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 are under common control, this transaction has been 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, 2001, the total revenues derived from the real estate division were $304,260, constituting 13% 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:
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. The lawsuit had sought to enforce a previously approved subdivision plan for a greater number of homes on the property. It was settled by reducing the density of the subdivision to include only 165 single family homes. The Planning Board of the Village of Goshen was a party to this settlement and is currently reviewing a revised subdivision plan for compliance with regulations of the applicable municipal agencies. 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. The construction financing is to be provided by Windemere with the Company sharing any profits to be realized in the construction and sale of the homes.
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 remains deferred as of February 28, 2001, until the initial and continuing investment criteria is sufficient. That amount and any contingent profit have not been reflected in the Company's net income. The balance of the mortgage on February 28, 2001 was $2,310,000. The interest payment required for fiscal 2000 has not been made, resulting in the suspension of accruing interest as of November 30, 1999. See Note 4 of Notes to Consolidated Financial Statements. In September 2000 Windemere and the Company agreed in principle to seek a purchaser for the Goshen property rather than develop the subdivision, provided the purchase price is acceptable to both and will be for an amount which would require Windemere to prepay the Company's mortgage plus all accrued interest. As long as Windemere is attempting to sell the property, the Company does not intend to pursue the collection of interest or principal on the mortgage. Negotiations have taken place with two potential purchasers. No agreement has yet been reached and sale efforts are continuing. There is no allowance for loss because the market value of the collateral, less costs to sell, is greater than the carrying amounts of the related notes receivable and accrued interest receivable.
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 $3,795,115 has since been paid and $1,004,885, as reduced by amortization and partial
prepayment as of February 28, 2001, 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 which will be discharged as and when the properties are sold. 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 paid by Yolo Equities Corp. 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 water treatment plant (owned by a wholly-owned subsidiary of the Yolo Capital Corp., Highlands Pollution Control Corp.), (ii) a Clubhouse with swimming pool and six tennis courts, (iii) a small office building and (iv) a site for condominium units. Adjoining the site are 184 condominium units owned by unrelated persons, who purchased their resort homes from prior owners of Hunter Highlands. Management believes, based on one completed sale and sale negotiations, that these properties have a fair market value at least equal to the amount carried on its balance sheet at February 28, 2001. 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 owned by Highlands Pollution Control Corp. That corporation has the standard formal contract with the City of New York pursuant to which the City 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 either for development by Yolo Equities Corp. or sale to others.
Yolo Equities Corp. will seek to sell the undeveloped building site, clubhouse and office building during the next year. The hotel site will be offered to a hotel or development company with whom Yolo Equities Corp. can participate in the project without further cash outlay. This will then leave Yolo Equities Corp. with about 70 acres of undeveloped land up the mountain contiguous to the Hunter ski slopes for which there are no present plans for development. The owner of the ski slopes expressed an interest recently in purchasing this land from Yolo Equities Corp. and the capital stock of Highlands Pollution Control Corp. from Yolo Capital Corp. While one meeting was held to explore the price, there have been no further discussions since that time and Yolo Equities Corp. has decided to defer any development or sale of those 70 acres while it is proceeding with the hotel project.
Other Properties. The Company previously owned two parcels of undeveloped land in Brookfield, Connecticut, which it sold in December 1999. The property had a carrying value of $490,000 and was sold for approximately $538,000, resulting in a gain of approximately $44,000, net of closing costs. 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), which act as service organizations for providers of medical services and (ii) a wholly-owned subsidiary, Medical Financial Corp., which purchases insurance company receivables, paying cash to the medical provider in return for a negotiated fee. In the fiscal year ended February 28, 2001, the total revenues of the Medical Division were $2,054,863, constituting 87% 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. This division has not been profitable due to insufficient business to cover the operating costs calculated to service the additional clients which the Company anticipated and which have been gradually added during the last fiscal year. Management believes that the division, which was profitable during the last quarter of fiscal 2001, will be profitable during the Company's next fiscal year because purchases of receivables have increased during the last half of fiscal 2001, due to new business and increases from existing customers, a trend which the Company expects to continue so that revenues will be higher as the receivables are collected.
THE CAPCO DIVISION was recently commenced by the filing on September 14, 2000 of Articles of Organization in New York State for FRM N.Y. Capital LLC which is an 80% 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 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, such as a limited liability company, 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 providing 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, 80% of which was supplied by the Company and 20% by Daniel Elstein who was a director of FRM in 1997-1998, 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 Goshen property and properties held for sale in Hunter, N.Y.
The Medical Division has heretofore marketed 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 and in joint venture with Windemere in Goshen, New York. The real estate markets in those communities have 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 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 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, 2001, the Company had 32 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.
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.
ITEM 3. LEGAL PROCEEDINGS
MFC is not presently a party to any material litigation.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS AND OTHER INFORMATION
None, other than the election of directors on July 20, 2000.
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.
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, 2000 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.
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 in the Company's 4th fiscal, 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.
The high bid and low asked quote on May 21, 2001 was $1.50 bid and $2.00 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, 2001, 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 two options to purchase a total of 3,000 shares held by Allan Kornfeld, Chairman 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.
ITEM 6.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
MFC Development Corp. and Subsidiaries Selected Consolidated Financial Data
(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.
ITEM 7.
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 mortgage notes receivable on two properties that were 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.
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 that was recorded during the six months ended August 31, 2000. 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.
RESULTS OF OPERATIONS
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 is no longer being accrued on this mortgage because the annual interest payment that was due in February 2000 has 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 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 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 $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 amounts that had been borrowed to finance the purchase of medical claims receivable, offset by acquisition, by capital lease, of an MRI machine in the medical division and new debt incurred in the last two quarters of 2001 that was used to finance the purchase of medical claims receivable. 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 will not continue in fiscal 2002.
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.
YEAR ENDED FEBRUARY 29, 2000 COMPARED TO YEAR ENDED FEBRUARY 28, 1999
The Company's revenues from continuing operations increased by $825,000 or 57%, for the year ended February 29, 2000 ("2000") to $2,283,000 from $1,458,000 for the year ended February 28, 1999 ("1999"). The increase was a result of increased revenues in the real estate division, offset by a decrease in the medical division.
Revenue in the real estate division increased by $834,000, to $1,250,000 in 2000. The increase in revenue was attributable to sales of real estate totaling $941,000, as compared to $41,000 in 1999. The sales in 2000 consisted of six condominium units at the Hunter, NY property for $403,000 and the two parcels of vacant land in Brookfield, CT for $538,000.
The $9,000 net decrease in revenues in the medical division in 2000 was due to a decrease in medical claims purchased in that period as compared to 1999. The decrease was due to a lesser amount of bills purchased due to the Company's decision to be more selective in the bill purchasing process. The net decrease was offset by fees in the amount of $20,000 that were generated from the ownership, beginning in February 2000, of an MRI facility that provides management services to a finance client's radiology practice.
Costs and expenses from continuing operations increased $1,366,000, or 72%, for the year ended in 2000, to $3,259,000 as compared to $1,893,000 for the year ended in 1999. The net increase for 2000 was due to increases of $818,000 in the real estate division, $478,000 in the medical division, $38,000 in corporate expenses and $32,000 in depreciation and amortization.
The increase of $818,000 in costs and expenses in the real estate division is attributable to cost of sales of the properties that were sold in the amount of $892,000, offset by a decrease in operating expenses of $74,000. The cost of sales of the Hunter property, which was $398,000, and the Brookfield property, which was $494,000, resulted in a total gain of $49,000. The decrease in operating expenses in 2000 was due to a greater amount of professional fees in 1999, which were incurred during the successful litigation regarding ownership rights of the Hunter property. In addition, there was a decrease in operating expenses after the Hunter and Brookfield properties were sold.
The costs and expenses in the medical division in 2000 was $1,533,000, an increase of $478,000 from 1999. The greatest component of the increase in 2000 was attributable to additional expenses incurred that were needed to properly service the existing and projected client base. These expenses included an additional $219,000 on staff and related employment costs and $40,000 on occupancy and office costs. The infrastructure of the company as established, can now service a greater number of clients than currently exists. This is necessary to efficiently service expected new clients with properly trained employees. In 2000, to provide additional services to finance clients, three new subsidiaries were formed to manage the operations of certain medical practices. These new subsidiaries, also referred to as management companies, incurred approximately $79,000 of start up costs in 2000. In addition, the reserve for bad debts was increased by $126,000 in 2000. The increase in reserves is due to three major insurance companies challenging the corporate structure of a significant client. Management has commenced additional collection procedures to mitigate the effect of this challenge. 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 $38,000 increase in corporate expenses in 2000 is primarily due to additional professional fees incurred, offset by the reduction and stabilization of new costs in 1999 related to the initial registration of the Company's common stock pursuant to the Securities and Exchange Act of 1934 in 1998. The $32,000 net decrease in depreciation and amortization is attributable to the sale of the Wendclark subsidiary on May 14, 1999, offset by additional depreciation as a result of increased capital expenditures in the medical division.
Interest expense in 2000 was $42,000, a decrease of $17,000 from $59,000 in 1999. The decrease was attributable to the use of a portion of the proceeds from the sale of the Wendclark
subsidiary in May 1999, to repay amounts that had been borrowed to finance the purchase of medical claims receivable.
Income from discontinued operations increased by $205,000, to $325,000 in 2000 from $120,000 in 1999. The net increase was due to (i) a $577,000 increase in revenues offset by a $544,000 increase in costs and expenses from the eight restaurants that operated in the Wendcello subsidiary, (ii) $96,000 gain on the sale of the Wendclark subsidiary and (iii) the increase in net income of $77,000 from the Wendclark subsidiary.
For the reasons noted above, most notably, the additional costs of the medical division, the Company experienced a net loss of $692,000 in 2000, which was $326,000 greater than the net loss of $366,000 in 1999.
LIQUIDITY AND CAPITAL RESOURCES
The Company's two continuing business activities and discontinued operations during the year ended February 28, 2001 resulted in a decrease of cash in the amount of $297,000, from $581,000 in 2000 to $284,000 in 2001. The Company expects growth of its medical division to increase 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 the related party credit line described in Note 8 of the financial statements. Additional funds may be provided from financing activities such as additional asset-based borrowing facilities on the Company's mortgages and accounts receivable 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, 2001. 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 mortgage receivable on the Goshen, NY property does not call for principal payments until February 28, 2002, however, interest payments in the amount of $30,000 are due annually. The annual payments that have been due since February 29, 2000 have not been paid, which resulted in the suspension of interest being accrued.
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 used by operations for the year ended in 2001 was $567,000, as compared to $117,000 being provided in 2000. The $684,000 increase in the use of cash in 2000 was due to a net loss for the year ended in 2001 of $750,000 (net of $381,000 gain on sale of subsidiary) as compared to a net loss of $692,000 (includes gain on sale of subsidiary of $96,000) in 2000, a decrease in the sale of real estate, which resulted in a decrease in collections of $726,000,
offset by fluctuations in operating assets and liabilities (including net assets of discontinued operations) primarily caused by timing differences.
Cash used by investing activities was $13,000 for the year ended in 2001 as compared with $1,081,000 being provided in 2000. The $1,094,000 increase in the use of cash was primarily due to the increase in medical insurance claims receivable (net of amounts due to finance customers for payments of residual collections) by $1,485,000 in 2001, compared to a $316,000 decrease in 2000. The increase in 2001 was attributable to a greater amount of bills purchased, beginning during the month of May 2000, from new clients. The use of cash by the medical division was offset by an increase of $600,000 from discontinued operations, resulting from the sale of the Wendcello subsidiary in June 2000 and a reduction in the amount of capital expenditures by $51,000 in 2001.
Net cash provided by financing activities was $283,000 for the year ended in 2001 as compared with $859,000 being used in 2000. The $1,142,000 increase in cash being provided in 2001 was primarily due to (i) $258,000 of borrowings on the new related party credit in 2001 (ii) repayment of the prior related party credit line in the amount of $775,000 and other related party debt of $147,000 in 2000 and (iii) $100,000 sale of equity of FRM NY Capital, LLC to a minority interest. The above were offset by $28,000 used to purchase and acquire treasury stock in August 2000.
ITEM 7A.
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.
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.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
The Company filed a current report on Form 8-K on March 13, 2001 to report the change in its accountants.
PART III
ITEM 10.
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, 2001. Such information is incorporated herein by reference and made a part hereof.
ITEM 11.
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, 2001. Such information is incorporated herein by reference and made a part hereof.
ITEM 12.
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, 2001. Such information is incorporated herein by reference and made a part hereof.
ITEM 13.
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, 2001. Such information is incorporated herein by reference and made a part hereof.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES, AND REPORTS ON FORM 8-K
(a) FINANCIAL STATEMENTS, SCHEDULES AND EXHIBITS
(1) FINANCIAL STATEMENTS:
(2) FINANCIAL STATEMENT SCHEDULES:
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. 27.01 Financial data schedule for the six months ended August 31, 2000. 27.02 Financial data schedule for the year ended February 29, 2000.
(b) REPORTS ON FORMS 8-K
The Company filed Form 8K on March 13, 2001.
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, 2001.
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, 2001.
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/ SETH GROSSMAN Director - ------------------------------- Seth Grossman
/S/ ANDERS STERNER Director - ------------------------------- Anders Sterner MFC Development Corp. and Subsidiaries Index to Consolidated Financial Statements and Consolidated Financial Statement Schedules
The data required by all other schedules is either included in the financial statements or is not required.
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, 2001 and the related consolidated statements of operations, stockholders' equity and cash flows for the year ended February 28, 2001. Our audit also included the consolidated financial statement schedules listed in the Index at Item 14 (a) for the year ended February 28, 2001. 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 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 also 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 financial position of MFC Development Corp., Inc. and its subsidiaries at February 28, 2001 and the consolidated results of their operations and their cash flows for the year ended February 28, 2001 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 year ended February 28, 2001, 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 11, 2001
Report of Independent Auditors
The Board of Directors and Shareholders MFC Development Corp., Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheet of MFC Development Corp., Inc. and its subsidiaries as of February 29, 2000 and the related consolidated statements of operations, stockholders' equity and cash flows for the two years ended February 29, 2000. Our audits also included the consolidated financial statement schedules listed in the Index at Item 14 (a) for the two years 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 audits.
We conducted our audits 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 also 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 29, 2000, and the consolidated results of their operations and their cash flows for the two years 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 two years 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
MFC Development Corp. and Subsidiaries Consolidated Balance Sheets
See accompanying notes.
MFC Development Corp. and Subsidiaries Consolidated Balance Sheets (continued)
See accompanying notes.
MFC Development Corp. and Subsidiaries Consolidated Statements of Operations
See accompanying notes
MFC Development Corp. and Subsidiaries Consolidated Statements of Stockholders' Equity
See accompanying notes
MFC Development Corp. and Subsidiaries Consolidated Statements of Cash Flows
See accompanying notes
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 October 19, 2000, FRM filed Form 8-K with the Securities and Exchange Commission, which disclosed the board of directors' approval of the distribution. MFC filed a Form 10 on October 2, 2000 to register its common stock. Amendment Nos. 1, 2 and 3 to Form 10 were filed on November 20, 2000, December 6, 2000 and January 16, 2001. 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 80% owned subsidiary, 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 amended its certificate of incorporation as follows:
1. The Company changed its name from PSI Food Services, Inc. to MFC Development Corp.
2. The Company 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.
MFC Development Corp. and Subsidiaries Notes to Consolidated Financial Statements
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 and prior periods have been restated.
The real estate business is conducted by the Company through various subsidiaries. It owns real estate and holds mortgages on real estate parcels in New York and Connecticut, which are currently held for development and sale.
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, an 80% majority owned subsidiary 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, such as a limited liability company, 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 increase investment of financial resources of insurance companies into providing 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.
MFC Development Corp. and Subsidiaries Notes to Consolidated Financial Statements
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.
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 on a pro-rata basis as the related net collectible value (see discussion below, under finance receivables) of the receivables are collected. The deferred fee income is netted against finance receivables (see note 5). The Company is not entitled to interest on unpaid principal balances.
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.
Food Service Companies: The accrual method of accounting is used to record all income.
RECEIVABLES
MORTGAGE AND NOTES RECEIVABLE
Mortgages and notes receivable results 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.
MFC Development Corp. and Subsidiaries Notes to Consolidated Financial Statements
3. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RECEIVABLES (CONTINUED)
FINANCE RECEIVABLES
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 and/or referred to arbitration proceedings. Such receivables are deemed to be invalid and are immediately substituted. 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 is personally guaranteed by the owner of the practice and 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.
MFC Development Corp. and Subsidiaries Notes to Consolidated Financial Statements
3. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
DEPRECIATION AND AMORTIZATION
Depreciation of property and equipment is provided by application of the straight-line method over estimated useful lives as follows:
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.
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 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.
The Company has capitalized the applicable leasehold costs related to acquiring the leases for its various restaurants and is amortizing them over the terms of the applicable leases ranging from 10 to 20 years.
TECHNICAL ASSISTANCE FEES
Technical assistance fees represent initial franchise fees paid to Wendy's International at the inception of each franchised location and are amortized on a straight-line basis over the term of the related franchises, ranging from 15 to 20 years.
MFC Development Corp. and Subsidiaries Notes to Consolidated Financial Statements
3. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
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.
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.
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, 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. For the year ended February 28, 1999, fees earned from four medical providers were 26%, 18%, 12% and 11% of earned fees. As of February 28, 2001 and February 29, 2000, claims receivable from one insurance company comprised 15% and 26% of total finance receivables, respectively.
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, 2001, February 29, 2000 and February 28 1999 advertising expense totaled approximately $5,000, $20,000, and $16,000.
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
MFC Development Corp. and Subsidiaries Notes to Consolidated Financial Statements
3. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
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.
The carrying amounts and estimated fair values of financial instruments are summarized as follows:
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.
EFFECTS OF NEW ACCOUNTING PRONOUNCEMENTS
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
In June 1999, the Financial Accounting Standards Board issued Statement No. 137, amending Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities", which extended the required date of adoption to the years beginning after June 15, 2000. The Statement permits early adoption as of the beginning of any fiscal quarter after its issuance. The Company expects to adopt the new Statement effective March 1, 2001. The Company does not anticipate that the adoption of this Statement will have any effect on its results of operations or financial position.
MFC Development Corp. and Subsidiaries Notes to Consolidated Financial Statements
3. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
EFFECTS OF NEW ACCOUNTING PRONOUNCEMENTS(CONTINUED)
REVENUE RECOGNITION IN FINANCIAL STATEMENTS
The Company adopted Securities and Exchange Commission Staff Accounting Bulletin 101 ("SAB 101"), Revenue Recognition in Financial Statements in the quarter starting December 1, 2000. SAB 101 requires revenue to either be realized or realizable and earned prior to recognition. This generally does not occur until there is persuasive evidence of an arrangement, delivery has occurred or services have been rendered, the price is fixed or determinable, and collectibility is reasonably assured. The adoption of SAB 101 has not impacted the Company's current and prior revenue recognition policies and its results of operations or financial position.
ACCOUNTING FOR THE TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND EXTINGUISHMENT OF LIABILITIES
In September 2000, the Financial Accounting Standards Board issued Statement No. 140, Accounting for the Transfers and Servicing of Financial Assets and Extinguishment of Liabilities, which replaces Standard No. 125. This Statement is effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after March 31, 2001, and is to be applied prospectively. The Company does not anticipate that the adoption of this Statement will have any effect on its results of operations or financial position.
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., 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 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. A balance of
MFC Development Corp. and Subsidiaries Notes to Consolidated Financial Statements
4. REAL ESTATE ACTIVITIES (CONTINUED)
SALE OF REAL ESTATE (CONTINUED)
GOSHEN, NEW YORK (CONTINUED)
$1,557,311 of deferred profit remains at February 28, 2001 and February 29, 2000.
Interest income from this transaction (principal amount of note receivable is $2,310,000) was $-0-, $103,950 and $138,600 for the years ended February 28, 2001, February 29, 2000 and February 28, 1999. The terms of the note call for an annual payment of interest of $30,000. The payment for fiscal 2000 has not been paid, which resulted in the suspension of accruing interest as of November 30, 1999. There is no allowance for loss because the market value of the collateral, less costs to sell, is greater than the carrying amounts of the related notes receivable and accrued interest receivable.
The balance of accrued interest receivable is as follows:
In addition, the Company received additional contingent consideration on the sale in the form of a purchase money debenture in the amount of $2,499,750, contingent on the sale of the single family residences to be built on the 165 lots which were sold. This purchase money debenture matures on February 28, 2002 and bears interest at a rate of 6% per annum. The Company has not included any amounts in its consolidated financial statements relating to this purchase money debenture or its related interest since its collectibility is contingent on the profitable sale of the single family residences to be built.
OTHER REAL ESTATE SALES
The Company sold various other properties, including the property in Brookfield, Connecticut, eight condominium units units in Hunter, New York, during the three years ended February 28, 2001 for various amounts as part of the operations of the real estate division.
In January 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. 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.
MFC Development Corp. and Subsidiaries Notes to Consolidated Financial Statements
4. REAL ESTATE ACTIVITIES (CONTINUED)
MORTGAGES AND NOTES RECEIVABLE
Mortgages and notes receivable, arising from the sale of real estate, consist of the following:
These mortgages and notes have various terms for payments of principal and interest and are collateralized by the underlying real estate. These mortgages and notes bear interest ranging from 6% to 9% and mature as follows:
As of February 28, 2001 and February 29, 2000, except for the Goshen interest payment mentioned above, all notes receivable were performing. Windemere is currently trying to sell the Goshen property, rather than develop it. As long as Windemere is attempting to sell the property, the Company does not intend to pursue the collection of interest or principal on the mortgage. There is no allowance for loss because the market value of the collateral, less costs to sell, is greater than the carrying amounts of the related notes receivable.
The Granby note receivable is being used as collateral for a line of credit (see Note 8). Upon full collection of the note receivable, an additional liability will be payable to the co-investors for approximately $70,000. If the note is not collected in full, an amount substantially less will be paid. An accrual has been provided for this amount.
MFC Development Corp. and Subsidiaries Notes to Consolidated Financial Statements
4. REAL ESTATE ACTIVITIES (CONTINUED)
REAL ESTATE HELD FOR DEVELOPMENT AND SALE
The following properties are included in real estate held for development and sale:
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, one building site, 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 of the gain recorded on the sale in fiscal 1998, representing the present value of these rental payments, was deferred.
Deferred income consists of the following:
MFC Development Corp. and Subsidiaries Notes to Consolidated Financial Statements
5. FINANCE RECEIVABLES, NET
Net finance receivables consist of the following:
These receivables are collateral for a line of credit (see Note 8).
6. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
As of February 28, 2001 and February 29, 2000, accumulated amortization of equipment under capital leases was $46,922 and $21,699.
For the years ended February 28, 2001, February 29, 2000 and February 28, 1999, depreciation expense, which includes amortization under capital leases was $81,449, $61,726 and $29,909.
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
MFC Development Corp. and Subsidiaries Notes to Consolidated Financial Statements
7. LOANS RECEIVABLE (CONTINUED)
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 balance on this loan was $142,840 at February 28, 2001 and $98,381 at February 29, 2000.
8. NOTES PAYABLE
Notes payable include the following:
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, under which there was no outstanding balance at February 29, 2000, 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 a shareholder of the Company. The line, under which there was an outstanding balance of $258,000 at February 28, 2001, expires on October 31, 2002. Interest is calculated at a rate of 15% per annum. 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 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 (see Note 5) equal to at least 222% of the principal sum outstanding under the line.
MFC Development Corp. and Subsidiaries Notes to Consolidated Financial Statements
8. NOTES PAYABLE (CONTINUED)
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, 2001:
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 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, 2001, February 29, 2000 and February 28, 1999 was $20,639, $36,184 and $52,748.
Capital Lease Obligations: The Company has acquired certain equipment under various capital leases expiring in 2003. The leases provide for monthly payments of principal and interest of $5,782 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, 2001 are as follows:
(a) -- Total capital lease obligations represent present value of minimum lease payments.
MFC Development Corp. and Subsidiaries Notes to Consolidated Financial Statements
9. COMMITMENTS AND CONTINGENCIES
MINIMUM OPERATING LEASE COMMITMENTS
In October 1999, one of the Company's subsidiaries in the medical division signed a three year lease for premises that will be used to provide management services for a medical practice that provides physical therapy and pain treatment.
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.
Subject to annual real estate adjustments, the following is a schedule of future minimum rental payments required under the above operating leases as of February 28:
For the years ended February 28, 2001, February 29, 2000 and February 28 1999 rent expense totaled approximately $172,000, $85,000 and $45,000.
OTHER COMMITMENTS AND CONTINGENCIES
There are various 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, 2001, one director had been issued options for 3,000 shares, expiring through July 20, 2005, at option prices ranging from $1.625 to $1.75 per share.
MFC Development Corp. and Subsidiaries Notes to Consolidated Financial Statements
11. INCOME TAXES
The provision (benefit) for income taxes consist of the following:
MFC and its subsidiaries filed consolidated tax returns with FRM through January 23, 2001, which has 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 Company has net operating loss carryforwards for federal purposes of approximately $1,542,000. These losses will be available for future years, expiring through February 29, 2020. 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 generating taxable income in the foreseeable future.
Significant components of deferred tax assets (liabilities) were as follows:
In addition, as part of the spin-off transaction, the Company is entitled to receive the benefit of the tax loss carryforward of $1,258,000 of its former parent, FRM, when and if it is utilized. The Company has taken a 100% valuation allowance against this NOL carryforwards due to its former parent not yet having a history of generating taxable income and restrictions as to annual utilization subject to the provisions of Internal Revenue Code Section 382.
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:
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.
The components of discontinued operations are as follows:
MFC Development Corp. and Subsidiaries Notes to Consolidated Financial Statements
12. DISCONTINUED OPERATIONS (CONTINUED)
A summary of the results of discontinued operations for the food services division is as follows for the periods ended:
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
MFC Development Corp. and Subsidiaries Notes to Consolidated Financial Statements
13. BUSINESS SEGMENT INFORMATION (CONTINUED)
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.
Business segment information follows:
MFC Development Corp. and Subsidiaries Consolidated Financial Statement Schedules
NOTE 14. SUPPLEMENTAL FINANCIAL INFORMATION SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
MFC Development Corp. and Subsidiaries Consolidated Financial Statement Schedules
FEBRUARY 28, 2001
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
MFC Development Corp. and Subsidiaries Consolidated Financial Statement Schedules
YEAR ENDED FEBRUARY 28, 2001
SCHEDULE III -- REAL ESTATE AND ACCUMULATED DEPRECIATION
The following is a reconciliation of the total amount at which real estate was carried for the years ended:
The Federal Income Tax Basis of the Hunter property is $878,153.
MFC Development Corp. and Subsidiaries Consolidated Financial Statement Schedules
YEAR ENDED FEBRUARY 28, 2001
SCHEDULE IV -- MORTGAGE LOANS ON REAL ESTATE
The following is a reconciliation of the total amount at which mortgage loans were carried for the years ended: