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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended: May 31, 2002
[ ] TRANSITION REPORT PURSUANT TO SECTION 13(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the transition period from ________ to________
COMMISSION FILE NUMBER: 0-31667
MFC DEVELOPMENT CORP.
(Exact name of registrant as specified in its charter)
DELAWARE 13-3579974
(State or other jurisdiction of incorporation (I.R.S.Employer
or organization) Identification No.)
271 NORTH AVENUE, NEW ROCHELLE, NY 10801
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (914) 636-3432
N/A
(Former name, former address and former fiscal year, if changed
since last report)
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 [ ]
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Indicate by checkmark whether the registrant has filed all documents and reports
required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act
of 1934 subsequent to the distribution of securities under a plan confirmed by a
court. Yes [ ] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding
of each of the issuer's classes of common stock, at July 10, 2002: 1,790,000.
MFC DEVELOPMENT CORP.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED MAY 31, 2002
Page No.
PART I
Item 1. Financial Statements ............................................ 2
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition ...................................................... 13
Item 3. Quantitative and Qualitative Disclosures About
Market Risk .............................................................. 16
PART II
Item 6. Exhibits and reports on Form 8-K ................................ 16
1
MFC Development Corp. and Subsidiaries
Index to Consolidated Financial Statements
PART I
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets -- May 31, 2002 (unaudited) and February 28, 2002 ......................... 3
Consolidated Statements of Operations (unaudited) -- Three months ended
May 31, 2002 and 2001.................................................................................. 5
Consolidated Statement of Stockholders' Equity (unaudited) --
Three months ended May 31, 2002 .................................................................... 6
Consolidated Statements of Cash Flows (unaudited) --
Three months ended May 31, 2002 and 2001............................................................ 7
Notes to Consolidated Financial Statements (unaudited)................................................. 8
2
MFC Development Corp. and Subsidiaries
Consolidated Balance Sheets
MAY, 31 FEBRUARY 28,
2002 2002
----------- -----------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents $ 765,598 $ 1,338,214
Mortgage and notes receivable - current 32,544 31,822
Finance and management receivables, net 4,533,106 4,136,126
Other current assets 178,325 149,713
----------- -----------
Total current assets 5,509,573 5,655,875
----------- -----------
Property and equipment:
Property and equipment, at cost 819,993 790,169
Less accumulated depreciation and amortization 330,644 298,545
----------- -----------
489,349 491,624
----------- -----------
Other assets:
Real estate held for development and sale 626,713 625,713
Mortgage and notes receivable 935,559 943,970
Loans receivable 211,603 196,417
Other 100,763 61,769
----------- -----------
Total other assets 1,874,638 1,827,869
----------- -----------
Total assets $ 7,873,560 $ 7,975,368
=========== ===========
See notes to interim financial statements.
3
MFC Development Corp. and Subsidiaries
Consolidated Balance Sheets (continued)
MAY 31, FEBRUARY 28,
2002 2002
----------- -----------
(UNAUDITED)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 256,546 $ 287,890
Current portion of notes payable, including $110,000 at May 31,
2002 and $160,000 at February 28, 2002 payable to a related party 175,155 225,153
Due to finance customers 1,777,245 1,697,879
Income taxes payable 724 3,424
----------- -----------
Total current liabilities 2,209,670 2,214,346
----------- -----------
Other liabilities:
Notes payable, including $-0- at May 31, 2002 and $110,000
at February 28, 2002 payable to a related party 32,655 158,654
Deferred income 850,000 850,000
Other 42,000 45,000
----------- -----------
Total other liabilities 924,655 1,053,654
----------- -----------
Minority interest in subsidiary 5,000 5,000
----------- -----------
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 (1,222,686) (1,254,553)
----------- -----------
4,747,534 4,715,667
Less treasury stock, at cost - 10,000 shares (13,299) (13,299)
----------- -----------
Total stockholders' equity 4,734,235 4,702,368
----------- -----------
Total liabilities and stockholders' equity $ 7,873,560 $ 7,975,368
=========== ===========
See notes to interim financial statements.
4
MFC Development Corp. and Subsidiaries
Consolidated Statements of Operations
(unaudited)
THREE MONTHS ENDED
MAY 31,
2002 2001
----------- -----------
Revenues
Sale of real estate $ -- $ 50,000
Rental income 25,802 23,410
Interest from mortgages 21,859 22,522
Income from the purchase
and collections of medical receivables 411,356 357,287
Medical management service fees 507,522 328,810
----------- -----------
Total income 966,539 782,029
----------- -----------
COSTS AND EXPENSES
Real estate 54,719 88,321
Medical receivables 364,624 344,105
Medical management services 400,477 282,477
Corporate expenses and other 79,724 71,548
Depreciation and amortization 32,098 25,021
----------- -----------
Total costs and expenses 931,642 811,472
----------- -----------
Income (loss) from operations 34,897 (29,443)
----------- -----------
Other income (expense):
Interest income 9,784 5,331
Interest expense (9,928) (13,682)
Minority interest in net income of subsidiary -- (3,062)
----------- -----------
(144) (11,413)
----------- -----------
Income (loss) from operations before provision
for income taxes 34,753 (40,856)
Provision for income taxes 2,886 2,921
----------- -----------
Net income (loss) $ 31,867 $ (43,777)
=========== ===========
Earnings (loss) per common share:
Basic and diluted earnings (loss) per common share $ 0.02 $ (0.02)
=========== ===========
Number of shares used in computation of basic and
diluted earnings per share 1,790,000 1,797,863
=========== ===========
See notes to interim financial statements.
5
MFC Development Corp. and Subsidiaries
Consolidated Statement of Stockholders' Equity
February 28, 2002 through May 31, 2002
(unaudited)
RETAINED TOTAL
ADDITIONAL EARNINGS STOCK- COMPRE-
COMMON STOCK PAID-IN (ACCUMULATED TREASURY STOCK HOLDERS' HENSIVE
SHARES AMOUNT CAPITAL DEFICIT) SHARES AMOUNT EQUITY INCOME
--------- ------ ---------- ----------- ------ -------- ---------- -------
Balance, February 28, 2002 1,800,000 $1,800 $5,968,420 $(1,254,553) 10,000 $(13,299) $4,702,368
Net income -- -- -- 31,867 -- -- 31,867 $31,867
-------
Comprehensive income -- -- -- -- -- -- -- $31,867
--------- ------ ---------- ----------- ------ -------- ---------- =======
Balance, May 31, 2002 1,800,000 $1,800 $5,968,420 $(1,222,686) 10,000 $(13,299) $4,734,235
========= ====== ========== =========== ====== ======== ==========
See notes to interim financial statements.
6
MFC Development Corp. and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
THREE MONTHS ENDED
MAY 31, MAY 31,
2002 2001
----------- ---------
Cash flows from operating activities
Net income (loss) $ 31,867 $ (43,777)
Adjustments to reconcile net income (loss) to net cash used in
operating activities:
Depreciation and amortization 32,098 25,021
Gain on sale of real estate held for development and sale -- (16,376)
Provision for bad debts and billing adjustments 21,280 21,176
Minority interest in net income of subsidiary -- 3,062
Changes in operating assets and liabilities:
Management receivables (105,026) (168,875)
Collections from sale of real estate held for development
and sale -- 50,000
Additions to real estate held for development and sale (1,000) (331)
Prepaid expenses, miscellaneous receivables and other assets (67,606) (53,799)
Accounts payable, accrued expenses and taxes (34,044) (75,824)
Other liabilities (3,000) (1,311)
----------- ---------
Net cash used in operating activities (125,431) (261,034)
----------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures & intangible assets (29,823) --
Finance receivables (313,234) 534,415
Due to finance customers 79,366 (477,481)
Principal payments on notes receivable 7,689 7,032
Loan receivable (15,186) (13,498)
Principal payments on loan receivable -- 1,815
----------- ---------
Net cash (used in) provided by investing activities (271,188) 52,283
----------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds of notes payable -- 50,000
Principal payments on notes payable (175,997) (14,401)
Distribution to minority interest -- (1,835)
Purchase of treasury stock -- (13,299)
----------- ---------
Net cash (used in) provided by financing activities (175,997) 20,465
----------- ---------
Net decrease in cash and cash equivalents (572,616) (188,286)
Cash and cash equivalents, beginning of period 1,338,214 591,408
----------- ---------
Cash and cash equivalents, end of period $ 765,598 $ 403,122
=========== =========
ADDITIONAL CASH FLOW INFORMATION
Interest paid $ 12,201 $ 13,057
=========== =========
Income taxes paid $ 8,432 $ 11,887
=========== =========
See notes to interim financial statements.
7
MFC DEVELOPMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with accounting principles generally accepted in the United States
for interim financial information in response to the requirements of Article 10
of Regulation S-X. Accordingly they do not include all of the information and
footnotes required by accounting principles generally accepted in the United
States for complete financial statements. In the opinion of management, the
accompanying unaudited consolidated financial statements contain all adjustments
(consisting only of normal recurring items) necessary to present fairly the
financial position as of May 31, 2002; results of operations for the three
months ended May 31, 2002 and 2001; cash flows for the three months ended May
31, 2002 and 2001; and changes in stockholders' equity for the three months
ended May 31, 2002. For further information, refer to the Company's financial
statements and notes thereto included in the Company's Form 10-K for the year
ended February 28, 2002. The consolidated balance sheet at February 28, 2002 was
derived from the audited financial statements as of that date. Results of
operations for interim periods are not necessarily indicative of annual results
of operations.
Certain prior year amounts were reclassified to conform with the current year
presentation.
2. BUSINESS ACTIVITIES OF THE COMPANY
The Company operates in two distinct industries consisting of real estate and
medical financing. 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 (i) Medical Financial Corp.,
which purchases insurance claims receivable from medical practices and provides
certain services to those practices; and (ii) three other subsidiaries which
were formed to provide additional management services to certain medical
practices.
3. CHANGE IN ACCOUNTING ESTIMATE
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. 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
8
MFC DEVELOPMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
3. CHANGE IN ACCOUNTING ESTIMATE (CONTINUED)
collected. 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, there was no material difference in revenue during the
three months ended May 31, 2002 as compared to the three months ended May 31,
2001.
4. FINANCE RECEIVABLES, NET
Net finance and management receivables consist of the following:
MAY 31, FEBRUARY 28,
2002 2002
----------- -----------
Gross finance receivables $ 4,225,326 $ 3,882,913
Allowance for credit losses (255,349) (252,535)
Deferred finance income (253,410) (224,231)
----------- -----------
Net finance receivables 3,716,567 3,406,147
----------- -----------
Gross management receivables 1,153,822 1,048,796
Allowance for billing adjustments (337,283) (318,817)
----------- -----------
Net management receivables 816,539 729,979
----------- -----------
Finance and management receivables, net $ 4,533,106 $ 4,136,126
=========== ===========
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 $1,650,000 of additional collateral consisting of finance
receivables that are past the contractual collection period, and written off,
but not yet uncollectible.
Certain of these receivables are collateral for a line of credit (see Note 6).
5. REAL ESTATE HELD FOR DEVELOPMENT AND SALE
In 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-Renee Testa, who is the wife of Lester Tanner, a director,
president and shareholder of the Company. The 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 this
property.
9
MFC DEVELOPMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
6. NOTES PAYABLE
Notes payable include the following:
MAY 31, FEBRUARY 28,
2002 2002
-------- --------
Related party credit lines $110,000 $270,000
Capital lease obligations 97,810 113,807
-------- --------
207,810 383,807
Less current maturities 175,155 225,153
-------- --------
Long-term debt $ 32,655 $158,654
======== ========
In October 2000, a $500,000 line of credit was obtained from a related party,
NWM Capital, LLC. ("NWM"), which is owned by a shareholder, who is also
President of the Company. The line had an outstanding balance of $110,000 at May
31, 2002. The ability to borrow under the line expires on October 31, 2002.
Interest is calculated at a rate of 12% per annum (15% prior to 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. There were no commitment fees paid in connection with this
line of credit.
The line is a joint and several obligation of the Company and its subsidiary,
Medical Financial Corp. The line is collateralized by the Granby second
mortgage, and by certain insurance claims receivable purchased by Medical
Financial Corp., which are not older than six months, equal to at least 222% of
the principal sum outstanding under the line.
Interest expense on this related-party borrowing for the three months ended May
31, 2002 and 2001 was $6,575 and $40,183.
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%.
10
MFC DEVELOPMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
6. NOTES PAYABLE (CONTINUED)
Aggregate maturities of the amount of notes payable and capital leases at May
31, 2002 are as follows:
CAPITAL
NOTES LEASE
Year ending February 28, PAYABLE OBLIGATIONS TOTAL
-------- -------- --------
2003 $110,000 $ 56,965 $166,965
2004 -- 35,722 35,722
2005 -- 18,247 18,247
-------- -------- --------
110,000 110,934 220,934
Amount representing interest -- 13,124 13,124
-------- -------- --------
Total (a) $110,000 $ 97,810 $207,810
======== ======== ========
(a) -- Total capital lease obligations represent present value of minimum lease
payments
7. COMMITMENTS AND CONTINGENCIES
There are various commitments and contingencies relating to the sale of real
estate as discussed in Note 4 of the Financial Statements included in Form 10-K
for the year ended February 28, 2002.
8. INCOME TAXES
The provision for income taxes consist of the following:
THREE MONTHS ENDED
MAY 31, MAY 31,
2002 2001
Current:
Federal $ -- $ --
State 2,886 2,921
------ ------
Total current 2,886 2,921
------ ------
Deferred:
Federal -- --
State -- --
------ ------
Total deferred -- --
------ ------
Total $2,886 $2,921
====== ======
11
MFC DEVELOPMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
9. 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. "Other" is comprised of corporate overhead and Capco, which is inactive.
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. Business segment information for the three months ended May 31, 2002
and 2001 follows:
REAL MEDICAL
ESTATE FINANCING OTHER TOTAL
----------- ---------- --------- -----------
Three months ended May 31,
2002
Total revenue from external customers $ 47,661 $ 918,878 $ -- $ 966,539
Income(loss) from operations (7,562) 122,781 (80,322) 34,897
Other expense (income), net (923) 2,450 (1,383) 144
Income(loss) from operations before
provision for income taxes (6,639) 120,331 (78,939) 34,753
Total assets 1,849,225 5,509,597 514,738 7,873,560
Capital expenditures -- 29,823 -- 29,823
Depreciation and amortization 504 30,996 598 32,098
2001
Total revenue from external customers $ 95,932 $ 686,097 $ -- $ 782,029
Income(loss) from operations 6,322 36,381 (72,146) (29,443)
Other expense (income), net -- 8,986 2,427 11,413
Income(loss) from operations before
provision for income taxes 6,322 27,395 (74,573) (40,856)
Total assets 3,927,588 4,812,548 122,036 8,862,172
Capital expenditures -- -- -- --
Depreciation and amortization 1,289 23,134 598 25,021
12
ITEM 2. 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, a legislative change in insurance regulations would affect the
future purchases of medical receivables, 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 unaudited consolidated
financial statements for the three months ended May 31, 2002 and 2001. The
following should be read in conjunction with the Management's Discussion and
Analysis of results of operations and financial condition included in Form 10K
for the year ended February 28, 2002.
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
of 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 is reflected as
a financing, or is deferred to a future period.
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.
RESULTS OF OPERATIONS
2002 PERIOD COMPARED TO THE 2001 PERIOD
The Company's revenues from operations for the three months ended May 31, 2002
("2002") was $967,000, an increase of $185,000 or 24% as compared to the three
months ended May 31, 2001 ("2001"). The net increase was a result of an increase
in the medical division, offset by a decrease in the real estate division.
Revenue in the real estate division decreased in 2002 by $48,000, to $48,000.
The decrease was due the lack of real estate sales in 2002 as compared to 2001,
when the Company recorded the sale of undeveloped land in Hunter, NY.
13
The $233,000 increase in revenues in the medical division was due to an increase
in both income from the purchase and collection of medical claims, and in
management fees. The 15% increase in income from the purchase and collection of
medical claims of $54,000 in 2002 was due to additional collection services that
are now being provided to new and existing clients. These additional services
also generate interest income received from insurance companies for delayed
payments on improperly denied and delayed receivables.
The increase in management fees of $179,000 (54%) 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. Beginning in April 2002, the Company
began managing a second MRI facility for the same client. Management fees were
also generated from the management of a finance client's physical therapy
practice. These fees are net of billing adjustments of $18,000.
Costs and expenses from operations increased by $121,000 (15%) to $932,000 in
2002. The increase was due to increases of $139,000 in the medical division,
$8,000 in corporate expenses and other, and $7,000 in depreciation and
amortization, offset by a decrease of $33,000 in the real estate division.
The increase in costs and expenses in the medical division was due to an
increase in expenses of $21,000 in medical receivable expenses, and of $118,000
related to the management of two finance clients' medical practices. The
increase was primarily due to (i) an increase in employment costs of $19,000,
due to annual salary increases and to the expansion of the sales and marketing
department, and (ii) additional costs of $7,000 are related to the additional
collection services that the Company now provides. The 6% increase in medical
receivable expenses in 2002, as compared to its 15% increase in revenues reflect
modifications and improvements in the Company's infrastructure, which include
trained employees, improved 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 reduced 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 42% increase in medical management expenses in 2002 is related to the 54%
increase in revenues for the same period. The Company incurred additional
expenses due to growth in the management client's radiology practice. As
expenses increase, the Company may bill more for the services it provides.
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 2001, which results in a
decrease in the cost of sales.
The increase in corporate expenses and other of $8,000 in 2002 was primarily due
to increases in executive salaries and shareholder reporting expenses. The
increase in depreciation and amortization of $7,000 in 2002 is attributable to
increased capital expenditures in the medical financing division. Net interest
expense in 2002 was $-0-, a decrease of $8,000 from 2001. The decrease was
attributable to interest earned from the collection of the proceeds of the
Goshen
14
receivables and the partial use of those proceeds to repay debt that was
incurred to finance the purchase of additional medical claims receivable.
For the reasons described above (most notably the continuing increases in
revenues in the medical division, which are greater than increases in expenses),
the Company recorded net income of $32,000 for the three months ended May 31,
2002, a $76,000 increase as compared to a loss of $44,000 for the three months
ended in 2001.
LIQUIDITY AND CAPITAL RESOURCES
The Company's two business activities during the three months ended May 31, 2002
resulted in a decrease of cash in the amount of $573,000. The Company expects
continued growth of its medical division based on its ongoing 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, refinancing of assets under capital leases 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 its 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 used by operations in 2002 was $125,000, as compared to $261,000 in 2001.
The $136,000 decrease in the use of cash in 2002 was due to the elimination of
operating losses in 2002, a reduction of management receivables, and
fluctuations in operating assets and liabilities primarily caused by timing
differences, offset by a decrease in the collections from the sale of real
estate.
Cash used by investing activities was $271,000 in 2002 as compared with the
$52,000 provided in 2001. The increase in the use of cash in 2002 of $323,000
was primarily due to a $291,000 net increase in funds used to purchase medical
claims receivable and a $30,000 increase in capital expenditures for computers
and software projects. The technology that the Company has invested in has
already decreased 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 because to these capital expenditures.
Net cash used by financing activities was $176,000 in 2002 as compared with the
$20,000 provided in 2001. The $196,000 increase in the use of cash in 2002 was
primarily due to $175,000 of debt repayments in 2002, as compared to $36,000 of
net borrowings in 2001.
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EFFECTS OF NEW ACCOUNTING PRONOUNCEMENTS
None
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's market risk arises principally from the interest rate risk related
to certain of its receivables. Interest rate risk is a consequence of having
fixed interest rate receivables in the Company's Real Estate and Medical
Divisions. The Company is exposed to interest rate risk arising from changes in
the level of interest rates.
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) EXHIBITS.
None
b) REPORTS ON FORM 8K.
None
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
MFC DEVELOPMENT CORP.
By: /S/ VICTOR BRODSKY
-------------------------
Victor Brodsky
Vice President and
Chief Financial Officer
(Principal Financial and Accounting Officer)
Date: July 10, 2002
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