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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: August 31, 2002
OR
[ ] 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 or (I.R.S. Employer Identification No.)
organization)
271 NORTH AVENUE, NEW ROCHELLE, NY 10801
(Address of principal executive offices) (Zip Code)
(914) 636-3432
(Registrant's telephone number, including area code)
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 October 10, 2002: 1,790,000.
MFC DEVELOPMENT CORP.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED AUGUST 31, 2002
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS........................................................................ 2
Consolidated Balance Sheets -- August 31, 2002 (Unaudited) and February 28, 2002........... 2
Consolidated Statements of Operations (Unaudited) -- Six months and three months
ended August 31, 2002 and 2001 .......................................................... 4
Consolidated Statement of Stockholders' Equity -- February 28, 2002 through
August 31, 2002 (Unaudited) ............................................................ 5
Consolidated Statements of Cash Flows (Unaudited).......................................... 6
Notes to Consolidated Financial Statements (Unaudited)..................................... 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION....... 14
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.................................. 18
ITEM 4. CONTROLS AND PROCEDURES..................................................................... 18
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K........................................................... 18
1
MFC DEVELOPMENT CORP. AND SUBSIDIARIES
Consolidated Balance Sheets -- August 31, 2002 (Unaudited)
and February 28, 2002
AUGUST 31, FEBRUARY 28,
2002 2002
(UNAUDITED)
---------- ----------
Assets
Current assets:
Cash and cash equivalents $ 246,917 $1,338,214
Mortgage and notes receivable - current 33,281 31,822
Finance and management receivables, net 5,108,884 4,136,126
Other current assets 169,917 149,713
---------- ----------
Total current assets 5,558,999 5,655,875
---------- ----------
Property and equipment:
Property and equipment, at cost 857,641 790,169
Less accumulated depreciation and amortization 366,854 298,545
---------- ----------
490,787 491,624
---------- ----------
Other assets:
Real estate held for development and sale 666,363 625,713
Mortgage and notes receivable 926,957 943,970
Loans receivable 227,252 196,417
Other 146,276 61,769
---------- ----------
Total other assets 1,966,848 1,827,869
---------- ----------
Total assets $8,016,634 $7,975,368
========== ==========
See notes to interim financial statements.
2
MFC DEVELOPMENT CORP. AND SUBSIDIARIES
Consolidated Balance Sheets (continued)
AUGUST 31, FEBRUARY 28,
2002 2002
(UNAUDITED)
----------- -----------
Liabilities and stockholders' equity
Current liabilities:
Accounts payable and accrued expenses $ 243,147 $ 287,890
Current portion of notes payable, including $-0- at
August 31, 2002 and $160,000 at February 28, 2002
payable to a related party 179,289 225,153
Due to finance customers 1,909,578 1,697,879
Income taxes payable 1,616 3,424
----------- -----------
Total current liabilities 2,333,630 2,214,346
----------- -----------
Other liabilities:
Notes payable, including $-0- at August 31, 2002 and
$110,000 at February 28, 2002 payable to a related party 27,686 158,654
Deferred income 850,000 850,000
Other 37,500 45,000
----------- -----------
Total other liabilities 915,186 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 (1,194,103) (1,254,553)
----------- -----------
4,776,117 4,715,667
Less treasury stock, at cost - 10,000 shares (13,299) (13,299)
----------- -----------
Total stockholders' equity 4,762,818 4,702,368
----------- -----------
Total liabilities and stockholders' equity $ 8,016,634 $ 7,975,368
=========== ===========
See notes to interim financial statements.
3
MFC DEVELOPMENT CORP. AND SUBSIDIARIES
Consolidated Statements of Operations (Unaudited) --
Six months and three months
ended August 31,2002 and 2001
THREE MONTHS ENDED SIX MONTHS ENDED
AUGUST 31, AUGUST 31,
-----------------------------------------------------------
2002 2001 2002 2001
----------- ----------- ----------- -----------
REVENUES
Sale of real estate -- -- -- $ 50,000
Rental income 25,802 25,155 51,604 48,565
Interest from mortgages 21,733 57,012 43,592 79,534
Income from the purchase and collections of
medical receivables 516,456 456,052 927,812 813,339
Medical management service fees 581,974 387,863 1,089,496 716,673
----------- ----------- ----------- -----------
Total income 1,145,965 926,082 2,112,504 1,708,111
----------- ----------- ----------- -----------
COSTS AND EXPENSES
Real estate 60,553 57,588 115,272 145,909
Medical receivables 446,546 356,158 811,170 700,263
Medical management services 477,857 345,317 878,334 627,794
Corporate expenses and other 93,583 73,380 173,307 144,928
Depreciation and amortization 36,209 25,057 68,307 50,078
----------- ----------- ----------- -----------
Total costs and expenses 1,114,748 857,500 2,046,390 1,668,972
----------- ----------- ----------- -----------
Income from operations 31,217 68,582 66,114 39,139
----------- ----------- ----------- -----------
Other income (expense):
Interest income 6,354 4,784 16,138 10,115
Interest expense (6,152) (17,561) (16,080) (31,243)
Minority interest in net income of subsidiary -- (3,014) -- (6,076)
----------- ----------- ----------- -----------
202 (15,791) 58 (27,204)
----------- ----------- ----------- -----------
Income from operations before provision for
income taxes 31,419 52,791 66,172 11,935
Provision for income taxes 2,836 1,922 5,722 4,843
----------- ----------- ----------- -----------
Net income $ 28,583 $ 50,869 $ 60,450 $ 7,092
=========== =========== =========== ===========
Earnings per common share:
Basic and diluted earnings per common share $ 0.02 $ 0.03 $ 0.03 --
=========== =========== =========== ===========
Number of shares used in computation of basic
and diluted earnings per share 1,790,000 1,790,000 1,790,000 1,795,282
=========== =========== =========== ===========
See notes to interim financial statements.
4
MFC DEVELOPMENT CORP. AND SUBSIDIARIES
Consolidated Statement of Stockholders' Equity --
February 28, 2002 through August 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 -- -- -- 60,450 -- -- 60,450 $60,450
-------
Comprehensive income -- -- -- -- -- -- -- $60,450
--------- ----------- ----------- ----------- ------ ----------- ----------- =======
Balance, August 31, 2002 1,800,000 $ 1,800 $ 5,968,420 $(1,194,103) 10,000 $ (13,299) $ 4,762,818
========= =========== =========== =========== ====== =========== ===========
See notes to interim financial statements.
5
MFC DEVELOPMENT CORP. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Unaudited)
SIX MONTHS ENDED
AUGUST 31, AUGUST 31,
2002 2001
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 60,450 $ 7,092
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization 68,311 50,078
Gain on sale of real estate held for development and sale -- (16,376)
Provision for bad debts and billing adjustments 81,572 156,607
Minority interest in net income of subsidiary -- 6,076
Changes in operating assets and liabilities:
Management receivables (195,642) --
Collections from sale of real estate held for development and sale -- 50,000
Additions to real estate held for development and sale (40,650) (331)
Prepaid expenses, miscellaneous receivables and other assets (104,711) 107,552
Accounts payable, accrued expenses and taxes (46,551) (186,652)
Other liabilities (7,500) (2,214)
----------- -----------
Net cash (used in) provided by operating activities (184,721) 171,832
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures & intangible assets (67,474) (35,581)
Finance receivables (858,688) 568,197
Due to finance customers 211,699 (835,531)
Principal payments on notes receivable 15,554 14,220
Loan receivable (30,835) (30,462)
Principal payments on loan receivable -- 5,705
----------- -----------
Net cash (used in) investing activities (729,744) (313,452)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds of notes payable 125,000 150,000
Principal payments on notes payable (301,832) (29,194)
Distribution to minority interest -- (4,856)
Purchase of treasury stock -- (13,299)
----------- -----------
Net cash (used in) provided by financing activities (176,832) 102,651
----------- -----------
Net decrease in cash and cash equivalents (1,091,297) (38,969)
Cash and cash equivalents, beginning of period 1,338,214 284,073
----------- -----------
Cash and cash equivalents, end of period $ 246,917 $ 245,104
=========== ===========
ADDITIONAL CASH FLOW INFORMATION
Interest paid $ 18,355 $ 29,368
=========== ===========
Income taxes paid $ 8,432 $ 11,887
=========== ===========
See notes to interim financial statements.
6
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 August 31, 2002; results of operations for the six
months and three months ended August 31, 2002 and 2001; cash flows for the six
months ended August 31, 2002 and 2001; and changes in stockholders' equity for
the six months ended August 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
7
MFC DEVELOPMENT CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
(continued)
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 six
months ended August 31, 2002.
4. FINANCE RECEIVABLES, NET
Net finance and management receivables consist of the following:
AUGUST 31, FEBRUARY 28,
2002 2002
----------- -----------
Gross finance receivables $ 4,765,663 $ 3,882,913
Allowance for credit losses (258,807) (252,535)
Deferred finance income (248,293) (224,231)
----------- -----------
Net finance receivables 4,258,563 3,406,147
----------- -----------
Gross management receivables 1,244,438 1,048,796
Allowance for billing adjustments (394,117) (318,817)
----------- -----------
Net management receivables 850,321 729,979
----------- -----------
Finance and management receivables, net $ 5,108,884 $ 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 $1,551,000 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.
8
MFC DEVELOPMENT CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
(continued)
6. NOTES PAYABLE
Notes payable include the following:
AUGUST 31, FEBRUARY 28,
2002 2002
-------- --------
Series A Bonds $125,000 --
Related party credit lines -- 270,000
Capital lease obligations 81,975 113,807
-------- --------
206,975 383,807
Less current maturities 179,289 225,153
-------- --------
Long-term debt $ 27,686 $158,654
======== ========
In July 2002, the board of directors authorized the Company to issue an
aggregate of $750,000 of Series A Bonds ("Bonds") in $25,000 increments to
finance additional growth of the medical division. There were $125,000 of Bonds
outstanding at August 31, 2002. Each Bond matures eighteen months after the
issue date and may be extended for additional six month periods by mutual
consent of the Company and the individual bondholders. Interest is payable
monthly, and is calculated at a rate of prime plus 3% but not less than 9% per
annum nor more than 15% per annum. The rate of interest will adjusted at the end
of each calendar quarter. The rate of interest as of August 31, 2002 was 9%.
Monthly interest only payments are due through maturity. The Bonds may only be
prepaid on 120 days prior written notice. The Company, at the option of the
bondholders, may be required to prepay on 60 days prior written notice, up to an
aggregate of $50,000 per bondholder per 60 day period. The Company may not issue
more than $100,000 of Bonds to each bondholder. A director, officer and
shareholder of the Company is related to one of the bondholders.
The Bonds are a joint and several obligation of the Company and its subsidiary,
Medical Financial Corp. The Bonds are collateralized by insurance claims
receivable purchased by Medical Financial Corp., which are not older than six
months, equal to at least 333% of the principal sum outstanding under the line.
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 a
director and President of the Company. By mutual consent of the Company and NWM,
the line was terminated on August 31, 2002 and the then outstanding balance of
$110,000 was paid in full. Interest was calculated at a rate of 12% per annum
(15% prior to April 1, 2002). Monthly payments were made consisting only of
interest. There were no commitment fees paid in connection with this line
of credit.
The line was a joint and several obligation of the Company and its subsidiary,
Medical Financial Corp. The line was collateralized by the Granby second
mortgage, and by certain insurance claims receivable purchased by Medical
Financial Corp., which were not older than six months, equal to at least 222% of
the principal sum outstanding under the line.
9
MFC DEVELOPMENT CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
(continued)
6. NOTES PAYABLE (CONTINUED)
Interest expense on this related-party borrowing for the six months ended August
31, 2002 and 2001 was $9,875 and $25,746.
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 August
31, 2002 are as follows:
Year ending February 28, CAPITAL
NOTES LEASE
PAYABLE OBLIGATIONS TOTAL
-------- ----------- --------
2003 (six months) $125,000 $37,977 $162,977
2004 - 35,722 35,722
2005 - 18,247 18,247
-------- ----------- --------
125,000 91,946 216,946
Amount representing interest - 9,971 9,971
-------- ----------- --------
Total (a) $125,000 $81,975 $206,975
======== =========== ========
(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.
As part of the 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. In August 2002, the co-investors commenced a lawsuit
against the Company for the recovery of amounts they claim are due to them. The
Company is defending their position and believes that the resolution of this
lawsuit will not have any material effect on future results of operations.
10
MFC DEVELOPMENT CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
(continued)
8. INCOME TAXES
The provision for income taxes consist of the following:
THREE MONTHS ENDED SIX MONTHS ENDED
AUGUST 31, AUGUST 31,
2002 2001 2002 2001
------ ------ ------ ------
Current:
Federal $ -- $ -- $ -- $ --
State 2,836 1,922 5,722 4,843
------ ------ ------ ------
Total current 2,836 1,922 5,722 4,843
------ ------ ------ ------
Deferred:
Federal -- -- -- --
State -- -- -- --
------ ------ ------ ------
Total deferred -- -- -- --
------ ------ ------ ------
Total $2,836 $1,922 $5,722 $4,843
====== ====== ====== ======
9. SUBSEQUENT EVENT
Capital Lease Obligation
In October 2002, the Company acquired an additional MRI facility that it will
use to manage a finance client's radiology practice. The purchase price of
$90,000 was comprised of a down-payment of $15,833 and the assignment of a
capital lease in the amount of $74,167 plus applicable tax. The terms of the
lease call for 27 monthly payments $3,264, including interest at the rate of
10.9% per annum.
Rent Obligation
As discussed in Note 4 of the Company's Form 10-K for the year ended February
28, 2002, 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 (the
"Vacancy Period") for rental payments aggregating $1,482,194. As a result,
$850,000 of the gain recorded on the sale in fiscal 1998, representing the
present value of these rental payments, was deferred. Northwest Management Corp.
("NMC"), a shareholder of the Company, signed an agreement that it would
indemnify the Company for any payments made during the Vacancy Period in
exchange for keeping any profits if a sub-tenant pays more than the rent that
the Company is obligated to pay. The president of NMC, Lester Tanner, also a
shareholder, director and president of the Company, has the power to vote NMC
shares, which are owned by his two children. On September 1, 2002, the Company
became obligated for rental payments of $31,000 per month on that lease and has
made two rental payments totaling approximately $62,000.
11
MFC DEVELOPMENT CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
(continued)
10. 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 six months and three months
ended August 31, 2002 and 2001 follows:
12
MFC DEVELOPMENT CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
(continued)
10. BUSINESS SEGMENT INFORMATION (CONTINUED)
REAL MEDICAL
ESTATE FINANCING OTHER TOTAL
------ --------- ----- -----
THREE MONTHS ENDED AUGUST 31,
2002
Total revenue from external customers $ 47,535 $1,098,430 $ - $1,145,965
Income (loss) from operations (13,520) 138,918 (94,181) 31,217
Other expense (income), net - 796 (998) (202)
Income (loss) from operations before provision
for income taxes (13,520) 138,122 (93,183) 31,419
Capital expenditures - 37,651 - 37,651
Depreciation and amortization 502 35,109 598 36,209
2001
Total revenue from external customers $ 82,167 $ 843,915 $ - $ 926,082
Income (loss) from operations 24,229 118,330 (73,977) 68,582
Other expense (income), net - 12,846 2,945 15,791
Income (loss) from operations before provision
for income taxes 24,229 105,484 (76,922) 52,791
Capital expenditures - - - -
Depreciation and amortization 1,639 47,244 1,195 50,078
SIX MONTHS ENDED AUGUST 31,
2002
Total revenue from external customers $ 95,196 $2,017,308 $ - $2,112,504
Income (loss) from operations (21,082) 261,699 (174,503) 66,114
Other expense (income), net (923) 3,246 (2,381) (58)
Income (loss) from operations before provision
for income taxes (20,159) 258,453 (172,122) 66,172
Total assets 1,729,277 5,774,719 512,638 8,016,634
Capital expenditures - 67,474 - 67,474
Depreciation and amortization 1,006 66,105 1,196 68,307
2001
Total revenue from external customers $ 178,099 $1,530,012 $ - $1,708,111
Income (loss) from operations 30,551 154,711 (146,123) 39,139
Other expense (income), net - 21,832 5,372 27,204
Income (loss) from operations before provision
for income taxes 30,551 132,879 (151,495) 11,935
Total assets 2,902,369 4,670,316 121,402 7,694,087
Capital expenditures - 35,581 - 35,581
Depreciation and amortization 1,639 47,244 1,195 50,078
13
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 six months and three months ended August 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.
RESULT OF OPERATIONS
2002 Period Compared to the 2001 Period
The Company's revenues from operations for the three months ended August 31,
2002 ("2002") was $1,146,000, an increase of $220,000 or 24% as compared to the
three months ended August 31, 2001 ("2001"). The Company's revenues from
operations for the six months ended August 31, 2002 ("2002") was $2,113,000, an
increase of $405,000 or 24% as compared to the six months ended August 31, 2001
("2001"). The net increases in both of the three and six month periods were a
result of increase in the medical division, offset by decreases in the real
estate division.
Revenue in the real estate division decreased by $34,000, to $48,000 in the
three month period and decreased by $82,000, to $96,000 in the six month period.
The decrease in the three month period was due to a $35,000 decrease in interest
income from the Goshen mortgage that was settled in November 2001. The decrease
in the six month period was due to (i) a $36,000 decrease in interest income
from the Goshen mortgage and (ii) to the lack
14
of real estate sales in 2002 as compared to 2001, when the Company recorded the
sale of undeveloped land in Hunter, NY, during the first quarter.
The $254,000 and $487,000 increases in revenues in the medical division for the
three month and six month periods ended in 2002 were due to increases in both
income from the purchase and collection of medical claims and in management
fees. The 13% and 14% increases in earned fees from the purchase and collection
of medical claims of $60,000 and $115,000 in the three month and six month
periods ended in 2002 were 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 increases in gross fees (before income deferrals) from the purchase and
collection of medical claims was $107,000 and $182,000 in the three month and
six month periods ended in 2002. The income that is derived from these purchases
is deferred and recognized over the contractual collection period in proportion
to the costs of collection, which is usually six months, resulting in an
increase in deferred income that will be recognized in future periods. The
increase in deferred income in both periods ended in 2002 was greater than the
same periods in 2001, the result of which caused a decrease in earned fees
during the three months and six month periods ended in 2002 as compared to same
periods ended in 2001. The increase in claims purchased was attributable both to
new clients and additional purchases from existing clients.
The increases in management fees of $194,000 (50%) and $372,000 (52%) for the
three months and six months ended in 2002, were 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 $57,000 and $75,000 for both of the three
month and six month periods. 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 operations increased by $257,000 (30%) to $1,115,000 for
the three months ended in 2002. During the six month period ended in 2002 costs
and expenses from operations increased by $377,000 (23%) to $2,046,000. The
increase for the three months ended in 2002 was due to increases of $2,000 in
the real estate division, $224,000 in the medical division, $20,000 in
depreciation and amortization and $11,000 in corporate expenses and other. The
increase for the six month period ended in 2002 was due to increases of $362,000
in the medical division, $28,000 in corporate expenses and other, and $12,000
in depreciation and amortization, offset by a decrease of $31,000 in real
estate.
The $2,000 increase in costs and expenses in the real estate division for the
three month period ended in 2002 was due to an annual salary increase. The net
decrease for the six month period ended in 2002 was due to a decrease in the
amount of properties sold in 2002, which results in a decrease in the cost of
sales.
15
The increase in costs and expenses in the medical division for the three month
period was due to an increase of $91,000 in medical receivable expenses and an
increase of $133,000 of expenses that are related to the management of two
finance clients' medical practices. The increase for the six month period was
due to an increase of $111,000 in medical receivable expenses and an increase in
medical management expenses of $251,000.
The increases in medical receivable expenses for the three month and six month
periods ended in 2002 were primarily due to (i) increases in employment costs,
due to annual salary increases, the expansion of the sales and marketing
department and new employees needed to provide the additional collection
services that the Company now provides, (ii) new costs that are related to the
additional collection services that the Company now provides and (iii) new
banking fees that are related to client services. 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 39% and 40% increase in medical management expenses for the three and six
month periods are related to the 50% and 52% increases in revenues for the same
periods. The Company incurred additional expenses due to growth in the
management client's radiology practice. A portion of the increase was due to the
managing of a second MRI. As expenses increase, the Company may bill more for
the services it provides.
The increase in corporate expenses and other of $20,000 and $28,000 for the
three and six month periods ended in 2002 are primarily due increases in
executive salaries, accounting fees, director and officer liability insurance
and shareholder reporting expenses. The increase in depreciation and
amortization of $11,000 and $18,000 for the three and six month periods ended in
2002 is attributable to increased capital expenditures in the medical financing
division. Net interest expense in for the three and six month periods ended in
2002 was $-0-, a decrease of $13,000 and $21,000 from 2001. The decrease was
attributable to interest earned from the collection of the proceeds of the
Goshen 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, the Company recorded net income from
operations of $28,000 for the three months ended August 31, 2002 as compared to
net income of $50,000 for the three months ended in 2001. For the same reasons,
net income from operations for the six months ended August 31, 2002 was
$61,000, as compared to net income of $7,000 for the same period in 2001.
LIQUIDITY AND CAPITAL RESOURCES
The Company's two business activities during the six months ended August 31,
2002 resulted in a decrease of cash in the amount of $1,091,000. 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
16
and the issuance of additional Series A Bonds. 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.
As discussed in Note 9, the Company's obligation for rental payments of $31,000
per month is subject to indemnification by NMC for any payments made during the
Vacancy Period. NMC is a shareholder of the Company . The president of NMC,
Lester Tanner, also a shareholder, director and president of the Company, has
the power to vote NMC shares, which are owned by his two children The Company
does not expect any material effect on its liquidity as a result of this
obligation.
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 $185,000, as compared to $172,000 being
provided in 2001. The $357,000 increase in the use of cash in 2002 was due to an
increase in management receivables in 2002, 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 $730,000 in 2002 as compared with the
$313,000 used in 2001. The increase in the use of cash in 2002 of $417,000 was
primarily due to a $379,000 net increase in funds used to purchase medical
claims receivable and a $32,000 increase in capital expenditures for computers
and software projects. The capital expenditures for technology continues the
program begun last year, which has significantly decreased the time required to
perform collection tasks.
Net cash used by financing activities was $177,000 in 2002 as compared with the
$103,000 provided in 2001. The $280,000 increase in the use of cash in 2002 was
primarily due to $177,000 of net debt repayments in 2002, as compared to
$121,000 of net borrowings in 2001.
EFFECTS OF NEW ACCOUNTING PRONOUNCEMENTS
None.
17
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.
ITEM 4. CONTROLS AND PROCEDURES
Under the supervision and with the participation of our management, including
our principal executive officer and principal financial officer, we have
evaluated the effectiveness of the design and operation of our disclosure
controls and procedures within 90 days of the filing date of this quarterly
report, and, based on their evaluation, our principal executive officer and
principal financial officer have concluded that these controls and procedures
are effective. There were no significant changes in our internal controls or in
other factors that could significantly affect these controls subsequent to the
date of their evaluation.
Disclosure controls and procedures are our controls and other procedures that
are designed to ensure that information required to be disclosed by us in the
reports that we file or submit under the Exchange Act is recorded, processed,
summarized and reported, within the time periods specified in the Securities and
Exchange Commission's rules and forms. Disclosure controls and procedures
include, without limitation, controls and procedures designed to ensure that
information required to be disclosed by us in the reports that we file under the
Exchange Act is accumulated and communicated to our management, including our
principal executive officer and principal financial officer, as appropriate to
allow timely decisions regarding required disclosure.
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
EXHIBITS
None.
REPORTS ON FORM 8-K
None.
18
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)
Dated: October 10, 2002
CERTIFICATION
Each of the undersigned hereby certifies in his capacity as an officer of MFC
Development Corp. (the "Company") that the Quarterly Report of the Company on
Form 10-Q for the period ended August 31, 2002 fully complies with the
requirements of Section 13(a) of the Securities Exchange Act of 1934 and that
the information contained in such report fairly presents, in all material
respects, the financial condition of the Company at the end of such period and
the results of operations of the Company for such period.
Dated: October 10, 2002
By: /S/ LESTER TANNER
-----------------------
Lester Tanner
President and Chief Executive Officer
By: /S/ VICTOR BRODSKY
-----------------------
Victor Brodsky
Vice President and Chief Financial Officer
19
CERTIFICATIONS
I, Lester Tanner, certify that:
1. I have reviewed this quarterly report on Form 10-Q of MFC Development Corp;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified
for the registrant's auditors any material weaknesses in internal
controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Dated: October 10, 2002
By: /S/ LESTER TANNER
-------------------
Lester Tanner
President and Chief Executive Officer
20
CERTIFICATIONS
I, Victor Brodsky, certify that:
1. I have reviewed this quarterly report on Form 10-Q of MFC Development Corp;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified
for the registrant's auditors any material weaknesses in internal
controls; and
b. any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Dated: October 10, 2002
By: /S/ VICTOR BRODSKY
------------------
Victor Brodsky
Vice President and Chief Financial Officer
21