medical Receivables Management Group, LLC
251 Jeanell Drive, No. 3, Carson City, Nevada 89703... 1,170,222 9.2%
JEBAJ Management Corp.
251 Jeanell Drive, No. 3, Carson City, Nevada 89703... 3,333,333(5) 26.2%
Directors and Executive Officers as a Group
(6 persons)........................................... 4,874,334 38.3%
</TABLE>
----------
* Less than 1%
(1) Share amounts are rounded to the nearest whole number. All shares not
outstanding but which may be acquired by a stockholder within 60 days by
the exercise of any stock option or any other right, are deemed outstanding
for the purpose of calculating beneficial ownership and computing the
percentage of the class beneficially owned by that shareholder, but not by
any other shareholder.
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(2) Includes 1,000 shares owned directly by Mr. Field and 3,333,333 shares
which Mr. Field holds the power to vote through an agreement with the owner
of those shares, JEBAJ Management Corp.
(3) Owned by the Lawrence J. Edwards Revocable Living Trust for which Mr.
Edwards is the trustee.
(4) Mr. Robert B. McDonald, a director of Medical Capital Holdings, has the
power to vote these shares.
(5) Mr. Field has the power to vote these shares.
DESCRIPTION OF CAPITAL STOCK
We have issued 1,000 shares of our common stock, all of which is currently
held by our parent, Medical Capital Holdings. Our common stock is not listed for
trading on a securities exchange. There is no public market for our common
stock. Since we are newly formed, we have not paid any dividends on our common
stock.
DESCRIPTION OF THE NOTES
GENERAL
The notes will be issued under a Note Issuance and Security Agreement, or
note agreement, between us and Zions First National Bank, as trustee. You may
review a copy of the note agreement upon request. A copy of the note agreement
is filed as an exhibit to the registration statement relating to this prospectus
and is also available for inspection at the office of the trustee.
The terms and provisions of the notes include those stated in the note
agreement and those made part of the note agreement by reference to the Trust
Indenture Act of 1939. The following is a summary of the material terms of the
note agreement and the notes. For further information you should refer to the
note agreement and the Trust Indenture Act.
The notes:
* are general obligations of our company and are not guaranteed by any
other person or entity;
* are not savings accounts or deposits and are not insured by the FDIC
or any other governmental agency;
* will be issued in book-entry form only without coupons;
* are secured by, and paid primarily from, the healthcare receivables
and the other collateral described in this prospectus, the composition
of which may change over time;
* do not have the benefit of a sinking fund for the retirement of
principal;
* are, to the extent the collateral securing the notes is insufficient,
subordinated in right of payment to all of our future senior
indebtedness;
* are not convertible into capital stock or other securities of our
company; and
* will cease to accrue interest after the applicable redemption date
under the terms and subject to the conditions of the note agreement.
The notes will be denominated in U.S. dollars and we intend to sell them at
100% of the principal face amount. Notes will be sold in denominations of
$1,000, subject to the stated minimum investment amount of $5,000. Each class of
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notes will have the maturities and interest rates shown on the cover page of
this prospectus. The total amount of Class C notes that we may sell under this
prospectus will be limited to $20,000,000 in aggregate principal amount. The
total amount of Class D notes that we may sell under this prospectus will be
limited to $10,000,000 in aggregate principal amount. There are no limits on the
total amount of Class A and B notes we may sell under this prospectus, except
that the total amount of notes we may sell under this prospectus for all classes
of notes combined may not exceed $75,000,000. We may sell additional notes from
time to time in the future in excess of these limitations under a different or
amended prospectus.
Additional series of notes may also be issued in the future under the note
agreement. We may change the stated interest rates, maturities and minimum
investment amounts of any unissued notes at any time by supplementing this
prospectus. Any change will have no effect on the terms of the notes sold prior
to the date of the change. The notes issued under this prospectus, and any
future series of notes, may be secured by the same collateral or separate pools
of collateral.
The outstanding principal amount due at the maturity for each note, or upon
redemption of the note by us, and all interest accrued and payable on the note,
will be payable by us at the office or agency of the paying agent, in Denver,
Colorado, or any other office of the paying agent maintained for this purpose.
The trustee will be the paying agent and the registrar. The function of the
paying agent is to facilitate the transfer of payments of interest and principal
on the notes from Medical Capital Management to the note holders when due.
Notes may be transferred or exchanged for other notes of the same series
and class of a like aggregate principal amount subject to the limitations in the
note agreement. We will not charge a fee for any registration, transfer or
exchange of notes. However, we may require the holder to pay any tax, assessment
or other governmental charge required in connection with any registration,
transfer or exchange of notes. The registered holder of a note will be treated
as its owner for all purposes.
INTEREST RATE AND MATURITY
The notes will be issued in classes designated as Class A, Class B, Class C
and Class D. Each class of notes will bear interest at a different rate as shown
on the cover page of this prospectus. Each class of notes will also have a
different maturity date and, unless automatically renewed, will mature as
follows:
Each Class A note will mature 1 year from the date that Class A note is
issued;
Each Class B note will mature 2 years from the date that Class B note is
issued;
Each Class C note will mature 3 years from the date that Class C note is
issued; and
Each Class D note will mature 4 years from the date that Class D note is
issued.
We may change the interest rate for any or all of the classes of notes to
reflect market conditions at any time by supplementing this prospectus. If we
change the interest rate on any class, the interest rate on notes issued before
the date of the change will not be affected.
PAYMENTS OF INTEREST
Interest will accrue on the notes at the stated rate from the date of issue
until maturity. Notes generally do not earn interest after the maturity date or
date set for redemption. We will pay interest to the person in whose name the
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note is registered at the close of business on the first day of the calendar
month preceding the month in which the payment date occurs. The trustee will
transmit payment for the interest on the notes when due to the person who is
shown as the record holder on the books and records of the registrar as of the
applicable record date for payment. Interest will be calculated based on a year
with twelve 30 day months. Therefore, if a note is purchased on the 31st day of
a month, no interest will accrue for the date of purchase.
Interest on the notes will be paid monthly. Interest payments will be made
on the tenth day of each month with respect to interest accruing during the
preceding month. If the tenth day is not a business day, interest will be paid
on the next following business day. Interest payments will be prorated to
reflect any partial months. Any accrued but unpaid interest outstanding on the
maturity date of a note will be paid on the maturity date. Interest payments
generally will be funded from amounts collected on the healthcare receivables
and other collateral securing the notes. Interest payments may be funded from
the proceeds of sales of new notes.
PAYMENTS OF PRINCIPAL AND AUTOMATIC RENEWAL
Each note matures either 1, 2, 3 or 4 years from the date the note was
issued, as indicated on the cover page of this prospectus, unless redeemed
earlier, which we may do at our option. No principal payments are due before the
maturity of the note unless we decide to redeem a note, or a portion of a note,
before its stated maturity date. You have no right to demand that we redeem your
note prior to its stated maturity date. The trustee will transmit payment for
the principal on the notes when due to the person who is shown as the record
holder on the books and records of the registrar as of the applicable record
date for payment.
If the holder of a note wishes to receive the principal due on the note in
cash at maturity, the holder must give notice to Medical Capital Management at
least 90 but no more than 120 days prior to the stated date of maturity for that
note. Principal will be due and payable in cash upon the maturity of the note
only if proper notice is received from the holder. If notice is not received 90
days prior to maturity, and we have a then currently effective prospectus
relating to the new notes to be issued, we will renew the maturing note by
issuing a new note with terms identical to those of the note that is maturing.
The new note will have the same interest rate as the note that is maturing. The
new note will mature either 1, 2, 3 or 4 years from the maturity date of the
original note, depending on whether the original note was a Class A, B, C or D
note, respectively. If we do not have a currently effective prospectus relating
to the new notes to be issued at the time the original note matures, we will pay
the maturing note in cash.
We may, at our option, pay a maturing note in cash at maturity instead of
renewing the note, regardless of whether any notice relating to the maturity of
that note has been given or not. If a note holder has not given notice of a
request for payment in cash at maturity, and we decide to pay the maturing note
in cash at maturity instead of renewing the note, we will give notice to the
note holder not less than 20 days nor more than 60 days before the maturity date
of the note, in accordance with the note redemption procedures in the note
agreement. Principal payments may be funded from the proceeds of sales of new
notes.
THE TRUSTEE
Zions First National Bank, a national banking association, is the trustee
under the note agreement. We may maintain deposit accounts with the trustee. We
may, from time to time, borrow money from the trustee and conduct other banking
transactions with it. At December 31, 2000, we had no loans outstanding from the
trustee. In the event of default, the note agreement permits the trustee to
become a creditor of Medical Capital Management and does not preclude the
trustee from enforcing its rights as a creditor, including rights as a holder of
collateralized indebtedness.
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Generally, under the note agreement, the trustee is permitted to
temporarily invest funds held in trust from time to time in:
* direct obligations of the United States government or obligations
guaranteed by the United States government;
* interest-bearing time or demand deposits, certificates of deposit or other
similar banking arrangements, or investment agreements, repurchase
agreements or guaranteed investment contracts, with any bank, trust
company, national banking association or other depository institution,
including those of the trustee;
* commercial paper, including that of the trustee, which matures not more
than 270 days after the date of purchase;
* bonds, debentures, notes or other evidences of indebtedness issued or
guaranteed by Federal Farm Credit Banks, Federal Home Loan Mortgage
Corporation, Governmental National Mortgage Association, Export-Import Bank
of the United States, Federal National Mortgage Association, Student Loan
Marketing Association, Farmers Home Administration, Federal Home Loan Banks
or any agency of the United States established for the purposes of
acquiring the obligations of any of these agencies; and
* money market mutual funds investing solely in the above listed assets.
COLLATERAL
Our obligation to pay principal and interest on the notes generally will be
secured by a pledge to the trustee of:
* the receivables and the stock and other tangible and intangible assets,
moneys, rights and properties related to the healthcare industry, including
HMOs, PPOs, and third party administrators, that may be purchased by us
from time to time from funds disbursed from the concentration account;
* amounts as from time to time may be held in the accounts created under the
note agreement;
* our rights under the lock box agreements for collections on the receivables
and the servicing and administration agreements;
* our rights under the various receivables purchase agreements; and
* any and all proceeds of the above, which is referred to in this prospectus
as the "collateral".
The notes will have a first priority claim against the collateral pledged to the
trustee to the extent the collateral is acquired solely with proceeds of the
notes. Therefore, if there is a default on other obligations of our company,
collateral acquired solely with note proceeds can not be used to satisfy those
obligations until the notes are paid in full. The note agreement does not
require us to maintain any specified financial ratios, minimum net worth or
minimum working capital.
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SALE OF COLLATERAL PLEDGED TO TRUST
Receivables and other collateral may be sold, or otherwise disposed of by
the trustee, free from the lien of the note agreement. Prior to any sale we will
identify to the trustee in writing the sale price and the person to which the
collateral will be sold. We will also certify to the trustee in writing that:
* the disposition price is equal to or in excess of the amount disbursed
from the concentration account to acquire the collateral, less any
principal amounts received by the trustee with respect to that
collateral; or
* the disposition price is lower than the amount disbursed from the
concentration account to acquire the collateral, less any principal
amounts received by the trustee with respect to that collateral, and
(1) we reasonably believe that the receipts expected to be received
from the remaining collateral, after giving effect to the disposition,
would be at least equal to the receipts required to timely pay the
principal and interest on the notes; (2) we will remain able to pay
debt service on the notes and make payment on any other obligations to
you on a timely basis, after giving effect to the sale, transfer or
other disposition of the collateral, whereas we would not have been
able to do so on a timely basis if we had not sold, transferred or
disposed of the collateral at the discounted amount; or (3) the sum of
the amounts on deposit in the concentration account and note payment
account, less moneys in any of these accounts which we, the servicer
or administrator are then entitled to receive but which has not yet
been removed from the account, plus the net collectable amount of the
receivables and the fair market value of other collateral will be at
least equal to 100% of the aggregate principal amount of the
obligations owed to all holders of notes combined, plus accrued
interest, after giving effect to the sale, transfer or other
disposition.
Collateral may also be sold or transferred by the trustee if it receives a
written direction from us certifying that the sale or transfer is necessary in
order to avoid the occurrence of an event of default under the note agreement.
Proceeds received upon any disposition of collateral may consist of cash,
permitted investments under the note agreement and/or healthcare receivables.
The proceeds will be deposited by the trustee into the concentration account
described below.
FLOW OF FUNDS
Under the note agreement, the trustee will create and oversee two main
accounts: the acquisition account, the concentration account and the note
payment account. In addition to these accounts, lock box accounts will also be
established for each provider at various banks. The amounts on deposit in all of
these accounts will be pledged to the trustee and held in trust for your
benefit. The following is a brief description of the function of each of these
accounts.
CONCENTRATION ACCOUNT. The primary purposes of the concentration account
are to collect net proceeds from the sale of new notes and to pool funds to be
used for various operational functions. The funds in the concentration account
will be used in the following order of priority, to:
* pay fees to the trustee;
* fund the note payment account;
* fund the purchase of receivables and other assets;
* pay fees to the administrator and the servicer;
* pay distributions to Medical Capital Management.
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NOTE PAYMENT ACCOUNT. The primary purpose of the note payment account is to
facilitate the payment of principal and interest on the notes to you on the
applicable due dates for those payments. The note payment account is not a
sinking fund. The balance in the note payment account is not required to be kept
at a level sufficient to pay the principal on the notes at maturity. Prior to
each interest payment date, funds will be withdrawn from the concentration
account in an amount sufficient to pay the interest then due on the notes. These
funds will be deposited in the note payment account to facilitate the payment to
the note holders.
LOCK BOX ACCOUNTS. The primary purpose of the lock box accounts is to
facilitate collection of the receivables. Payments on the receivables will be
made to these lock box accounts at various lock box processing banks. The
trustee will periodically withdraw the money in the lock box accounts and
deposit the funds in the concentration account.
The trustee will invest amounts on deposit in any of the above accounts, as
we direct, in investment securities and other permitted investments described in
the note agreement. If we make no direction to the trustee, and to the extent
practicable, the trustee will invest amounts held under the note agreement in
direct obligations of, or in obligations fully guaranteed by, the United States
government.
REDEMPTION OF NOTES
We may redeem any or all of the notes without penalty or premium, at our
option, in whole or in part, at any time. If we redeem notes, we will make
payment in cash to you of all unpaid principal and interest accrued to the date
set for redemption, but excluding the date of redemption. We are required by the
note agreement to deposit the amount to be paid in redemption of the notes with
the trustee prior to the redemption date. If we decide to redeem notes, we will
give notice of the redemption date by mail to the holders of the notes, or
portions of notes, to be redeemed not less than 20 days nor more than 60 days
before the redemption date. If notes are redeemed, they will be redeemed in
denominations of $1,000. No sinking fund is provided for the notes.
We have the sole discretion whether to prepay any note, the amount to be
prepaid and which notes, if any, to prepay. The notes are not required to be
prepaid pro rata or according to any other formula.
SUBORDINATION OF NOTES
The notes will be subordinate in right of payment to the holders of all
future senior indebtedness. NOTHING IN THE NOTE AGREEMENT RESTRICTS OUR RIGHT TO
ISSUE, ASSUME, OR GUARANTEE SENIOR INDEBTEDNESS OR ANY OTHER INDEBTEDNESS ON
TERMS DEEMED ACCEPTABLE TO US. By reason of their senior status, holders of
senior indebtedness may receive more, ratably, than our other creditors,
including you, if we are unable to pay all of our obligations when due. If the
receivables and other assets pledged to the trustee are not sufficient to pay
the notes in full, and if the notes or the senior indebtedness are declared due
and payable prior to maturity because of an event of default, the holders of
senior indebtedness may have rights to payment on the senior indebtedness out of
the general funds of the company before you. This could cause a temporary or
permanent interruption in the payments on the notes.
In the event that the trustee or any holder of the notes receives any
payment of any kind in contravention of the subordination provisions of the note
agreement or the senior indebtedness before full payment of the senior
indebtedness, then the payment will be held by the recipient in trust for the
benefit of, and to be paid over to, holders of senior indebtedness or their
representatives. However, the notes will have a first priority claim on the
receivables acquired solely with more proceeds and the funds in the various
accounts pledged to the trustee to the extent they represent proceeds from the
collection of receivables.
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"Senior indebtedness" is indebtedness of Medical Capital Management where
the instrument creating or evidencing the indebtedness, or the assumption or
guarantee of indebtedness, expressly provides that the indebtedness will be
senior in right of payment to the notes or indebtedness which is senior by law
in right of payment to the notes, including all deferrals, renewals, extensions
or refundings of, or amendments, modifications or supplements to, the above. The
term "senior indebtedness" does not include:
* indebtedness evidenced by the notes;
* indebtedness of our company to any subsidiary, parent or affiliate of
ours, a majority of the voting stock of which is owned, directly or
indirectly, by the same persons or entities;
* accounts payable or other indebtedness to trade creditors created or
assumed by us in the ordinary course of our business unless required
by law to be senior to the notes; and
* any particular indebtedness in which the instrument creating or
evidencing the same or the assumption or guarantee of the indebtedness
expressly provides that the indebtedness will not be senior in right
of payment to, or is equal with, or is subordinated to, the notes.
MERGERS AND SALES OF ASSETS
We may not consolidate with or merge into any other person or entity or
convey, transfer or lease our properties and assets substantially as an entirety
to another person or entity, unless:
* the resulting, surviving or transferee entity, if other than us, is
organized and existing under the laws of the United States, any state
of the U.S. or the District of Columbia;
* the successor entity assumes all of our obligations under the notes
and the note agreement; and
* we and the successor entity will not, immediately upon completion of
the proposed merger transaction, be in default under the note
agreement.
Upon the assumption of our obligations by a successor as described above,
subject to exceptions, we will be discharged from all obligations under the
notes and the note agreement.
DEFAULTS AND REMEDIES
Events of default with respect to the notes include:
* the failure to pay interest or principal on any note for a period of
15 days after it becomes due and payable;
* a material breach of any covenant in the note agreement or a
continuing material breach of the servicing agreement or the
administration agreement for 30 days after notice of breach is given
to us;
* some events of bankruptcy, insolvency, or reorganization with respect
to Medical Capital Management;
* material judgments against Medical Capital Management; or
* a cessation of our business.
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The trustee must give you notice of any default within 90 days after the
occurrence of the default, unless it has been cured or waived. The trustee may
withhold the notice if it determines in good faith that withholding the notice
is in your best interests, unless the default is a failure to pay principal or
interest on any note.
If an event of default occurs, either the trustee or the noteholders of
more than 50% in principal amount of the outstanding notes as to which the event
of default occurred may declare the principal of those notes to be immediately
due and payable. The noteholders will have the right to direct the time, method
and place of conducting any proceeding for some of the remedies available to the
trustee, or of exercising some of the powers conferred on the trustee, except as
otherwise provided in the note agreement. The trustee may require reasonable
indemnity from noteholders before acting at their direction. You will not have
any right to pursue any remedy with respect to the note agreement or the notes
unless you satisfy the conditions contained in the note agreement.
Under some circumstances, the noteholders of more than 50% in aggregate
principal amount due on the outstanding notes may rescind any acceleration with
respect to the notes and its consequences or waive an event of default, except
for a failure to pay principal and interest when due.
Within 120 days after the end of each fiscal year, we must furnish to the
trustee a statement concerning our knowledge as to whether or not we are in
default under the note agreement.
MODIFICATION OF THE NOTE AGREEMENT AND SUPPLEMENTAL NOTE AGREEMENTS
Modification and amendment of the note agreement or the notes may be made
by us and the trustee with the consent of the noteholders of more than 50% of
the principal amount due on the outstanding notes, or the notes of a particular
series if only that series would be affected. However, no amendment may, without
the consent of each noteholder affected, make changes that would:
* extend the maturity date of any note;
* reduce the principal amount due on, or redemption price of, any note
or alter the manner or rate of accrual of the rate of interest on any
note;
* reduce the aggregate principal amount on the notes required for
consent to a supplemental note agreement or a change in the note
agreement; or
* result in the creation of any lien on the collateral securing the
notes other than a lien ratably securing all of the obligations under
the note agreement with respect to the notes at any time outstanding
except as otherwise provided in the note agreement.
The note agreement also provides for modifications of its terms, in some
cases, without the consent of the note holders.
BOOK-ENTRY SYSTEM
The notes will be issued in book-entry form only, without physical
certificates. Each book-entry note will be registered in the name of the broker,
or its nominee, who sells the note, in "street name" on behalf of the broker's
client. Beneficial owners of the notes do not have the right to have notes
registered directly in their name or to demand notes be issued in definitive
form with physical certificates. The brokers in whose names notes are registered
on the books of the registrar will be treated as the holders and owners of
record of the notes for all purposes.
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Purchases of notes must be made by or through the selling brokers, which
will receive a credit for the notes sold on the trustee's records. The ownership
interest of each actual purchaser of each note, know as a beneficial owner, is
in turn recorded on the applicable broker's records. A beneficial owner does not
receive a written confirmation from the trustee of its purchase. The beneficial
owner is expected to receive a written confirmation providing details of the
transaction, as well as periodic statements of its holdings, from the broker
through which the beneficial owner entered into the transaction.
Transfers of ownership interests in notes are accomplished by entries made
on the books of the brokers acting on behalf of beneficial owners. The
beneficial owners do not receive certificates representing their ownership
interests in notes, except in the event that use of the book-entry system for
the notes is discontinued. The registered ownership of the notes on the books of
the trustee may only be transferred from a broker to another broker, or their
respective nominees.
To facilitate subsequent transfers, the notes are registered in the name of
the broker selling the notes. The registration of the notes in the name of the
broker effects no change in beneficial ownership. Neither the trustee nor
Medical Capital Management have knowledge of the actual beneficial owners of the
notes; the trustee's records reflect only the identity of the brokers to whose
accounts notes are credited, which may or may not be the beneficial owners. The
brokers remain responsible for keeping account of their holdings on behalf of
their customers.
Delivery notices and other communications by the trustee or Medical Capital
Management to the brokers, and by the brokers to beneficial owners are governed
by arrangements among them, subject to statutory or regulatory requirements as
may be in effect from time to time.
Redemption notices will be sent to the brokers. If less than all of the
notes are to be redeemed, the brokers will determine by lot, or by other
customary practice of the brokers, the amount of the interest of each beneficial
owner to be redeemed.
The brokers will not consent or vote with respect to the notes in most
cases. Proxies will be sent to the brokers in whose name the notes are
registered on the applicable record date, who in turn will forward the proxies
to their clients as governed by the arrangements between the broker and the
client.
Principal and interest payments on the notes will be made by Medical
Capital Management to the trustee and from the trustee to the brokers. The
trustee will credit the brokers' accounts on the payment date in accordance with
the brokers' respective holdings as shown on the trustee's records unless the
trustee has reason to believe that it will not receive payment on the payment
date. Payments by brokers to beneficial owners will be governed by standing
instructions and customary practices, as is the case with securities held for
the accounts of customers in bearer form or registered in "street name," and
will be the responsibility of the broker and not the trustee or Medical Capital
Management, subject to any statutory or regulatory requirements as may be in
effect from time to time. Payment of principal and interest to the trustee is
the responsibility of Medical Capital Management, disbursement of the payments
to the brokers is the responsibility of the trustee, and disbursement of the
payments to the beneficial owners is the responsibility of the brokers.
The trustee may discontinue providing its services as registrar with
respect to the notes at any time by giving reasonable notice to Medical Capital
Management. Under these circumstances, in the event that a successor registrar
is not appointed, we may amend the note agreement to provide for the issuance of
physical note certificates to be printed and delivered. Medical Capital
Management may decide to discontinue use of the system of book-entry transfers
through the trustee, or a successor trustee or registrar. In that event, note
certificates will be printed and delivered.
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None of Medical Capital Management, the trustee, any paying agent, or the
note registrar will have any liability or responsibility for any aspect of the
records relating to or payments made on account of beneficial ownership
interests in the notes or for maintaining, supervising or reviewing any records
relating to the beneficial ownership interests or for any other aspect of the
relationship between the brokers and the owners of beneficial interests in a
note owned through a broker.
MATERIAL FEDERAL INCOME TAX CONSIDERATIONS
The following is a general discussion of the material U.S. federal income
tax considerations relating to the initial purchase, ownership and disposition
of the notes by U.S. and non-U.S. holders. This discussion is a summary only and
is not a complete analysis of all the potential tax considerations relating to
the purchase, ownership and disposition of the notes. We have based this summary
on the U.S. federal income tax laws in effect as of the date of this prospectus.
However, these laws may change with possible retroactive effect. In addition, we
have not obtained, nor do we intend to obtain, a ruling from the IRS or an
opinion of counsel with respect to any tax consequences of purchasing, owning or
disposing of notes. Thus, there can be no assurance that the IRS could not
successfully challenge one or more of the tax consequences or matters described
in this prospectus.
This discussion is limited to purchasers of notes who acquire the notes
from us in the initial offering and hold the notes as capital assets for federal
income tax purposes. This discussion does not address all possible tax
consequences that may be applicable to you in light of your specific
circumstances. For instance, this discussion does not address the alternative
minimum tax provisions of the Internal Revenue Code of 1986, or the "Code", or
special rules applicable to some categories of investors, like some financial
institutions, insurance companies, tax-exempt organizations, dealers in
securities, real estate investment trusts, regulated investment companies, or
persons who hold notes as part of a hedge, conversion or constructive sale
transaction, straddle or other risk reduction transaction, that may be subject
to special rules. This discussion also does not address the tax consequences
arising under the laws of any foreign, state or local jurisdiction or U.S.
estate and gift tax law as applicable to U.S. holders.
If you are considering the purchase of a note, you should consult your own
tax advisors as to the particular tax consequences to you of acquiring, holding
or otherwise disposing of the notes, including the effect and applicability of
state, local or foreign tax laws.
As used in this discussion, the term U.S. holder means a holder of a note
that is:
* for United States federal income tax purposes, a citizen or resident
of the United States;
* a corporation, partnership or other entity created or organized in or
under the laws of the United States or of any political subdivision
thereof or other entity characterized as a corporation or partnership
for federal income tax purposes;
* an estate, the income of which is subject to United States federal
income taxation regardless of its source; or
* a trust, the administration of which is subject to the primary
supervision of a court within the United States and which has one or
more United States persons with authority to control all substantial
decisions, or if the trust was in existence on August 20, 1996, and
has elected to continue to be treated as a United States trust.
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For the purposes of this discussion, a non-U.S. holder means any holder
other than a U.S. holder.
CHARACTERIZATION OF THE NOTES
The federal income tax consequences of owning notes are dependent upon the
characterization of the notes as debt of Medical Capital Management for federal
income tax purposes, rather than as equity interests in Medical Capital
Management or a partnership among the holders of the notes and Medical Capital
Management. Medical Capital Management believes that the notes have been
structured in a manner that will allow the notes to be characterized as debt of
Medical Capital Management for federal income tax purposes. However, this is
only Medical Capital Management's belief, and no ruling from the service or an
opinion of counsel has been sought in this regard. Thus, there can be no
assurance that the IRS could not successfully challenge this characterization.
In the event the notes are treated as equity interests in Medical Capital
Management, the notes would be deemed to be ownership interests in a taxable
corporation for federal tax purposes. Similarly, if the notes were deemed to be
equity interests in a partnership among the holders of notes and Medical Capital
Management, the holders likely would be deemed to own interests in a publicly
traded partnership taxable as a corporation since the safe harbors to the
application of the publicly traded partnership rules likely would not be
available.
In either event, adverse tax consequences would result to holders. For
example, payments of interest and principal on the notes would be treated as
corporate distributions and dividends to the extent Medical Capital Management
has current or accumulated earnings and profits. The entire amount of any
dividends would be taxable to holders of the notes as ordinary income.
Distributions and dividends are not deductible by corporations and publicly
traded partnerships taxable as corporations. Thus, payments on the notes would
not be deductible by Medical Capital Management if the notes were deemed to be
equity interests. In most cases, if the notes were deemed to be equity
interests, Medical Capital Management would have less available cash to make
payment on the notes.
In addition to the above, treatment of the notes as equity interests could
have other adverse effects on some holders. For example, income to non-U.S.
holders could (1) be subject to federal income tax withholding, (2) constitute
business taxable income to some tax-exempt entities, including pension funds and
some retirement accounts, and (3) cause the timing and amount of income that
accrues to holders of notes to be different from that described below.
Because of these potential adverse effects, you are urged to consult your
own tax advisors as to the tax consequences that may apply to your particular
situation in the event the notes are re-characterized as equity interests and as
to the likelihood the notes could be so re-characterized. The remainder of this
discussion assumes that the notes are characterized as debt of Medical Capital
Management.
TAXATION OF U.S. HOLDERS
STATED INTEREST. Under general federal income tax principles, you must
include stated interest in income in accordance with your method of tax
accounting. Accordingly, if you are using the accrual method of tax accounting,
you must include stated interest in income as it accrues. If you are using the
cash method of tax accounting, you must include stated interest in income as it
is actually or constructively received.
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Payments of interest to taxable holders of notes will constitute portfolio
and not passive activity income for the purposes of the passive loss limitations
of the Code. Accordingly, income arising from payment on the notes will not be
subject to reduction by losses from passive activities of a holder.
Income attributable to interest payments on the notes may be offset by
investment expense deductions, subject to the limitation that individual
investors may only deduct miscellaneous itemized deductions, including
investment expenses, to the extent these deductions exceed two percent of the
investor's adjusted gross income.
ORIGINAL ISSUE DISCOUNT. At the present time, we do not expect that the
notes will be issued with original issue discount since the issue price of the
notes will equal the stated redemption price at maturity. However, if a note is
deemed to be issued with original issue discount, the accrual of interest income
by its holder will be subject to the rules discussed below.
Original issue discount is defined generally as the excess of a debt
instrument's stated redemption price at maturity over its issue price, subject
to a statutorily-defined DE MINIMIS exception, which is generally one-quarter of
1% of the debt instrument's stated redemption price at maturity multiplied by
the number of complete years to maturity from its issue date. The "stated
redemption price at maturity" of a debt instrument is generally the sum of the
debt instrument's stated principal amount plus all other payments required,
other than payments of "qualified stated interest." Generally, "qualified stated
interest" consists of interest that is unconditionally payable in cash or in
property at least annually at a single fixed rate. The "issue price" of a debt
instrument that is part of an issue of which a substantial part is sold for
money is generally the purchase price of the debt instrument.
We believe that interest on the notes will be characterized as "qualified
stated interest" for the purposes of calculating original issue discount.
However, there can be no assurance that it will be so treated. In the event
interest on the notes is not treated as "qualified stated interest," the notes
could be deemed to be issued with original issued discount, or more original
issue discount than anticipated, in which case the timing and amounts of income
you realize could be affected.
If the notes are deemed to be issued with more original issue discount than
the statutorily-defined DE MINIMIS amount discussed above, then you, regardless
of your method of accounting, would be required to include in gross income, on a
constant yield to maturity basis, the sum of the daily portions of original
issue discount for the period during the taxable year you held the notes even
though you may not receive a cash payment representing the original issue
discount in that year. Any amount of original issue discount included in income
would increase your tax basis in the note.
BOND PREMIUM AND MARKET DISCOUNT. In the event the notes have an issue
price or are acquired for a price in excess of the face amount of the notes, the
notes would be deemed to be issued with or acquired with bond premium. Notes
acquired by a holder after the date of original issue for a price that is less
than the face amount of the note will have market discount.
If the notes have bond premium, you may be able to elect to deduct the bond
premium using a constant yield method over the remaining term of the notes as
amortizable bond premium under Section 171 of the Code, provided that the notes
are held as a capital asset. Except as provided in Treasury Department
regulations, amortizable bond premium will be treated as an offset to interest
income on the notes rather than as a separate deduction item. An election under
Section 171 of the Code generally is binding once made and applies to all
obligations owned or subsequently acquired by the taxpayer.
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The market discount provisions of the Code generally provide that, subject
to a statutorily-defined DE MINIMIS exception, if you acquire a debt instrument
at a market discount and thereafter recognize gain on a disposition of the debt
instrument, including a gift, the lesser of the gain or the portion of the
market discount that accrued while the debt instrument was held by you will be
treated as ordinary interest income at the time of the disposition. For this
purpose, an acquisition at a market discount includes an acquisition, other than
an acquisition at original issuance, resulting in a basis in the debt instrument
below the debt instrument's stated redemption price at maturity. If you acquire
a debt instrument at a market discount, and do not elect to include the market
discount in income on a current basis, as discussed below, you may be required
to defer a portion of any interest incurred or maintained to purchase or carry
the debt instrument until you dispose of the debt instrument in a taxable
transaction.
You may elect to have market discount accrue on a constant interest rate
basis, as opposed to a straight-line basis. The current inclusion election, once
made, applies to all market discount obligations acquired by you on or after the
first day of the first taxable year to which the election applies and may not be
revoked without the consent of the IRS. If you elect to include market discount
in income in accordance with the preceding sentence, the above rules with
respect to the recognition of ordinary income on a sale or select other
dispositions of a note and the deferral of interest deduction on indebtedness
related to the note will not apply.
The notes provide that they may be redeemed, in whole or in part, before
maturity. If some or all of the notes are redeemed, each holder of a note
acquired at a market discount would be required to treat the principal payment
as ordinary interest income to the extent of any accrued market discount on the
notes.
DISPOSITION OF NOTES. In general, you will recognize gain or loss upon the
sale, exchange, redemption or other taxable disposition of a note measured by
the difference between (1) the amount of cash and the fair market value of
property received, excluding any portion of the payment that is attributable to
accrued interest on the notes, and (2) your adjusted basis in the note as
increased by any original issue discount or market discount previously included
in income and decreased by any cash payments received, other than payments
constituting qualified stated interest, and any amortizable bond premium
deducted over the term of the note. Subject to the market discount rules
discussed above, any of this gain or loss generally will be long-term capital
gain or loss, provided that the note was a capital asset in the hands of the
holder and was held for more than one year. Non-corporate taxpayers generally
are subject to a maximum federal income tax rate of 20% on net long-term capital
gains.
The terms of the notes may be modified upon the consent of a specified
percentage of holders and, in some instances, without consent of the holders. In
addition, the notes may be assumed upon the occurrence of specific transactions
involving Medical Capital Management. The modification or assumption of a note
could, in some instances, give rise to a deemed exchange of a note for a new
debt instrument for federal income tax purposes. If an exchange is deemed to
occur by reason of a modification or assumption, you could realize gain or loss.
CONSIDERATIONS FOR TAX-EXEMPT HOLDERS OF NOTES
Holders of notes that are tax-exempt entities, including charitable
corporations, pension, profit sharing or stock bonus plans, keogh plans,
individual retirement accounts and some other employee benefit plans are subject
to federal income tax on unrelated business taxable income. For example, net
income derived from the conduct of a trade or business regularly carried on by a
tax-exempt entity or by a partnership in which it is partner is treated as
unrelated business taxable income.
52
<PAGE>
A $1,000 special deduction is allowed in determining the amount of
unrelated business taxable income subject to tax. Tax-exempt entities taxed on
their unrelated business taxable income are also subject to the alternative
minimum tax for items of tax preference which enter into the computation of
unrelated business taxable income.
In general, interest income does not constitute unrelated business taxable
income. Note however, that under the debt-financed property rules, if tax-exempt
holders of notes finance the acquisition or holding of notes with debt, interest
on the notes will be taxable as unrelated business taxable income. The notes
will be treated as debt-financed property if the debt was incurred to acquire
the notes or debt was incurred after the acquisition of the notes so long as the
debt would not have been incurred but for the acquisition and, at the time of
the acquisition, the incurrence of the debt was foreseeable.
Tax-exempt persons who are members of a partnership will be deemed engaged
in the trade or business of the partnership. Thus, income from the partnership
will be treated as unrelated business taxable income. In addition, income from
publicly traded partnerships is no longer excluded from the definition of
unrelated business taxable income. Thus, if the notes are deemed to be equity
interests in a partnership, interest payments on the notes could be treated as
unrelated business taxable income. Investors who are tax-exempt entities are
urged to consult their tax advisors with respect to the application of the
foregoing provisions to their particular situations.
NON-U.S. HOLDERS
The following discussion is a summary of the principal U.S. federal income
consequences resulting from the ownership of the notes by non-U.S. holders.
However, application of the U.S. federal income tax rules associated with
non-U.S. holders is complex and factually sensitive. Thus, if you could be
considered to be a non-U.S. holder, you are urged to consult your own tax
advisors with respect to the application of the federal income tax rules for
your particular situation.
PAYMENTS OF INTEREST TO NON-U.S. HOLDERS. Subject to the discussion below
under "Backup Withholding and Information Reporting," payments of interest,
including any accruals of original issue discount, received by a non-U.S. holder
generally will not be subject to United States federal withholding tax, provided
that (1) the non-U.S. holder does not actually or constructively own 10% or more
of the total combined voting power of all classes of voting stock of Medical
Capital Management, (2) the non-U.S. holder is not a controlled foreign
corporation that is related to Medical Capital Management, actually or
constructively, through stock ownership, (3) the beneficial owner of the note
complies with the identification requirements, including delivery of a
statement, signed by the holder under penalties of perjury, certifying that the
holder is a foreign person and provides its name and address, or (4) the
non-U.S. holder is entitled to the benefits of an income tax treaty under which
the interest is exempt from United States withholding tax and the non-U.S.
holder complies with the reporting requirements. This exemption does not apply
to market discount.
Payments of interest not exempt from United States federal withholding tax
as described above will be subject to a withholding tax at the rate of 30%,
subject to reduction under an applicable income tax treaty. Payments of interest
on a note to a non-U.S. holder generally will not be subject to United States
federal income tax, as opposed to withholding tax, unless the income is
effectively connected with the conduct by the non-U.S. holder of a trade or
business in the United States.
DISPOSITION OF THE NOTES BY NON-U.S. HOLDERS. Subject to the discussion
below under "Backup Withholding and Information Reporting," a non-U.S. holder
generally will not be subject to United States federal income tax, and generally
no tax will be withheld, with respect to gains realized on the disposition of a
note, unless (1) the gain is effectively connected with a United States trade or
business conducted by the non-U.S. holder or (2) the non-U.S. holder is an
individual who is present in the United States for 183 or more days during the
taxable year of the disposition and other requirements are satisfied.
53
<PAGE>
NON-U.S. HOLDERS SUBJECT TO U.S. INCOME TAXATION. If interest and other
payments received by a non-U.S. holder with respect to the notes, including
proceeds from the disposition of the notes, are effectively connected with the
conduct by the non-U.S. holder of a trade or business within the United States,
or the non-U.S. holder is otherwise subject to United States federal income
taxation on a net basis with respect to the holder's ownership of the notes, or
are individuals that have by operation of law become residents in the United
States for federal income tax purposes, the non-U.S. holder generally will be
subject to the rules described above applicable to U.S. holders of notes,
subject to any modification provided under an applicable income tax treaty.
These non-U.S. holders may also be subject to the "branch profits tax," if the
holder is a corporation.
BACKUP WITHHOLDING AND INFORMATION REPORTING
Non-corporate U.S. holders may be subject to backup withholding at a rate
of 31% on payments of principal, premium and interest on, and the proceeds of
the disposition of, the notes. In general, backup withholding will be imposed
only if the U.S. holder (1) fails to furnish its taxpayer identification number
("TIN"), which, for an individual, would be his or her Social Security number,
(2) furnishes an incorrect TIN, (3) is notified by the IRS that it has failed to
report payments of interest or dividends, or (4) under some circumstances, fails
to certify, under penalty of perjury, that it has furnished a correct TIN and
has been notified by the IRS that it is subject to backup withholding tax for
failure to report interest or dividend payments. In addition, the payments of
principal and interest to U.S. holders generally will be subject to information
reporting. You should consult your tax advisors regarding your qualification for
exemption from backup withholding and the procedure for obtaining an exemption,
if applicable.
Backup withholding generally will not apply to payments made to a non-U.S.
holder of a note who provides the certification that it is a non-U.S. holder,
and the payor does not have actual knowledge that a certificate is false, or
otherwise establishes an exemption from backup withholding. Payments by a United
States office of a broker of the proceeds of a disposition of the notes
generally will be subject to backup withholding at a rate of 31% unless the
non-U.S. holder certifies it is a non-U.S. holder under penalties of perjury or
otherwise establishes an exemption. In addition, if a foreign office of a
foreign custodian, foreign nominee or other foreign agent of the beneficial
owner, or if a foreign office of a foreign "broker" pays the proceeds of the
sale of a note to the seller, backup withholding and information reporting will
not apply provided that the nominee, custodian, agent or broker is not a "United
States related person," or a person which derives more than 50% of its gross
income for some periods from the conduct of a trade or business in the United
States or is a controlled foreign corporation. The payment by a foreign office
of a broker that is a United States person or a United States related person of
the proceeds of the sale of notes will not be subject to backup withholding, but
will be subject to information reporting unless the broker has documentary
evidence in its records that the beneficial owner is not a United States person
for purposes of the backup withholding and information reporting requirements
and other conditions are met, or the beneficial owner otherwise establishes an
exemption.
The amount of any backup withholding imposed on a payment to a holder of a
note will be allowed as a credit against the holder's United States federal
income tax liability and may entitle the holder to a refund, provided that the
required information is furnished to the IRS.
RECENTLY ISSUED TREASURY REGULATIONS. The Treasury Department has
promulgated final regulations regarding the withholding and information
reporting rules discussed above. In general, these regulations do not
significantly alter the substantive withholding and information reporting
requirements but rather unify current certification procedures and forms and
clarify reliance standards. In addition, these regulations impose more stringent
54
<PAGE>
conditions on the ability of financial intermediaries acting for a non-U.S.
holder to provide certifications on behalf of the holder, which may include
entering into an agreement with the IRS to audit documentation with respect to
the certifications. In general, these regulations are effective for payments
made after December 31, 2000, subject to transition rules. You should consult
your own tax advisor to determine the effects of the application of these
regulations to your particular circumstances.
STATE TAXES
We make no representations regarding the tax consequences of the purchase,
ownership or disposition of the notes under the tax laws of any state. You
should consult your own tax advisors regarding these state tax consequences.
ERISA CONSIDERATIONS
GENERAL
The Employee Retirement Income Security Act of 1974, or "ERISA," and
Section 4975 of the Code impose restrictions on employee benefit plans subject
to ERISA or plans or arrangements subject to Section 4975 of the Code and on
persons who are parties in interest or disqualified persons with respect to the
plans. Some employee benefit plans, like governmental plans and church plans, if
no election has been made under Section 410(d) of the Code, are not subject to
the restrictions of Title I of ERISA, and assets of these plans may be invested
in the notes without regard to the ERISA considerations described below, subject
to other applicable Federal and state law. However, any governmental or church
plan like these which is qualified under Section 401(a) of the Code and exempt
from taxation under section 501(a) of the Code is subject to the prohibited
transaction rules. Any plan fiduciary which proposes to cause a plan to acquire
any of the notes should consult with its counsel with respect to the potential
consequences under ERISA and the Code of the plan's acquisition and ownership of
the notes. Investments by plans are also subject to ERISA's general fiduciary
requirements, including the requirement of investment prudence and
diversification and the requirement that a plan's investments be made in
accordance with the documents governing the plan.
PROHIBITED TRANSACTIONS
GENERAL. Section 406 of ERISA prohibits parties in interest with respect to
a plan from engaging in select transactions involving a plan and its assets
unless a statutory, regulatory or administrative exemption applies to the
transaction. Section 4975 of the Code imposes excise taxes or, in some cases, a
civil penalty may be assessed under Section 502(i) of ERISA, on parties in
interest which engage in non-exempt prohibited transactions. Section 502(i) of
ERISA requires the Secretary of the United States Department of Labor ("Labor")
to assess a civil penalty against a fiduciary who breaches any fiduciary
responsibility under, or commits any other violation of, part 4 of Title I of
ERISA, or any other person who knowingly participates in the breach or
violation.
PLAN ASSET REGULATION. Labor has issued final regulations concerning the
definition of what constitutes the assets of a plan for purposes of ERISA and
the prohibited transaction provisions of the Code. The plan asset regulations
describe the circumstances where the assets of an entity in which a plan invests
will be considered to be "plan assets" so that any person who exercises control
over the assets would be subject to ERISA's fiduciary standards. Generally,
under the plan asset regulation, when a plan invests in another entity, the
plan's assets do not include, solely by reason of the investment, any of the
underlying assets of the entity. However, the plan asset regulation provides
that, if a plan acquires an "equity interest" in an entity that is neither a
"publicly-offered security" nor a security issued by an investment company
55
<PAGE>
registered under the Investment Company Act of 1940, the assets of the entity
will be treated as assets of the plan investor unless exceptions apply. If the
notes were deemed to be equity interests for this purpose and no statutory,
regulatory or administrative exception applies, Medical Capital Management could
be considered to hold plan assets by reason of a plan's investment in the notes.
These plan assets would include an undivided interest in any assets held by
Medical Capital Management. In this case, providers of services to Medical
Capital Management may be parties in interest with respect to the plans, subject
to the fiduciary responsibility provisions of Title I of ERISA, including the
prohibited transaction provisions of Section 406 of ERISA, and to Section 4975
of the Code with respect to transactions involving Medical Capital Management's
assets. Under the plan asset regulation, the term "equity interest" is defined
as any interest in an entity other than an instrument that is treated as
indebtedness under "applicable local law" and which has no "substantial equity
features." Although the plan asset regulation is silent with respect to the
questions of which law constitutes "applicable local law" for this purpose,
Labor has stated that these determinations should be made under the state law
governing interpretation of the instrument in questions. In the preamble to the
plan asset regulation, Labor declined to provide a precise definition of what
features are equity features or the circumstances under which the features would
be considered "substantial," noting that the question of whether a plan's
interest has substantial equity features is an inherently factual one, but that
in making that determination it would be appropriate to take into account
whether the equity features are such that a plan's investment would be a
practical vehicle for the indirect provision of investment management services.
We believe that the notes will be classified as indebtedness without substantial
equity features for ERISA purposes. However, if contrary to our belief that the
notes constitute indebtedness, the notes are deemed to be equity interests in
Medical Capital Management or a partnership among the holders of notes and
Medical Capital Management, and no statutory, regulatory or administrative
exception applies, Medical Capital Management or the partnership could be
considered to hold plan assets by reason of a plan's investment in the notes.
Depending on the relevant facts and circumstances, prohibited transaction
exemptions may apply to the purchase or holding of the notes -- for example,
Prohibited Transaction Class Exemption ("PTE") 96-23, which exempts some
transactions effected on behalf of a plan or by an "in-house asset manager"; PTE
95-60, which exempts some transactions between insurance company general
accounts and parties in interest; PTE 91-38, which exempts some transactions
between bank collective investment funds and parties in interest; PTE 90-1,
which exempts some transactions between insurance company pooled separate
accounts and parties in interest; or PTE 84-14, which exempts some transactions
effected on behalf of a plan by a "qualified professional asset manager."
However, there can be no assurance that any of these exemptions will apply with
respect to any plan's investment in the notes, or that the exemption, if it did
apply, would apply to all prohibited transactions that may occur in connection
with the investment.
Any plan fiduciary considering whether to purchase any notes on behalf of a
plan should consult with its counsel regarding the applicability of the
fiduciary responsibility and prohibited transaction provisions of ERISA and the
Code to the investment. Before purchasing any notes, a fiduciary of a plan
should make its own determination as to whether Medical Capital Management, as
borrower on the notes, is a party in interest with respect to the plan, the
availability of the exemptive relief provided in the plan asset regulation and
the availability of any other prohibited transaction exemptions. In addition,
purchasers that are insurance companies should consult their own ERISA counsel
with respect to their fiduciary responsibilities associated with their purchase
and ownership of the notes, including any responsibility under the Supreme Court
case, JOHN HANCOCK MUTUAL LIFE INSURANCE CO. V. HARRIS TRUST AND SAVINGS BANK.
56
<PAGE>
LEGAL MATTERS
The legality of the notes offered in this prospectus is being passed upon
for us by the law firm of Kutak Rock LLP, Denver, Colorado.
EXPERTS
The financial statements of Medical Capital Management, Inc. as of October
31, 2000 and for the period from August 4, 2000 (Inception) to October 31, 2000
appearing in this prospectus have been audited by Stonefield Josephson, Inc.,
certified public accountants, as contained in their reports included in the
financial statements appearing elsewhere in this prospectus, and are included in
this prospectus in reliance upon those reports given upon the authority of that
firm as experts in accounting and auditing.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
We have filed a registration statement on Form SB-2 with the Securities and
Exchange Commission under the Securities Act of 1933 for the notes being offered
by this prospectus. Prior to the effective date of the registration statement,
we were not subject to the information reporting requirements of the Securities
Exchange Act of 1934. At the time of the effectiveness of this Registration
Statement, we become a "reporting company" and are required to file reports
under to the provisions of the Exchange Act.
This prospectus does not contain all of the information contained in the
registration statement, as permitted by the rules and regulations of the SEC.
For further information about us and the notes offered, see the registration
statement and the exhibits filed with it. Statements contained in this
prospectus regarding the contents of any contract or any other document
referenced are not necessarily complete, and, in each instance where a copy of a
contract or other document has been filed as an exhibit to the registration
statement, reference is made to the copy filed, each of those statements being
qualified in all respects by that reference.
Copies of the registration statement and other information filed by us with
the SEC can be inspected and copied at the public reference facilities
maintained by the SEC in Washington, D.C. at 450 Fifth Street, NW, Washington,
DC 20549 and at some of its regional offices which are located in the New York
Regional Office, Seven World Trade Center, Suite 1300, New York, NY 10048, and
the Chicago Regional Office, CitiCorp Center, 500 West Madison Street, Suite
1400, Chicago, IL 60661-2511. Copies of all or any part of the registration
statement may be obtained from the Public Reference Room of the SEC in
Washington, D.C. upon the payment of the fees prescribed by the SEC. The public
may obtain information on the operation of the Public Reference Room by calling
the SEC at 1-800-SEC-0330. In addition, the SEC maintains a World Wide Web site
that contains reports, proxy statements and other information regarding
registrants like us, that file electronically with the SEC at the following
Internet address: (http:www.sec.gov). We intend to furnish the holders of the
notes and our stockholders with annual reports containing audited financial
statements and with quarterly reports for the first three quarters of each year
containing unaudited interim financial information, to the extent required by
the Exchange Act.
57
<PAGE>
INDEX TO FINANCIAL STATEMENTS
Page
----
Independent Auditors' Report.............................................. F-2
FINANCIAL STATEMENTS:
Balance Sheet........................................................... F-3
Statement of Operations................................................. F-4
Statement of Stockholder's Equity....................................... F-5
Statement of Cash Flows................................................. F-6
Notes to Financial Statements........................................... F-7
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
Medical Capital Management, Inc.
Anaheim, California
We have audited the accompanying balance sheet of Medical Capital Management,
Inc., (a development stage enterprise) as of October 31, 2000, and the related
statements of operations, stockholder's equity and cash flows for the period
from inception of operations on August 4, 2000 to October 31, 2000. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Medical Capital Management,
Inc. as of October 31, 2000, and the results of its operations and its cash
flows for the period from inception of operations on August 4, 2000 to October
31, 2000, in conformity with generally accepted accounting principles.
/s/ Stonefield Josephson, Inc.
CERTIFIED PUBLIC ACCOUNTANTS
Santa Monica, California
November 20, 2000
F-2
<PAGE>
MEDICAL CAPITAL MANAGEMENT, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
BALANCE SHEET - OCTOBER 31, 2000
ASSETS
CURRENT ASSETS -
cash $ 100
DEFERRED OFFERING COSTS 39,823
-------
$39,923
=======
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES -
accrued expenses - due to parent $39,823
STOCKHOLDER'S EQUITY:
Preferred stock; $0.01 par value, 10,000 shares
authorized, no shares issued and outstanding $ --
Common stock; $0.01 par value, 10,000 shares
authorized, 1,000 shares issued and outstanding 10
Additional paid-in capital 90
Deficit accumulated during development stage --
-------
Total stockholder's equity 100
-------
$39,923
=======
See accompanying notes to financial statements.
F-3
<PAGE>
MEDICAL CAPITAL MANAGEMENT, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENT OF OPERATIONS
FROM INCEPTION OF OPERATIONS ON
AUGUST 4, 2000 TO OCTOBER 31, 2000
NET REVENUES $ --
COST OF REVENUES --
---------
GROSS PROFIT --
OPERATING EXPENSES --
---------
NET INCOME $ --
=========
NET INCOME PER SHARE - BASIC AND DILUTED $ 0.00
=========
WEIGHTED AVERAGE NUMBER OF COMMON STOCK EQUIVALENT 1,000
=========
See accompanying notes to financial statements.
F-4
<PAGE>
MEDICAL CAPITAL MANAGEMENT, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENT OF STOCKHOLDER'S EQUITY
FROM INCEPTION OF OPERATIONS ON
AUGUST 4, 2000 TO OCTOBER 31, 2000
<TABLE>
<CAPTION>
Deficit
accumulated
Additional during Total
Common stock paid-in development stockholder's
Shares Amount capital stage equity
------ ------ ------- ----- ------
<S> <C> <C> <C> <C> <C>
Issuance of common stock at
inception on August 4, 2000 1,000 $10 $90 $ -- $100
Net income for the period from
inception on August 4, 2000 to
October 31, 2000 -- -- -- -- --
----- --- --- ----- ----
Balance at October 31, 2000 1,000 $10 $90 $ -- $100
===== === === ===== ====
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE>
MEDICAL CAPITAL MANAGEMENT, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENT OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
FROM INCEPTION OF OPERATIONS ON
AUGUST 4, 2000 TO OCTOBER 31, 2000
CASH FLOWS PROVIDED BY (USED FOR) OPERATING ACTIVITIES:
Net income $ --
CASH FLOWS PROVIDED BY FINANCING ACTIVITY -
proceeds from issuance of common stock 100
-------
NET INCREASE IN CASH 100
CASH, beginning of period --
-------
CASH, end of period $ 100
=======
Supplemental disclosure of non-cash financing activity -
due to parent for deferred offering costs incurred $39,823
=======
See accompanying notes to financial statements.
F-6
<PAGE>
MEDICAL CAPITAL MANAGEMENT, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
FROM INCEPTION OF OPERATIONS ON
AUGUST 4, 2000 TO OCTOBER 31, 2000
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
ORGANIZATION:
The Company was organized on August 4, 2000, under the laws of the
State of Delaware. The Company currently has no operations and in
accordance with Statement of Financial Accounting Statement No. 7, is
considered a development stage company.
The Company is a wholly owned subsidiary of Medical Capital Holdings,
Inc. (Parent).
BUSINESS ACTIVITY:
The Company was formed primarily to acquire healthcare receivables.
The Company will acquire these receivables at a discount to the face amount
of the receivable, and then attempt to collect the full face amount of the
receivable, and retain any profit resulting from the difference, or a
predetermined rate of profit from the receivables. As of October 2000, the
Company has not entered into any agreements or arrangements to acquire
receivables from identified providers.
USE OF ESTIMATES:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect certain reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
CASH:
Equivalents
For purposes of the statement of cash flows, cash equivalents include
all highly liquid debt instruments with original maturities of three months
or less which are not securing any corporate obligations.
See accompanying financial statements.
F-7
<PAGE>
MEDICAL CAPITAL MANAGEMENT, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FROM INCEPTION OF OPERATIONS ON
AUGUST 4, 2000 TO OCTOBER 31, 2000
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
INCOME TAXES:
The Company uses the liability method of accounting for income taxes
pursuant to SFAS No. 109, "Accounting for Income Taxes." Deferred income
tax assets result from temporary differences when certain amounts are
deducted for financial statement purposes and when they are deducted for
income tax purposes.
NET LOSS PER SHARE:
The Company computes net loss per share following SFAS No. 128,
"Earnings Per Share". Under the provisions of SFAS No. 128, basic net
income (loss) per share is computed by dividing the net income (loss)
available to common shareholders for the period by the weighted average
number of common shares outstanding during the period. Diluted net income
(loss) per share is computed by dividing the net income (loss) for the
period by the weighted average number of common and common equivalent
shares outstanding during the period. Common equivalent shares are not
included in the computation of diluted loss per share for the periods
presented because the effect would reduce net loss per share.
(2) STOCKHOLDERS' EQUITY:
During August 2000, the Company issued 1,000 shares of its $0.01 par
value common stock in consideration for $100 in cash.
(3) RELATED PARTY TRANSACTIONS:
Several affiliates that are wholly owned by the Parent will provide
services to the Company. These related parties are as follows:
The Company has entered into an Administrative Services Agreement with
Medical Capital Corporation who is an administrator in purchasing and
monitoring healthcare receivables generated by all healthcare providers.
Medical Capital Corporation will be compensated for underwriting and
administering the healthcare receivables that are purchased.
Medical Tracking Services, Inc., will be compensated for servicing
those receivables purchased.
See accompanying financial statements.
F-8
<PAGE>
MEDICAL CAPITAL MANAGEMENT, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FROM INCEPTION OF OPERATIONS ON
AUGUST 4, 2000 TO OCTOBER 31, 2000
(4) THE OFFERING:
The Company plans on offering $75,000,000 in principal amount of
secured notes, to acquire healthcare receivables as filed on a registration
statement on Form SB-2 with the Securities and Exchange Commission. The
Company will sell the notes in incremental denominations of $1,000 (with a
$5,000 minimum investment amount) on a continuous basis. The notes will be
issued in book-entry form.
Interest only will be paid on the notes monthly on the tenth day of
the month to the holder of record as of the first day of the month
preceding the month in which the payment date occurs. Interest will be paid
without any compounding. Each class of notes will have a different maturity
date and will accrue interest at different rates.
The principal balance will be paid together with any unpaid interest
of each note on the stated maturity date of that class, unless the note is
paid sooner.
The notes will be secured by the assets acquired using the proceeds
from this offering or from the proceeds of the healthcare receivables
previously pledged that are paid before the maturity of the notes. The
Company will pay interest and principal primarily from proceeds of the
assets pledged as collateral. These assets will consist of the insured
portion of receivables arising from healthcare services provided by others
and may consist of other operating or financial assets of companies related
to the healthcare industry. Collateral other than healthcare receivables
will be acquired for fair market value as determined in good faith by the
board of directors from persons or entities that may or may not be
affiliated with the Company.
The Company will also pledge other security, including amounts held
from time to time by Zions First National Bank, the trustee (see Note 5) in
various accounts under the note agreement, the Company's rights under the
agreements they use to acquire healthcare receivables, and the company's
rights under lock box accounts where insurance payments on the healthcare
receivables securing the notes are deposited directly by the healthcare
providers or third parties required to pay the receivables.
The Company will pledge the collateral to an independent trustee for
the note holder's benefit. As the Company sells additional notes under the
prospectus they will acquire additional collateral, which will also be
pledged to the trustee. The pledged collateral will secure all of the
notes, regardless of when the collateral was acquired or when the notes
were issued. Although the collateral pledged will be acquired from the
proceeds of the sale of the notes, or previously pledged healthcare
receivables that are paid, the value of the collateral pledged can
fluctuate and may at times be less than 100% of the outstanding principal
amount of the notes. Also, because the Company will pledge assets other
than healthcare receivables as notes are issued, the percentage of the
collateral that consists of healthcare receivables can change over time.
The Company plans on issuing additional series of notes in the future
under the note agreement. The collateral securing the notes issued under
the prospectus and the collateral acquired with the proceeds from
additional series of notes may secure both the notes and the additional
series of notes.
See accompanying financial statements.
F-9
<PAGE>
MEDICAL CAPITAL MANAGEMENT, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FROM INCEPTION OF OPERATIONS ON
AUGUST 4, 2000 TO OCTOBER 31, 2000
(5) SIGNIFICANT AGREEMENTS:
The Company has entered into a Broker-Dealer Agreement with
Metropolitan Investment Securities for the purpose of engaging a
Broker-Dealer to offer, sell, and distribute certain secured notes of the
Company on a best efforts basis. The effective term shall be the earlier of
(a) one year from the effective date or (b) the expiration, cancellation or
withdrawal of the offering.
See accompanying financial statements.
F-10
<PAGE>
====================================== ======================================
You should only rely on the
information contained in this
prospectus. We have not authorized
any person to provide you with
different information. If anyone $75,000,000
provides you with different or
inconsistent information, you
should not rely on it. We are not
making an offer to distribute or MEDICAL CAPITAL MANAGEMENT, INC.
sell these securities in any
jurisdiction where the distribution
or sale is not permitted. You
should assume that the information
appearing in this prospectus is REDEEMABLE SECURED NOTES, SERIES I
accurate as of the date on the
front cover of this prospectus
only. Our business, financial
condition, results of operations
and prospects may have changed
since that date.
--------------------------------------
TABLE OF CONTENTS
--------------------------------------
Page
----
Prospectus Summary...............
Risk Factors.....................
Forward-Looking Statements....... ----------
Use of Proceeds..................
Plan of Distribution............. PROSPECTUS
Plan of Operation................
Business......................... ----------
Management.......................
Certain Relationships and
Related Transactions...........
Principal Stockholders...........
Description of Capital Stock.....
Description of the Notes.........
Material Federal Income Tax
Considerations.................
State Taxes......................
ERISA Considerations.............
Legal Matters....................
Experts..........................
Where You Can Find Additional
Information....................
Index to Financial Statements.... F-1
Until ____, 2001 (__ days
after the date of this prospectus),
all dealers effecting transactions
in the preferred stock, whether or
not participating in this
distribution, may be required to
deliver a prospectus. This delivery
requirement is in addition to the
obligation of dealers to deliver a
prospectus when acting as
underwriters and with respect to
their unsold allotments or
subscriptions. ________________, 2001
====================================== ======================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the Delaware General Corporation Law provides generally and
in pertinent part that a Delaware corporation may indemnify its directors and
officers against expenses, judgments, fines and settlements actually and
reasonably incurred by them in connection with any civil suit or action, except
actions by or in the right of the corporation, or any administrative or
investigative proceeding if, in connection with the matters in issue, they acted
in good faith and in a manner they reasonably believed to be in, or not opposed
to, the best interests of the corporation, and in connection with any criminal
suit or proceeding, if in connection with the matters in issue, they had no
reasonable cause to believe their conduct was unlawful. Section 145 further
provides that in connection with the defense or settlement of any action by or
in the right of the corporation, a Delaware corporation may indemnify its
directors and officers against expenses actually and reasonably believed to in,
or not opposed to, the best interests of the corporation.
Section 102 of the Delaware General Corporation Law specifies that the
Certificate of Incorporation of a Delaware corporation may include a provision
eliminating or limiting the personal liability of a director or officer to that
corporation or its stockholders for damages for breach of fiduciary duty as a
director or officer, but such a provision must not eliminate or limit the
liability of a director or officer for (a) acts or omissions which involve
intentional misconduct, fraud, or a knowing violation of law; or (b) unlawful
distributions to stockholders.
Our Certificate of Incorporation provides for indemnification of our
officers and directors against all liability and expense to the fullest extent
permitted by Delaware law, including eliminating or limiting the personal
liability of our officers and directors to us and our shareholders for damages
for breach of fiduciary duty as a director or officer. Moreover, our Bylaws
provide indemnity to our officers and directors which affects such a person's
liability while acting in a corporate capacity. Accordingly, our officers and
directors may have no liability to our shareholders for any mistakes or errors
of judgment or for any act or omission, unless such act or omission involves
intentional misconduct, fraud, or a knowing violation of law or results in
unlawful distributions to our shareholders.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
We will pay all expenses in connection with the registration and sale of
the shares of the notes specified in this prospectus. The estimated expenses of
issuance and distribution are set forth below.
SEC Registration Fees $ 19,800
NASD Filing Fees 8,000
Blue Sky Qualification Fees and Expenses 20,000
Trustee Fees 25,000
Printing Fees and Expenses 40,000
Legal Fees 100,000
Accounting Fees 20,000
Miscellaneous 2,200
--------
Total $235,000
========
II-1
<PAGE>
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
(a) On August 4, 2000, in connection with our incorporation, we issued
1,000 shares of common stock, par value $0.01 per share, to our parent, Medical
Capital Holdings, Inc., at a purchase price of $0.01 per share. These shares
represent all of our issued and outstanding common stock. This sale and issuance
of securities was deemed to be exempt from registration under the Securities Act
in reliance upon Section 4(2) of the Securities Act of 1933 as a transaction by
an issuer not involving any public offering. Exemption from the registration
provisions of the Securities Act of 1933 is claimed on the basis that the
purchaser represented its intention to acquire the securities for investment
only and not with a view to or for sale in connection with any distribution
thereof, such transactions did not involve any public offering and the
purchasers were sophisticated and had adequate access to information about us
through their relationship with us.
(b) There were no underwriters employed in connection with the transaction
set forth in Item 15(a).
ITEM 27. EXHIBITS
The following is a list of exhibits filed with this Registration Statement:
EXHIBIT DESCRIPTION
------- -----------
1.01 Broker-Dealer Agreement, dated as of October 6, 2000, between Medical
Capital Management, Inc. and First Securities USA, Inc. (1)
1.02 Broker-Dealer Agreement, dated as of October 19, 2000, between Medical
Capital Management, Inc. and Metropolitan Investment Securities. (1)
1.03 Amendment No. 1, dated as of January 17, 2001, to the Broker-Dealer
Agreement, dated as of October 6, 2000, between Medical Capital
Management, Inc. and First Securities USA, Inc.
1.04 Amendment No. 1, dated as of January 17, 2001, to the Broker-Dealer
Agreement, dated as of October 19, 2000, between Medical Capital
Management, Inc. and Metropolitan Investment Securities.
3.01 Articles of Incorporation of Medical Capital Management, Inc. (1)
3.02 Bylaws of Medical Capital Management, Inc. (1)
4.01 Form of Note Issuance and Security Agreement, dated ______, 2001,
between Medical Capital Management, Inc. and Zions First National Bank,
as trustee. (1)
5.01 Opinion of Kutak Rock LLP as to the validity of the notes. (1)
8.01 Opinion of Kutak Rock LLP as to material tax matters.
10.01 Master Servicing Agreement between Medical Capital Management, Inc. and
Medical Tracking Services, Inc. (1)
II-2
<PAGE>
10.02 Administrative Services Agreement, dated August 4, 2000, between Medical
Capital Management, Inc. and Medical Capital Corporation. (1)
23.01 Consent of Independent Accountants.
23.02 Consent of Kutak Rock LLP (included in exhibits 5.01 and 8.01).
24.01 The Power of Attorney, included on Page II-4 of the Registration
Statement, filed on September 8, 2000, is incorporated herein by
reference.
25.01 Statement of Eligibility of the Trustee.
27.01 Financial Data Schedule of Medical Capital Management, Inc. (1)
----------
(1) Previously filed.
ITEM 28. UNDERTAKINGS
(a) The undersigned Registrant hereby undertakes to:
(1) File, during any period in which it offers or sells securities, a
post-effective amendment to this registration statement to:
(i) Include any prospectus required by Section 10(a)(3) of the
Securities Act;
(ii) Reflect in the prospectus any facts or events arising which,
individually or together, represent a fundamental change in the
information in the registration statement; and
(iii) Include any additional or changed material information on the
plan of distribution.
(2) For determining liability under the Securities Act, treat each
post-effective amendment as a new registration statement of the
securities offered, and the offering of the securities at that time to
be the initial bona fide offering.
(3) File a post-effective amendment to remove from registration any of the
securities that remain unsold at the end of the offering.
(b) The undersigned registrant will:
(1) For purposes of determining any liability under the Securities Act,
treat the information omitted from the form of prospectus filed as
part of this registration statement in reliance upon Rule 430A and
contained in a form of prospectus filed by the registrant pursuant to
Rule 424(b)(1) or (4) or 497(h) under the Securities Act as part of
this registration statement as of the time the Commission declared it
effective.
(2) For the purpose of determining any liability under the Securities Act,
treat each post-effective amendment that contains a form of prospectus
as a new registration statement for the securities offered in the
registration statement, and that offering of the securities at that
time as the initial bona fide offering of those securities.
II-3
<PAGE>
(c) Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than
the payment by the registrant of expenses incurred or paid by a director,
officer or controlling person of the registrant in the successful defense
of any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against
public policy as expressed in the Securities Act will be governed by the
final adjudication of such issue.
II-4
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form SB-2 and authorized this Pre-Effective
Amendment No. 2 to the registration statement to be signed on its behalf by the
undersigned, in the city of Reno, state of Nevada, on January 18, 2001.
MEDICAL CAPITAL MANAGEMENT, INC.
By: /s/ Sidney M. Field
-----------------------------------------
Sidney M. Field, President, Chief
Executive Officer and Director
In accordance with the requirements of the Securities Act of 1933, this
Registration Statement was signed by the following persons in the capacities and
on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Sidney M. Field President, Chief Executive Officer January 18, 2001
--------------------- and Director
Sidney M. Field
*** Vice President and Director January 18, 2001
---------------------
Lawrence J. Edwards
*** Chief Operating Officer, Secretary January 18, 2001
--------------------- and Director
Joseph J. Lampariello
*** Treasurer and Chief Accounting January 18, 2001
--------------------- Officer (Chief Financial Officer)
Alan J. Meister
*** Director January 18, 2001
---------------------
Joseph J. DioGuardi
*** Director January 18, 2001
---------------------
Gary L. Nielsen
*** By: /s/ Sidney M. Field
-----------------------
Sidney M. Field,
As Attorney-in-Fact
II-5
<PAGE>
EXHIBIT INDEX
EXHIBIT DESCRIPTION
------- -----------
1.01 Broker-Dealer Agreement, dated as of October 6, 2000, between Medical
Capital Management, Inc. and First Securities USA, Inc. (1)
1.02 Broker-Dealer Agreement, dated as of October 19, 2000, between Medical
Capital Management, Inc. and Metropolitan Investment Securities. (1)
1.03 Amendment No. 1, dated as of January 17, 2001, to the Broker-Dealer
Agreement, dated as of October 6, 2000, between Medical Capital
Management, Inc. and First Securities USA, Inc.
1.04 Amendment No. 1, dated as of January 17, 2001, to the Broker-Dealer
Agreement, dated as of October 19, 2000, between Medical Capital
Management, Inc. and Metropolitan Investment Securities.
3.01 Articles of Incorporation of Medical Capital Management, Inc. (1)
3.02 Bylaws of Medical Capital Management, Inc. (1)
4.01 Form of Note Issuance and Security Agreement, dated ______, 2001,
between Medical Capital Management, Inc. and Zions First National Bank,
as trustee. (1)
5.01 Opinion of Kutak Rock LLP as to the validity of the notes. (1)
8.01 Opinion of Kutak Rock LLP as to material tax matters.
10.01 Master Servicing Agreement between Medical Capital Management, Inc. and
Medical Tracking Services, Inc. (1)
10.02 Administrative Services Agreement, dated August 4, 2000, between Medical
Capital Management, Inc. and Medical Capital Corporation. (1)
23.01 Consent of Independent Accountants.
23.02 Consent of Kutak Rock LLP (included in exhibits 5.01 and 8.01).
24.01 The Power of Attorney, included on Page II-4 of the Registration
Statement, filed on September 8, 2000, is incorporated herein by
reference.
25.01 Statement of Eligibility of the Trustee.
27.01 Financial Data Schedule of Medical Capital Management, Inc. (1)
----------
(1) Previously filed.
