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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended: February 28, 2002
[ ] TRANSITION REPORT PURSUANT TO SECTION 13(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________ to ______________
COMMISSION FILE NUMBER: 0-3579974
MFC DEVELOPMENT CORP.
(Exact name of registrant as specified in its charter)
DELAWARE 13-3579974
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
271 NORTH AVENUE, NEW ROCHELLE, NY 10801
(Address of principal executive offices) (Zip Codes)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (914) 636-3432
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Title of Each Class
-------------------
Common Stock, $.001 par value
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes (x) No( )
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. (x)
The aggregate market value of the voting stock held by non-affiliates
of the registrant at May 21, 2002 was $1,678,996.
The number of shares outstanding of the registrant's Common Stock as of
May 21, 2002 was 1,790,000 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Part III of this Form 10-K incorporates information by reference from the
registrant's definitive proxy statement to be filed with the Securities and
Exchange Commission within 120 days after the close of the year ended February
28, 2002.
MFC DEVELOPMENT CORP.
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED FEBRUARY 28, 2002
Page No.
--------
PART I
Item 1. Business.................................................. 1
Item 2. Properties................................................ 5
Item 3. Legal Proceedings......................................... 5
Item 4. Submission of Matters to a Vote of Security Holders
and Other Information ..................... 6
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters........................ 6
Item 6. Selected Financial Data................................... 8
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations........ 9
Item 7A. Quantitative and Qualitative Disclosures About
Market Risk................................ 14
Item 8. Financial Statements and Supplementary Data............... 14
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure........ 14
PART III
Item 10. Directors and Executive Officers of the Registrant........ 15
Item 11. Executive Compensation.................................... 15
Item 12. Security Ownership of Certain Beneficial Owners
and Management............................. 15
Item 13. Certain Relationships and Related Transactions............ 15
PART IV
Item 14. Exhibits, Financial Statements, Schedules
and Reports on Form 8-K.................... 16
PART I
ITEM 1. BUSINESS
ORGANIZATION OF THE COMPANY
MFC DEVELOPMENT CORP. (the "Company" or "MFC") was incorporated in the State of
Delaware on May 18, 1990 under the name of PSI Food Services Corp., which had
been a wholly-owned subsidiary of FRMO Corp., formerly FRM Nexus, Inc., a
Delaware corporation ("FRM "), since November 1993. All of FRM's assets and
liabilities were transferred to MFC on August 31, 2000, except for $10,000.
Because such entities were under common control, this transaction was accounted
for in a manner similar to a pooling of interests on MFC's books. On January 23,
2001, all of the outstanding shares of MFC were distributed to shareholders of
FRM, which no longer owns any shares of MFC.
On August 9, 2000, PSI Food Services Corp. changed its name to MFC Development
Corp. That corporation was part of the food services division of FRM, consisting
of two subsidiaries, Wendclark, Inc. and Wendcello Corp., which operated Wendy's
Restaurants, nine in West Virginia and eight in upstate New York, respectively.
The food service division was discontinued on June 20, 2000. On May 14, 1999 the
outstanding capital stock of Wendclark, Inc. was sold for $975,000 in cash and
on June 20, 2000 the outstanding capital stock of Wendcello Corp. was sold for
$1,575,000 in cash. Gains of $96,303 and $381,182 were recorded on said sales by
FRM and PSI Food Services Corp., respectively. The results of the food services
operations have been classified as discontinued operations and prior periods
have been restated. The components of the discontinued operations are set forth
in Note 12 to Notes to Consolidated Financial Statements of MFC herein.
On May 23, 2000, MFC decided to discontinue the food services division and shift
the focus of its business operations to medical services and real estate.
Management believed that the investment of its resources in the restaurant
business would not be as profitable in the future as the employment of those
resources in the medical services and real estate divisions.
DESCRIPTION OF BUSINESS OF MFC
MFC is engaged in the business of (i) developing real estate and (ii) providing
financing and management services to medical practices. On September 14, 2000, a
subsidiary of the Company formed a majority-owned Limited Liability Company to
operate as a "certified capital company" pursuant to Sections 11 and 1511 of the
New York State Tax Law (herein as "Capco") under the State's Capco Program.
THE REAL ESTATE DIVISION of the Company presently conducts its operations
through PSI Capital Corp., Yolo Equities Corp. and Yolo Capital Corp.,
wholly-owned subsidiaries which own the interests described below in parcels of
real estate. For the fiscal year ended February 28, 2002, the total revenues
derived from the real estate division were $1,116,723, constituting 27% of the
total revenues of MFC. MFC controls the development, for residential and
commercial use, of this real estate, which is located in New York and
Connecticut. See Note 4 of Notes to Consolidated Financial Statements herein. A
brief description of each parcel follows:
1
Goshen, New York. This property is to be developed pursuant to a subdivision
plan for the development of 165 single family homes in the Village of Goshen,
Orange County, New York, a growing suburban community 90 minutes from Manhattan.
The plan was agreed upon in settlement of a lawsuit between the Company and the
necessary officials of the Village of Goshen. Participating in the settlement
was Windemere in the Pines at Goshen, Inc., a part of the Windemere Group of
construction companies ("Windemere"), in which Jed Schutz is an officer,
director and shareholder. Mr. Schutz, a shareholder of MFC, was also a director
of FRM until May 1999. MFC agreed with Windemere on terms that assured it of the
profit noted in the next paragraph on the lots that were sold during fiscal 1996
and 1997.
In February and August, 1996, MFC sold the 165 building lots to Windemere for
$2,499,150 to be paid principally from construction loan funding plus an amount
contingent on the amount of profit to be realized on the construction and sale
of the homes to be built on the lots. The sale was accounted for using the
installment method resulting in a deferral of profit, of which $1,557,311
remained deferred as of February 28, 2001, until the initial and continuing
investment criteria was sufficient. The balance of the mortgage on February 28,
2001 was $2,310,000. The interest payment required for fiscal 2000 was not made,
resulting in the suspension of accruing interest from December 1, 1999 through
May 31, 2001. See Note 4 of Notes to Consolidated Financial Statements.
In August 2001, the Company entered into an agreement with Windemere regarding
the mortgage receivable and debenture on the Goshen property (together the
"Goshen Receivables"). Under the terms of the agreement, Windemere satisfied the
Goshen Receivables with payments of $167,500 on August 16, 2001 and $1,507,500
on November 14, 2001, which included principal and accrued interest, resulting
in the realization of $745,000 of deferred income related to the original sale
of the property.
East Granby, Connecticut. The Company owned a partially built two-story office
building located at 2 Gateway Boulevard in East Granby, Connecticut which was
carried at the value of $900,000 on February 28, 1995. In the fiscal year ended
February 29, 1996, the Company spent about $1,300,000 in developing the site and
improving a portion of the building. In February 1996, the property was sold to
Gateway Granby, LLC. ("Gateway"), a limited liability company of which certain
members are shareholders of MFC, for $4,800,000, of which $3,824,208 has since
been paid and $975,792, as reduced by amortization and partial prepayment as of
February 28, 2002, is held by the Company pursuant to a purchase money second
mortgage bearing interest at the rate of 9% per annum. The gain on the sale of
this property has already been recognized on the accrual method except, for a
reserve of $850,000 pending the release of the Company from a contingent
liability for certain rental payments.
Hunter, New York. MFC has two wholly-owned subsidiaries, Yolo Equities Corp.,
which owns the fee interest in properties in Hunter, New York, along with
co-investors, and Yolo Capital Corp., which owns a mortgage on a portion of the
property. The co-investors, together are entitled to receive 35% of the proceeds
of the sales of Hunter Properties made after June 30, 2000 after deducting the
net costs of carrying the properties after June 30, 2000 and the costs of the
sales (the "net proceeds"). Yolo Equities Corp. is entitled to receive 65% of
the said net proceeds. The properties consist of acreage in an area known as
Hunter Highlands, which is adjacent to the Hunter Mountain Ski Slopes in the
Town of Hunter, Greene County, New York. The undeveloped portion of the acreage,
which Yolo Equities Corp. plans to develop, is zoned for single family
residences, condominium units and a hotel site. There is already constructed on
the property (i) a
2
water treatment plant (owned by a wholly-owned subsidiary of the Yolo Capital
Corp.), (ii) a Clubhouse with swimming pool and six tennis courts and (iii) a
small office building. Adjoining the site are 200 condominium units owned by
unrelated persons. See Note 4 of Notes to Consolidated Financial Statements with
respect to related party transactions.
On November 7, 2000, Yolo Equities Corp. received site approval from the
Planning Board of the Town of Hunter for the construction of a 200 room hotel on
the 10 acre hotel site which is contiguous to the ski slopes at Hunter Mountain.
In connection therewith, the Company is proceeding to double the capacity of the
waste water treatment plant. The City of New York has agreed to pay for the
upgrade of all the waste water treatment facilities in New York City's Catskill
watershed area (in which Hunter is located), incorporating the latest technology
in order to improve the water quality in New York City. This expansion and
upgrade is expected to enhance the value of the Company's remaining property in
Hunter, New York.
Yolo Equities Corp. will seek to sell the clubhouse and office building during
the next year. The Company will seek to participate in the hotel site
development with a hotel or development company. This will then leave Yolo
Equities Corp. with about 70 acres of undeveloped land contiguous to the Hunter
ski slopes for which there are no present plans for development.
Other Properties. The Company previously owned two parcels of undeveloped land
in Brookfield, Connecticut, which it sold in December 1999. MFC, alone or with
co-investors and joint ventures, intends to acquire other lands for development
of residential, commercial and office structures, when management identifies
opportunities for enhancement of shareholder values.
THE MEDICAL DIVISION consists of (i) the three Limited Liability Companies
(Nexus Garden City, LLC, FRM Court Street, LLC and Nexus Borough Park, LLC),
which act as service organizations for providers of medical services and (ii) a
wholly-owned subsidiary of the Company, Medical Financial Corp., which purchases
unpaid medical insurance claims, paying cash to the medical provider in return
for a negotiated fee. In the fiscal year ended February 28, 2002, the total
revenues of the Medical Division were $3,049,771, constituting 73% of total
revenues of the Company. For its clients, this Division delivers management
services and increased liquidity, which is normally unavailable to medical
groups from traditional sources. The management services include inputting the
data on the customers' receivables into the Company's computer system,
processing the data and presenting the customers' bills to the insurance company
in compliance with regulations to facilitate payment, following up with
collection efforts if the bills are not paid promptly, furnishing weekly or
other periodic status reports of the customers' receivables and other
information relating to their medical practices.
The expected growth in revenues of the Medical Division will be supported by the
Company's investment in new technology. This technology, which includes document
imaging equipment and software, the internal development of a more efficient
collections program and the purchase of new computers needed to run these
programs. The investment in this technology will decrease the time required to
perform collection tasks to a fraction of the time required under the old
systems. The Company's labor intensive services are now more efficient due to
these capital expenditures.
THE CAPCO DIVISION was commenced by the filing on September 14, 2000 of Articles
of Organization in New York State for FRM N.Y. Capital LLC which is a 99%
majority owned subsidiary of PSI Capital Corp., a wholly owned subsidiary of
MFC. This LLC was formed for the purpose of being approved as a "certified
capital company" pursuant to Sections 11 and 1511 of
3
the New York State Tax Law (herein a "Capco") under the Capco Program. A
"certified capital company" as used in this context is a "for profit" entity,
located and qualified to conduct business in New York State, which is certified
by the New York State Insurance Department ("Department") based on standards set
forth in the New York Tax Law (the "Statute"). The Capco was approved on
November 28, 2000 and certified to participate in New York's Capco Program. The
Statute creates a tax credit incentive mechanism to increase investment of
financial resources of insurance companies into venture capital to businesses
approved by the Department as qualified to provide jobs and promote the growth
of the economy in New York State ("Qualified Businesses").
The Capco will use (i) its own capital of $500,000, plus (ii) the investment of
insurance companies which wish to take substantial equity interests in New York
companies in order to encourage and assist them in creating, developing and
expanding their business. The Capco's emphasis will be on viable small business
enterprises which have had difficulty in attracting institutional venture
capital and which will expand employment opportunities in New York thereby
promoting the growth of the State's economy. The Capco has not yet commenced the
business for which it was formed.
MARKETING
The Company's marketing in its real estate activities is limited to working with
real estate brokers to sell the properties held for sale in Hunter, N.Y.
The Medical Division markets its services to medical groups through its own
individual employees and consultants by direct contact with potential customers
recommended by existing customers and those who contact MFC after receiving its
brochure by direct mail solicitation. MFC designs its own brochure for such
solicitations. In fiscal 2000, MFC designed and obtained the names for two
websites, "medicalfinancial.com" and "mdhelp.com".
The Capco Program will be marketed by the Managers of FRM N.Y. Capital LLC, who
are experienced in the venture capital field.
COMPETITION
Real Estate Division:
The Company's presently owned real estate held for development and sale is
located in Hunter, New York. The real estate market in this community has been
depressed in the past years, so that competition has not been a factor. With the
expectation of improved demand and financing for purchasers, the Company will be
competing with many owners and developers in the locale to market properties,
which it presently owns and which will be developed for sale.
Medical Division:
MFC competes with a wide variety of management and financial service companies,
including public companies, banks, and factoring companies (which advance funds
on the security of purchased receivables). The Company is very small in relation
to such competitors. However the
4
Company's services are also designed to serve a niche market and in its focus on
purchasing and collecting medical insurance claims of certain medical groups,
the competition is limited to only a few companies.
Capco:
The Company is awaiting further legislation in New York to provide financial
incentives for New York Capco organizations. If and when the legislation is
enacted, the Company will compete with many other Capco organizations for
approval by the New York Insurance Department for its Capco Programs.
TRADEMARKS - None.
EMPLOYEES
As of February 28, 2002, the Company had 34 employees. None of the Company's
employees are represented by a labor union. MFC considers its relationship with
its employees to be good.
REGULATORY LAWS
The Company is in compliance with all environmental laws relating to hazardous
substances in real property. Future compliance with environmental laws is not
expected to have a material effect on its business.
ITEM 2. PROPERTIES
In addition to the real property held for development and sale as set forth in
Item 1 above, MFC lease its offices in New Rochelle, New York, under a lease
expiring on February 28, 2007. All of the space leased by the Company is leased
from an unaffiliated third party.
MFC leases a medical office under two separate leases in Brooklyn, NY, where it
provides management services for a medical practice that is also a finance
client. These leases expire October 31, 2002 and March 31, 2004.
MFC leases an MRI facility in Garden City South, NY, where it provides
MRI and management services for a radiology practice that is also a finance
client. This lease expires February 28, 2005, with a five year renewal option.
ITEM 3. LEGAL PROCEEDINGS
MFC is not presently a party to any material litigation.
5
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS AND OTHER
INFORMATION
None, other than the election of directors on July 19, 2001.
OTHER INFORMATION
CAUTIONARY STATEMENT
In connection with the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995, the Company is hereby filing cautionary
statements identifying important risk factors that could cause the Company's
actual results to differ materially from those projected in forward looking
statements of the Company made by or on behalf of the Company.
Such statements may relate, but are not limited, to projections of revenues,
earnings, capital expenditures, plans for growth and future operations,
competition as well as assumptions relating to the foregoing. Forward-looking
statements are inherently subject to risks and uncertainties, many of which
cannot be predicted or quantified.
When the Company uses the words "estimates", "expects", "anticipates",
"believes", "plans", "intends", and variations of such words or similar
expressions, they are intended to identify forward-looking statements that
involve risks and uncertainties. Future events and actual results could differ
materially from those underlying the forward-looking statements. The factors
that could cause actual results to differ materially from those suggested by any
such statements include, but are not limited to, those discussed or identified
from time to time in the Company's public filings, including general economic
and market conditions, changes in domestic laws, regulations and taxes, changes
in competition and pricing environments, regional or general changes in real
estate values.
Undue reliance should not be placed on these forward-looking statements, which
are applicable only as of the date they are made. The Company undertakes no
obligation to revise or update these forward-looking statements to reflect
events or circumstances that arise after that date or to reflect the occurrence
of anticipated events.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
REGISTRATION AND MARKET PRICES OF COMMON STOCK
The Form 10 Registration of the common stock of MFC Development Corp. pursuant
to Section 12(g) of the Securities Exchange Act of 1934 as finally amended on
January 17, 2001 was effective as of November 30, 2000 and MFC has been a
reporting company since that date, filing its first quarterly statement for the
nine months ended November 30, 2000, on January 16, 2001.
6
The Company's common stock was distributed on January 23, 2001 in a spin-off
from FRM. Shareholders' basis in the Company's shares is equal to the market
value when distributed, which was $1.00 per share based on its trading on the
NASDAQ Bulletin Board under the symbol MFCD. The following table sets forth the
range of high and low bid quotations of the Company's common stock for the
periods set forth below, as reported by the National Quotation Bureau, Inc. Such
quotations represent inter-dealer quotations, without adjustment for retail
markets, markdowns or commissions, and do not necessarily represent actual
transactions.
FISCAL PERIOD COMMON STOCK
- ------------- ------------------------
HIGH BID LOW BID
-------- -------
2001
4th Fiscal Quarter (12/1/00 - 2/28/01) $ 1.00 $ 1.00
2002
1st Fiscal Quarter ( 3/1/01 - 5/31/01) $ 2.15 $ 1.00
2nd Fiscal Quarter ( 6/1/01 - 8/31/01) $ 1.60 $ .59
3rd Fiscal Quarter ( 9/1/01 - 11/30/01) $ 2.70 $ .55
4th Fiscal Quarter (12/1/01 - 2/28/02) $ 2.50 $ 2.01
The high bid and low asked quote on May 21, 2002 was $1.25 bid and $1.65 asked.
DIVIDENDS
No cash dividend has been paid by MFC since its inception. The Company has no
present intention of paying any cash dividends on its common stock.
HOLDERS
As of May 1, 2002, there were approximately 1,100 holders of record of MFC
common stock representing about 2,500 beneficial owners of its shares. There are
no options or warrants to purchase common stock of the Company outstanding
except for three options to purchase a total of 4,500 shares held by Allan
Kornfeld, Chairman of the Company and 1,500 shares held each by David Michael
and Anders Sterner, Directors of the Company. The Company does not know of any
shares of common stock of MFC that are held by any director, officer or holder
of as much as 5% of the outstanding stock for sale pursuant to a filing under
Rule 144 of the Securities Act. The Company has not agreed to register any
common stock for sale under the Securities Act by any shareholder or the
Company, the offering of which could have a material effect on the market price
of the Company's common equity.
7
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
MFC Development Corp. and Subsidiaries
Selected Consolidated Financial Data
Fiscal Year Ended
-------------------------------------------------------------------------
February 28, February 28, February 29, February 28, February 28,
2002 2001 2000 1999 1998
------------ ------------ ------------ ------------ ------------
Income Statement Data:
Total Revenue $ 4,166,494 $ 2,359,123 $ 2,283,267 $ 1,457,690 $ 3,182,249
Costs and expenses 3,294,304 3,277,340 3,258,798 1,893,223 1,859,984
----------- ----------- ----------- ------------ -----------
Income (loss) from operations 872,190 (918,217) (975,531) (435,533) 1,322,265
Other (expenses) net of other income (50,199) (220,170) (27,636) (44,874) (210,779)
----------- ----------- ----------- ------------ -----------
Income (loss) from continuing
operations before provision for
income taxes and extraordinary item 821,991 (1,138,387) (1,003,167) (480,407) 1,111,486
Provision for income taxes 13,606 10,936 14,328 5,676 112,937
----------- ----------- ----------- ------------ -----------
Income (loss) from continuing operations 808,385 (1,149,323) (1,017,495) (486,083) 998,549
Income from discontinued operations, net
of taxes (including gain on sale of sub-
sidiary of $381,182 in 2000 and $96,303
in 1999 -- 399,028 325,215 119,514 317,868
----------- ----------- ----------- ------------ -----------
Income (loss) before extraordinary items 808,385 (750,295) (692,280) (366,569) 1,316,417
Extraordinary income net of taxes -- -- -- -- 91,674
----------- ----------- ----------- ------------ -----------
Net income (loss) $ 808,385 $ (750,295) $ (692,280) $ (366,569) $ 1,408,091
=========== =========== =========== ============ ===========
Earnings (loss) per common share:
Income (loss) from continuing operations $ 0.45 $ (0.64) $ (0.56) $ (0.27) $ 0.55
Income from discontinued operations -- 0.22 0.18 0.07 0.17
----------- ----------- ----------- ------------ -----------
Income (loss) before extraordinary items 0.45 (0.42) (0.38) (0.20) 0.72
Extraordinary income net of taxes -- -- -- -- 0.05
----------- ----------- ----------- ------------ -----------
Basic and diluted earnings
(loss) per common share $ 0.45 $ (0.42) $ (0.38) $ (0.20) $ 0.77
=========== =========== =========== ============ ===========
Number of shares used in computation of
of basic and diluted earnings per share 1,792,662 1,807,261 1,816,462 1,816,462 1,816,462
=========== =========== =========== ============ ===========
As of
-------------------------------------------------------------------------
February 28, February 28, February 29, February 28, February 28,
2002 2001 2000 1999 1998
------------ ------------ ------------ ------------ ------------
Balance Sheet Data:
Working Capital $ 3,441,529 $ 2,264,177 $ 1,531,120 $ 1,471,640 $ 1,645,273
=========== =========== =========== ============ ===========
Total Assets $ 7,975,368 $ 9,437,038 $ 8,778,756 $ 10,483,028 $ 9,771,636
=========== =========== =========== ============ ===========
Long-term debt $ 203,654 $ 316,982 $ 24,655 $ 799,480 $ 385,177
=========== =========== =========== ============ ===========
Common Shareholders' equity $ 4,702,368 $ 3,907,282 $ 4,685,912 $ 5,378,192 $ 5,745,076
=========== =========== =========== ============ ===========
Book value per share $ 2.63 $ 2.17 $ 2.58 $ 2.96 $ 3.16
=========== =========== =========== ============ ===========
Common shares outstanding 1,790,000 1,800,000 1,816,462 1,816,462 1,816,462
=========== =========== =========== ============ ===========
(a) Common shares outstanding for all periods have been restated to give effect
to a stock dividend declared on May 14, 1998
(b) During fiscal year ended February 29, 2000, the Company disposed of its
interest in Wendclark Corp.
(c) During the year ended February 28, 2001, the Company disposed of its
interest in Wendcello Corp.
8
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
All statements contained herein that are not historical facts, including but not
limited to, statements regarding future operations, financial condition and
liquidity, expenditures to develop real estate owned by the Company, future
borrowing, capital requirements and the Company's future development plans are
based on current expectations. These statements are forward looking in nature
and involve a number of risks and uncertainties. Actual results may differ
materially. Among the factors that could cause actual results to differ
materially are the following: changes in the business of the Company's medical
provider clients, changes in the real estate and financial markets, and other
risk factors described herein and in the Company's reports filed and to be filed
from time to time with the Commission. The discussion and analysis below is
based on the Company's Consolidated Financial Statements and related Notes
thereto included herein and incorporated herein by reference.
OVERVIEW
MFC presently generates revenues from two business segments: real estate and
medical. The real estate segment consists of various parcels of real estate,
held for future development and sale, in which co-investors also have interests,
and a mortgage note receivable on a property that was previously sold. Revenues
in the real estate division vary substantially from period to period depending
on when a particular transaction closes and depending on whether the closed
transaction is recognized for accounting purposes as a sale or reflected as a
financing or is deferred to a future period.
In August 2001, the Company entered into an agreement with Windemere Pines at
Goshen, Inc. ("Windemere") regarding the mortgage receivable and debenture on
the property located in Goshen, New York (together the "Goshen Receivables").
This property was sold to Windemere in 1996 and 1997 as described in Note 4 of
the Financial Statements. Under the terms of the agreement, Windemere satisfied
the Goshen Receivables by payments of $167,500 on August 16, 2001 and $1,507,500
on November 14, 2001, which included principal and accrued interest resulting,
in the realization of $745,000 of deferred income related to the original sale
of the property.
The medical segment consists of three Limited Liability Companies which act as
service organizations for providers of medical services and a wholly-owned
subsidiary, Medical Financial Corp., which purchases medical insurance claims
receivable, paying cash to the medical provider in return for a negotiated fee.
Prior to June 20, 2000, MFC generated revenues from a third business segment, a
food division engaged in the operations of Wendy's restaurants. On May 23, 2000
the Company committed to sell Wendcello Corp., the remaining subsidiary that
operated in the food service division. On June 20, 2000 the Company completed
the sale and received $1,575,000 in cash, resulting in a gain of approximately
$381,000. As a result of that sale and the sale of the Wendclark subsidiary in
May 1999, the food service segment has been classified as discontinued
operations and prior periods have been restated.
The consolidated financial statements and the discussion below include the
operations of the Company's former parent, FRMO Corp., as if the transfer of
assets and liabilities on August 31, 2000 had occurred at the beginning of the
periods presented.
9
RESULTS OF OPERATIONS
YEAR ENDED FEBRUARY 28, 2002 COMPARED TO YEAR ENDED FEBRUARY 28, 2001
The Company's revenues from continuing operations for the year ended February
28, 2002 ("2002") was $4,166,000, an increase of $1,807,000 or 77% as compared
to the year ended February 28, 2001 ("2001"). The increase was a result of
increases in both the real estate and medical divisions.
Revenue in the real estate division increased in 2002 by $812,000, to
$1,116,000. The increase was due to the settlement of the Goshen receivables,
which resulted in the realization of $745,000 of deferred income from real
estate that was sold in prior periods and an increase in interest from
mortgages. The increase in interest from mortgages of $61,000 in 2002 was
attributable to an increase in accrued interest income on the mortgage
receivable from the property located in Goshen, NY. The accrual of interest on
this mortgage had been suspended during the period from December 1, 1999 through
May 31, 2001 because the annual interest payments that were due in February 2000
and 2001 were not paid until August 2001.
The $995,000 increase in revenues in the medical division was due to an increase
in both income from the purchase and collection of medical claims and management
fees. The 43% increase in income from the purchase and collection of medical
claims of $488,000 in 2002 was due to (i) additional collections services that
are now being provided to existing clients and (ii) $120,000 due to the change
in the accounting estimate related to the timing of revenue as set forth in Note
3.
The increase in management fees of $507,000 (55%) in 2002, was a result of the
increase in management services that the Company provides to two of its finance
clients. The Company operates an MRI facility that provides management services
to a finance client's radiology practice. Management fees were also generated
from the management of a finance client's physical therapy practice. These fees
are net of billing adjustments of $83,000. Management service fees are billed
monthly according to the cost of services rendered to the client. If the assets
of the management client, which is also a finance client, are not enough to
satisfy the billed fees, an allowance for billing adjustments is recorded to
reduce the Company's net receivables to an amount that is equal to the assets of
the client that are available for payment.
Costs and expenses from continuing operations increased by $17,000 (1%) to
$3,294,000 in 2002. The increase was due to increases of $227,000 in the
medical division and $22,000 in depreciation and amortization, offset by
decreases of $182,000 in the real estate division and $50,000 in corporate
expenses and other.
The decrease in costs and expenses in the real estate division in 2002 were due
to a decrease in the amount of properties sold in 2002, which results in a
decrease in the cost of sales. The decrease was also due to a reduction of
operating expenses in 2002, after a portion of the Hunter property was sold
during the first quarter of the current fiscal year.
The increase in costs and expenses in the medical division was due to an
increase in expenses of $266,000 that are related to the management of two
finance client's medical practices, offset by a decrease of $39,000 in medical
receivable expenses. The 27% increase in medical management expenses in 2002 are
related to the 55% increase in revenues for the same period. The 3% decrease in
medical receivable expenses in 2002 as compared to its increase in revenues was
primarily due to the cost of increasing the infrastructure in 2001 in
anticipation of the new clients that were eventually
10
obtained. The Company now has an improved infrastructure, which includes better
trained employees, computer systems and office facilities that can handle
further increases of revenue without substantial increases in expenses. In
addition, the Company has also been more selective in the bill purchasing
process, which results in a minimal amount of bad debt losses. The Company may
incur a bad debt loss when the portion of a medical claim collected does not
exceed the advance (including the fee charged) given to the client. The Company
also has other contractual rights to help minimize its risk of loss. The Company
continually monitors the aging of the uncollected medical claims as it relates
to its advances and establishes a reserve deemed adequate to cover potential
losses.
The decrease in corporate expenses and other of $50,000 in 2002 is primarily due
to reductions in professional fees, reallocations of a greater portion of
executive salaries to the medical division and a reduction in shareholder
reporting expenses. The increase in depreciation and amortization of $22,000 in
2002 is attributable to increased capital expenditures in the medical financing
division. Interest expense in 2002 was $62,000, an increase of $29,000 from
2001. The increase was attributable to the debt that was incurred to finance the
purchase of additional medical claims receivable and an MRI machine in the
medical division.
Spin-off expenses decreased by $209,000 in 2002 to $-0-, due to the one time
only charge in 2001 of the distribution of MFC stock to FRM's shareholders and
the registration of MFC's common stock.
Income from discontinued operations decreased by $399,000 to $-0- in 2001, due
to the gain of $381,000 from the sale of the Wendcello subsidiary in the quarter
ended August 31, 2000.
For the reasons described above, most notably, (i) the settlement of the Goshen
receivables resulting in the realization of $745,000 of deferred income, (ii)
the continuing increases in revenues in the medical division, which are
substantially greater than increases in expenses and (iii) the elimination of
spin-off expenses, the Company recorded net income from continuing operations of
$808,000 for the year ended February 28,2002 as compared to a loss of $1,149,000
for the year ended February 28, 2002.
YEAR ENDED FEBRUARY 28, 2001 COMPARED TO YEAR ENDED FEBRUARY 29, 2000
The Company's revenues from continuing operations increased by $76,000 or 3%,
for the year ended February 28, 2001 ("2001") to $2,359,000 from $2,283,000 for
the year ended February 29, 2000 ("2000"). The increase was a result of an
increase in the medical division, offset by decreased revenues in the real
estate division.
Revenue in the real estate division decreased in 2001 by $946,000, to $304,000
from $1,250,000 in 2000. The decrease in revenue was due to a decrease of
$822,000 in the sales of real estate in 2001 as compared to 2000. Rental income
decreased by $18,000 in 2001 because rent is no longer being received on the
properties that were sold during 2001 and 2000. The $106,000 decrease in 2001 in
interest from mortgages was attributable to a decrease in accrued interest
income on the mortgage receivable from the property located in Goshen, NY.
Interest was no longer being accrued on this mortgage because the annual
interest payment that was due in February 2000 had not been paid.
The $1,022,000 increase in revenues in the medical division in 2001 was due to
an increase in both earned fees from the purchase and collection of medical
claims and management fees. The 9% increase in earned fees from the purchase and
collection of medical claims of $96,000 in 2001 was due to an
11
increase in medical claims purchased, which resulted in an increase in revenue
recognition over the period of collections, which is usually six months. The
increase in claims purchased was due to the Company obtaining new clients and
additional purchases from existing clients. The increase in purchases in 2001
resulted in an increase in purchases of $3,262,000, which is a 37% increase over
2000. The income that is derived from these purchases is deferred and recognized
as the claims are collected during an average six month period.
The increase in management fees of $926,000 for the year ended in 2001, was a
result of the ownership, beginning in February 2000, of an MRI facility that
provides management services to a finance client's radiology practice.
Management fees were also generated, beginning in April 2000, from the
management of a finance client's physical therapy practice. Two other finance
client's practices were managed for a temporary period in 2000. These fees are
net of reserves of $236,000 for the year ended February 28, 2001.
Costs and expenses from continuing operations increased by $18,000, or less than
1% in 2001, to $3,277,000 as compared to $3,259,000 in 2000. The net increase in
2001 was due to increases of $877,000 in the medical division and $20,000 in
depreciation and amortization, which were offset by decreases of $775,000 in the
real estate division and $103,000 in corporate expenses and other.
The decrease in costs and expenses in the real estate division in 2001 were due
to a decrease in the amount of properties sold in 2001, which results in a
decrease in the cost of sales. Operating expenses also decreased in 2001, after
a portion of the Hunter property and all of the Brookfield property were sold
during the last three quarters of fiscal 2000.
The costs and expenses in the medical division in 2001 was $2,410,000, an
increase of $877,000 from 2000. The net increase was due to expenses of $994,000
that are related to the three new subsidiaries that were formed in 2000 to
manage the operations of certain medical practices, offset by a decrease of
$117,000 in medical receivable expenses. The decrease in medical receivable
expenses is primarily due to a reduction in the amount of additional bad debt
reserves in 2001.
The decrease in corporate expenses and other of $103,000 in 2001 is primarily
due to reductions in professional fees and reallocations of a greater portion of
executive salaries to the medical division. The increase in depreciation and
amortization of $20,000 in 2001 is attributable to additional depreciation as a
result of increased capital expenditures in the medical financing division.
Interest expense in 2001 was $33,000, a decrease of $9,000 from $42,000 in 2000.
The decrease was attributable to the debt that was eliminated in 2000 when a
portion of the proceeds from the sale of the Wendclark subsidiary was used to
repay debt, offset by new debt incurred in the last two quarters of 2001 used to
finance the purchase of medical claims receivable and acquisition, by capital
lease, of an MRI machine. Interest income increased by $10,000, from $15,000 in
2000 to $25,000 in 2001. The increase was due to the investment of a portion of
the proceeds from the sale of Wendcello in June 2000.
Expenses related to the distribution of MFC stock to FRM's shareholders and the
registration of MFC's common amounted to approximately $209,000. These expenses
primarily consist of professional fees, filing costs, printing and shareholder
communications. These expenses are a one-time only charge, most of which were
incurred in the last quarter of fiscal 2001 and did not continue in fiscal 2002.
12
Income from discontinued operations in 2001 increased $74,000, to $399,000. The
increase in 2001 was primarily due to the gain of $381,000 from the sale of the
Wendcello subsidiary, offset by the profits from that subsidiary that were
included in the entire 2000 period.
For the reasons noted above, the Company's net loss increased by $58,000 in 2001
to $750,000 as compared to a net loss of $692,000 in 2000.
LIQUIDITY AND CAPITAL RESOURCES
The Company's two continuing business activities and discontinued operations
during the year ended February 28, 2002 resulted in an increase of cash in the
amount of $1,054,000. The Company expects continued growth of its medical
division based on its on-going negotiations with prospective new clients, which
are expected to be obtained in the next few months. These prospective clients
will result in an increase in the amount of cash needed to purchase their
medical insurance claims receivable. The funds for those needs are expected to
be provided from existing cash and the related party credit line. Additional
funds may be provided by additional asset-based borrowing facilities and the
sale of real estate assets.
The real estate division is not expected to be a significant user of cash flow
from operations, due to the elimination of carrying costs on the real estate
that was sold during the two years ended February 28, 2002. The Company's real
estate assets in Hunter, NY are owned free and clear of mortgages. Further
development of this property, at any significant cost, is expected to be funded
by the sale of property in Hunter or asset-based financing.
The Company believes that its present cash resources and the cash available from
financing activities will be sufficient on a short-term basis and over the next
12 months to fund continued expansion of its medical financing business, its
company-wide working capital needs and expected investments in property and
equipment. The Company intends to pace its growth in the medical division to its
capacity to provide the funds internally and from its financing activities.
Cash provided by operations in 2002 was $356,000, as compared to $567,000 being
used in 2001. The $923,000 increase in cash in 2002 was due to the elimination
of operating losses in 2002, offset by fluctuations in operating assets and
liabilities (including net assets of discontinued operations) primarily caused
by timing differences.
Cash provided by investing activities was $872,000 in 2002 as compared with
$13,000 being used in 2001. The net increase of $885,000 was primarily due to
the collection of the Goshen receivables of $1,315,000 and by a $1,250,000 net
increase in funds from collections in the medical division, offset by the
proceeds of $1,575,000 from the sale of the Wendcello subsidiary in 2001 and a
$97,000 increase in capital expenditures. The increase in capital expenditures
is primarily due to the Company's decision to invest in technology that will
support the Company's expected growth. This technology, which includes document
imaging equipment and software (included in assets acquired under capital
leases), the internal development of a more efficient collections program and
the purchase of new computers needed to run these programs. The investment in
this technology will decrease the time required to perform collection tasks to a
fraction of the time required under the old systems. The Company's labor
intensive services are now more efficient due to these capital expenditures.
Net cash used by financing activities was $173,000 in 2002 as compared with
$283,000 being
13
provided in 2001. The $456,000 increase in the use of cash in 2002 was due to
$49,000 of net repayments in 2002, as compared to $212,000 of net borrowings in
2001 and the sale of equity to minority interests of $100,000 in 2001 and the
repurchase of those minority interests for $100,000 in 2002.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES OF MARKET RISK
The Company's market risk arises principally from the interest rate risk related
to its receivables. Interest rate risk is a consequence of having fixed interest
rate receivables. The Company is exposed to interest rate risk arising from
changes in the level of interest rates. It is anticipated that the fair market
value of debt with a fixed interest rate will increase as interest rates fall
and the fair market value will decrease as interest rates rise.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Financial Statements and supplementary data required by this Item 8 are set
forth at the pages indicated in Item 14(a) below.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
14
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item is set forth in the Company's definitive
proxy statement, which will be filed with the Securities and Exchange Commission
within 120 days of February 28, 2002. Such information is incorporated herein by
reference and made a part hereof.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is set forth in the Company's definitive
proxy statement, which will be filed with the Securities and Exchange Commission
within 120 days of February 28, 2002. Such information is incorporated herein by
reference and made a part hereof.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is set forth in the Company's definitive
proxy statement, which will be filed with the Securities and Exchange Commission
within 120 days of February 28, 2002. Such information is incorporated herein by
reference and made a part hereof.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is set forth in the Company's definitive
proxy statement, which will be filed with the Securities and Exchange Commission
within 120 days of February 28, 2002. Such information is incorporated herein by
reference and made a part hereof.
15
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES, AND REPORTS ON FORM 8-K
(a) FINANCIAL STATEMENTS, SCHEDULES AND EXHIBITS
(1) FINANCIAL STATEMENTS:
Index to Consolidated Financial Statements and Schedules...................... F-1
Report of Holtz Rubenstein & Co., LLP......................................... F-2
Report of Ernst & Young, LLP.................................................. F-3
Consolidated Balance Sheets - February 28, 2002 and 2001...................... F-4
Consolidated Statements of Operations -
Years ended February 28, 2002, February 28, 2001 and February 29, 2000..... F-6
Consolidated Statements of Stockholders' Equity -
Years ended February 28, 2002, February 28, 2001 and February 29, 2000..... F-7
Consolidated Statements of Cash Flows -
Years ended February 28, 2002, February 28, 2001 and February 29, 2000..... F-8
Notes to Consolidated Financial Statements.................................... F-9
(2) FINANCIAL STATEMENT SCHEDULES:
Schedule II - Valuation and Qualifying Accounts..................... F-30
Schedule III - Real Estate and Accumulated Depreciation.............. F-31
Schedule IV - Mortgage Loans on Real Estate......................... F-32
All other schedules are omitted because they are not applicable, not required,
or because the required information is included in the consolidated financial
statements or notes thereto.
(3) EXHIBITS:
All exhibits are incorporated herein by reference to Amendment No. 3 to Form 10
dated January 17, 2001.
Exhibit
Number Description
- ------ -----------
3.01 Certificate of Incorporation of the Company.
3.03 Amended By-Laws of the Company.
5.01 Opinion of Tanner Propp, LLP
21.01 A list of subsidiaries of the Company.
(b) REPORTS ON FORMS 8-K
The Company filed Form 8K on September 10, 2001 and December 5, 2001.
16
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d)2 of the Securities Exchange
Act of 1934 as amended, the Registrant has duly cause this Report to be signed
on its behalf by the undersigned, thereunto duly authorized, on May 23, 2002.
MFC DEVELOPMENT CORP.
By: /S/ VICTOR BRODSKY
---------------------
Victor Brodsky
Vice President and
Chief Financial Officer
(Principal Financial and Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
this Report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated on May 23, 2002.
Signature Title
- --------- -----
/S/ LESTER TANNER President and Director
- ------------------------------------ (Principal Executive Officer)
Lester Tanner
/S/ ALLAN KORNFELD Chairman of the Board
- ------------------------------------
Allan Kornfeld
/S/ DAVID MICHAEL Director
- ------------------------------------
David Michael
/S/ VICTOR BRODSKY Director
- ------------------------------------
Victor Brodsky
/S/ ANDERS STERNER Director
- ------------------------------------
Anders Sterner
MFC Development Corp. and Subsidiaries
Index to Consolidated Financial Statements
and Consolidated Financial Statement Schedules
This Index................................................................ F-1
Report of Independent Auditors............................................ F-2
Consolidated Balance Sheets --
As of February 28, 2002 and 2001....................................... F-4
Consolidated Statements of Operations --
Years Ended February 28, 2002, February 28, 2001
and February 29, 2000.................................................. F-6
Consolidated Statements of Stockholders' Equity --
Years Ended February 28, 2002, February 28, 2001
and February 29, 2000.................................................. F-7
Consolidated Statements of Cash Flows --
Years Ended February 28, 2002, February 28, 2001
and February 29, 2000.................................................. F-8
Notes to Consolidated Financial Statements................................ F-9
Consolidated Financial Statement Schedules:
II -- Valuation and Qualifying Accounts................................ F-30
III -- Real Estate and Accumulated Depreciation........................ F-31
IV -- Mortgage Loans on Real Estate.................................... F-32
The data required by all other schedules is either included in the financial
statements or is not required.
F-1
Report of Independent Auditors
The Board of Directors and Shareholders
MFC Development Corp., Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of MFC Development
Corp., Inc. and its subsidiaries as of February 28, 2002 and 2001 and the
related consolidated statements of operations, stockholders' equity and cash
flows for the two years ended February 28, 2002. Our audits also included the
consolidated financial statement schedules listed in the Index at Item 14 (a)
for the two years ended February 28, 2002. These consolidated financial
statements and consolidated financial statement schedules are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these consolidated financial statements and consolidated financial statement
schedules based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the 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 audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of MFC
Development Corp., Inc. and its subsidiaries at February 28, 2002 and 2001 and
the consolidated results of their operations and their cash flows for the two
years ended February 28, 2002 in conformity with accounting principles generally
accepted in the United States of America. Also, in our opinion, the related
consolidated financial statement schedules for the two years ended February 28,
2002, when considered in relation to the basic financial statements taken as a
whole, present fairly, in all material respects, the information set forth
therein.
/s/ HOLTZ RUBENSTEIN & CO., LLP
Melville, New York
May 3, 2002
F-2
Report of Independent Auditors
The Board of Directors and Shareholders
MFC Development Corp., Inc. and Subsidiaries
We have audited the accompanying consolidated statements of operations,
stockholders' equity and cash flows for the year ended February 29, 2000 of MFC
Development Corp., Inc. and its subsidiaries. Our audit also included the
consolidated financial statement schedules listed in the Index at Item 14 (a)
for the year ended February 29, 2000. These financial statements and
consolidated financial statement schedules are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and consolidated financial statement schedules based on our
audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States. 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 consolidated financial statements referred to above present
fairly, in all material respects, the consolidated results of operations and
cash flows of MFC Development Corp., Inc. and its subsidiaries for the year
ended February 29, 2000 in conformity with accounting principles generally
accepted in the United States. Also, in our opinion, the related consolidated
financial statement schedules for the year ended February 29, 2000, when
considered in relation to the basic financial statements taken as a whole,
present fairly, in all material respects, the information set forth therein.
/s/ ERNST & YOUNG LLP
New York, New York
May 8, 2000, except for
Note 1, as to which the date is
September 25, 2000
F-3
MFC Development Corp. and Subsidiaries
Consolidated Balance Sheets
FEBRUARY 28, FEBRUARY 28,
2002 2001
--------------------------
ASSETS
Current assets:
Cash and cash equivalents $1,338,214 $ 284,073
Mortgage and notes receivable - current 31,822 29,093
Finance & management receivables, net 4,136,126 4,520,319
Other current assets 149,713 134,361
-------------------------
Total current assets 5,655,875 4,967,846
-------------------------
Property and equipment:
Property and equipment, at cost 790,169 550,386
Less accumulated depreciation and amortization 298,545 195,744
-------------------------
491,624 354,642
-------------------------
Other assets:
Real estate held for development and sale 625,713 439,153
Mortgage and notes receivable 943,970 3,123,590
Accrued interest receivable - related party mortgage -- 321,150
Loans receivable 196,417 142,840
Other 61,769 87,817
-------------------------
Total other assets 1,827,869 4,114,550
-------------------------
Total assets $7,975,368 $9,437,038
=========================
See accompanying notes.
F-4
MFC Development Corp. and Subsidiaries
Consolidated Balance Sheets (continued)
FEBRUARY 28, FEBRUARY 28,
2002 2001
-----------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 287,890 $ 403,707
Current portion of notes payable, including $160,000 in 2002
payable to a related party 225,153 57,050
Due to finance customers 1,697,879 2,214,938
Income taxes payable 3,424 6,967
Other current liabilities -- 21,007
-----------------------------
Total current liabilities 2,214,346 2,703,669
-----------------------------
Other liabilities:
Notes payable, including $110,000 in 2002 and $258,000
in 2001 payable to a related party 158,654 316,982
Deferred Income 850,000 2,407,311
Other 45,000 --
-----------------------------
Total other liabilities 1,053,654 2,724,293
-----------------------------
Minority interest in subsidiary 5,000 101,794
-----------------------------
Commitments and contingencies
Stockholders' equity:
Preferred stock - $.001 par value;
Authorized - 2,000,000 shares;
Issued and outstanding - 0 shares -- --
Common stock - $.001 par value;
Authorized - 40,000,000 shares;
Issued and outstanding - 1,800,000 shares 1,800 1,800
Capital in excess of par value 5,968,420 5,968,420
Accumulated deficit (1,254,553) (2,062,938)
-----------------------------
4,715,667 3,907,282
Less treasury stock, at cost - 10,000 shares at February 28,
2002 and -0- shares at February 28, 2001 (13,299) --
-----------------------------
Total stockholders' equity 4,702,368 3,907,282
-----------------------------
Total liabilities and stockholders' equity $ 7,975,368 $ 9,437,038
=============================
See accompanying notes.
F-5
MFC Development Corp. and Subsidiaries
Consolidated Statements of Operations
YEAR ENDED YEAR ENDED YEAR ENDED
FEBRUARY 28, FEBRUARY 28, FEBRUARY 29,
2002 2001 2000
----------------------------------------------
REVENUES
Gain on sale of real estate $ 815,288 $ -- $ --
Sale of real estate 50,000 119,000 941,000
Rental income 99,246 93,639 111,264
Interest from mortgages 152,189 91,621 197,864
Income from the purchase
and collections of medical receivables 1,616,787 1,128,849 1,033,139
Medical management service fees 1,432,984 926,014 --
----------------------------------------------
Total income 4,166,494 2,359,123 2,283,267
----------------------------------------------
COSTS AND EXPENSES
Real estate 253,574 435,966 1,211,711
Medical receivables 1,376,644 1,416,420 1,533,127
Medical management services 1,260,230 994,035 --
Corporate expenses and other 299,595 349,470 452,234
Depreciation and amortization 104,261 81,449 61,726
----------------------------------------------
Total costs and expenses 3,294,304 3,277,340 3,258,798
----------------------------------------------
Income (loss) from operations 872,190 (918,217) (975,531)
----------------------------------------------
Other income (expense):
Interest income 25,901 24,904 14,801
Interest expense (62,060) (33,037) (42,437)
Spin-off expenses -- (209,187) --
Minority interest in net income of subsidiary (14,040) (2,850) --
----------------------------------------------
(50,199) (220,170) (27,636)
----------------------------------------------
Income (loss) from continuing operations before
provision for income taxes 821,991 (1,138,387) (1,003,167)
Provision for income taxes 13,606 10,936 14,328
----------------------------------------------
Income (loss) from continuing operations 808,385 (1,149,323) (1,017,495)
Income from discontinued operations, net of taxes
(including gain on sale of subsidiary of $381,182 for the
year ended February 28, 2001 and $96,303 for the year
ended February 29, 2000) -- 399,028 325,215
----------------------------------------------
Net income (loss) $ 808,385 $ (750,295) $ (692,280)
==============================================
Earnings (loss) per common share:
Earnings (loss) from continuing operations $ 0.45 $ (0.64) $ (0.56)
Income from discontinued operations -- 0.22 0.18
----------------------------------------------
Basic and diluted earnings (loss) per common share $ 0.45 $ (0.42) $ (0.38)
==============================================
Number of shares used in computation of basic and
diluted earnings per share 1,792,662 1,807,261 1,816,462
==============================================
See accompanying notes
F-6
MFC Development Corp. and Subsidiaries
Consolidated Statements of Stockholders' Equity
RETAINED
ADDITIONAL EARNINGS TOTAL COMPREHENSIVE
COMMON STOCK PAID-IN (ACCUMULATED TREASURY STOCK STOCKHOLDERS' INCOME
SHARES AMOUNT CAPITAL DEFICIT) SHARES AMOUNT EQUITY (LOSS)
----------------------------------------------------------------------------------------------------
Balance, February 28, 1999 1,816,462 $ 1,816 $ 5,996,739 $ (620,363) -- $ -- $ 5,378,192
Net (loss) -- -- -- (692,280) -- -- (692,280) $(692,280)
---------
Comprehensive (loss) -- -- -- -- -- -- -- $(692,280)
------------------------------------------------------------------------------------ ==========
Balance, February 29, 2000 1,816,462 1,816 5,996,739 (1,312,643) -- -- 4,685,912
Purchase and retirement of
treasury stock (16,462) (16) (28,319) -- -- -- (28,335)
Net (loss) -- -- -- (750,295) -- -- (750,295) $(750,295)
---------
Comprehensive (loss) -- -- -- -- -- -- -- $(750,295)
------------------------------------------------------------------------------------ ==========
BALANCE, FEBRUARY 28, 2001 1,800,000 1,800 5,968,420 (2,062,938) -- -- 3,907,282
PURCHASE OF TREASURY STOCK -- -- -- -- 10,000 (13,299) (13,299)
NET INCOME -- -- -- 808,385 -- -- 808,385 $ 808,385
---------
COMPREHENSIVE INCOME -- -- -- -- -- -- -- $ 808,385
------------------------------------------------------------------------------------ ==========
BALANCE, FEBRUARY 28, 2002 1,800,000 $ 1,800 $ 5,968,420 $(1,254,553) $10,000 $(13,299) $ 4,702,368
====================================================================================
See accompanying notes
F-7
MFC Development Corp. and Subsidiaries
Consolidated Statements of Cash Flows
YEAR ENDED YEAR ENDED YEAR ENDED
FEBRUARY 28, FEBRUARY 28, FEBRUARY 29,
2002 2001 2000
------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 808,385 $ (750,295) $ (692,280)
Adjustments to reconcile net income (loss) to net cash provided
by (used in) operating activities:
Depreciation and amortization 104,261 81,449 61,726
Gain on sale of real estate held for development and sale (16,376) (1,872) (48,621)
Gain on sale of real estate (815,288) -- --
Gain on sale of subsidiaries -- (381,182) (96,303)
Provision for bad debts and billing adjustments 101,883 256,981 126,488
Minority interest in net income of subsidiary 14,040 2,850 --
Changes in operating assets and liabilities:
Collections from sale of real estate held for development
and sale, net of payment to participant 50,000 119,000 845,304
Additions to real estate held for development and sale (75,184) (45,401) --
Prepaid expenses, miscellaneous receivables and other assets 279,196 (22,193) (13,423)
Net assets of discontinued operations -- (18,926) 29,354
Accounts payable, accrued expenses and taxes (119,360) 191,624 (51,806)
Other liabilities 23,993 1,007 (43,671)
------------------------------------------------------
Net cash provided by (used in) operating activities 355,550 (566,958) 116,768
------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures & intangible assets (182,231) (85,622) (136,466)
Finance and management receivables 282,310 (2,297,301) 373,672
Due to finance customers (517,059) 812,392 (57,864)
Principal payments on notes receivable 1,342,518 26,597 24,318
Loan receivable (59,282) (86,774) (100,000)
Principal payments on loan receivable 5,705 42,315 1,619
Proceeds from sale of subsidiaries -- 1,575,000 975,000
------------------------------------------------------
Net cash provided by (used in) investing activities 871,961 (13,393) 1,080,279
------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds of notes payable 150,000 678,000 96,779
Principal payments on notes payable (199,237) (465,593) (955,430)
Sale of equity to minority interest -- 100,000 --
Acquisition of minority interest shares (100,000) -- --
Distribution to minority interest (10,834) (1,056) --
Purchase of treasury stock (13,299) (28,335) --
------------------------------------------------------
Net cash (used in) provided by financing activities (173,370) 283,016 (858,651)
------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 1,054,141 (297,335) 338,396
Cash and cash equivalents, beginning of year 284,073 581,408 243,012
------------------------------------------------------
Cash and cash equivalents, end of year $ 1,338,214 $ 284,073 $ 581,408
======================================================
ADDITIONAL CASH FLOW INFORMATION
Interest paid $ 61,909 $ 15,830 $ 120,935
======================================================
Income taxes paid $ 18,097 $ 17,916 $ 19,011
======================================================
NONCASH INVESTING AND FINANCING ACTIVITIES
Assets acquired under capital leases $ 59,012 $ 117,689 $ --
======================================================
See accompanying notes
F-8
MFC Development Corp. and Subsidiaries
Notes to Consolidated Financial Statements
1. ORGANIZATION OF THE COMPANY
The consolidated financial statements consist of MFC Development Corp. (the
"Company" or "MFC") and its wholly-owned subsidiaries. MFC was a wholly-owned
subsidiary of FRMO Corp., formerly FRM Nexus, Inc. ("FRM or Nexus"). All of
FRM's assets and liabilities were transferred to MFC on August 31, 2000, except
for $10,000. Because such entities are under common control, this transaction
has been accounted for in a manner similar to a pooling of interests on MFC's
books.
On August 31, 2000, FRM filed Form 8-K with the Securities and Exchange
Commission, which disclosed that FRM contemplated distributing on or about
November 30, 2000, to its shareholders on the record date one share of MFC
common stock for each one share of FRM's 1,800,000 shares of outstanding common
stock at the close of business on November 1, 2000, (the record date). On
January 16, 2001, MFC filed a Form 10, as amended, to register its common stock
and on January 23, 2001, 1,800,000 shares of MFC were distributed to FRM's
shareholders.
The consolidated financial statements of MFC include Medical Financial Corp.,
PSI Capital Corp. and its 99% owned subsidiary (80% through November 8, 2001),
FRM NY Capital LLC, Yolo Capital Corp. and its subsidiary Highlands Pollution
Control Corp., Yolo Equities Corp., Nexus Garden City LLC, FRM Court Street LLC,
Nexus Borough Park LLC, Wendcello Corp. ("Wendcello"), and Wendclark Corp.
("Wendclark"). Wendclark was sold May 14, 1999 and Wendcello was sold on June
20, 2000.
The Company was incorporated on May 18, 1990 under the laws of the State of
Delaware as PSI Food Services, Inc. On August 9, 2000, the Company changed its
name to MFC Development Corp. and increased authorized capital stock from
2,000,000 shares common stock, par value $.10 per share to 2,000,000 shares
preferred stock, par value $.001 per share and 40,000,000 shares common stock,
par value $.001 per share. The Board of Directors is authorized to provide at
anytime for the issuance of MFC preferred stock with the rights, preferences and
limitations as established by the Board. Stockholders' equity for prior periods
was restated to reflect this change.
In August 2000, the Company purchased and retired 16,462 shares of treasury
stock for $28,335.
2. BASIS OF PRESENTATION
BUSINESS ACTIVITIES OF THE COMPANY
The Company operates in two distinct industries consisting of real estate and
medical financing. On May 23, 2000, the Company committed to sell Wendcello
Corp., the remaining subsidiary that operated in the food service division. On
June 20, 2000, the Company completed the sale. As a result of that sale and the
sale of the Wendclark subsidiary in May 1999, the food service segment has been
classified as discontinued operations.
F-9
MFC Development Corp. and Subsidiaries
Notes to Consolidated Financial Statements
2. BASIS OF PRESENTATION (CONTINUED)
BUSINESS ACTIVITIES OF THE COMPANY (CONTINUED)
The real estate business is conducted by the Company through various
subsidiaries. It owns real estate in New York, which is currently held for
development and sale, and holds a mortgage on a real estate parcel in
Connecticut.
The medical financing business is conducted through Medical Financial Corp.,
which purchases insurance claims receivable of medical practices and provides
certain services to those practices. During fiscal 2000, three subsidiaries were
formed to provide additional management services to certain medical practices.
In addition to the two operating divisions of the Company, a new division,
Capco, was formed during the quarter ended November 30, 2000. Capco has not yet
conducted the business for which it was formed. Capco operates through FRM N.Y.
Capital LLC, a 99% majority owned subsidiary (80% through November 8, 2001) of
PSI Capital Corp., a wholly owned subsidiary of the Company. This LLC was
approved on November 30, 2000 as a "certified capital company" pursuant to
Sections 11 and 1511 of the New York State Tax Law (herein a "Capco"). A
"certified capital company" as used in this context is a "for profit" entity,
located and qualified to conduct business in New York State, which is certified
by the New York State Insurance Department ("Department") based on standards set
forth in the New York Tax Law (the "Statute"). The Statute creates a tax credit
incentive mechanism to encourage investment of financial resources by insurance
companies into venture capital to businesses approved by the Department as
qualified to provide jobs and promote the growth of the economy in New York
State ("Qualified Businesses").
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
all of its subsidiaries (hereinafter also referred to as the "Company"). All
significant intercompany accounts and transactions have been eliminated in
consolidation.
3. SIGNIFICANT ACCOUNTING POLICIES
REVENUE RECOGNITION
Real Estate: The full accrual method is used on the sale of real estate if the
profit is determinable, the Company is not obligated to perform significant
activities after the sale to earn the profit and there is no continuing
involvement with the property. If the buyer's initial and continuing investments
are inadequate to demonstrate a commitment to pay for the property, the
installment method is used, resulting in the deferral of income. If there is
continuing involvement with the property by the Company, the financing method is
used.
F-10
MFC Development Corp. and Subsidiaries
Notes to Consolidated Financial Statements
3. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REVENUE RECOGNITION (CONTINUED)
Purchase and Collection of Medical Insurance Claims Receivable: A fee is charged
to medical providers upon the purchase of their accounts receivable by the
Company. The fee is for the up-front payment that the Company makes upon
purchase of the receivables and for collection services rendered to collect the
receivables. This fee income is deferred and recognized over the contractual
collection period in proportion to the costs of collection. The deferred fee
income is netted against finance receivables (see note 5). The Company is not
entitled to interest on unpaid principal balances.
Through June 1, 2001, income was recognized on a pro-rata basis as the related
net collectible value of the receivables were collected. The Company incurs most
of its expenses at the beginning of the contractual collection period, while
collections vary throughout the period. Effective June 1, 2001, the Company
determined that income would be more accurately reflected if the related costs
of collection were used as a basis for determining the timing of revenue
recognition over the contractual period since the Company is entitled to this
fee whether or not the receivables are collectible. The total amount of revenue
during the contractual period remains the same under both methods. As a result
of the modification as to the timing of revenue recognition, an additional
$120,000 was included in revenue during the year ended February 28, 2002.
Medical Management Service Fees: Three subsidiaries provide additional
management services to certain medical practices. Management fees are billed to
these medical practices monthly in amounts that are relative to the expenses and
services provided by the Company for that month. The accrual method of
accounting is used to record all management service fees.
RECEIVABLES
MORTGAGE AND NOTES RECEIVABLE
Mortgages and notes receivable result from the sale of real estate. These
receivables bear interest and are recorded at face value, less unamortized
discount.
Impairment Assessment: The Company evaluates the credit positions on its notes
receivable and the value of the related collateral on an ongoing basis. The
Company estimates that all of its notes receivable are fully collectible and the
collateral is in excess of the related receivables. The Company continually
evaluates its notes receivable that are past due as to the collectibility of
principal and interest. The Company considers the financial condition of the
debtor, the outlook of the debtor's industry, decrease in the ratio of
collateral values to loans and any prior write downs on loans. The above
considerations are all used in determining whether the Company should suspend
recording interest income on any notes receivable or provide for any loss
reserves.
F-11
MFC Development Corp. and Subsidiaries
Notes to Consolidated Financial Statements
3. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FINANCE RECEIVABLES (CONTINUED)
The Company purchases the net collectible value of medical insurance claims on a
limited recourse basis. Net collectible value is the amount that the insurance
companies will pay based on established fee schedules used by insurance
companies. The net collectible value is often less than the face value of the
claim due to the difference in billing rates between the established fee
schedules and what the medical practice ordinarily would bill for a particular
procedure. The Company is only responsible to collect the fee scheduled amount.
If any amounts are collected in excess of the purchased amount and the Company's
fee, that amount will be applied to the client's loan balance. Finance
receivables are reported at their outstanding unpaid principal balances, reduced
by any charge-off or valuation allowance and net of unearned revenues. The
recourse basis is limited to the extent any receivables purchased by the Company
are disputed. Such receivables are deemed to be invalid and are substituted or
repaid at the end of the contractual period. The Company is still entitled to
the collection of its fees from customers regardless of whether or not the
underlying accounts receivable are collectible. Performance of these receivables
are personally guaranteed by the owner of the practice and/or the principals of
the related management companies.
The Company purchases the receivables and has the right to return the "invalid
receivables". By contractual definition, these are receivables that have not
been recovered from insurance companies because of denials, requests for
additional information not readily available, or a matter under investigation
within 180 days of the purchase date.
In addition to the right to return the invalid receivables to the Seller, the
Company has the right to offset any of its obligations to the Seller by any
invalid receivables. As a result of the right of return and right of offset
features, the Company believes that a valuation allowance generally is not
required for these receivables.
Impairment Assessment: Management's periodic evaluation of the adequacy of the
allowance for loan losses is based on the Company's past loan loss experience,
known and inherent risks in the portfolio, adverse situations that may affect
the customer's ability to repay, the estimated value of any underlying
collateral and current economic conditions.
DEPRECIATION AND AMORTIZATION
Depreciation of property and equipment is provided by application of the
straight-line method over estimated useful lives as follows:
Furniture and fixtures 7 years
Computer, medical and transportation equipment 5 years
Amortization of leasehold improvements is provided by the application of the
straight-line method over the shorter of their estimated useful lives or the
terms of the related leases and range from 1.5 to 22 years.
F-12
MFC Development Corp. and Subsidiaries
Notes to Consolidated Financial Statements
3. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REAL ESTATE HELD FOR DEVELOPMENT AND SALE
Properties are carried at the lower of acquisition cost or market, less the
costs to sell. The methods for valuing property and mortgages where current
appraisals are unobtainable are based on management's best judgments regarding
the economy and market trends. As a result, estimates may change based on
ongoing evaluation of future economic and market trends. Such judgments are
based on management's knowledge of real estate markets in general and of sale or
rental prices of comparable properties in particular.
LEASES
Leases which transfer substantially all of the risk and benefits of ownership
are classified as capital leases, and assets and liabilities are recorded at
amounts equal to the lesser of the present value of the minimum lease payments
or the fair value of the leased properties at the beginning of the respective
lease terms. Such assets are amortized in the same manner as owned assets are
depreciated. Interest expenses relating to the lease liabilities are recorded to
effect constant rates of interest over the terms of the leases. Leases which do
not meet such criteria are classified as operating leases and the related
rentals are charged to expense as incurred.
INCOME TAXES
Deferred income taxes are recognized for all temporary differences between the
tax and financial reporting bases of the Company's assets and liabilities based
on enacted tax laws and statutory tax rates applicable to the periods in which
the differences are expected to affect taxable income.
EARNINGS PER SHARE
Earnings per common share for each of the three years ended February 28, 2002,
are calculated by dividing net income by weighted average common shares
outstanding during the period. The effect of outstanding stock options on
earnings per share does not have a material effect in calculation of earnings
per share during any of the periods presented.
CASH AND CASH EQUIVALENTS
For purposes of the consolidated statements of cash flows, the Company considers
all highly liquid, short-term investments with an original maturity of three
months or less to be cash equivalents.
F-13
MFC Development Corp. and Subsidiaries
Notes to Consolidated Financial Statements
3. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CONCENTRATION OF RISK
Financial instruments which potentially subject the Company to concentrations of
credit risk consist principally of cash, money market mutual funds, commercial
paper and trade and notes receivable. As of February 28, 2002, the Company had
$575,000 and $117,000 of cash in two of its accounts and $380,000 in an
uninsured money market fund.
Finance receivables arise from the purchase from medical providers in the New
York City area of their insurance claims from various insurance companies. For
the year ended February 28, 2002, fees earned from four medical providers were
18%, 16%, 14% and 12% of earned fees. For the year ended February 28, 2001, fees
earned from four medical providers were 19%, 13%, 11% and 11% of earned fees.
For the year ended February 29, 2000, fees earned from four medical providers
were 23%, 14%, 13% and 12% of earned fees. As of February 28, 2002, claims
receivable from two insurance companies comprised 20% and 10% of total finance
receivables. As of February 28, 2001, claims receivable from one insurance
company comprised 15% of total finance receivables.
All note receivables are from the sale of real estate in New York and
Connecticut (see Note 4).
ADVERTISING COSTS
The Company expenses the cost of advertising as incurred. For the years ended
February 28, 2002, February 28, 2001 and February 29, 2000 advertising expense
totaled approximately $1,000, $5,000, and $20,000.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair value of financial instruments is
made in accordance with the requirements of Statement of Financial Accounting
Standards No. 107, "Disclosures about Fair Value of Financial Instruments". The
estimated fair values of financial instruments have been determined by the
Company using available market information and appropriate valuation
methodologies. Considerable judgment is required in interpreting market data to
develop the estimates of fair value. Accordingly, the estimates presented herein
are not necessarily indicative of the amounts that the Company could realize in
a sale.
F-14
MFC Development Corp. and Subsidiaries
Notes to Consolidated Financial Statements
3. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
The carrying amounts and estimated fair values of financial instruments are
summarized as follows:
FEBRUARY 28, FEBRUARY 28,
2002 2001
-------------------------------------------------------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
-------------------------------------------------------------------
ASSETS
Cash and cash equivalents $1,338,214 $1,338,214 $ 284,073 $ 284,073
Mortgage and notes receivable 975,792 975,792 3,152,683 3,152,683
Finance receivables 4,136,126 4,136,126 4,520,319 4,520,319
LIABILITIES
Accounts payable and accrued expenses,
income taxes payable, due to finance
customers and other liabilities 2,034,193 2,034,193 2,646,619 2,646,619
Notes payable 383,807 383,807 374,032 374,032
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the 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.
DISCONTINUED OPERATIONS
The following are significant accounting policies that only effect discontinued
operations:
Revenue Recognition: The accrual method of accounting was used to record all
food service income.
Depreciation and Amortization: Depreciation of property and equipment was
provided by application of the straight-line method over estimated useful lives
as follows:
Land improvements 15 years
Restaurant equipment and furniture 7 years
Computer equipment 5 years
Amortization of leasehold improvements were provided by the application of the
straight-line method over the shorter of their estimated useful lives or the
terms of the related leases ranging from 10 to 22 years.
F-15
MFC Development Corp. and Subsidiaries
Notes to Consolidated Financial Statements
3. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
DISCONTINUED OPERATIONS (CONTINUED)
Leasehold Costs: The Company capitalized the applicable leasehold costs related
to acquiring the leases for its various restaurants and amortized them over the
terms of the applicable leases ranging from 10 to 20 years.
Technical Assistance Fees: Technical assistance fees represented initial
franchise fees paid to Wendy's International at the inception of each franchised
location and were amortized on a straight-line basis over the term of the
related franchises, ranging from 15 to 20 years.
EFFECTS OF NEW ACCOUNTING PRONOUNCEMENTS
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
The Company adopted Statement No. 133, "Accounting for Derivative Instruments
and Hedging Activities", effective March 1, 2001. The adoption of this Statement
has not had any material effect on the Company's results of operations or
financial position.
ACCOUNTING FOR THE TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND
EXTINGUISHMENT OF LIABILITIES
The Company adopted Statement No. 140, "Accounting for the Transfers and
Servicing of Financial Assets and Extinguishment of Liabilities", effective
April 1, 2001. The adoption of this Statement has not had any material effect on
the Company's results of operations or financial position.
OTHER ACCOUNTING PRONOUNCEMENTS
In July 2001, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards Statement No. 141, "Business Combinations" and
No. 142, "Goodwill and Other Intangible Assets." The statements eliminate the
pooling-of-interest method of accounting for business combinations and require
that goodwill and certain intangible assets not be amortized. Instead, these
assets will be reviewed for impairment annually with any related losses
recognized in earnings when incurred. Statement No. 141 is effective for the
Company July 1, 2001. Statement No. 142 will be effective for the Company March
1, 2002. In July 2001, the FASB issued Statement No. 143, "Accounting for Asset
Retirement Obligations" which requires the recognition of a liability for an
asset retirement obligation in the period in which it is incurred. When the
liability is initially recorded, the carrying amount of the related long-lived
asset is correspondingly increased. Over time, the liability is accreted to its
present value and the related capitalized charge is depreciated over the useful
life of the asset. Statement No. 143 is effective for fiscal years beginning
after June 15, 2002. In August 2001, the FASB issued Statement No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets" which is
effective for fiscal periods beginning
F-16
MFC Development Corp. and Subsidiaries
Notes to Consolidated Financial Statements
3. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
OTHER ACCOUNTING PRONOUNCEMENTS (CONTINUED)
after December 15, 2001 and interim periods within those fiscal years. Statement
No. 144 establishes an accounting model for impairment or disposal of long-lived
assets including discontinued operations. The Company is currently evaluating
the impact of Statement Nos. 141, 142, 143 and 144. The Company does not believe
that these pronouncements will have a material effect on the financial
statements.
4. REAL ESTATE ACTIVITIES
SALE OF REAL ESTATE
GOSHEN, NEW YORK
The Company acquired its property in Goshen, New York through the foreclosure of
two mortgages it held. During fiscal years 1997 and 1996, the Company sold all
of the 165 lots of the property for $2,499,350. This transaction and the related
note receivable was with Windemere Pines at Goshen, Inc. ("Windemere"), a part
of the Windemere Group of construction companies, in which Jed Schutz is an
officer, director and shareholder. Mr. Schutz is also a shareholder of MFC and
FRM and was a director of FRM until May 1999. It is management's opinion that
this transaction would be at the same terms had the parties not been related.
The consideration received on this sale did not satisfy the initial investment
criteria to use the full accrual method of profit recognition. The sale was
accounted for using the installment method, resulting in the deferral of income
until the initial and continuing investment criteria is sufficient (see Note 3).
The installment method was used since recovery of the cost of the property is
reasonably assured if the buyer defaults on the mortgage receivable.
In August 2001, the Company entered into an agreement with Windemere regarding
the mortgage receivable and debenture on the property located in Goshen, New
York (together the "Goshen Receivables"). Under the terms of the agreement,
Windemere satisfied the Goshen Receivables by payments of $167,500 on August 16,
2001 and $1,507,500 on November 14, 2001, which included principal and accrued
interest, resulting in the realization of $745,000 of deferred income related to
the original sale of the property.
Interest income from this transaction (principal amount of note receivable was
$2,310,000) was $63,075, $-0-, and $103,950 for the years ended February 28,
2002, February 28, 2001 and February 29, 2000. The terms of the note called for
an annual payment of interest of $30,000. The payment for fiscal 2000 was not
paid, which resulted in the suspension of accruing interest from December 1,
1999 through May 31, 2002. There was no allowance for loss because the market
value of the collateral, less costs to sell, was greater than the carrying
amounts of the related notes receivable and accrued interest receivable. As part
of the
F-17
MFC Development Corp. and Subsidiaries
Notes to Consolidated Financial Statements
4. REAL ESTATE ACTIVITIES (CONTINUED)
GOSHEN, NEW YORK (CONTINUED)
original Goshen investment that was foreclosed in 1991, there were co-investors
who invested a total of $75,000 along with the Company's investment of $575,000.
The proceeds from the settlement were first allocated to the reimbursement of
costs that were incurred by the Company to carry and maintain the Goshen
property for the period from foreclosure through settlement (June 1991 through
November 2001). Due to the excess of these costs over the proceeds received
during that period, the Company is not liable for any distributions to the
co-investors. The co-investors are currently disputing the calculation of these
costs. The Company believes that the resolution of this dispute will not have
any material effect on future results of operations.
OTHER REAL ESTATE SALES
The Company sold various other properties, including the property in Brookfield,
Connecticut and eight condominium units in Hunter, New York, during the three
years ended February 28, 2002 for various amounts as part of the operations of
the real estate division.
In each of January 2001 and May 2001, the land for eight unbuilt condominium
units in Hunter, New York was sold to a related party, Eastern Mountain
Properties, LLC, which is 45% owned by Dr. Anne-Renne Testa, who is the wife of
Lester Tanner, a director, president and shareholder of the Company. Each parcel
of land was sold for $50,000, which approximated the fair market value of the
property, based on a bid for the same amount from an unrelated party, which was
acceptable to the Company, but was later withdrawn. The Company realized a gain
of $16,000 from the sale of each property.
MORTGAGES AND NOTES RECEIVABLE
Mortgages and notes receivable, arising from the sale of real estate, consist of
the following:
FEBRUARY 28,
2002 2001
---------------------------------
Granby, Connecticut (Real Estate Operator) $ 975,792 $ 1,004,885
Goshen, New York (Construction Company)
(Net of unamortized discount of $162,202) -- 2,147,798
---------------------------------
975,792 3,152,683
Less current portion (31,822) (29,093)
---------------------------------
$ 943,970 $ 3,123,590
=================================
These mortgages and notes have various terms for payments of principal and
interest and are collateralized by the underlying real estate. The Granby
mortgage bears interest at 9% and matures as follows:
F-18
MFC Development Corp. and Subsidiaries
Notes to Consolidated Financial Statements
4. REAL ESTATE ACTIVITIES (CONTINUED)
MORTGAGES AND NOTES RECEIVABLE (CONTINUED)
YEAR ENDING FEBRUARY 28,
2003 $ 31,822
2004 34,807
2005 38,072
2006 41,644
2007 45,550
Thereafter 783,897
--------
$975,792
========
As of February 28, 2002 and 2001, except for the Goshen interest payment
mentioned above, all notes receivable were performing.
The Granby note receivable is being used as collateral for a line of credit.
Co-investors will share in the positive cash flow from the collections of this
note, after deducting costs and expenses of carrying and developing the Granby
property. As of February 28, 2002, the balance due to co-investors was $39,000.
Until the obligation as discussed in "Deferred Income" is satisfied, no accrual
is being provided for amounts due to co-investors.
REAL ESTATE HELD FOR DEVELOPMENT AND SALE
The following properties are included in real estate held for development and
sale:
FEBRUARY 28,
2002 2001
---------------------------
Hunter, New York $ 625,713 $ 584,153
Less due to co-investors on
property previously sold -- (145,000)
---------------------------
$ 625,713 $ 439,153
===========================
The Hunter property is located at the base of Hunter Mountain in Greene County,
New York. This property includes approximately 80 acres of undeveloped land, a
hotel site, a clubhouse with a recreational facility, an office building and a
sewage treatment plant that serves the development. This property was acquired
through foreclosure and was written down to its fair market value. The net
proceeds of any sales of this property will be allocated 65% to the Company and
35% to co-investors, after deducting the cost of carrying all of the Hunter
properties.
DEFERRED INCOME
The Company sold an office building in Granby, Connecticut during fiscal 1996
but leased back a portion of the space, which was then sub-leased to a third
party through August 31, 2002. The Company remains obligated on that lease for
the period from September 1, 2002 through February 28, 2006 for rental payments
aggregating $1,482,194. As a result, $850,000
F-19
MFC Development Corp. and Subsidiaries
Notes to Consolidated Financial Statements
4. REAL ESTATE ACTIVITIES (CONTINUED)
DEFERRED INCOME (CONTINUED)
of the gain recorded on the sale in fiscal 1998, representing the present value
of these rental payments, was deferred. To the extent that payments are not made
on this obligation, and income is realized, a liability may be incurred to
co-investors as discussed in the mortgages notes receivable section, above.
Deferred income consists of the following:
FEBRUARY 28,
2002 2001
-----------------------------
Granby, CT $ 850,000 $ 850,000
Goshen, NY -- 1,557,311
-----------------------------
Total $ 850,000 $2,407,311
=============================
5. FINANCE RECEIVABLES, NET
Net finance and management receivables consist of the following:
FEBRUARY 28,
2002 2001
---------------------------------
Gross finance receivables $ 3,882,913 $ 4,831,507
Allowance for credit losses (252,535) (233,345)
Deferred finance income (224,231) (457,736)
---------------------------------
Net finance receivables 3,406,147 4,140,426
---------------------------------
Gross management receivables 1,048,796 616,017
Allowance for billing adjustments (318,817) (236,124)
---------------------------------
Net management receivables 729,979 379,893
---------------------------------
Finance and management receivables, net $ 4,136,126 $ 4,520,319
=================================
Management service fees are billed monthly according to the cost of services
rendered to the client. If the assets of the management client, which is also a
finance client, are not enough to satisfy the billed fees, an allowance for
billing adjustments is recorded to reduce the Company's net receivables to an
amount that is equal to the assets of the client that are available for payment.
There is approximately $1,390,000 of additional collateral consisting of finance
receivables that is past the contractual collection period and written off, but
not yet uncollectible.
These receivables are collateral for a line of credit (see Note 8).
F-20
MFC Development Corp. and Subsidiaries
Notes to Consolidated Financial Statements
6. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
FEBRUARY 28,
2002 2001
-------------------------
Leasehold improvements $ 73,587 $ 52,902
Computer equipment 328,734 233,830
Medical equipment 84,281 47,670
Equipment under capital leases 244,072 185,060
Other equipment and furniture 59,495 30,924
-------------------------
790,169 550,386
Less accumulated depreciation and amortization 298,545 195,744
-------------------------
Property and equipment, net $491,624 $354,642
=========================
As of February 28, 2002 and 2001, accumulated amortization of equipment under
capital leases was $78,030 and $46,922.
For the years ended February 28, 2002, February 28, 2001 and February 29, 2000,
depreciation expense, which includes amortization under capital leases, was
$104,621, $81,449 and $61,726.
7. LOANS RECEIVABLE
In February 2000, one of the Company's subsidiaries entered into an agreement to
provide management services to a finance client's radiology practice. These
services include operating an MRI facility that the Company leases from a third
party. In February 2000, the Company entered into an additional agreement to pay
the prior operator ("the manager") of the MRI facility a management fee of 50%
of the positive cash flow from the services derived from that facility, in
exchange for the continuation of his management and business development
services. The remainder of the cash flow is retained by the Company. As part of
this agreement, the Company agreed to administer the repayment of certain debts
of the manager from various sources of funds that are due to him. The Company
may, in its discretion, advance cash to meet the schedule of payments if the
source of funds is insufficient to do so. These advances bear interest at the
rate of prime plus 2%, with a minimum rate of 12%. The outstanding balances on
this loan at February 28, 2002 and 2001 were $196,417 and $142,840.
8. NOTES PAYABLE
Notes payable include the following:
FEBRUARY 28,
2002 2001
-------------------------
Related party credit lines $270,000 $258,000
Capital lease obligations 113,807 116,032
-------------------------
383,807 374,032
Less current maturities 225,153 57,050
-------------------------
Long-term debt $158,654 $316,982
=========================
F-21
MFC Development Corp. and Subsidiaries
Notes to Consolidated Financial Statements
8. NOTES PAYABLE (CONTINUED)
Related Party Credit Lines: In December 1997, a $700,000 line of credit was
obtained from a related party, Northwest Management Corp. ("NMC"), a shareholder
of the Company. In January 1999, the line of credit was increased to $785,000.
The president of NMC, who is also a shareholder of the Company, has the power to
vote NMC shares, which are owned by his two children. The line was terminated by
mutual consent of both parties upon full repayment on June 21, 2000 of the
outstanding balance of $200,000. Interest was calculated at a rate of 12% per
annum. There were no commitment fees paid in connection with this line of
credit.
In October 2000, a $500,000 line of credit was obtained from a related party,
NWM Capital, LLC. ("NWM"), which is owned by an officer, director and
shareholder of the Company. The line, under which there was an outstanding
balance of $270,000 at February 28, 2002 and $258,000 at February 28, 2001,
permits borrowing through October 31, 2002. Interest is calculated at a rate of
15% per annum (12% effective April 1, 2002). Monthly interest only payments are
due through October 31, 2002. Commencing on December 1, 2002, monthly payments
will be $34,000 per month plus interest, with a final payment of any outstanding
balance at October 31, 2003, the maturity date. The credit line may only be
prepaid on six months prior written notice. The Company, at the option of the
lender, may be required to prepay up to an aggregate of 20% of the stated
principal amount of the credit line on 30 days prior written notice. By mutual
consent of both parties, $160,000 of the amount of the note was prepaid
subsequent to February 28, 2002. There were no commitment fees paid in
connection with this line of credit.
The line has a joint and several obligation of the Company and its subsidiary,
Medical Financial Corp. The line is collateralized by the second mortgage
receivable in Granby, Connecticut and certain purchased insurance claims
receivable of Medical Financial Corp., which are not older than six months equal
to at least 222% of the principal sum outstanding under the line.
In addition to the above related party credit lines, the Company borrowed and
repaid the following two related party loans during the three years ended
February 28, 2002:
Related party escrow loan: In February 1999, a related partnership, whose
partners are directors, officers and shareholders of the Company, committed to
place in an escrow account until March 15, 2001 an investment portfolio, which
at the time was valued at $240,000, for the benefit of the Medical Financial
Corp. subsidiary. This investment portfolio was held in escrow and used as
collateral for the purpose of obtaining margin loans. All risks and rewards of
the investment portfolio pass to the related party. The Company, being the
primary obligor on the margin loans, was responsible for the repayment of the
loans. The margin loans carried interest at a variable rate based on market
condition set at the discretion of the investment brokerage firm. A fee was
payable monthly to the related party at the rate of 5% per annum on the value of
the investment escrow account. This fee is included in interest expense. On
F-22
MFC Development Corp. and Subsidiaries
Notes to Consolidated Financial Statements
8. NOTES PAYABLE (CONTINUED)
June 26, 2000, the then outstanding balance of $170,000 was paid in full. On
June 30, 2000, the line was terminated by mutual consent of both parties.
Other Related Party Loans: During the year ended February 28, 1999, the Company
borrowed at various times a total of $60,000 from two individuals, who were both
directors, officers and shareholders. These loans were repaid during the year
ended February 29, 2000. Interest on these loans was at the rate of 12% per
annum.
Interest expense on these related party borrowings for the years ended February
28, 2002, February 28, 2001 and February 29, 2000 was $50,305, $20,639 and
$36,184.
Capital Lease Obligations: The Company has acquired certain equipment under
various capital leases expiring in 2004. The leases provide for monthly payments
of principal and interest of $6,430 and have been capitalized at imputed
interest rates of 10.00% to 16.72%.
Aggregate maturities of the amount of notes payable and capital leases at
February 28, 2002 are as follows:
CAPITAL
NOTES LEASE
Year ending February 28, PAYABLE OBLIGATIONS TOTAL
------------------------------------------
2003 $262,000 $ 75,953 $337,953
2004 8,000 35,722 43,722
2005 -- 18,247 18,247
------------------------------------------
270,000 129,922 399,922
Amount representing interest -- 16,115 16,115
------------------------------------------
Total (a) $270,000 $113,807 $383,807
==========================================
(a) -- Total capital lease obligations represent present value of minimum lease
payments.
9. MINIMUM OPERATING LEASE COMMITMENTS
In March 2000, one of the Company's subsidiaries in the medical division signed
a five year lease for premises for an MRI facility that will be used to provide
management services for a radiology practice.
In April 2000, MFC signed a lease extension for its executive offices under a
seven year lease expiring on February 28, 2007.
In April 2001, one of the Company's subsidiaries in the medical division signed
a three year lease extension for premises that are used to provide management
services for a medical practice that provides physical therapy and pain
treatment.
F-23
MFC Development Corp. and Subsidiaries
Notes to Consolidated Financial Statements
9. MINIMUM OPERATING LEASE COMMITMENTS (CONTINUED)
Subject to annual real estate adjustments, the following is a schedule of future
minimum rental payments required under the above operating leases:
Year ending February 28:
2003 $ 205,495
2004 196,931
2005 144,025
2006 80,400
2007 80,400
-----------
$ 707,251
===========
For the years ended February 28, 2002, February 28, 2001 and February 29, 2000
rent expense totaled approximately $211,000, $172,000 and $85,000.
OTHER COMMITMENTS AND CONTINGENCIES
There are commitments and contingencies relating to the sale of real estate (see
Note 4).
10. STOCK OPTIONS
Each non-employee director who owns less than 5% of the Company's stock is
annually granted a five year option to purchase 1,500 shares of common stock.
The exercise price of the options is the mean between the high and low asked
price at the close of trading on the grant date. As of February 28, 2002, three
directors had been issued options totaling 7,500 shares, expiring through July
19, 2006, at option prices ranging from $1.00 to $1.75 per share.
As allowed by SFAS 123, "Accounting for Stock-Based Compensation", the Company
has elected to continue to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB 25), in accounting for its stock
option grants to board members. Under APB 25, the Company does not recognize
compensation expense upon the issuance of its stock options because the option
terms are fixed and the exercise price equals the market price of the underlying
stock on the grant date. The Company has determined that utilizing the fair
value method of SFAS 123 would have an immaterial effect on its results of
operations for all periods presented.
F-24
MFC Development Corp. and Subsidiaries
Notes to Consolidated Financial Statements
11. INCOME TAXES
The provision for income taxes consist of the following:
YEAR ENDED YEAR ENDED YEAR ENDED
FEBRUARY 28, FEBRUARY 28, FEBRUARY 29,
2002 2001 2000
--------------------------------------------
Current:
Federal $ -- $ -- $ --
State 13,606 10,936 14,328
--------------------------------------------
Total current 13,606 10,936 14,328
--------------------------------------------
Deferred:
Federal -- -- --
State -- -- --
--------------------------------------------
Total deferred -- -- --
--------------------------------------------
Total $13,606 $10,936 $14,328
============================================
MFC and its subsidiaries filed consolidated tax returns with FRM through January
23, 2001, which had no federal tax liability due to current and prior year net
operating losses. After January 23, 2001, MFC and its subsidiaries are not
filing consolidated tax returns with FRM. MFC and its subsidiaries file
individual state tax returns. The gain on sale of real estate, resulting from
the settlement of the Goshen receivables was included in taxable income of the
Company's former parent in the years that the property was sold.
The Company has net operating loss ("NOL") carryforwards for Federal purposes of
approximately $3,585,000. These losses will be available for future years,
expiring through February 29, 2020. During fiscal 2002, the Company utilized
$146,000 of its Federal NOL carryforwards. The Company, however, has taken a
100% valuation allowance against Federal NOL carryforwards due to a history of
operating tax losses and the uncertainty of continuing to generate taxable
income in the foreseeable future.
Significant components of deferred tax assets (liabilities) were as follows:
YEAR ENDED YEAR ENDED YEAR ENDED
FEBRUARY 28, FEBRUARY 28, FEBRUARY 29,
2002 2001 2000
------------------------------------------------------
Tax loss carryforwards $ 1,218,875 $ 521,273 $ 728,169
Less valuation allowance (1,218,875) (521,273) (728,169)
------------------------------------------------------
Deferred tax assets $ -- $ -- $ --
======================================================
F-25
MFC Development Corp. and Subsidiaries
Notes to Consolidated Financial Statements
11. INCOME TAXES (CONTINUED)
The following is a reconciliation of the statutory federal and effective income
tax rates for the years ended:
YEAR ENDED YEAR ENDED YEAR ENDED
FEBRUARY 28, FEBRUARY 28, FEBRUARY 29,
2002 2001 2000
------------------------------------------
% OF % OF % OF
PRETAX PRETAX PRETAX
INCOME INCOME INCOME
------------------------------------------
Statutory federal income tax
expense rate 34.0% (34.0)% (34.0)%
Permanent timing differences (34.0) -- --
Valuation allowance against
NOL carryforwards -- 34.0 34.0
State taxes, less federal
tax effect 1.6 1.0 1.4
------------------------------------------
1.6% 1.0% 1.4%
==========================================
12. DISCONTINUED OPERATIONS
On May 14, 1999, the Company sold Wendclark, Inc., one of the two subsidiaries
that operated in the food service division. The Company received $975,000 in
cash, resulting in a gain of $96,303, which was recorded during the three months
ended May 31, 1999. As a result of this sale, $2,342,555 of debt that was
carried on Wendclark was assumed by the buyer. On May 23, 2000, the Company
committed to sell Wendcello Corp., the remaining subsidiary that operated in the
food service division. On June 20, 2000, the Company completed the sale of
Wendcello Corp., including all of its assets and liabilities, and received
$1,575,000 in cash, resulting in a gain of approximately $381,000 that was
recorded during the six months ended August 31, 2000. As a result of this sale,
$125,000 of current debt that was carried on Wendcello was eliminated. During
the period from May 23, 2000 (the measurement date for discontinuing operations
of the food service division) to June 20, 2000 (disposal date), net income from
operations of the discontinued food service division was $11,700. The results of
operations of both subsidiaries have been classified as discontinued operations
and prior periods have been restated.
A summary of the results of discontinued operations for the food services
division is as follows for the periods ended:
F-26
MFC Development Corp. and Subsidiaries
Notes to Consolidated Financial Statements
12. DISCONTINUED OPERATIONS (CONTINUED)
YEAR ENDED YEAR ENDED YEAR ENDED
FEBRUARY 28, FEBRUARY 28, FEBRUARY 29,
2002 2001 2000
-----------------------------------------------------
Operating revenues, including gain on
sale of subsidiary of $381,182 for the
year ended February 28, 2001 and
$96,303 for the year ended February 29,
2000 $ -- $ 3,714,425 $12,154,279
Operating expenses -- 3,316,091 11,785,817
-----------------------------------------------------
Income from operations -- 398,334 368,462
Interest expense, net of interest (income) -- (1,774) 40,831
-----------------------------------------------------
Income before income taxes -- 400,108 327,631
Income taxes -- 1,080 2,416
-----------------------------------------------------
Income from discontinued operations,
net of taxes $ -- $ 399,028 $ 325,215
=====================================================
13. BUSINESS SEGMENT INFORMATION
Operating segments are managed separately and represent separate business units
that offer different products and serve different markets. The Company's
reportable segments include: (1) real estate, (2) medical financing and (3)
other, which is comprised of corporate overhead, Capco, which is inactive and
net assets of discontinued operations. The real estate segment operates in New
York and Connecticut. The medical financing segment operates in New York and New
Jersey.
The accounting policies of the segments are the same as those described in the
summary of significant accounting policies. All inter-segment balances have been
eliminated. Inter-segment balances that have not been capitalized, bear interest
at the rate of 10% per annum and are included in net interest expense.
F-27
MFC Development Corp. and Subsidiaries
Notes to Consolidated Financial Statements
13. BUSINESS SEGMENT INFORMATION (CONTINUED)
Business segment information follows:
REAL MEDICAL
ESTATE FINANCING OTHER TOTAL
---------------------------------------------------------------------------
FEBRUARY 28, 2002
Total revenue from external customers $ 1,116,723 $ 3,049,771 $ -- $ 4,166,494
Income (loss) from operations 860,092 314,119 (302,021) 872,190
Other expense (income), net (2,778) 41,829 11,148 50,199
Income (loss) from continuing operations 862,870 272,290 (313,169) 821,991
Assets - continuing 1,677,406 5,122,948 1,175,014 7,975,368
Assets - discontinued -- -- -- --
Total assets 1,677,406 5,122,948 1,175,014 7,975,368
Capital expenditures 2,833 235,505 2,905 241,243
Depreciation and amortization 3,057 98,778 2,426 104,261
FEBRUARY 28, 2001
Total revenue from external customers $ 304,260 $ 2,054,863 $ -- $ 2,359,123
Income (loss) from operations (138,277) (430,470) (349,470) (918,217)
Other expense (income), net (9,928) 21,944 208,154 220,170
Income (loss) from continuing operations (128,349) (452,414) (557,624) (1,138,387)
Assets - continuing 4,078,447 5,242,092 116,499 9,437,038
Assets - discontinued -- -- -- --
Total assets 4,078,447 5,242,092 116,499 9,437,038
Capital expenditures 4,322 201,189 500 206,011
Depreciation and amortization 2,821 74,878 3,750 81,449
FEBRUARY 29, 2000
Total revenue from external customers $ 1,250,128 $ 1,033,139 $ -- $ 2,283,267
Income (loss) from operations 30,887 (554,184) (452,234) (975,531)
Other expense (income), net (151,228) 178,864 -- 27,636
Income (loss) from continuing operations 182,115 (733,048) (452,234) (1,003,167)
Assets - continuing 4,605,444 2,996,317 2,103 7,603,864
Assets - discontinued -- -- 1,174,892 1,174,892
Total assets 4,605,444 2,996,317 1,176,995 8,778,756
Capital expenditures 4,185 131,033 1,248 136,466
Depreciation and amortization 7,280 54,196 250 61,726
F-28
MFC Development Corp. and Subsidiaries
Notes to Consolidated Financial Statements
NOTE 14. SUPPLEMENTAL FINANCIAL INFORMATION
SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
QUARTER
-----------------------------------------------------------
FIRST SECOND THIRD FOURTH TOTAL
----------- ----------- ----------- ----------- -----------
YEAR ENDED FEBRUARY 28, 2002:
Total revenue $ 782,029 $ 926,082 $ 1,552,943 $ 905,440 $ 4,166,494
----------- ----------- ----------- ----------- -----------
Income (loss) from continuing operations (43,777) 50,869 728,291 73,002 808,385
Income from discontinued operations -- -- -- -- --
----------- ----------- ----------- ----------- -----------
Net income (loss) $ (43,777) $ 50,869 $ 728,291 $ 73,002 $ 808,385
=========== =========== =========== =========== ===========
Earnings (loss) per common share:
Earnings (loss) from continuing operations $ (0.02) $ 0.03 $ 0.41 $ 0.04 $ 0.45
Income from discontinued operations -- -- -- -- --
----------- ----------- ----------- ----------- -----------
Basic and diluted income (loss)
per common share $ (0.02) $ 0.03 $ 0.41 $ 0.04 $ 0.45
=========== =========== =========== =========== ===========
Number of shares used in computation
of basic and diluted earnings (loss) per share 1,797,863 1,790,000 1,790,000 1,790,000 1,792,662
=========== =========== =========== =========== ===========
YEAR ENDED FEBRUARY 28, 2001:
Total revenue $ 393,292 $ 631,967 $ 587,855 $ 746,009 $ 2,359,123
----------- ----------- ----------- ----------- -----------
(Loss) from continuing operations (343,752) (369,181) (193,696) (242,694) (1,149,323)
Income from discontinued operations,
net of taxes (including gain on sale of
subsidiary of $381,182 for the quarter
ended August 31, 2000) 6,146 392,882 -- -- 399,028
----------- ----------- ----------- ----------- -----------
Net (loss) income $ (337,606) $ 23,701 $ (193,696) $ (242,694) $ (750,295)
=========== =========== =========== =========== ===========
Loss (earnings) per common share:
(Loss) from continuing operations $ (0.19) $ (0.20) $ (0.11) $ (0.13) $ (0.64)
Income from discontinued operations -- 0.22 -- -- 0.22
----------- ----------- ----------- ----------- -----------
Basic and diluted (loss) income
per common share $ (0.19) $ 0.02 $ (0.11) $ (0.13) $ (0.42)
=========== =========== =========== =========== ===========
Number of shares used in computation
of basic and diluted loss per share 1,816,462 1,812,347 1,800,000 1,816,462 1,807,261
=========== =========== =========== =========== ===========
F-29
MFC Development Corp. and Subsidiaries
Consolidated Financial Statement Schedules
FEBRUARY 28, 2002
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- -----------------------------------------------------------------------------------------------------------------------
ADDITIONS
---------------------------
BALANCE CHARGED CHARGED TO BALANCE
AT TO COSTS OTHER AT
BEGINNING AND ACCOUNTS ADDITIONS END
DESCRIPTION OF PERIOD EXPENSES DESCRIBE (DEDUCTIONS) OF PERIOD
- -----------------------------------------------------------------------------------------------------------------------
FEBRUARY 29, 2000
Allowance for credit losses $ 86,000 $ 126,488 $ -- $ -- $ 212,488
====================================================================================
Valuation allowance-
Deferred tax asset $ 558,228 $ 169,941 $ -- $ -- $ 728,169
====================================================================================
FEBRUARY 28, 2001
Allowance for credit losses $ 212,488 $ 256,981 $ -- $ -- $ 469,469
====================================================================================
Valuation allowance-
Deferred tax asset $ 728,169 $ -- $ -- $ (206,896) $ 521,273
====================================================================================
FEBRUARY 28, 2002
ALLOWANCE FOR CREDIT LOSSES $ 469,469 $ 101,883 $ -- $ -- $ 571,352
====================================================================================
VALUATION ALLOWANCE-
DEFERRED TAX ASSET $ 521,273 $ -- $ -- $ 697,602 $1,218,875
====================================================================================
F-30
MFC Development Corp. and Subsidiaries
Consolidated Financial Statement Schedules
YEAR ENDED FEBRUARY 28, 2002
SCHEDULE III -- REAL ESTATE AND ACCUMULATED DEPRECIATION
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- ----------------------------------------------------------------------------------------------------------------
COST CAPITALIZED
INITIAL COST TO SUBSEQUENT GROSS AMOUNT AT WHICH
COMPANY TO ACQUISITION CARRIED AT CLOSE OF PERIOD
-----------------------------------------------------------------
BUILDINGS BUILDINGS
AND AND
ENCUM- IMPROVE- IMPROVE- CARRYING IMPROVE-
DESCRIPTIONS BRANCES LAND MENTS MENTS COST LAND MENTS TOTAL
- ----------------------------------------------------------------------------------------------------------------
Partial investment in condominium
development, Hunter, NY
$ -- $ -- $ 467,560 $128,830 $ 62,946 $60,585 $ 565,128 $625,713
-----------------------------------------------------------------------------
Total $ -- $ -- $ 467,560 $128,830 $ 62,946 $60,585 $ 565,128 $625,713
=============================================================================
COLUMN A COLUMN F COLUMN G COLUMN H COLUMN I
- ---------------------------------------------------------------------------------------
LIFE ON
WHICH
DEPRECIATION
IN LATEST
INCOME
ACCUMULATED DATE OF DATE STATEMENTS
DESCRIPTIONS DEPRECIATION CONSTRUCTION ACQUIRED IS COMPUTED
- ---------------------------------------------------------------------------------------
Partial investment in condominium
development, Hunter, NY
$ -- -- 2/29/96 N/A
--------------
Total $ --
==============
The following is a reconciliation of the total amount at which real estate was
carried for the years ended:
FEBRUARY 28, FEBRUARY 28, FEBRUARY 29,
2002 2001 2000
-------------------------- ------------------------ ------------------------
Balance at beginning of period $ 584,153 $ 655,880 $1,497,443
Additions during period:
Other acquisitions $ -- $ -- $ --
Improvements, etc. 75,183 45,401 --
Capitalized carrying costs -- 75,183 -- 45,401 3,278 3,278
-------------------------- ------------------------ ------------------------
659,336 701,281 1,500,721
Deductions during period:
Cost of real estate sold 33,623 117,128 844,841
---------- -------- --------
33,623 117,128 844,841
---------- ------------ ----------
Balance at close of period $ 625,713 $ 584,153 $ 655,880
========== ============ ==========
The Federal Income Tax Basis of the Hunter property is $953,336.
F-31
MFC Development Corp. and Subsidiaries
Consolidated Financial Statement Schedules
YEAR ENDED FEBRUARY 28, 2002
SCHEDULE IV -- MORTGAGE LOANS ON REAL ESTATE
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F COLUMN G COLUMN H
- ---------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL
AMOUNT OF
LOANS SUBJECT
FINAL PERIODIC FACE CARRYING TO DELINQUENT
INTEREST MATURITY PAYMENT PRIOR AMOUNT OF AMOUNT OF PRINCIPAL OR
DESCRIPTIONS RATE DATE TERM LIENS MORTGAGES MORTGAGES INTEREST
- ---------------------------------------------------------------------------------------------------------------------------------
Second Mortgage:
Office building, Granby, CT 9% 03/08/17 9,863 per month $2,436,759 975,792 975,792 --
---------------------------------------------
$ 975,792 $ 975,792 $ --
=============================================
The following is a reconciliation of the total amount at which mortgage loans
were carried for the years ended:
FEBRUARY 28, FEBRUARY 28, FEBRUARY 29,
2002 2001 2000
------------------------- -------------------------- -----------------------
Balance at beginning of period $3,152,683 $3,179,280 $3,203,598
Additions during period:
New mortgage loans $ -- $ -- $ --
---------- -------- --------
-- -- --
---------- ---------- ----------
3,152,683 3,179,280 3,203,598
Deductions during period:
Collection of principal 1,342,518 26,597 24,318
Other -- Settlement of Goshen Receivables 834,373 -- --
---------- -------- --------
2,176,891 26,597 24,318
---------- ---------- ----------
Balance at close of period $ 975,792 $3,152,683 $3,179,280
========== ========== ==========
F-32