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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10
GENERAL FORM FOR REGISTRATION OF SECURITIES
PURSUANT TO SECTION 12(g) OF THE SECURITIES EXCHANGE ACT OF 1934
MFC DEVELOPMENT CORP.
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(Exact name of registrant as specified in its charter)
Delaware 13-3579974
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
271 North Avenue New Rochelle, NY 10801
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (914) 636-0188
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Securities to be registered pursuant to Section 12(g) of the Act:
Common Stock, Par Value $.001 Per Share
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(Title of Class)
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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 has been a wholly-owned subsidiary of FRM Nexus, Inc., a Delaware
corporation ("FRM Corp."), since November 1993. That corporation was the food
services division of FRM Corp., consisting of two subsidiaries, Wendclark, Inc.
and Wendcello Corp, which operated 17 Wendy's Restaurants until 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 $381,112 respectively were recorded on said sales.
The results of operations of both subsidiaries have been classified as
discontinued operations and prior periods have been restated. The components of
the discontinued operations are set forth in Note 13 to Notes to Consolidated
Financial Statements of MFC herein.
As of the close of business on August 31, 2000, FRM Corp. assigned to MFC
all of its assets (except $10,000 in cash) subject to all of its liabilities as
of that date in exchange for the issuance by MFC to FRM Corp. of additional
shares of common stock of MFC to bring such ownership to 1,800,000 shares of
common stock of MFC constituting all of the issued and outstanding stock of MFC.
Said assignment included all of the issued and outstanding capital stock of each
of the following corporations, which as of said date became the wholly owned
subsidiaries of MFC, namely Medical Financial Corp., PSI Capital Corp., Yolo
Equities Corp., Yolo Capital Corp and Highlands Pollution Control Corp. The
Company also owns three Limited Liability Companies which were formed during the
fiscal year ended February 29, 2000 to provide management services to medical
practices namely, Nexus Garden City LLC, FRM Court Street LLC and Nexus Borough
Park LLC. Because the entities are under common control, such transaction has
been accounted for in a manner similar to a pooling of interests; accordingly,
prior period balances have been restated to reflect this transaction. See Note 1
to Notes to Consolidated Financial Statements of MFC herein. On September 14,
2000, MFC organized FRM N.Y. Capital LLC, which is applying to the Insurance
Department of the State of New York for approval as a "certified capital
company". See "Capco Program" under "Description of Business" herein.
The Board of Directors of FRM Corp has adopted resolutions to distribute
on November 30, 2000 to its shareholders as of the close of business on November
1, 2000 (the "record date") one share of MFC common stock for each one share of
FRM common stock. There are 1,800,000 shares of common stock of FRM Corp.
presently outstanding which are also expected to be outstanding on the record
date. Accordingly, on November 30, 2000 the
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shareholders of FRM Corp together will own 1,800,000 shares of both FRM Corp.
and MFC. FRM Corp will not continue to own any shares of MFC on December 1, 2000
and MFC will own no shares of FRM Corp. on December 1, 2000. The spin-off of the
MFC shares has been approved by the Boards of Directors of FRM Corp. and MFC and
is subject to the receipt of the written consents of a majority of the
outstanding capital stock of FRM Corp. on or before October 31, 2000.
The Spin-off Agreement provides for a closing on November 30, 2000 (the
"Closing") at which FRM Corp will issue to the FRM Control Group, as defined on
page 7, an aggregate of 34,200,000 shares of common stock of FRM Corp. (but not
any shares of MFC) for an aggregate consideration of $3,420,000 to be paid as
set forth below in this Item 1.
FRM Corp has filed its Quarterly Report on Form 10-Q for the six months
ended August 31, 2000. After the distribution of the MFC shares to its
shareholders on November 30, 2000 FRM Corp. will file its 10-Q Report for the
nine months ended November 30, 2000 as a corporation without any subsidiary
corporations.
This application is to register the common stock of MFC pursuant to
Section 12(g) of the Securities Exchange Act of 1934 so that it will be a
reporting company. This application contains the financial information of MFC
for the requisite periods including the six months ended August 31, 2000. MFC
will file its next 10Q report for the nine months ended November 30, 2000 on or
before the due date of January 15, 2001.
The shares of MFC to be received by the shareholders of FRM Corp. after
November 30, 2000 will not be taxable as a dividend distribution because FRM
Corp. will not have accumulated earnings and profits on that date, nor will it
have earnings and profits in the current fiscal year. Shareholders' basis in MFC
shares will equal the market value of MFC shares distributed. Shareholders'
basis in FRM Corp. shares will be reduced, though not below zero, by an amount
equal to the market value of MFC shares received. In the event the market value
of the MFC shares distributed exceeds the basis of a shareholders' FRM stock,
the excess would be treated as capital gain in calendar year 2000. The Company
will inform the shareholders of that market value by January 31, 2001.
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Description of Business
MFC is engaged in the business of (i) developing real estate and (ii)
providing financing and management services to medical practices. In September
2000, the Company organized 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 3.
THE REAL ESTATE DEVELOPMENT DIVISION of the Company presently conducts
its operations through PSI Capital Corp and Yolo Equities Corp., wholly-owned
subsidiaries which own and/or control the fee interests in a variety of parcels
of real estate, in which co-investors also have interests. 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 165 single family homes in the Village of Goshen, in 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 to enforce a previously approved subdivision
plan for the property. Participating in the settlement was Windemere 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 Nexus, was also a director of Nexus until May 1999.
Nexus agreed with Windemere on terms that assured Nexus a specified profit on
its land, which was sold during fiscal 1996 and 1997. The construction financing
is to be provided by Windemere, with Nexus sharing any profits to be realized in
the construction and sale of the homes. Windemere and the Company are seeking
approval from the Planning Board in the Village of Goshen confirming the
sub-division plan to which agreement was obtained when the lawsuit was settled.
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 income until the initial and
continuing investment criteria is sufficient. The long term deferred income
attributable to the construction loan funding and any contingent profit have not
been reflected in the Company's net income. The balance of the mortgage on
August 31, 2000 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..
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
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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 FRM, for $4,800,000, of which $3,781,518 has since been paid and
$1,018,482, as reduced by amortization and partial prepayment on August 31,
2000, 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 controls the fee interest in various properties in
Hunter, New York, in which it owns the principal co-investment interest and a
mortgage. The properties consist of undeveloped 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 acreage, which MFC
plans to develop, is zoned for single family residences, condominium units and a
hotel site. There is already constructed on the property a water treatment
plant, a clubhouse with restaurant, tennis courts and swimming pool, a small
office building and two sites 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 that these properties
have a fair market value at least equal to the amount carried on its balance
sheet at August 31, 2000. See Note 4 of Notes to Consolidated Financial
Statements.
The Company is presently seeking 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 expand the capacity of the waste water
treatment plant owned by Highlands Pollution Control Corp., a subsidiary of MFC.
The City of New York is obligated to pay for the upgrade of the plant
incorporating the latest technology in order to improve the water quality in New
York City's watershed area. This expansion and upgrade is calculated to enhance
the value of the Company's remaining property in Hunter, New York either for
development by MFC or sale to others.
Other Properties. 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 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 receivables, paying cash to the medical provider in return for
a negotiated fee. For its clients, this Division delivers
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valuable management services and increased liquidity, which is normally
unavailable to medical groups from traditional sources. MFC's services include
an organized, efficient collection of the customers' receivables and management
information systems reports of their clients' 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 since August 31, 2000. Management believes that
the division will be profitable during the Company's next fiscal year.
THE CAPCO PROGRAM was commenced by the organization on September 14, 2000
of FRM N.Y. Capital LLC, an 80% majority owned subsidiary organized for the
purpose of being approved as a "certified capital company" (herein a "Capco")
pursuant to Sections 11 and 1511 of the New York State Tax Law under the Capco
Program 3. The remaining 20% of the Capco is owned by Dr. Daniel Elstein, who
served on the Board of Directors of FRM Corp for a two year period ending in
1998. The Capco Program provides state tax credits for calendar year 2002 for
insurers investing in the Program (Certified Insurers). The Capco will use its
own capital and loans from Certified Insurers to take equity interests in New
York qualified companies to assist them in creating, developing and expanding
their businesses thereby promoting the growth of the State's economy. By virtue
of the equity interests that Capco obtains in the Qualified Businesses, or
through contemporaneous agreements, it is expected that it will be a significant
factor in the direction and control of the Qualified Businesses in which it
invests its funds. The Capco's mission is to be a special partner for its
selected companies, thereby growing the values of the qualified company, its own
investment therein, the interests of the Certified Insurer(s) at the same time
that the enterprise contributes to more jobs in New York State.
Marketing
The Company's marketing in its real estate activities has been limited in
the past, and for the present, to working with real estate brokerage firms in
connection with the sale of properties.
The Medical Division has heretofore marketed its services to medical
groups through its own individual employees and consultants. MFC designs its own
direct mail and personal recruiting campaigns. In fiscal 2000, MFC developed the
websites medical financial.com and mdhelp.com where information on MFC's
services may be easily obtained.
The Capco Program will be marketed by the Managers of FRM N.Y. Capital
LLC who are experienced in the venture capital field.
Competition
The Company's presently owned real estate held for development and sale
is located
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in Hunter, New York and in joint venture with Windemere in Goshen, New York. The
real estate markets in those communities have improved so that the Company will
be competing with other developers in the locale to market properties which it
presently owns and which will be developed for sale.
MFC competes with a wide variety of management and financial service
companies, including public companies, banks, and factoring companies which
provide financial and office management assistance to medical providers. The
Company's services are 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 of which it is aware.
The Company competes with many other Capco organizations for approval by
the New York Insurance Department for its Capco Program. The Capco Program 3 in
New York State provides for the issuance of a maximum of $150 million of state
tax credits for Certified Insurers. If FRM N.Y. Capital LLC is approved in New
York it will be competing with larger and older Capcos for access to such
credits for the calendar year 2002.
Trademarks - None.
Employees
As of August 31, 2000 the Company had 30 employees. None of the Company's
employees is represented by a union and 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.
Continuing Business of FRM Corp.
If the Spin-Off Agreement is consummated on November 30, 2000 the FRM Control
Group will own 95% of the 36,000,000 shares of issued and outstanding common
stock of FRM
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Corp. That Agreement provides that said shares will be voted for the persons
listed below as the Board of Directors of FRM Corp. and the election of the
officers as well on November 30, 2000. The business experience of the Chairman,
Chief Executive Officer and President, Chief Operating Officer of FRM Corp. for
more than the last ten years has been in financial risk management including
analysis and research of public companies as well as identification of companies
in early stages of promising business strategies. FRM Corp's continuing business
will utilize that experience but its operations will not fall within the
definition of an investment company so as to require it to register under the
Investment Company Act of 1940.
FRM Control Group
MURRAY STAHL and STEVEN BREGMAN are the principal persons in the
Stahl-Bregman Group which is expected to control FRM Corp after November 30,
2000 by purchasing 28,800,000 shares of common stock of FRM Corp at $.10 per
share for a total consideration fixed at $2,880,000 but payable as dividends are
received from Kinetics Asset Management, Inc. over a period of five years.
Messrs. Stahl and Bregman have worked together at Kinetics Asset Management,
Inc. which is the investment adviser to nine mutual funds, including The
Internet Fund.
MURRAY STAHL is Chairman and a co-founder of Horizon Asset Management,
Inc. He is the Co-Portfolio Manager of the Small Cap Opportunities Portfolio.
Prior to founding Horizon, Murray Stahl was with Bankers Trust Company for 16
years as a portfolio manager and research analyst, managing $600 million of
individual trust and institutional client assets. As the senior fund manager, he
directed the investments of three of the bank's Common Trust Funds, the Special
Opportunity, Utility and Tangible Assets Funds. Murray Stahl also served as a
member of the Equity Strategy Group as well as the Investment Strategy Group,
which established asset allocation guidelines for the Private Bank. Mr. Stahl
was also deeply involved in new product development. If the transaction
described at pages 1-2 above is completed, it is expected that Murray Stahl will
be elected Chairman and Chief Executive Officer of FRM Corp after November 30,
2000.
STEVEN BREGMAN co-founded Horizon Asset Management, Inc. in 1994 and is
currently its President. Horizon is a New York State based research and
investment management firm and Mr. Bregman's primary duties include analysis of
business enterprises small and large for equity investment. If the transaction
described at pages 1-2 above is completed it is expected that Mr. Bregman will
be elected President and Chief Operating Officer of FRM Corp. From 1987 until he
started Horizon in 1994 Steven Bregman was an Investment Officer in Bankers
Trust Company's Private Clients Group, where he managed in excess of $600
million of equity and fixed income assets. At that bank he was one of a five
manager group responsible for managing the bank's largest individual
relationships and for setting equity investment guidelines for the Private Bank.
Steven Bregman served as a
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member of the Special Situations Equity Strategy Group and served in a variety
of new product development projects. He has his BA degree in Economics from the
City University of New York.
Of the 34,200,000 shares of common stock of FRM Corp. expected to be issued
after the spin-off described at pages 1-2 above, the Stahl Bregman Group will
purchase 28,800,000 shares. In addition to Messrs. Stahl and Bregman, the group
includes Peter Doyle, John Meditz, Catherine Bradford, Thomas C. Ewing and
Katherine Ewing, who together are the beneficial owners of 8.1% of the
outstanding common stock of Kinetics Asset Management, Inc. None of the seven
persons in that group are presently officers, directors or owners of as much as
5% of the outstanding common stock of FRM Corp. The remaining 5,400,000 new
shares of FRM Corp are expected to be purchased by two purchasers. Lestar
Partners LLC will purchase 3,600,000 shares and Lawrence Goldstein, personally
will purchase 1,800,000 shares, in each case for the same consideration as the
Stahl-Bregman Group, namely ten cents ($.10) per share. Lestar Partners, LLC is
a New York Limited Liability Company owned by Lester Tanner, President and a
director of FRM Corp and the Company, together with members of his family.
Lawrence Goldstein is the Manager of Santa Monica Partners, a private fund,
which owns 200,000 shares of common stock of FRM Corp.
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ITEM 2. FINANCIAL INFORMATION
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 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. The consolidated financial
statements and the discussion below include the operations of the Company's
parent, FRM Corp., as if the transfer of assets had occurred at the beginning
of the periods presented.
OVERVIEW
MFC generates revenues from two business segments: real estate and medical.
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. 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.
RESULTS OF OPERATIONS
SIX MONTHS ENDED AUGUST 31, 2000 COMPARED TO SIX MONTHS ENDED AUGUST 31, 1999
The Company's revenues from continuing operations increased by $36,000 or 4%,
for the six months ended August 31, 2000 ("2000") to $1,025,000 from $989,000
for the six months ended August 31, 1999 ("1999"). The increase in the six month
period 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 by $218,000 to $162,000 for the
six month period. The decrease in revenue in the six month period was due to a
decrease in the sales of real estate in 2000 as compared to 1999. Rental income
decreased in 2000 because rent is no longer being received on the properties
that were sold during the remainder of fiscal 2000. The decrease in
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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 $253,000 net increase in revenues in the medical division for the six month
period ended in 2000 was due to an increase in management fees, offset by a
decrease of earned fees from the purchase of medical claims. The increase in
management fees of $420,000 for the six months ended in 2000, 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.
The increase in management fee income in 2000 was offset by a decrease of
$167,000 in earned fees from the purchase of medical claims during the six month
period. The decrease in earned fees for the six month period was due to a
decrease in medical claims purchased in earlier periods, which resulted in a
decrease in revenue recognition over the period of collections, which is usually
six months. The decrease in claims purchased was due to the Company's decision
to be more selective in the bill purchasing process
Costs and expenses from continuing operations increased by $514,000, or 42%, for
the six months ended in 2000, to $1,726,000 as compared to $1,212,000 for the
same period ended in 1999. The net increase for the six months ended in 2000 was
due to increases of $620,000 in the medical division, $15,000 in corporate
expenses and $15,000 in depreciation and amortization, which were offset by
decreases of $136,000 in the real estate division.
The decrease in costs and expenses in the real estate division in the six month
period ended in 2000 was due to decrease in the amount of properties sold in
2000, which results in a decrease in the cost of sales. Operating expenses also
decreased in 2000, 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 for the six month period ended in
2000 was $1,251,000. This was an increase of $620,000 for the six month period.
The increases in 2000 was due to (i) a $109,000 increase in medical receivable
expenses in the six month period and (ii) expenses of $511,000 in the six month
period that is related to the three new subsidiaries that were formed in 2000 to
manage the operations of certain medical practices.
The $109,000 increase in medical receivable expenses in the six month period is
attributable to additional expenses incurred that were needed to properly
service the existing and projected client base. These expenses included
additional (i) staff and related employment costs, in part due to reclassifying
a portion of executive salaries from corporate, part due to the hiring of
additional employees and part due to annual salary increases, (ii) occupancy and
office costs and (iii) marketing 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
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clients with properly trained employees.
The increase in corporate expenses in the six month period ended in 2000 is
primarily due to cost savings in shareholder reporting expenses. The increase in
depreciation and amortization is attributable to additional depreciation as a
result of increased capital expenditures in the medical division.
Interest expense for the six months ended 2000 was $14,000, a decrease of
$18,000 from $32,000 in 1999. The decrease was attributable to the debt that was
eliminated in 1999 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
Income from discontinued operations for the six month period increased $106,000,
to $399,000 in 2000. The increases in 2000 were primarily due to the gain of
$381,000 from the sale of the Wendcello subsidiary in the six month period. The
increase was offset by the profits from that subsidiary that were included in
the entire 1999 period.
For the reasons noted above, most notably, the increase in income from
discontinued operations, offset by the additional costs of the medical division
in relation to its increase in recognized revenue, the Company experienced a net
loss for the six month period in 2000 of $314,000, compared to a profit of
$30,000 in 1999 due to the loss in the medical division, offset by the increase
in discontinued operations.
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
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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
12
<PAGE> 14
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.
YEAR ENDED FEBRUARY 28, 1999 COMPARED TO YEAR ENDED FEBRUARY 28, 1998
The Company's revenues from continuing operations decreased by $1,724,000, or
54%, for the year ended February 28, 1999 ("1999") to $1,458,000 from $3,182,000
for the year ended February 28, 1998 ("1998"). The decrease was a result of
decreased revenues in the real estate division offset by increased revenues in
medical division.
Revenues in the real estate division decreased by $1,993,000 from $2,409,000 in
1998 to $416,000 in 1999. The decrease was due to the lack of significant sales
of real estate in 1999. Revenues increased in the medical division by $269,000,
or 35%, in 1999 from $773,000 in 1998 to $1,042,000 in 1999. The growth in
revenues was due to the increase in the medical insurance claims receivables
that were purchased in the current period from existing and new customers.
Costs and expenses from continuing operations increased $33,000 or 2%, in 1999
to $1,893,000 from $1,860,000 in 1998. The net increase in 1999 was due to
increases of $229,000 in the medical division and $231,000 in corporate
expenses, which were offset by decreases in the real estate division of $384,000
and $43,000 in depreciation and amortization.
The decrease in the costs and expenses of the real estate division is
attributable to the elimination of operating costs on the Granby property on
which the sale was recognized in the fourth quarter of fiscal 1998 and the lack
of costs on the sales of property in 1999. The 28% increase in costs and
expenses in the medical division in 1999 as compared to 1998 was due to
additional expenditures on staff and systems as a result of the 35% increase in
volume in 1999. The increase in corporate expenses from $183,000 in 1998 to
$414,000 in 1999 is primarily due to the additional costs related to the initial
registration of the Company's common stock pursuant to the Securities and
Exchange Act of 1934 in the fourth quarter of fiscal 1998. The decrease in
depreciation and amortization is attributable to the elimination of depreciation
on the Granby property, the sale of which was realized in the fourth quarter of
fiscal 1998.
Interest expense decreased by $183,000 from $242,000 in 1998 to $59,000 in 1999.
The decrease, all of which was in the real estate division, is attributable to
the elimination of the use of the financing method of accounting for the Granby
property, which was offset by additional borrowings, the proceeds of which were
loaned to the medical financial division. The medical division incurred $150,000
of interest expense, which was paid to the real estate
13
<PAGE> 15
division on inter-division debt that was used to finance the increase in the
purchase of medical claims receivable. All inter-division interest and the
related debt have been eliminated on the consolidated financial statements.
The provision for income taxes decreased by $107,000 from $113,000 in 1998 to
$6,000 in 1999. The greater provision for taxes in 1998 was a result of the
recognition of gain on the Granby property during that year.
Income from discontinued operations decreased by $198,000, to $120,000 in 1999
from $318,000 in 1998. The net decrease was due to a decrease in net income from
these subsidiaries of $294,000, offset by the $96,000 gain on the sale of the
Wendclark subsidiary in 1999. The decrease in net income in 1999 was
attributable to decreased sales in certain restaurants, higher labor costs and
start-up costs incurred as a result of the opening of a new restaurant.
For the reasons noted above, most notably being the lack of real estate sales,
the Company sustained a net loss in the amount of $367,000 for the year ended
February 28, 1999 as compared with net income of $1,408,000 for the year ended
February 28, 1998.
LIQUIDITY AND CAPITAL RESOURCES
The Company's two continuing business activities during the six months ended
August 31, 2000 resulted in an increase of cash in the amount of $117,000.The
Company's two continuing business activities during the year ended February 29,
2000 resulted in an increase of cash in the amount of $338,000, to $581,000 in
2000 from $243,000 in 1999. The Company expects growth of its medical division
to increase which will result in the use of cash. The funds for those needs are
expected to be provided from the remainder of the $1,575,000 in proceeds (less
repayments of $420,000 of related party debt) that were received from the sale
of Wendcello Corp., the remaining subsidiary in the now discontinued food
service division, which occurred in June 2000. The loss of the cash flow that
was provided from the food service division should eventually be replaced by the
anticipated profits that will be generated from the use of the sale proceeds to
purchase additional medical insurance claims receivable. As a result of the sale
of Wendcello, $125,000 of current debt was eliminated, improving the Company's
working capital and debt-equity ratio. Additional funds may be provided for 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. 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 payment that was due on February
29, 2000 has not been paid, which resulted in the suspension of interest being
14
<PAGE> 16
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 during the six months ended August 31, 2000 was $74,000,
as compared to $127,000 being provided in the same period in 1999. The $201,000
increase in 2000 was due to a net loss for the six months ended in 2000 of
$314,000 as compared to a net profit of $30,000 in 1999, a decrease in the sale
of real estate, which resulted in a decrease in collections of $130,000, offset
by fluctuations in operating assets and liabilities primarily caused by timing
differences.
Cash provided by operations for the year ended in 2000 was $184,000, as compared
to $592,000 being used in 1999. The $776,000 increase in 2000 was due to
$845,000 of proceeds from the sale of real estate, offset by a $325,000 increase
in the net loss for the year and fluctuations in operating assets and
liabilities primarily caused by timing differences.
Cash provided by investing activities was $236,000 in for the six months ended
in 2000 as compared with $1,024,000 being provided in 1999. The net decrease of
$788,000 was primarily due to the increase in medical insurance claims
receivable (net of amounts due to finance customers for payments of residual
collections) by $851,000 in 2000, compared to a $351,000 decrease in 1999. The
increase in 2000 was attributable to a greater amount of bills purchased,
beginning during the month of May from new clients. The use of cash by the
medical division was offset by an increase of $448,000 from discontinued
operations, resulting from the sale of the Wendcello subsidiary in June 2000.
Cash provided by investing activities was $1,013,000 for the year ended in 2000
as compared with $656,000 being used in 1999. The net increase of $1,669,000 was
primarily due to the $975,000 proceeds from the sale of the Wendclark subsidiary
and a decrease of $67,000 from discontinued operations in 2000, compared to an
increase of $114,000 in 1999. In the medical division, a decrease of medical
insurance claims receivable (net of amounts due to finance customers for
payments of residual collections) by $316,000 in 2000, compared to a $726,000
increase in 1999. The decrease in the medical claims receivable was attributable
to a lesser amount of bills purchased due to the Company's decision to be more
selective in the bill purchasing process and an increase in collection
effectiveness as a result of the additional costs and expenses in the medical
division. Loans receivable in the medical division increased by $98,000 in 2000
compared to no change in 1999.
Net cash used by financing activities was $46,000 for the six months ended in
2000 as compared with $850,000 being used in 1999. The $804,000 decrease in 2000
was primarily due to the repayment of the related party credit line in the
amount of $775,000 and other
15
<PAGE> 17
related party debt of $147,000 in 1999, offset by the use of $28,000 used to
purchase and acquire treasury stock in 2000.
Net cash used in financing activities was $859,000 in 2000 as compared with
$401,000 being provided in 1999. The $1,260,000 decrease in 2000 was primarily
due to the borrowing in 1999 and repayment in 2000 of the related party credit
line.
16
<PAGE> 18
MFC Development Corp. and Subsidiaries
Selected Consolidated Financial Data
<TABLE>
<CAPTION>
Six Months Ended Fiscal Year Ended
---------------------------- ----------------------------------------------
August 31, August 31, February 29, February 28, February 28,
2000 1999 2000 1999 1998
----------- ----------- ----------- ----------- ------------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Income Statement Data:
Total Revenue $ 1,025,259 $ 989,296 $ 2,283,267 $ 1,457,690 $ 3,182,249
Costs and expenses 1,725,801 1,212,450 3,258,798 1,893,223 1,859,984
----------- ----------- ----------- ----------- -----------
(Loss) income from operations (700,542) (223,154) (975,531) (435,533) 1,322,265
Interest (expense) net of interest income (2,189) (29,318) (27,636) (44,874) (210,779)
----------- ----------- ----------- ----------- -----------
(Loss) income from continuing
operations before provision for
income taxes and extraordinary item (702,731) (252,472) (1,003,167) (480,407) 1,111,486
Provision for income taxes 10,202 10,298 14,328 5,676 112,937
----------- ----------- ----------- ----------- -----------
(Loss) income from continuing operations (712,933) (262,770) (1,017,495) (486,083) 998,549
Income from discontinued operations, net
of taxes (including gain on sale of sub-
sidiary of $381,152 in 2000 and $96,303
in 1999 399,028 292,523 325,215 119,514 317,868
----------- ----------- ----------- ----------- -----------
(Loss) income before extraordinary items (313,905) 29,753 (692,280) (366,569) 1,316,417
Extraordinary income net of taxes - - - - 91,674
----------- ----------- ----------- ----------- -----------
Net (loss) income $ (313,905) $ 29,753 $ (692,280) $ (366,569) $ 1,408,091
=========== =========== =========== =========== ===========
(Loss) earnings per common share:
(Loss) income from continuing operations $ (0.39) $ (0.14) $ (0.56) $ (0.27) $ 0.55
Income from discontinued operations 0.22 0.16 0.18 0.07 0.17
----------- ----------- ----------- ----------- -----------
(Loss) income before extraordinary items (0.17) 0.02 (0.38) (0.20) 0.72
Extraordinary income net of taxes - - - - 0.05
----------- ----------- ----------- ----------- -----------
Basic and diluted earnings
(Loss) income per common share $ (0.17) $ 0.02 $ (0.38) $ (0.20) $ 0.77
=========== =========== =========== =========== ===========
Number of shares used in computation of
of basic and diluted earnings per share 1,814,404 1,816,462 1,816,462 1,816,462 1,816,462
=========== =========== =========== =========== ===========
<CAPTION>
Fiscal Year Ended
------------------------------
February 28, February 29,
1997 1996
----------- ------------
<S> <C> <C>
Income Statement Data:
Total Revenue $ 1,036,149 $ 546,359
Costs and expenses 2,252,700 711,202
----------- -----------
(Loss) income from operations (1,216,551) (164,843)
Interest (expense) net of interest income (129,463) 25,644
----------- -----------
(Loss) income from continuing
operations before provision for
income taxes and extraordinary item (1,346,014) (139,199)
Provision for income taxes (16,161) 33,189
----------- -----------
(Loss) income from continuing operations (1,329,853) (172,388)
Income from discontinued operations, net
of taxes (including gain on sale of sub-
sidiary of $381,152 in 2000 and $96,303
in 1999 70,844 (54,584)
----------- -----------
(Loss) income before extraordinary items (1,259,009) (226,972)
Extraordinary income net of taxes - -
----------- -----------
Net (loss) income $(1,259,009) $ (226,972)
=========== ===========
(Loss) earnings per common share:
(Loss) income from continuing operations $ (0.73) $ (0.09)
Income from discontinued operations 0.04 (0.03)
----------- -----------
(Loss) income before extraordinary items (0.69) (0.12)
Extraordinary income net of taxes - -
----------- -----------
Basic and diluted earnings
(Loss) income per common share $ (0.69) $ (0.12)
=========== ===========
Number of shares used in computation of
of basic and diluted earnings per share 1,816,462 1,816,462
=========== ===========
</TABLE>
<TABLE>
<CAPTION>
As of As of
--------------------------- -----------------------------------------------------------------------
August 31, August 31, February 29, February 28, February 28, February 28, February 29,
2000 1999 2000 1999 1998 1997 1996
------------ ------------ ------------ ------------ ------------ ------------ -----------
(Unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Working Capital $ 2,331,079 $ 1,649,448 $ 1,531,120 $ 1,471,640 $ 1,645,273 $ 1,591,581 $ (359,404)
============ ============ ============ ============ ============ ============ ===========
Total Assets $ 9,074,132 $ 9,397,290 $ 8,862,939 $ 10,496,114 $ 9,933,838 $ 10,524,057 $ 7,985,191
============ ============ ============ ============ ============ ============ ===========
Long-term debt $ 86,974 $ 35,133 $ 24,655 $ 799,480 $ 385,177 $ 3,036,466 $ 100,000
============ ============ ============ ============ ============ ============ ===========
Common Shareholders' equity $ 4,265,653 $ 5,313,329 $ 4,607,893 $ 5,229,076 $ 5,582,874 $ 4,336,985 $ 5,606,310
============ ============ ============ ============ ============ ============ ===========
Book value per share $ 2.35 $ 2.93 $ 2.54 $ 2.88 $ 3.07 $ 2.39 $ 3.09
============ ============ ============ ============ ============ ============ ===========
Common shares outstanding 1,814,404 1,816,462 1,816,462 1,816,462 1,816,462 1,816,462 1,816,462
============ ============ ============ ============ ============ ============ ===========
</TABLE>
(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 nine months ended August 31, 2000, the Company disposed of its
interest in Wendcello Corp.
17
<PAGE> 19
ITEM 2 (CONTINUED) QUANTITIVE 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 3. 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 March 31, 2001 and October 31, 2002.
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.
18
<PAGE> 20
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The table below is as of September 25, 2000 and shows the beneficial
ownership of the Company's Common Shares by (i) each person who, to the
knowledge of the Company, is the beneficial owner of more than 5% of the
outstanding Common Shares (the Company's only class of voting securities), (ii)
each executive officer and director and (iii) all executive officers and
directors of the Company as a group.
<TABLE>
<CAPTION>
Number of
Common Shares
Beneficially Percent of
Owned Class
----- -----
<S> <C> <C>
Seth Grossman (a) (b) 169,156 9.4%
Victor Brodsky (b) 22,400 1.2%
Deborah Knowlton (b) 150 0.0%
Allan Kornfeld (c) 550 0.0%
David Michael (c) 10,000 0.6%
Anders Sterner (c) 3,400 0.2%
Lester Tanner (d) 345,790 19.2%
Jed Schutz (c) 152,656 8.7%
Santa Monica Partners (c) 200,000 11.1%
All executive officers and directors (7 persons) 551,446 30.6%
</TABLE>
(a) Includes all shares owned by Seymour Grossman Pension Trust of which Seth
Grossman is sole Trustee for the benefit of himself and his sister, Joy Testa
Grossman, whose shares are included above.
(b) The addresses of Seth Grossman, Victor Brodsky, and Deborah Knowlton are 271
North Avenue, Suite 520, New Rochelle, N.Y. 10801.
(c) Allan Kornfeld has an option to purchase 1,500 shares of common stock at
$1.625 per share expiring on July 20, 2004 and 1,500 shares at $1.75 per share
expiring on July 20, 2005. His address is 5 Patterson Place, Newtown Square, PA
19073. The address of David Michael is 7 Penn Plaza, New York, N.Y. 10001. The
address of Anders Sterner is 195 Adams Street, Brooklyn, N.Y. 11201. The address
of Jed Schutz is 24 Borden Lane, East Hampton, N.Y. 11937. The address of Santa
Monica Partners is 1865 Palmer Avenue, Larchmont, N.Y. 10538.
(d) Includes (i) shares owned by Tanner Gilbert P.C. Retirement Plan Trust, of
which Mr. Tanner is the sole Trustee and beneficiary of the shares in his
segregated account, (ii) the shares owned by Northwest Management Corp, of which
Mr. Tanner is the President with the power to vote its shares which are owned by
his two adult children, Jonathan Tanner and Shari Tanner Stack and (iii) the
shares owned by his wife, Dr. Anne-Renee Testa, the mother of Seth Grossman. Mr.
Tanner's address is 99 Park Avenue, New York, NY 10016
19
<PAGE> 21
ITEM 5. DIRECTORS AND EXECUTIVE OFFICERS.
DIRECTORS
The directors of the Company are the following five persons:
SETH GROSSMAN
Age: 32
Director Since: January 1994
Principal Occupation: Chairman and CEO of Panacea Medical Services
Recent Business
Experience: Mr. Grossman was the President and CEO of MFC from
January 1, 1998 to August 1, 2000. He is a director
of M & A London, LLC, of New York, NY, which
provides corporate development services to mid-range
public and private companies. In 1991, Mr. Grossman
founded a transportation company, which he sold in
1994.
ALLAN KORNFELD
Age: 63
Director Since: November 1996
Principal Occupation: Independent consultant on financial matters
Recent Business
Experience: Mr. Kornfeld is a certified public accountant and
attorney. He was an accountant and audit partner at
Ernst & Young from 1960-1975, a comptroller, Vice
President and Senior Vice President of Ametek, Inc.
(NYSE) from 1975-1986 and then Chief Financial
Officer and Executive Vice President of Ametek from
1986-1994. Mr. Kornfeld is a director of M & A
London, LLC and has been Chairman of the Board of
MFC since March 1, 1998.
20
<PAGE> 22
DAVID MICHAEL
Age: 63
Director Since: May 23, 2000
Principal Occupation: President of David Michael & Co., P.C., Certified
Public Accountants
Recent Business
Experience: Mr. Michael has been a certified public accountant
practicing as a partner in independent public
accounting firms for more than 25 years and as the
President of David Michael & Co., P.C. since 1983.
He is a director of the Del Global Technologies Corp
(NASDAQ: DGTC) since 1986.
ANDERS STERNER
Age: 57
Director Since: May 23, 2000
Principal Occupation: President of Of-Counsel Systems, consultants in
computer applications
Recent Business
Experience: Mr. Sterner has his Bachelor's and Law degrees from
Yale University. He was admitted to the bar in 1970
and practiced as an associate with two Wall Street
law firms. In 1976 he was a founding partner at the
law firm of Tanner Propp Fersko & Sterner from which
he retired in 1992 to form Of-Counsel Systems, which
is engaged in computer applications in the legal
field.
LESTER TANNER
Age: 77
Director Since: May 21, 1999
Principal Occupation: President of MFC since August 1, 2000 and a partner
at Tanner Propp, LLP, a law firm in New York, N.Y.
Recent Business
Experience: Mr. Tanner has practiced law as a partner in his law
firm for more than 30 years with a concentration in
corporate, real estate and financial matters.
21
<PAGE> 23
OFFICERS
The executive officers of the Company are:
<TABLE>
<S> <C>
Chairman of the Board.............................Allan Kornfeld
President and CEO.................................Lester Tanner
Vice President and CFO............................Victor Brodsky
Secretary, Treasurer..............................Deborah Knowlton
</TABLE>
MEETINGS AND COMMITTEES
Since the last annual meeting of shareholders on July 20, 2000, the Board
of Directors held two meetings. The Board of Directors has a standing Executive
Committee, Audit Committee and Compensation Committee.
The Executive Committee exercises the authority of the Board of Directors
in the management of the business of the Company at such times as the full Board
of Directors is unavailable. The Executive Committee, which met twice in 2000
currently consists of Messrs. Tanner (Chair), Kornfeld and Sterner.
The functions of the Audit Committee are to recommend to the Board of
Directors' independent public accountants to audit the Company's books and
records, to consult with these accountants concerning the scope of their audit,
to analyze their reports and recommendations and to review internal audit
procedures and controls. The Audit Committee met twice in 2000 and currently
consists of Messrs. Kornfeld (Chair), Michael and Sterner.
The Compensation Committee reviews the compensation, benefits and stock
options for the Company's executive and key personnel and makes recommendations
to the Board of Directors. The Compensation Committee, which met twice in 2000,
currently consists of Messrs. Michael (Chair), Kornfeld and Grossman.
The five directors in office, since May 23, 2000 when David Michael and
Anders Sterner were elected, attended all meetings of the Board and Committees
of the Board on which they served.
22
<PAGE> 24
ITEM 6. EXECUTIVE COMPENSATION
The table below shows for the three Fiscal Years ended February 29, 2000,
and February 28, 1999, and 1998, compensation paid by MFC, including salaries,
bonuses and certain other compensation, to the following executive officers of
the Company in those periods:
<TABLE>
<CAPTION>
Name and Principal Position
---------------------------
Fiscal Year Salary Bonus Other Annual
Ended 2/28 $ $ Compensation (a)
----------- --------- --------- ----------------
<S> <C> <C> <C> <C>
Seth Grossman, 2000 117,500 - $10,000
President and CEO 1999 110,000 - 10,000
1998 36,000 - -
Victor Brodsky 2000 107,500 20,000 10,000
Vice President and CFO 1999 79,577 20,000 8,846
1998
Kenneth Fuld 2000 60,800 - 6,600
President, Medical 1999 100,000 - 10,000
Financial Corp. 1998 100,000 - -
</TABLE>
----------
(a) The amounts in this column represent automobile allowances and
certain unaccountable and reasonable expense allowances.
EMPLOYMENT AGREEMENTS
The Company has no present employment agreements with any officer but
intends to consider the following compensation policy for the current fiscal
year for them and other key employees.
23
<PAGE> 25
COMPENSATION POLICY
The Company's compensation package for Lester Tanner and Victor Brodsky
and other key employees are expected to consist of three elements: (1) base
salary, (2) annual bonus compensation and (3) long-term incentive in the form of
stock options.
Each element of compensation has a different purpose. Salary and bonus
payments are discretionary with the Board of Directors and are designed to
reward current and past performance. Stock options are designed to provide
strong incentive for superior long-term performance and are directly linked to
shareholders' interests because the value of the awards will increase or
decrease based upon the future price of the Common Shares.
Base compensation of each executive officer is determined by the Board of
Directors consistent with the executive's office, period of incumbency and level
of responsibility. For Fiscal 2001, the fiscal year ending February 28, 2001,
the Board has fixed the base annual compensation for Mr. Brodsky at $122,500 and
for Mr. Tanner (7 months) at $84,000 plus an automobile allowance of $10,000 for
each of them and indicated that the Board will consider an appropriate bonus, if
any, based on the factors indicated below.
The Company's executive compensation policy emphasizes performance-based
compensation. Accordingly, a significant percentage of annual compensation may
consist of bonus compensation. This ensures that compensation paid to an
executive reflects the individual's specific contributions to the success of the
Company. Bonus compensation is determined on the basis of the directors'
subjective assessment of an executive's performance, the Company's performance
and each individual's contribution thereto. Bonus compensation is not based on
any specific formula.
The Company plans to adopt a Stock Option Plan, if and when its shares of
common stock are listed on NASDAQ, designed to retain the services of persons
now holding key positions and to secure the services of persons capable of
filling such positions. This would include key management personnel as well as
the executive officers. From time to time, stock options may be awarded which,
under the terms of the Stock Option Plan, will permit the employee to purchase
Common Shares at not less than the fair market value of the Common Shares on the
date of grant. The extent to which the employee realizes any gain is, therefore,
directly related to increases in the price of the Common Shares and hence,
shareholder value, during the period of the option. Options granted to employees
will become exercisable at the rate of 20% per year, commencing one year after
the date of grant. The amount of stock options awarded to an employee is not
based on any specific formula, but rather on a subjective assessment of the
executive's performance and the Company's performance by the Board of Directors.
The Company believes that, as it grows, its compensation program will
enable it to attract, motivate and retain senior management by providing a
competitive total
24
<PAGE> 26
compensation opportunity based on performance.
COMPENSATION OF DIRECTORS
Directors who are also employees of the Company (at present, only Mr.
Tanner is an employee) will receive no remuneration for services as a member of
the Board or any committee of the Board. Each director who is not an employee
receives $500 for each meeting of the Board and each meeting of a Committee of
the Board that he attends except that the Chairman of the Board, who was Allan
Kornfeld since March 1, 1998, received $10,000 per annum (increased to $12,500
per annum as of June 1, 2000) as a director in addition to other compensation.
In addition, each non-employee director, who does not own as much as 5% of the
Company's stock, is automatically granted a five year option to purchase 1,500
shares of common stock on the date on which the annual meeting of the Company's
shareholders is held each year if he or she is re-elected at that meeting,
beginning in 1999. The purchase price of the common stock covered by such
options is the mean between the high bid and low asked price at the close of
trading on the date of grant. As yet no options have been granted to any
employee or director other than Allan Kornfeld who received options for 1,500
shares each at $1.625 per share expiring July 20, 2004 and 1,500 shares at $1.75
each expiring July 20, 2005.
INDEMNIFICATION
The Company maintains an indemnification insurance policy covering all
directors and officers of the Company and its named subsidiaries. No claims have
been made and no payments were received under the Company's indemnification
insurance.
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Lester Tanner, a director and President of the Company, is President of
Northwest Management Corp. with power to vote its shares which are owned by his
two adult children, and that corporation had given the Company a $785,000
secured line of credit pursuant to which the Company could borrow at an interest
rate of 12% per annum on a self amortizing basis to October 2003, prepayable by
the Company at any time. At February 29, 2000 there were no amounts outstanding
on the line of credit. At February 28, 1999, $781,483 was outstanding on the
line of credit. Interest expense was $51,748 and $19,723 for the years ended
February 28, 1999 and 2000, respectively. In June 2000 the line of credit was
terminated after the then outstanding balance of $200,000 was paid.
25
<PAGE> 27
Northwest Management Corp. has indemnified the Company for any liability
the Company may have in the period from September 1, 2002 to February 28, 2006
under a lease made by the Company with the landlord for the office space in East
Granby, Connecticut which is presently vacant and being offered for rental under
a lease for seven years. The landlord has released the Company from any
liability through August 31, 2002. Northwest Management Corp has the risk and
benefit of obtaining a new tenant and, with the landlord, is seeking to rent the
office space for a term ending on or after February 28, 2006, in which event the
Company's liability to the landlord would be terminated, as well as Northwest
Management Corp's indemnification agreement.
In February 1999, a related partnership, whose partners are Seth Grossman
and Lester Tanner, directors, of the Company, committed to loan until March 15,
2001 an investment portfolio then valued at $300,000 to the Medical Financial
Corp. subsidiary. This investment portfolio was held in escrow and was used as
collateral for the purpose of obtaining margin loans. All risks and rewards of
the investment portfolio passed to the related party. Medical Financial Corp.
could borrow up to the maximum margin of the investment portfolio balance.
Between March 1, 1999 and August 31, 1999 the Company used margin loans totaling
$120,000. No margin loans were outstanding between September 1, 1999 and April
30, 2000. The margin loans bear interest at a variable rate based on market
condition set at the discretion of the investment brokerage. A fee is payable
monthly to the related party at the rate of 5% per annum on the value of the
investment escrow account. No fees or interest were paid for the year ended
February 28, 1999. A total of $15,431 of fees and interest were paid for the
year ended February 29, 2000. The margin loan of $170,000 was fully repaid on
June 21, 2000 and the facility was terminated on June 30, 2000
During the year ended February 28, 1999, the Company borrowed at various
times a total of $60,000 from Seth Grossman and Kenneth Fuld, directors of the
Company. These loans were payable on demand and carried interest at the rate of
12% per annum. $25,000 was repaid on these loans in March 1999 and $35,000 was
repaid in June 1999. Interest expense on these loans for the years ended
February 28, 1999 and 2000 were $1,202 and $1,029 respectively. The Company
borrowed $50,000 from Seth Grossman in June 2000 which was repaid in the same
month with interest of $263.
It is management's opinion that these transactions would have been at the
same terms had Lester Tanner, Seth Grossman and Kenneth Fuld not been directors
of Nexus at the time they took place.
ITEM 8. LEGAL PROCEEDINGS
None.
26
<PAGE> 28
ITEM 9. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS.
MFC is unaware of any significant transfers of its common stock, sales or
trading since the Board of Directors of FRM Corp. approved the distribution to
the shareholders. The Company does not know of anyone making a market for its
common stock. After this application has been reviewed by the SEC, the Company
plans to send this Form 10 to its shareholders and to seek market makers,
preliminary to its application to list the common stock for trading on the
NASDAQ Bulletin.
The Company has never paid dividends on the common stock and there is no
present intention to do so in the foreseeable future.
ITEM 10. RECENT SALES OF UNREGISTERED SECURITIES
None.
ITEM 11. DESCRIPTION OF REGISTRANT'S SECURITIES TO BE REGISTERED
The authorized capital stock of the Company consists of 42,000,000
shares, of which, 40,000,000 are shares of common stock, $.001 par value and
2,000,000 shares are preferred stock, $.001 par value. No preferred stock is
outstanding and no preferred shares have been authorized for issuance. The
common stock are the securities to be registered. There are issued and
outstanding 1,800,000 shares of common stock to be released to shareholders in
connection with the distribution described in Item 1.
The Company believes that it will meet the requirements for listing the
common stock on NASDAQ Bulletin Board but there is no assurance that this will
occur.
ITEM 12. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Article VII of the Company's By-Laws provides indemnification by the
Company for its directors, officers, employees, agents and other persons who may
be indemnified pursuant to the provisions of Section 145 of the General
Corporation Law of the State of Delaware (the "Indemnitee").
MFC shall, and is obligated to, indemnify and advance the expenses of the
Indemnitee in every situation where it is obligated to do so pursuant to the
aforesaid statutory provisions provided MFC had made the determination that the
Indemnitee has acted in good faith and in a manner such Indemnitee reasonably
believed to be in or not opposed to the best
27
<PAGE> 29
interests of the Company, and, in the case of any criminal action or proceeding,
had not reasonable cause to believe that such Indemnitee's conduct was unlawful.
See the text of Article VII in the By-laws filed as an Exhibit herein.
ITEM 13. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
All financial statements required by Regulation S-X and the supplementary
financial information required by Item 302 of Regulation S-K has been furnished
by the Company's independent accountants and is included in the financial
statements listed in Item 15 and filed as part of this registration statement.
ITEM 14. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
MFC has had the same independent accountants since February 28, 1998 and
there have been no disagreements with them on accounting or financial matters.
ITEM 15. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements
The response to this portion of Item 15 is submitted as a separate
"Index to Financial Statements and Schedules" which precedes the Independent
Auditor's Report herein.
(b) Exhibits: The following exhibits are being filed herewith.
<TABLE>
<CAPTION>
Exhibit
Number Description
------- ---------------------------------------------------------------------
<S> <C>
3.01 Amended Certificate of Incorporation of the Company.
3.03 Amended By-Laws of the Company.
5.01 Opinion of Tanner Propp, LLP
</TABLE>
28
<PAGE> 30
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange Act
of 1934, the registrant has duly cause this amendment to the registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized.
MFC DEVELOPMENT CORP.
(Registrant)
By /s/ Lester Tanner
-----------------------------
September 29, 2000 Lester Tanner, President
29
<PAGE> 31
MFC Development Corp. and Subsidiaries
(A Subsidiary of FRM Nexus, Inc.)
Index to Consolidated Financial Statements
and Consolidated Financial Statement Schedules
<TABLE>
<S> <C>
This Index......................................................................................... F- 1
Report of Independent Auditors..................................................................... F- 2
Consolidated Balance Sheets--as of August 31,2000 (unaudited),
February 29, 2000 and February 28, 1999......................................................... F- 3
Consolidated Statements of Operations--
Six months ended August 31, 2000 and 1999 (unaudited),
Years Ended February 29, 2000, February 28, 1999 and 1998....................................... F- 5
Consolidated Statements of Stockholders' Equity--
Six months ended August 31, 2000 (unaudited),
Years Ended February 29, 2000, February 28,1999 and 1998........................................ F- 6
Consolidated Statements of Cash Flows--
Six months ended August 31, 2000 and 1999 (unaudited),
Years Ended February 29, 2000, February 28, 1999 and 1998....................................... F- 7
Notes to Consolidated Financial Statements......................................................... F- 9
Consolidated Financial Statement Schedules:
II--Valuation and Qualifying Accounts........................................................... F-31
III--Real Estate and Accumulated Depreciation................................................... F-32
IV--Mortgage Loans on Real Estate............................................................... F-33
</TABLE>
The data required by all other schedules is either included in the financial
statements or is not required.
F-1
<PAGE> 32
Report of Independent Auditors
The Board of Directors and Shareholders
MFC Development Corp., Inc. and Subsidiaries
(A Subsidiary of FRM Nexus, Inc.)
We have audited the accompanying consolidated balance sheets of MFC Development
Corp., Inc. and its subsidiaries (A Subsidiary of FRM Nexus, Inc.) as of
February 29, 2000 and February 28, 1999, and the related consolidated statements
of operations, stockholders' equity and cash flows for the three years ended
February 29, 2000. Our audits also included the consolidated financial statement
schedules listed in the Index at Item 15 (a) for the three 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 (A Subsidiary of FRM Nexus, Inc.)
at February 29, 2000 and February 28, 1999, and the consolidated results of
their operations and their cash flows for the three years ended February 29,
2000 in conformity with accounting principles generally accepted in the Untied
States. Also, in our opinion, the related consolidated financial statement
schedules for the three 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
F-2
<PAGE> 33
MFC Development Corp. and Subsidiaries
(A Subsidiary of FRM Nexus, Inc.)
Consolidated Balance Sheets
<TABLE>
<CAPTION>
AUGUST 31, FEBRUARY 29, FEBRUARY 28,
2000 2000 1999
-------------------- ----------------------------------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash & cash equivalents $ 697,967 $ 581,408 $ 243,012
Mortgage and notes receivable - current 27,818 26,597 24,317
Finance receivables, net 3,668,340 2,479,999 2,980,159
Other current assets 88,946 103,994 122,197
-------------------- ----------------------------------------
Total current assets 4,483,071 3,191,998 3,369,685
-------------------- ----------------------------------------
Property and equipment:
Property and equipment, at cost 526,341 348,575 212,109
Less accumulated depreciation and amortization 157,750 115,794 54,068
-------------------- ----------------------------------------
368,591 232,781 158,041
-------------------- ----------------------------------------
Other assets:
Real estate held for development and sale 476,732 510,880 1,282,443
Mortgage and notes receivable 3,222,646 3,236,866 3,192,367
Accrued interest receivable - related party mortgage 321,150 321,150 217,200
Loans receivable 137,751 98,381 -
Other 64,191 95,991 193,435
Net assets of discontinued operations - 1,174,892 2,082,943
-------------------- ----------------------------------------
Total other assets 4,222,470 5,438,160 6,968,388
-------------------- ----------------------------------------
Total assets $ 9,074,132 $ 8,862,939 $ 10,496,114
==================== ========================================
</TABLE>
See accompanying notes.
F-3
<PAGE> 34
MFC Development Corp. and Subsidiaries
(A Subsidiary of FRM Nexus, Inc.)
Consolidated Balance Sheets (continued)
<TABLE>
<CAPTION>
AUGUST 31, FEBRUARY 29, FEBRUARY 28,
2000 2000 1999
-------------------- ---------------------------------------
(UNAUDITED)
<S> <C> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 180,843 $ 213,683 $ 263,365
Current portion of notes payable, including $85,972
in 1999 payable to related parties 56,733 19,282 103,108
Due to finance customers 1,873,140 1,402,546 1,460,410
Income taxes payable 6,444 5,367 7,491
Other current liabilities 34,832 20,000 63,671
-------------------- ---------------------------------------
Total current liabilities 2,151,992 1,660,878 1,898,045
-------------------- ---------------------------------------
Other liabilities:
Notes payable, including $755,511 in 1999
payable to related parties 86,974 24,655 799,480
Deferred Income 2,569,513 2,569,513 2,569,513
-------------------- ---------------------------------------
Total other liabilities 2,656,487 2,594,168 3,368,993
-------------------- ---------------------------------------
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 at August 31, 2000
and 1,816,462
shares at February 29, 2000 and February 28, 1999 1,800 1,816 1,816
Capital in excess of par value 5,968,420 5,996,739 5,996,739
Unrealized loss on mortgage and notes receivable (78,019) (78,019) (149,116)
Accumulated deficit (1,626,548) (1,312,643) (620,363)
-------------------- ---------------------------------------
Total stockholders' equity 4,265,653 4,607,893 5,229,076
-------------------- ---------------------------------------
Total liabilities and stockholders' equity $ 9,074,132 $ 8,862,939 $ 10,496,114
==================== =======================================
See accompanying notes
</TABLE>
F-4
<PAGE> 35
MFC Development Corp. and Subsidiaries
(A Subsidiary of FRM Nexus, Inc.)
Consolidated Statements of Operations
<TABLE>
<CAPTION>
YEAR ENDED
SIX MONTHS ENDED AUGUST 31, FEBRUARY 29,
2000 1999 2000
---------------------------- ----------------------
(UNAUDITED) (Unaudited)
<S> <C> <C> <C>
REVENUES
Sale of real estate $ 69,000 $ 211,000 $ 941,000
Rental income 46,820 52,185 111,264
Interest from mortgages 46,110 116,530 197,864
Income from the purchase of medical receivables 443,379 609,581 1,033,139
Medical management service fees 419,950 - -
---------------------------- ----------------------
Total income 1,025,259 989,296 2,283,267
---------------------------- ----------------------
COSTS AND EXPENSES
Real estate 228,213 1,211,711
364,435
Medical receivables 739,726 1,533,127
630,816
Medical management services 510,935
- -
Corporate expenses 204,027 452,234
188,944
Depreciation and amortization 42,900 28,255 61,726
---------------------------- ----------------------
Total costs and expenses 1,725,801 1,212,450 3,258,798
---------------------------- ----------------------
(Loss) income from operations (700,542) (223,154) (975,531)
---------------------------- ----------------------
Other income (expense):
Interest income 11,685 2,394 14,801
Interest expense (13,874) (31,712) (42,437)
---------------------------- ----------------------
(2,189) (29,318) (27,636)
---------------------------- ----------------------
(Loss) income from continuing operations before
provision (credit) for income taxes and extraordinary item (702,731) (252,472) (1,003,167)
Provision (credit) for income taxes 10,202 10,298 14,328
---------------------------- ----------------------
(Loss) income from continuing operations
before extraordinary item (712,933) (262,770) (1,017,495)
Income from discontinued operations, net of taxes
(including gain on sale of subsidiary of $381,182
in 2000 and $96,303 in 1999) 399,028 292,523 325,215
---------------------------- ----------------------
(313,905) 29,753 (692,280)
(Loss) income before extraordinary item
Extraordinary item, net of applicable taxes of $0 - - -
---------------------------- ----------------------
Net (loss) income $ (313,905) $ 29,753 $ (692,280)
============================ ======================
(Loss) earnings per common share:
(Loss) income from continuing operations $ (0.39) $ (0.14) $ (0.56)
Income from discontinued operations 0.22 0.16 0.18
---------------------------- ----------------------
(Loss) income before extraordinary item (0.17) 0.02 (0.38)
Extraordinary income, net of taxes
- - -
---------------------------- ----------------------
Basic and diluted (loss) earnings per common share $ (0.17) $ 0.02 $ (0.38)
============================ ======================
Number of shares used in computation of basic and
diluted earnings per share 1,814,404 1,816,462 1,816,462
============================ ======================
</TABLE>
<TABLE>
<CAPTION>
YEARS ENDED FEBRUARY 28,
1999 1998
----------------------------
REVENUES
<S> <C> <C>
Sale of real estate $ 40,678 $ 2,125,696
Rental income 140,633 115,951
Interest from mortgages 234,609 167,128
Income from the purchase of medical receivables 1,041,770 773,474
Medical management service fees - -
----------------------------
Total income 1,457,690 3,182,249
----------------------------
COSTS AND EXPENSES
Real estate 393,727 777,861
Medical receivables 1,055,439 826,085
Medical management services
- -
Corporate expenses 414,148 182,729
Depreciation and amortization 29,909 73,309
----------------------------
Total costs and expenses 1,893,223 1,859,984
----------------------------
(Loss) income from operations (435,533) 1,322,265
----------------------------
Other income (expense):
Interest income 13,817 30,746
Interest expense (58,691) (241,525)
----------------------------
(44,874) (210,779)
----------------------------
(Loss) income from continuing operations before
provision (credit) for income taxes and extraordinary item (480,407) 1,111,486
Provision (credit) for income taxes 5,676 112,937
----------------------------
(Loss) income from continuing operations
before extraordinary item (486,083) 998,549
Income from discontinued operations, net of taxes
(including gain on sale of subsidiary of $381,182
in 2000 and $96,303 in 1999) 119,514 317,868
----------------------------
(366,569) 1,316,417
(Loss) income before extraordinary item
Extraordinary item, net of applicable taxes of $0 - 91,674
----------------------------
Net (loss) income $ (366,569) $ 1,408,091
============================
(Loss) earnings per common share:
(Loss) income from continuing operations $ (0.27) $ 0.55
Income from discontinued operations 0.07 0.17
----------------------------
(Loss) income before extraordinary item (0.20) 0.72
Extraordinary income, net of taxes
- 0.05
----------------------------
Basic and diluted (loss) earnings per common share $ (0.20) $ 0.77
============================
Number of shares used in computation of basic and
diluted earnings per share 1,816,462 1,816,462
============================
</TABLE>
See accompanying notes
F-5
<PAGE> 36
MFC Development Corp. and Subsidiaries
(A Subsidiary of FRM Nexus, Inc.)
Consolidated Statements of Stockholders' Equity
<TABLE>
<CAPTION>
ACCUMULATED
ADDITIONAL OTHER
COMMON STOCK PAID-IN COMPREHENSIVE (ACCUMULATED
SHARES AMOUNT CAPITAL (LOSS)INCOME DEFICIT)
-----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, as previously reported,
February 28, 1997 100 $ - $ 950,000 $ - $ 470,924
Adjustment related to transfer of
ownership of FRM Nexus, Inc. assets 1,816,362 1,816 5,047,054 (2,132,809)
-----------------------------------------------------------------------------------
Balance, February 28, 1997 1,816,462 1,816 5,997,054 - (1,661,885)
Unrealized loss on mortgage and
notes receivable - - - (162,202) -
Net income - - - - 1,408,091
Comprehensive income - - - - -
-----------------------------------------------------------------------------------
Balance, February 28, 1998 1,816,462 1,816 5,997,054 (162,202) (253,794)
Payment of fractional shares - - (315) - -
Change in unrealized loss on
mortgage and notes receivable - - - 13,086 -
Net loss - - - - (366,569)
Comprehensive (loss) income - - - - -
-----------------------------------------------------------------------------------
BALANCE, FEBRUARY 28, 1999 1,816,462 1,816 5,996,739 (149,116) (620,363)
CHANGE IN UNREALIZED LOSS ON
MORTGAGE AND NOTES RECEIVABLE - - - 71,097 -
NET LOSS - - - - (692,280)
COMPREHENSIVE LOSS - - - - -
-----------------------------------------------------------------------------------
BALANCE, FEBRUARY 29, 2000 1,816,462 1,816 5,996,739 (78,019) (1,312,643)
PURCHASE AND RETIREMENT OF
TREASURY STOCK (UNAUDITED) (16,462) (16) (28,319) - -
NET LOSS (UNAUDITED) - - - - (313,905)
COMPREHENSIVE LOSS (UNAUDITED) - - - - -
-----------------------------------------------------------------------------------
BALANCE, AUGUST 31, 2000 (UNAUDITED) 1,800,000 $ 1,800 $ 5,968,420 $ (78,019) $ (1,626,548)
===================================================================================
</TABLE>
<TABLE>
<CAPTION>
TOTAL
STOCKHOLDERS' COMPREHENSIVE
EQUITY (LOSS)INCOME
-------------- -------------------
<S> <C> <C>
Balance, as previously reported,
February 28, 1997 $ 1,420,924
Adjustment related to transfer of
ownership of FRM Nexus, Inc. assets 2,916,061
--------------
Balance, February 28, 1997 4,336,985
Unrealized loss on mortgage and
notes receivable (162,202) $ (162,202)
Net income 1,408,091 1,408,091
-------------------
Comprehensive income - $ 1,245,889
-------------- ===================
Balance, February 28, 1998 5,582,874
Payment of fractional shares (315)
Change in unrealized loss on
mortgage and notes receivable 13,086 $ 13,086
Net loss (366,569) (366,569)
-------------------
Comprehensive (loss) income - $ (353,483)
-------------- ===================
BALANCE, FEBRUARY 28, 1999 5,229,076
CHANGE IN UNREALIZED LOSS ON
MORTGAGE AND NOTES RECEIVABLE 71,097 $ 71,097
NET LOSS (692,280) (692,280)
-------------------
COMPREHENSIVE LOSS - $ (621,183)
-------------- ===================
BALANCE, FEBRUARY 29, 2000 4,607,893
PURCHASE AND RETIREMENT OF
TREASURY STOCK (UNAUDITED) (28,335)
NET LOSS (UNAUDITED) (313,905) $ (313,905)
-------------------
COMPREHENSIVE LOSS (UNAUDITED) - $ (313,905)
-------------- ===================
BALANCE, AUGUST 31, 2000 (UNAUDITED) $ 4,265,653
==============
</TABLE>
See accompanying notes
F-6
<PAGE> 37
MFC Development Corp. and Subsidiaries
(A Subsidiary of FRM Nexus, Inc.)
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
YEAR ENDED
SIX MONTHS ENDED AUGUST 31, FEBRUARY 29, YEARS ENDED FEBRUARY 28,
2000 1999 2000 1999 1998
---------------------------- -------------------------------------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss) income $ (313,905) $ 29,753 $ (692,280) $ (366,569) $ 1,408,091
Adjustments to reconcile net (loss) income to net
cash provided by operating activities:
Depreciation and amortization 42,900 28,255 61,726 29,910 73,309
Gain on sale of real estate held for
development and sale (15,727) (7,288) (48,621) - (1,932,994)
Provision for bad debts 133,424 (9,234) 126,488 13,134 37,034
Deferred interest expense - - - - 90,919
Deferred income taxes - - - (20,729) 78,153
Changes in operating assets and liabilities:
Collections from sale of real estate held for
development and sale, net of payment
to participant 69,000 199,350 845,304 - -
Additions to real estate held for
development and sale (19,125) - - (98,109) (16,076)
Prepaid expenses, miscellaneous receivables
and other assets 46,848 57,792 (13,423) (158,287) (169,135)
Accounts payable, accrued expenses and taxes (31,763) (130,795) (51,806) (35,945) 34,586
Other current liabilities 14,832 (41,179) (43,671) 44,182 (76,040)
---------------------------- -------------------------------------------
Net cash (used in) provided by operating activities (73,516) 126,654 183,717 (592,413) (472,153)
---------------------------- -------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures & intangible assets (61,021) (67,406) (136,466) (66,188) (619,449)
Finance receivables (1,321,765) 511,574 373,672 (1,210,606) (543,796)
Due to finance customers 470,594 (160,343) (57,864) 484,865 17,960
Principal payments on notes receivable 12,999 13,919 24,318 22,232 159,717
Loan receivable (75,000) - (100,000) - -
Principal payments on loan receivable 35,630 - 1,619 - -
Proceedes from sale of subsidiaries 1,575,000 975,000 975,000 - -
Net assets of discontinued operations (400,108) (248,523) (66,949) 113,549 (178,116)
---------------------------- -------------------------------------------
Net cash provided by (used in) investing activities 236,329 1,024,221 1,013,330 (656,148) (1,163,684)
---------------------------- -------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds of notes payable 420,000 96,779 96,779 685,000 700,000
Principal payments on notes payable (437,919) (946,578) (955,430) (283,533) (366,250)
Purchase and retirement of treasury stock (28,335) - - - -
Proceeds of finance obligation - - - - 926,602
Principal payments on finance obligation - - - - (71,438)
Payment of fractional shares - - - (315) -
---------------------------- -------------------------------------------
Net cash (used in) provided by financing activities (46,254) (849,799) (858,651) 401,152 1,188,914
---------------------------- -------------------------------------------
</TABLE>
See accompanying notes
F-7
<PAGE> 38
MFC Development Corp. and Subsidiaries
(A Subsidiary of FRM Nexus, Inc.)
Consolidated Statements of Cash Flows (continued)
<TABLE>
<CAPTION>
YEAR ENDED
SIX MONTHS ENDED AUGUST 31, FEBRUARY 29, YEARS ENDED FEBRUARY 28,
2000 1999 2000 1999 1998
---------------------------- -----------------------------------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net increase (decrease) in cash and cash equivalents $ 116,559 $ 301,076 $ 338,396 $ (847,409) $ (446,923)
Cash and cash equivalents, beginning of period 581,408 243,012 243,012 1,090,421 1,537,344
---------------------------- -----------------------------------------
Cash and cash equivalents, end of period $ 697,967 $ 544,088 $ 581,408 $ 243,012 $ 1,090,421
============================ =========================================
ADDITIONAL CASH FLOW INFORMATION
Interest paid $ 10,311 $ 36,072 $ 120,935 $ 275,176 $ 441,403
============================ =========================================
Income taxes paid $ 17,916 $ 14,123 $ 19,011 $ 39,074 $ 61,497
============================ =========================================
NONCASH INVESTING AND FINANCING ACTIVITIES
Assets acquired under capital leases $ 117,689 $ - $ - $ 42,234 $ 25,137
============================ =========================================
Notes receivable from purchasers of real estate sold $ - $ - $ - $ - $ 1,081,547
============================ =========================================
</TABLE>
See accompanying notes.
F-8
<PAGE> 39
MFC Development Corp. and Subsidiaries
(A Subsidiary of FRM Nexus, Inc.)
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 is a wholly-owned
subsidiary of 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.
The consolidated financial statements of MFC include Medical Financial Corp.,
PSI Capital Corp., 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. 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 $26,689.
On August 31, 2000, FRM filed form 8-K with the Securities and Exchange
Commission, which disclosed that FRM contemplates the intent of 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 outstanding common stock at the
close of business on November 1, 2000, (the record date). There are presently
1,800,000 shares of common stock of FRM outstanding.
F-9
<PAGE> 40
MFC Development Corp. and Subsidiaries
(A Subsidiary of FRM Nexus, Inc.)
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.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
all of its subsidiaries (hereinafter also referred to as the "Company"). All
significant intercompany accounts and transactions have been eliminated in
consolidation.
3. SIGNIFICANT ACCOUNTING POLICIES
REVENUE RECOGNITION
Real Estate: The full accrual method is used on the sale of real estate if the
profit is determinable, the Company is not obligated to perform significant
activities after the sale to earn the profit and there is no continuing
involvement with the property. If the buyer's initial and continuing investments
are inadequate to demonstrate a commitment to pay for the property, the
installment method is used, resulting in the deferral of income. If there is
continuing involvement with the property by the Company, the financing method is
used.
F-10
<PAGE> 41
MFC Development Corp. and Subsidiares
(A Subsidiary of FRM Nexus, Inc.)
Notes to Consolidated Financial Statements
3. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REVENUE RECOGNITION (CONTINUED)
Purchase of Medical Insurance Claims Receivable: A fee is charged to medical
providers upon the purchase of their accounts receivable by the Company. This
fee income is deferred and recognized on a pro-rata basis as the related
receivables are collected. The deferred fee income is netted against finance
receivables (see note 5). Management fees are billed monthly in amounts that are
relative to the expenses and services provided for that month.
Food Service Companies: The accrual method of accounting is used to record all
income.
RECEIVABLES
Real Estate: 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.
Purchases of Medical Insurance Claims: The Company purchases the net collectible
value of medical insurance claims on a limited recourse basis. 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.
Upon full collection of the advance paid in connection with the purchased
medical insurance claims and the related fee, the contracts allow for accounts
receivable that are determined to be invalid or remain unpaid for a specified
period of time to be returned (charged back) to the customer. The charge back
will also reduce the amount due to the customer.
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.
F-11
<PAGE> 42
MFC Development Corp. and Subsidiaries
(A Subsidiary of FRM Nexus, Inc.)
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:
<TABLE>
<CAPTION>
<S> <C>
Land improvements 15 years
Restaurant equipment and furniture 7 years
Computer, medical and transportation equipment 5 years
</TABLE>
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 AND LEASEHOLD COSTS
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.
F-12
<PAGE> 43
MFC Development Corp. and Subsidiaries
(A Subsidiary of FRM Nexus, Inc.)
Notes to Consolidated Financial Statements
3. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
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.
As of February 29, 2000, the Company had an investment in seven day commercial
paper in the amount of $400,000. As of August 31, 2000, the Company had an
investment in seven day commercial paper in the amount of $300,000 (unaudited).
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 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.
For the year ended February 28, 1998, two medical providers generated 46% and
30% of total earned fees. As of February 29, 2000, claims receivable from one
insurance company comprised 26% of total finance
F-13
<PAGE> 44
MFC Development Corp. and Subsidiaries
(A Subsidiary of FRM Nexus, Inc.)
Notes to Consolidated Financial Statements
3. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CONCENTRATION OF RISK (CONTINUED)
receivables. As of February 28, 1999, claims receivable from three insurance
companies comprised 23%, 13% and 10% of total finance receivables.
For the six months ended August 31, 2000 (unaudited), fees earned from three
medical providers were 13%, 31%, and 38% of earned fees. For the six months
ended August 31, 1999 (unaudited), fees earned from five medical providers were
15%, 16%, 20%, 21% and 28% of earned fees. As of August 31, 2000 (unaudited),
claims receivable from one insurance company comprised 22% of total finance
receivables.
All note receivables are from the sale of real estate in New York and
Connecticut (see Note 4).
ADVERTISING COSTS
The Company expenses the cost of advertising as incurred. For the years ended
February 29, 2000, February 28 1999 and 1998 advertising expense totaled
approximately $20,000, $16,000, and $32,000. For the six months ended August 31,
2000 and 1999 advertising expense totaled approximately $19,931 (unaudited) and
$ -0- (unaudited).
FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair value of financial instruments is
made in accordance with the requirements of Statement of Financial Accounting
Standards No. 107, "Disclosures about Fair Value of Financial Instruments". The
estimated fair values of financial instruments have been determined by the
Company using available market information and appropriate valuation
methodologies. Considerable judgment is required in interpreting market data to
develop the estimates of fair value. Accordingly, the estimates presented herein
are not necessarily indicative of the amounts that the Company could realize in
a sale.
F-14
<PAGE> 45
MFC Development Corp. and Subsidiaries
(A Subsidiary of FRM Nexus, Inc.)
Notes to Consolidated Financial Statements
3. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
The carrying amounts and estimated fair values of financial instruments are
summarized as follows:
<TABLE>
<CAPTION>
AUGUST 31 FEBRUARY 29 FEBRUARY 28
2000 2000 1999
(UNAUDITED)
-----------------------------------------------------------------------------------
CARRYING ESTIMATED CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE AMOUNT FAIR VALUE
-----------------------------------------------------------------------------------
ASSETS
<S> <C> <C> <C> <C> <C> <C>
Cash and cash equivalents $ 697,967 $ 697,967 $ 581,408 $ 581,408 $ 243,012 $ 243,012
Mortgage and notes 3,250,464 3,250,464 3,263,463 3,263,463 3,216,684 3,216,684
receivable
Finance receivables 3,668,340 3,668,340 2,479,999 2,479,999 2,980,159 2,980,159
LIABILITIES
Accounts payable and
accrued expenses,
income taxes payable,
due to finance
customers and other 2,095,259 2,095,259 1,641,596 1,641,596 1,794,937 1,794,937
current liabilities
Notes payable 143,707 143,707 43,937 43,937 902,588 902,588
</TABLE>
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles 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.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the current year
presentation.
F-15
<PAGE> 46
MFC Development Corp. and Subsidiaries
(A Subsidiary of FRM Nexus, Inc.)
Notes to Consolidated Financial Statements
4. REAL ESTATE ACTIVITIES
SALE OF REAL ESTATE
GOSHEN, NEW YORK
The Company acquired its property in Goshen, New York through the foreclosure of
two mortgages it held. During fiscal years 1997 and 1996, the Company sold all
of the 165 lots of the property for $2,499,350. This transaction and the related
note receivable was with Windemere Pines at Goshen, Inc., 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 Nexus and was a
director of Nexus 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 $1,719,513 of deferred profit remains at August 31, 2000, (unaudited)
February 29, 2000 and February 28, 1999.
Interest income from this transaction (principal amount of note receivable is
$2,310,000) was $103,950, $138,600 and $138,600 for the years ended February 29,
2000, February 28, 1999 and 1998. Interest income from this transaction was $-0-
(unaudited) and $69,300 (unaudited) for the six months ended August 31, 2000 and
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:
<TABLE>
<CAPTION>
AUGUST 31, FEBRUARY 29, FEBRUARY 28,
2000 2000 1999
------------------- ------------------- -------------------
(UNAUDITED)
<S> <C> <C> <C>
Current $ - $ - $ 30,000
Long-term 321,150 321,150 217,200
------------------ ------------------- -------------------
$ 321,150 $ 321,150 $ 247,200
================== =================== ===================
</TABLE>
F-16
<PAGE> 47
MFC Development Corp. and Subsidiaries
(A Subsidiary of FRM Nexus, Inc.)
Notes to Consolidated Financial Statements
4. REAL ESTATE ACTIVITIES (CONTINUED)
SALE OF REAL ESTATE (CONTINUED)
GOSHEN, NEW YORK (CONTINUED)
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.
GRANBY, CONNECTICUT
The Company acquired this partially built office building in Granby, Connecticut
as a result of the foreclosure of the first mortgage on the property of
approximately $1,000,000. In fiscal year 1994, the Company wrote down its
investment in the property to $900,000 to reflect the then market value of the
property.
This property was sold to a limited liability company, of which certain members
are shareholders in the Company, in fiscal year 1996 for $4,800,000. The terms
of the sale provided that the Company complete construction of the building and
provide a tenant for the unoccupied portion of the building. To provide the
tenant, the Company entered into a sales-leaseback transaction with the buyer.
The Company also guaranteed the first mortgage of the buyer-lessor and sublet
the unoccupied space it leased from the buyer. The Company's continuing
involvement with the property precluded the use of full accrual accounting and,
accordingly, no sale was recognized at that time.
During fiscal year 1997 and a portion of 1998, the Company used the financing
method to report this transaction. The historical cost of the asset remained on
the Company's books and was being depreciated. The proceeds of the sale were
recorded as a finance obligation at a rate of 8.25%. Rental payments to the
buyer-lessor were treated as a reduction in the finance obligation.
In December 1997, the buyer of the property refinanced the first mortgage,
eliminating the Company's guarantee. In addition, in January 1998, the Company
sold for $120,000 the term of its lease on the property to the buyer and was
released of all obligations on its lease through August 31, 2002. The Company
has a lease for the period September 1, 2002 through February 28, 2006 which
specifies rental payments aggregating $1,482,194. $850,000 of the gain,
representing the present value of these rental payments was deferred.
F-17
<PAGE> 48
MFC Development Corp. and Subsidiaries
(A Subsidiary of FRM Nexus, Inc.)
Notes to Consolidated Financial Statements
4. REAL ESTATE ACTIVITIES (CONTINUED)
SALE OF REAL ESTATE (CONTINUED)
GRANBY, CONNECTICUT (CONTINUED)
In January 1998, the Company recorded the sale under the accrual method of
accounting since its continuing involvement with the property was terminated.
The Company recorded a gain on the sale of the property of $1,932,994, net of
the above mentioned lease liability.
The sale of this property includes a second mortgage receivable from the buyer.
Upon full collection of the receivable, an additional liability will be payable
to the co-investors of the original mortgage for approximately $70,000. If the
second mortgage is not collected in full, an amount substantially less will be
paid. An accrual has been provided for this amount.
OTHER REAL ESTATE SALES
The Company sold various other properties, including the property in Brookfield,
Connecticut and six condominium units in Hunter, New York, during the three
years ended February 29, 2000 for various amounts as part of the operations of
the real estate division. The remaining two built condominium units were sold
during the six months ended August 31, 2000 (unaudited).
MORTGAGES AND NOTES RECEIVABLE
Mortgages and notes receivable, arising from the sale of real estate, consist of
the following:
<TABLE>
<CAPTION>
AUGUST 31 FEBRUARY 29 FEBRUARY 28
2000 2000 1999
------------------ ------------------ -----------------
(UNAUDITED)
<S> <C> <C> <C>
Goshen, New York (Construction Company) $ 2,310,000 $ 2,310,000 $ 2,310,000
Granby, Connecticut (Real Estate Operator) 1,018,483 1,031,482 1,055,800
------------------ ------------------ -----------------
3,328,483 3,341,482 3,365,800
Less current portion (27,818) (26,597) (24,317)
Less unrealized loss on mortgage and
notes receivable (78,019) (78,019) (149,116)
------------------ ------------------ -----------------
$ 3,222,646 $ 3,236,866 $ 3,192,367
================== ================== =================
</TABLE>
F-18
<PAGE> 49
MFC Development Corp. and Subsidiaries
(A Subsidiary of FRM Nexus, Inc.)
Notes to Consolidated Financial Statements
4. REAL ESTATE ACTIVITIES (CONTINUED)
MORTGAGES AND NOTES RECEIVABLE (CONTINUED)
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:
<TABLE>
<CAPTION>
FISCAL YEAR
<S> <C>
2001 $ 26,597
2002 2,339,093
2003 31,822
2004 34,807
2005 38,072
Thereafter 871,091
------------------
$ 3,341,482
==================
</TABLE>
As of August 31, 2000 (unaudited), February 29, 2000 and February 28, 1999,
except for the Goshen interest payment mentioned above, all notes receivable
were performing. 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 7).
REAL ESTATE HELD FOR DEVELOPMENT AND SALE
The following properties are included in real estate held for development and
sale:
<TABLE>
<CAPTION>
AUGUST 31 FEBRUARY 29 FEBRUARY 28
2000 2000 1999
--------------------------------------------------------
(UNAUDITED)
<S> <C> <C> <C>
Hunter, New York $ 621,732 $ 655,880 $ 1,007,030
Brookfield, Connecticut - - 490,413
--------------------------------------------------------
621,732 655,880 1,497,443
Less due to co-investors (145,000) (145,000) (215,000)
--------------------------------------------------------
$ 476,732 $ 510,880 $ 1,282,443
========================================================
</TABLE>
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, two
remaining
F-19
<PAGE> 50
MFC Development Corp. and Subsidiaries
(A Subsidiary of FRM Nexus, Inc.)
Notes to Consolidated Financial Statements
4. REAL ESTATE ACTIVITIES (CONTINUED)
REAL ESTATE HELD FOR DEVELOPMENT AND SALE (CONTINUED)
condominium units available for sale or rental, two building sites, 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.
5. FINANCE RECEIVABLES, NET
Net finance receivables consist of the following:
<TABLE>
<CAPTION>
AUGUST 31 FEBRUARY 29 FEBRUARY 28
2000 2000 1999
---------------------------------------------------------------
(UNAUDITED)
<S> <C> <C> <C>
Gross finance receivables $ 4,386,764 $ 2,958,825 $ 3,409,095
Allowance for credit losses (345,912) (212,488) (86,000)
Deferred finance income (372,512) (266,338) (342,936)
---------------------------------------------------------------
$ 3,668,340 $ 2,479,999 $ 2,980,159
===============================================================
</TABLE>
These receivables are collateral for a line of credit (see Note 7).
6. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
AUGUST 31 FEBRUARY 29 FEBRUARY 28
2000 2000 1999
-------------------------------------------------
(UNAUDITED)
<S> <C> <C> <C>
Leasehold improvements $ 51,402 $ 51,402 $ 43,166
Computer equipment 218,558 173,414 84,172
Medical equipment 45,520 32,500 -
Equipment under capital leases 185,060 67,371 67,371
Other equipment and furniture 25,801 23,888 17,400
-------------------------------------------------
526,341 348,575 212,109
Less accumulated depreciation and amortization
157,750 115,794 54,068
-------------------------------------------------
Property and equipment, net $ 368,591 $ 232,781 $ 158,041
=================================================
</TABLE>
F-20
<PAGE> 51
MFC Development Corp. and Subsidiaries
(A Subsidiary of FRM Nexus, Inc.)
Notes to Consolidated Financial Statements
6. PROPERTY AND EQUIPMENT (CONTINUED)
As of August 31, 2000, February 29, 2000 and February 28 1999,
accumulated amortization of equipment under capital leases was $28,426
(unaudited), $21,699 and $8,245.
For the years ended February 29, 2000, February 28, 1999 and 1998, depreciation
expense, which includes amortization under capital leases was $61,726, $29,909
and $73,309. For the six months ended August 31, 2000 and 1999, depreciation
expense, which includes amortization under capital leases was $42,900
(unaudited) and $28,255 (unaudited).
7. LOANS RECEIVABLE
In February 2000, one of the Company's subsidiaries entered into a participation
agreement to share 50% of the profits of an MRI facility that provides
management services to a radiology practice. The participant was already
providing these services from this location. In consideration for the 50%
interest in this facility, the Company has assumed operating responsibility and
agreed to administer the repayment of certain debts of the participant from
various sources of funds that are due to the participant. 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 $137,751 (unaudited) at August 31, 2000 and $98,381 at February 29, 2000.
8. NOTES PAYABLE
Notes payable include the following:
<TABLE>
<CAPTION>
AUGUST 31 FEBRUARY 29 FEBRUARY 28
2000 2000 1999
(UNAUDITED)
-----------------------------------------------------
<S> <C> <C> <C>
Capital lease obligations $ 143,707 $ 43,937 $ 61,105
Related party credit line - - 781,483
Related party escrow loan - - -
Related party loans - - 60,000
-----------------------------------------------------
143,707 43,937 902,588
Less current maturities 56,733 19,282 103,108
-----------------------------------------------------
Long-term debt $ 86,974 $ 24,655 $ 799,480
=====================================================
</TABLE>
F-21
<PAGE> 52
MFC Development Corp. and Subsidiaries
(A Subsidiary of FRM Nexus, Inc.)
Notes to Consolidated Financial Statements
8. NOTES PAYABLE (CONTINUED)
Related Party Credit Line: 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 2000, 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 (unaudited). Interest was calculated at a rate of 12% per
annum. There were no commitment fees paid in connection with this line of
credit.
Related party escrow loan: In February 1999, a related partnership, whose
partners are directors, officers and shareholders of the Company, committed to
loan until March 15, 2001 an investment portfolio, which at the time was valued
at $240,000, to the Medical Financial Corp. subsidiary. This investment
portfolio is being held in escrow and is used as collateral for the purpose of
obtaining margin loans. At February 29, 2000, the value of this portfolio was
$309,353. All risks and rewards of the investment portfolio pass to the related
party. The margin loans bear interest at a variable rate based on market
condition set at the discretion of the investment brokerage firm. A fee is
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.
Proceeds from the loan may only be used to fund the purchase of medical
receivables. The loan is repaid as payment is received from such receivables and
may be re-borrowed at any time until maturity. On June 26, 2000, the then
outstanding balance of $170,000 (unaudited) was paid in full. On June 30, 2000
(unaudited) the loan was terminated by mutual consent of both parties.
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
29, 2000 and February 28, 1999 was $36,184 and $52,748. Interest expense on
these related party borrowings for the six months ended August 31, 2000 and 1999
was $8,495 (unaudited) and $29,969 (unaudited).
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%.
F-22
<PAGE> 53
MFC Development Corp. and Subsidiaries
(A Subsidiary of FRM Nexus, Inc.)
Notes to Consolidated Financial Statements
8. NOTES PAYABLE (CONTINUED)
Aggregate maturities of the amount of notes payable and capital leases at
February 29, 2000 are as follows:
<TABLE>
<CAPTION>
CAPITAL
LEASE
NOTES PAYABLE OBLIGATIONS TOTAL
------------------ ------------------ -----------------
<S> <C> <C> <C>
2001 $ - $ 23,813 $ 23,813
2002 - 21,055 21,055
2003 - 6,054 6,054
-------------------------------------------------------
- 50,922 50,922
Amount representing interest 6,985 6,985
-------------------------------------------------------
Total (a) $ - $ 43,937 $ 43,937
======================================================
</TABLE>
(a)--Total capital lease obligations represent present value of minimum lease
payments.
9. COMMITMENTS AND CONTINGENCIES
MINIMUM OPERATING LEASE COMMITMENTS
In April 2000, Nexus signed a lease extension for its executive offices under
a seven year lease expiring on February 28, 2007.
In October 1999, one of the Company's subsidiaries in the medical division
signed a 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 lease for premises for an MRI facility that will be used to provide management
services for a radiology practice.
F-23
<PAGE> 54
MFC Development Corp. and Subsidiaries
(A Subsidiary of FRM Nexus, Inc.)
Notes to Consolidated Financial Statements
9. COMMITMENTS AND CONTINGENCIES (CONTINUED)
MINIMUM OPERATING LEASE COMMITMENTS (CONTINUED)
Subject to annual real estate adjustments, the following is a schedule of future
minimum rental payments required under the above operating leases as of February
28:
<TABLE>
<S> <C>
Year ending February:
2001 (six months) $ 84,200
2002 139,600
2003 130,920
2004 133,556
2005 138,744
Thereafter 160,800
------------------
Total $ 787,820
==================
</TABLE>
For the years ended February 29, 2000, February 28 1999 and 1998 rent expense
totaled approximately $85,000, $45,000 and $43,000. For the six months ended
August 31, 2000 and 1999 rent expense totaled approximately $83,426 (unaudited)
and $24,000 (unaudited).
There are various commitments and contingencies relating to the sale of real
estate (see Note 3).
10. INCOME TAXES
The provision (benefit) for income taxes consist of the following:
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED YEARS ENDED
AUGUST 31 AUGUST 31 FEBRUARY 29 FEBRUARY 28
2000 1999 2000 1999 1998
-----------------------------------------------------------------------------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Current:
Federal $ - $ - $ - $ - $ -
State 10,202 10,298 14,328 18,332 37,093
-----------------------------------------------------------------------------------
Total current 10,202 10,298 14,328 18,332 37,093
-----------------------------------------------------------------------------------
Deferred:
Federal - - - - -
State - - - (12,656) 75,844
-----------------------------------------------------------------------------------
Total deferred - - - (20,729) 75,844
-----------------------------------------------------------------------------------
Total $ 10,202 $ 10,298 $ 14,328 $ 5,676 $ 112,937
===================================================================================
</TABLE>
F-24
<PAGE> 55
MFC Development Corp. and Subsidiaries
(A Subsidiary of FRM Nexus, Inc.)
Notes to Consolidated Financial Statements
10. INCOME TAXES (CONTINUED)
MFC and its subsidiaries file consolidated federal tax returns with Nexus, which
has no federal tax liability due to current and prior year net operating losses.
MFC and its subsidiaries file individual state tax returns.
Significant components of deferred tax assets (liabilities) were as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED YEARS ENDED
AUGUST 31 AUGUST 31 FEBRUARY 29 FEBRUARY 28
2000 1999 2000 1999 1998
----------------------------------------------------------------------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Tax loss carryforwards $ 834,139 $ 522,229 $ 728,169 $ 558,228 $ 314,773
Less valuation allowance (834,139) (522,229) (728,169) (558,228) (314,773)
----------------------------------------------------------------------------
Deferred tax assets $ - $ - $ - $ - $ -
============================================================================
Installment sale of real $ $
estate - - $ - $ - $ (12,656)
Property, plant and
equipment - - - - (8,073)
============================================================================
Deferred tax liabilities $ - $ - $ - $ - $ (20,729)
============================================================================
</TABLE>
The following is a reconciliation of the statutory federal and effective income
tax rates for the years ended:
<TABLE>
<CAPTION>
AUGUST 31 AUGUST 31 FEBRUARY 29 FEBRUARY 28,
2000 1999 2000 1999 1998
(UNAUDITED) (UNAUDITED)
---------------------------------------------------------------------------------
% OF % OF % OF % OF % OF
PRETAX PRETAX PRETAX PRETAX PRETAX
INCOME INCOME INCOME INCOME INCOME
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Statutory federal income tax
Expense rate (34.0)% (34.0)% (34.0)% (34.0)% 34.0%
Valuation allowance against
NOL carryforwards 34.0 34.0 34.0 34.0 (34.0)
State taxes, less federal
Tax effect 1.4 4.0 1.4 1.2 10.2
---------------------------------------------------------------------------------
1.4% 4.0% 1.4% 1.2% 10.2%
=================================================================================
</TABLE>
F-25
<PAGE> 56
MFC Development Corp. and Subsidiaries
(A Subsidiary of FRM Nexus, Inc.)
Notes to Consolidated Financial Statements
10. INCOME TAXES (CONTINUED)
Nexus has net operating loss carryforwards for federal purposes of approximately
$2,142,000. 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.
11. EXTRAORDINARY ITEM
During fiscal year 1998, the Company realized an extraordinary gain, net of fees
of $91,674, as a result of the extinguishment of certain debts. There was no
related tax effect since this occurred as a result of a discharge in bankruptcy
of a subsidiary of the Company.
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. 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 and received $1,575,000 (unaudited) in cash, resulting in a gain of
approximately $381,000 (unaudited) that was recorded during the six months ended
August 31, 2000. As a result of this sale, $125,000 (unaudited) of current debt
that was carried on Wendcello was eliminated. The results of operations of both
subsidiaries have been classified as discontinued operations and prior periods
have been restated.
F-26
<PAGE> 57
MFC Development Corp. and Subsidiaries
(A Subsidiary of FRM Nexus, Inc.)
Notes to Consolidated Financial Statements
12. DISCONTINUED OPERATIONS (CONTINUED)
The components of discontinued operations are as follows:
<TABLE>
<CAPTION>
AUGUST 31 FEBRUARY 29 FEBRUARY 28
2000 2000 1999
-----------------------------------------------------------
(UNAUDITED)
<S> <C> <C> <C>
Cash & cash equivalents $ - $ 328,607 $ 512,148
Inventories - 62,360 106,671
Other current assets - 146,552 244,830
Property and equipment, at cost - 2,352,846 6,683,319
Less accumulated depreciation and amortization - (1,548,005) (2,704,078)
Other assets - 536,579 767,212
-----------------------------------------------------------
Total assets - 1,878,939 5,610,102
-----------------------------------------------------------
Accounts payable and accrued expenses - 554,397 926,094
Other current liabilities - - 188,230
Long term debt - 149,650 2,412,835
-----------------------------------------------------------
Total liabilities - 704,047 3,527,159
-----------------------------------------------------------
Net assets of discontinued operations $ - $ 1,174,892 $ 2,082,943
===========================================================
</TABLE>
A summary of the results of discontinued operations for the food services
division is as follows for the periods ended:
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED YEARS ENDED
AUGUST 31 AUGUST 31 FEBRUARY 29 FEBRUARY 28
2000 1999 2000 1999 1998
----------------- ---------------- ----------------- ---------------- -----------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Operating revenues, including
gain on sale of subsidiary of
$381,182 in 2000 and $96,303
in 1999 $ 3,714,425 $ 6,893,149 $ 12,154,279 $ 17,092,610 $ 16,703,700
Operating expenses 3,316,091 6,556,679 11,785,817 16,778,542 16,165,374
----------------- ---------------- ----------------- ---------------- -----------------
Income from operations 398,334 336,470 368,462 314,068 538,326
Interest expense, net of
interest (income) (1,774) 42,697 40,831 202,627 184,263
----------------- ---------------- ----------------- ---------------- -----------------
Income before income taxes 400,108 293,773 327,631 111,441 354,063
Income taxes 1,080 1,250 2,416 (8,073) 36,195
----------------- ---------------- ----------------- ---------------- -----------------
Income from discontinued
Operations, net of taxes $ 399,028 $ 292,523 $ 325,215 $ 119,514 $ 317,868
================= ================ ================= ================ =================
</TABLE>
F-27
<PAGE> 58
MFC Development Corp. and Subsidiaries
(A Subsidiary of FRM Nexus, Inc.)
Notes to Consolidated Financial Statements
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 and net assets of discontinued
operations. The real estate segment operates in New York and Connecticut. The
medical financing segment operates in New York and New Jersey.
The accounting policies of the segments are the same as those described in the
summary of significant accounting policies. All inter-segment balances have been
eliminated. Inter-segment balances bear interest at the rate of 10% per annum
and are included in net interest expense. Business segment information follows.
Certain prior year information has been reclassified to conform with the current
year presentation.
F-28
<PAGE> 59
MFC Development Corp. and Subsidiaries
(A Subsidiary of FRM Nexus, Inc.)
Notes to Consolidated Financial Statements
13. BUSINESS SEGMENT INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
REAL MEDICAL
ESTATE FINANCING OTHER TOTAL
-------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FEBRUARY 29, 2000
Total revenue from external customers $ 1,250,128 $ 1,033,139 $ - $ 2,283,267
Income(loss) from operations 30,887 (554,184) (452,234) (975,531)
Interest expense,net (151,228) 178,864 - 27,636
Income(loss) from continuing operations before
provision for taxes and extraordinary items 182,115 (733,048) (452,234) (1,003,167)
Assets - continuing 4,689,627 2,996,317 2,103 7,688,047
Assets - discontinued - - 1,174,892 1,174,892
Total assets 4,689,627 2,996,317 1,176,995 8,862,939
Capital expenditures 4,185 131,033 1,248 136,466
Depreciation and amortization 7,280 54,196 250 61,726
FEBRUARY 28, 1999
Total revenue from external customers $ 415,920 $ 1,041,770 $ - $ 1,457,690
Income(loss) from operations 16,282 (37,667) (414,148) (435,533)
Interest expense,net (101,414) 146,288 - 44,874
Income(loss) from continuing operations before
provision for taxes and extraordinary items 117,696 (183,955) (414,148) (480,407)
Assets - continuing 4,915,858 3,494,477 2,836 8,413,171
Assets - discontinued - - 2,082,943 2,082,943
Total assets 4,915,858 3,494,477 2,085,779 10,496,114
Capital expenditures 17,420 91,001 - 108,421
Depreciation and amortization 5,911 23,999 - 29,910
FEBRUARY 28, 1998
Total revenue from external customers $2,408,775 $ 773,474 $ - $ 3,182,249
Income(loss) from operations 1,576,029 (71,035) (182,729) 1,322,265
Interest expense,net 140,372 70,407 - 210,779
Income(loss) from continuing operations before
provision for taxes and extraordinary items 1,435,657 (141,442) (182,729) 1,111,486
Assets - continuing 5,604,195 2,129,690 3,461 7,737,346
Assets - discontinued - - 2,196,492 2,196,492
Total assets 5,604,195 2,129,690 2,199,953 9,933,838
Capital expenditures 570,653 73,933 - 644,586
Depreciation and amortization 54,885 18,424 - 73,309
</TABLE>
F-29
<PAGE> 60
MFC Development Corp. and Subsidiaries
(A Subsidiary of FRM Nexus, Inc.)
Notes to Consolidated Financial Statements
13. BUSINESS SEGMENT INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
REAL MEDICAL
ESTATE FINANCING OTHER TOTAL
------------------------------------------------------------------
<S> <C> <C> <C> <C>
AUGUST 31, 2000 (UNAUDITED)
Total revenue from external customers $ 161,930 $ 863,329 $ - $ 1,025,259
Income(loss) from operations (67,497) (427,143) (205,902) (700,542)
Interest expense,net (22,282) 24,471 - 2,189
Income(loss) from continuing operations before
provision for taxes and extraordinary items (45,215) (451,614) (205,902) (702,731)
Assets - continuing 4,608,228 4,447,413 18,491 9,074,132
Assets - discontinued - - -
Total assets 4,608,228 4,447,413 18,491 9,074,132
Capital expenditures - 178,210 500 178,710
Depreciation and amortization 1,214 39,811 1,875 42,900
AUGUST 31, 1999 (UNAUDITED)
Total revenue from external customers $ 379,715 $ 609,581 $ - $ 989,296
Income(loss) from operations 12,059 (46,269) (188,944) (223,154)
Interest expense,net (78,418) 107,736 - 29,318
Income(loss) from continuing operations before
provision for taxes and extraordinary items 90,477 (154,005) (188,944) (252,472)
Assets - continuing 5,068,430 2,969,225 3,169 8,040,824
Assets - discontinued - - 1,356,466 1,356,466
Total assets 5,068,430 2,969,225 1,359,635 9,397,290
Capital expenditures - 67,406 - 67,406
Depreciation and amortization 3,221 25,034 - 28,255
</TABLE>
For the year ended February 28, 1998, net sales of the real estate division
included $1,932,994 of income due to changing from the financing method to the
full accrual method of accounting for the sale of real estate in Granby,
Connecticut.
F-30
<PAGE> 61
MFC Development Corp. and Subsidiaries
Consolidated Financial Statement Schedules
February 29, 2000
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
-----------------------------------------------------------------------------------------------------------------
ADDITIONS
-----------------------------------
BALANCE CHARGED TO CHARGED TO BALANCE
DESCRIPTION AT COSTS AND OTHER ACCOUNTS AT END
BEGINNING EXPENSES DESCRIBED DEDUCTIONS OF PERIOD
OF PERIOD
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
FEBRUARY 28, 1998
Allowance for credit losses $145,218 $ - $ - $ 72,352 $ 72,866
==================================================================================
FEBRUARY 28, 1999
Allowance for credit losses $ 72,866 $ 13,134 $ - $ - $ 86,000
==================================================================================
FEBRUARY 29, 2000
Allowance for credit losses $ 86,000 $126,488 $ - $ - $212,488
==================================================================================
</TABLE>
F-31
<PAGE> 62
MFC Development Corp. and Subsidiaries
Consolidated Financial Statement Schedules
Year ended February 29, 2000
SCHEDULE III--REAL ESTATE AND ACCUMULATED DEPRECIATION
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
--------------------------------------------------------------------------------------------------------------------------------
COST CAPITALIZED GROSS AMOUNT AT WHICH CARRIED
INITIAL COST TO COMPANY SUBSEQUENT TO ACQUISITION AT CLOSE OF PERIOD
------------------------------------------------------------------------------------------
BUILDINGS BUILDINGS
AND AND
ENCUM- IMPROVE- IMPROVE- CARRYING IMPROVE-
DESCRIPTIONS BRANCES LAND MENTS MENTS COST LAND MENTS TOTAL
--------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Partial investment in
condominium
development, Hunter, NY $ - $ - $ 569,179 $8,246 $78,455 $ - $655,880 $655,880
------------------------------------------------------------------------------------------------------
Total $ - $ - $ 569,179 $8,246 $ 78,455 $ - $655,880 $655,880
======================================================================================================
</TABLE>
<TABLE>
<CAPTION>
COLUMN A COLUMN F COLUMN G COLUMN H COLUMN I
-----------------------------------------------------------------------------
LIFE ON
WHICH
DEPRECIATION
IN LATEST
INCOME
ACCUMULATED DATE OF DATE STATEMENTS
DESCRIPTIONS DEPRECIATION CONSTRUCTION ACQUIRED IS COMPUTED
-----------------------------------------------------------------------------
<S> <S> <C> <C> <C>
Partial investment in
condominium
development, Hunter, NY
$- - 2/29/96 N/A
Total ------------
$-
============
</TABLE>
The following is a reconciliation of the total amount at which real estate was
carried for the years ended:
<TABLE>
<CAPTION>
FEBRUARY 29, February 28, February 28,
2000 1999 1998
--------------------------- -------------------------- --------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at beginning of period $1,497,443 $1,399,334 $1,383,258
Additions during period:
Other acquisitions $ - $ - $ -
Improvements, etc. - 2,246 6,000
Capitalized carrying costs 3,278 3,278 95,863 98,109 10,076 16,076
--------------------------- -------------------------- --------------------------
1,500,721 1,497,443 1,399,334
Deductions during period:
Cost of real estate sold 844,841 - -
------------- ------------ -------------
844,841 - -
-------------- -------------- -------------
Balance at close of period $ 655,880 $1,497,443 $1,399,334
============== ============== =============
</TABLE>
The Federal Income Tax Basis of the Hunter property is $945,880.
F-32
<PAGE> 63
MFC Development Corp. and Subsidiaries
Consolidated Financial Statement Schedules
Year ended February 29, 2000
SCHEDULE IV--MORTGAGE LOANS ON REAL ESTATE
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
----------------------------------------------------------------------------------------------
FINAL PERIODIC
INTEREST MATURITY PAYMENT PRIOR
DESCRIPTIONS RATE DATE TERM LIENS
----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
First Mortgages:
Unimproved land, Goshen, NY 6% 2/28/02 Interest only to -
maturity
Unimproved land, Goshen, NY 6 2/28/02 None -
Office building, Granby, CT 9 3/08/17 9,863 per month $2,600,000
</TABLE>
<TABLE>
<CAPTION>
COLUMN F COLUMN G COLUMN H
----------------------------------------------------
PRINCIPAL
AMOUNT OF LOANS
SUBJECT TO
FACE CARRYING DELINQUENT
AMOUNT OF AMOUNT OF PRINCIPAL OR
MORTGAGES MORTGAGES INTEREST
----------------------------------------------------
<S> <C> <C>
$ 500,000 $ 485,639 $500,000
1,810,000 1,746,342 -
1,031,482 1,031,482 -
--------------------------------------------------
$ 3,341,482 $ 3,263,463 $500,000
==================================================
</TABLE>
The following is a reconciliation of the total amount at which mortgage loans
were carried for the years ended:
<TABLE>
<CAPTION>
FEBRUARY 29, FEBRUARY 28, FEBRUARY 28,
2000 1999 1998
------------------------------- ------------------------------- -------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at beginning of period $ 3,216,684 $ 3,225,830 $ 2,503,236
Additions during period:
New mortgage loans $ - $ - $ 1,081,547
--------------- ---------------- -----------------
- - 1,081,547
---------------- --------------- --------------
3,216,684 3,225,830 3,584,783
Deductions during period:
Collection of principal 24,318 22,232 159,717
Change in unrealized
loss on mortgage and
notes receivable (71,097) (13,086) 162,202
Other--bad debts - - 37,034
--------------- ---------------- -----------------
(46,779) 9,146 358,953
---------------- --------------- --------------
Balance at close of period $ 3,263,463 $ 3,216,684 $ 3,225,830
================ =============== ==============
</TABLE>
F-33
