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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 3
TO
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)
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<S> <C>
Delaware 13-3579974
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
271 North Avenue New Rochelle, NY 10801
(Address of principal executive offices) (Zip Code)
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Registrant's telephone number, including area code (914) 636-0188
Securities to be registered pursuant to Section 12(g) of the Act:
Common Stock, Par Value $.001 Per Share
(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 FRMO Corp., formerly FRM Nexus,
Inc., a Delaware corporation ("FRM Corp."), since November 1993. On August 9,
2000 PSI Food Services Corp. changed its name to MFC Development Corp. That
corporation was the food services division of FRM Corp. consisting of two
subsidiaries, Wendclark, Inc. and Wendcello Corp., which operated Wendy's
Restaurants, 9 in West Virginia and 8 in upstate New York, respectively. The
food service division was discontinued on June 20, 2000. On May 14, 1999 the
outstanding capital stock of Wendclark, Inc. was sold for $975,000 in cash and
on June 20, 2000 the outstanding capital stock of Wendcello Corp. was sold for
$1,575,000 in cash. Gains of $96,303 and $381,182 were recorded on said sales
by FRM Corp. and PSI Food Services Corp., respectively. The results of the food
services operations have been classified as discontinued operations and prior
periods have been restated. The components of the discontinued operations are
set forth in Note 12 to Notes to Consolidated Financial Statements of MFC
herein.
On May 23, 2000 FRM Corp. decided to discontinue the food services
division and shift the focus of its business operations to medical services and
real estate because management believed that the investment of its resources in
that restaurant business would not be as profitable in the future as the
employment of those resources in the medical services and real estate divisions.
In June 2000, Lawrence J. Goldstein, who is the general partner of
Santa Monica Partners, LP, an owner of 200,000 shares of the common stock of FRM
Corp., introduced Steven Bregman and Murray Stahl of the Stahl-Bregman group,
described below, to Lester Tanner, who was then a director of FRM Corp., to
discuss a private investment in FRM Corp. By that time FRM Corp. had decided to
discontinue its food services business and develop an internet strategy for its
medical division for which it had not yet devoted any significant financial
resources. The Stahl-Bregman Group owned 8.2% of Kinetics Asset Management,
Inc., the investment advisor to The Internet Fund and over the course of the
negotiation FRM Corp. came to believe that the business experience of Messrs.
Stahl and Bregman in analysis and research of companies as well as
identification of companies in early stages of promising business strategies,
particularly in the internet sector could be an attractive opportunity for FRM
Corp. and its shareholders. See the discussion of "Continuing Business of FRM
Corp." which begins at page 11.
The Stahl-Bregman group did not wish to be engaged in the real estate
or medical business of FRM Corp. They were interested in pursuing business
strategies based on intellectual capital as well as financial risk management in
other sectors, and with a
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commitment to make a cash investment to give them a controlling interest. FRM
Corp. had continuing confidence that the real estate and medical divisions would
become profitable in the next fiscal year and was unwilling to sell any of its
common stock at the prevailing market value. On August 17, 2000 the parties
signed a Letter of Intent which provided for an agreement to satisfy both
objectives.
That Letter of Intent provided that the parties would seek to sign a
formal agreement by October 2, 2000. FRM Corp. would plan to spin-off the real
estate and medical operations with all the assets except for $10,000 in cash. In
that way the shareholders would continue to own the same pro-rata interests in
those operations and assets. The Stahl-Bregman Group would not own any part of
the Company being spun-off.
After the spin-off, current FRM shareholders will own 5% of FRM Corp.,
which will be recapitalized privately by the FRM Control Group purchasing
34,200,000 shares of common stock for $3,258,000 ($.095) per share); see pages
14-15. By retaining only $10,000 in cash in FRM Corp., the shareholders' book
value for the 1,800,000 shares outstanding was less than $.01 per share. By
fixing the price that the new Control Group will pay for their 95% ownership at
$.095 per share, the existing shareholders will realize an increase in book
value from about $.01 per share to about $.091 per share and the shares of the
new FRM Control Group will be diluted from about $.095 to about $.091 per share.
Book value of FRM Corp. does not take into account its existing structure and
status as a public company with a reporting history which was considered in the
transaction. The FRM Control Group will benefit from that as well as the $10,000
in cash remaining in FRM Corp.
The formal Agreement dated October 2, 2000 was signed and although it
is not to be consummated until after the distribution date of the spin-off it is
expected that the transaction will be closed in January 2001. FRM Corp. has
proceeded with the proposed spin-off and will complete the same before the
October 2, 2000 agreement is consummated and the spin-off is not contingent on
consummating that agreement.
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 its subsidiary 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 such 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, PSI Capital Corp. formed FRM N.Y.
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Capital LLC which was approved on November 28, 2000 by the Insurance Department
of the State of New York 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 such date as this registration statement becomes effective, 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 were
1,800,000 shares of common stock of FRM Corp. outstanding on the record date.
Accordingly, on the distribution date the 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 and MFC will own no shares of FRM Corp. after the
distribution date. The Board of Directors of FRM Corp. has approved an amendment
to its certificate of incorporation increasing its authorized common stock to
90,000,000 shares, par value $.001 per share and changing its corporate name to
FRMO Corp. The written consent of a majority of the outstanding common stock of
FRM Corp. to the amendment was received and the Certificate of Amendment was
filed on November 29, 2000.
The October 2, 2000 Agreement was made with the FRM Control Group
described at pages 13-15 and provides for a closing following the date of
distribution (the "Closing") at which FRM Corp. will issue to the FRM Control
Group a total of 34,200,000 shares of common stock of FRM Corp. (but not any
shares of MFC) for an aggregate consideration of $3,258,000 to be paid as set
forth below at pages 14-15.
FRM Corp. has filed its Quarterly Report on Form 10-Q for the six
months ended August 31, 2000. FRM Corp. has filed its 10-Q Report for the nine
months ended November 30, 2000 on the due date of January 16, 2001.
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
has filed its 10Q report for the nine months ended November 30, 2000 on the
due date of January 16, 2001.
The market value of the shares of MFC to be received by the
shareholders of FRM Corp. on the distribution date will not be taxable as
ordinary income 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. The Board
of Directors of MFC will determine the market value of its common stock on the
distribution date based on the average of the high bid price in the first 15
trading days after the distribution date and/or if the Board
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deems it necessary or appropriate an independent appraisal of market value. The
Company will inform the shareholders of that market value by February 28, 2001.
As noted at page 1, by the time FRM Corp was introduced to Steven
Bregman and Murray Stahl, it had decided to discontinue its food service
business and develop an internet strategy for its medical division. While FRM
Corp. had not devoted any significant financial resources to that strategy at
the time, management had learned that in the future, possibly far into the
future, the business conducted by its medical division will gravitate toward
companies that have an electronic capability of transmitting information and
employing intellectual capital. Management believes, however, that it is not a
wise business decision to have MFC proceed now with an internet strategy because
the capital and other commitments to do so would adversely affect the present
business of that division, which management believes will be profitable next
year in its present mode, which uses its web sites only for marketing. That
decision seems correct to the directors given a history of other companies which
had a good operating non-electronic-based business only to lose it because it
sought to convert important parts of its operations to e-commerce.
Management also concluded that it would be unwise for FRM Corp. to walk
away from the future it has seen in every field not only the medical field. That
future will be founded, in its opinion, on the "information highway" and the
employment of intellectual capital. Having started down this road already, the
introduction to Murray Stahl and Steven Bregman alerted the management of FRM
Corp. to the opportunity to obtain, what in its business judgment, is a special
expertise in intellectual capital. The negotiation which ensued was calculated
to find the best way from the standpoint of FRM's shareholders to pursue its
intellectual capital business purpose in a manner which holds out the potential
for significant growth in the value of its shares, after the MFC operations
which hold a different potential are placed outside the risks inherent in a
business whose value and earnings are based on intellectual capital.
The Company and FRM Corp. will be engaged, after the distribution of
the shares to be spun off, in different businesses. The Company will continue to
engage in the real estate and medical business as described herein. See the
chart of its subsidiaries below as the same will be in effect after the
spin-off. FRM Corp. will have no subsidiary after the spin-off and will pursue a
business plan that is not limited to the medical field. It will also use its new
management's experience to identify, and participate with, companies in early
stages of promising business strategies. See the discussion under "Continuing
Business of FRM Corp." beginning at page 11. The two websites which had been
established for the medical division, and referred to below, will belong to MFC
which will use it for marketing.
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The spin-off will enable each corporation to be identified by its
shareholders and trading markets for the separate businesses in which they
engage and focus on their different business sectors. This separation will
enhance access to the financial and business community by allowing each
corporation to raise capital and obtain lending facilities to take advantage of
growth opportunities in their respective business activities. Incentivizing
management and employees who do not already have significant equity interests
and the separation of the two corporations will permit each of them to issue
stock-based incentives linked specifically to the results of the operations of
one or the other corporation. After the spin-off of the Company, FRM Corp. will
be raising private equity capital from the FRM Control Group by the sale of its
common stock. See pages 14-15. The Company, which has no present intention to
sell common stock, will conduct its business as shown in this diagram or chart
of subsidiaries:
MFC DEVELOPMENT CORP.
WHOLLY OWNED SUBSIDIARIES EXCEPT WHERE NOTED
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MFC
Development Corp
Yolo Capital Yolo Equities Medical Nexus
Corp Corp PSI Capital Corp Financial Corp Garden City, LLC
Highlands Pollution FRM NY FRM
Control Corp Capital, LLC Court Street, LLC
(80% ownership)
Nexus
Borough Park, LLC
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DESCRIPTION OF BUSINESS OF MFC
MFC is engaged in the business of (i) developing real estate and (ii)
providing financing and management services to medical practices. On September
14, 2000, a subsidiary of the Company formed a majority-owned Limited Liability
Company to operate as a "certified capital company" pursuant to Sections 11 and
1511 of the New York State Tax Law (herein as "Capco") under the State's Capco
Program 3.
THE REAL ESTATE DIVISION of the Company presently conducts its
operations through PSI Capital Corp., Yolo Equities Corp. and Yolo Capital
Corp., wholly-owned subsidiaries which own the interests described below in
parcels of real estate. For the fiscal year ended February 29, 2000 and the six
months ended August 31, 2000, the total revenues derived from the real estate
division were $1,250,128 and $161,930 respectively, constituting 55% and 16% of
the total revenues of MFC. MFC controls the development, for residential and
commercial use, of this real estate which is located in New York and
Connecticut. See Note 4 of Notes to Consolidated Financial Statements herein. A
brief description of each parcel follows:
Goshen, New York. This property is to be developed pursuant to a subdivision
plan for the development of 165 single family homes in the Village of Goshen,
Orange County, New York, a growing suburban community 90 minutes from Manhattan.
The plan was agreed upon in settlement of a lawsuit between the Company and the
necessary officials of the Village of Goshen. The lawsuit had sought to enforce
a previously approved subdivision plan for a greater number of homes on the
property. It was settled by reducing the density of the subdivision to include
only 165 single family homes. The Planning Board of the Village of Goshen was a
party to this settlement and is currently reviewing a revised subdivision plan
for compliance with regulations of the applicable municipal agencies.
Participating in the settlement was Windemere in the Pines at Goshen, Inc., a
part of the Windemere Group of construction companies ("Windemere"), in which
Jed Schutz is an officer, director and shareholder. Mr. Schutz, a shareholder of
FRM Corp., was also a director of FRM Corp. until May 1999. FRM Corp. agreed
with Windemere on terms that assured it of the profit noted in the next
paragraph on the lots that were sold during fiscal 1996 and 1997, The
construction financing is to be provided by Windemere with the Company sharing
any profits to be realized in the construction and sale of the homes.
In February and August, 1996, MFC sold the 165 building lots to
Windemere for $2,499,150 to be paid principally from construction loan funding
plus an amount contingent on the amount of profit to be realized on the
construction and sale of the homes to be built on the lots. The sale was
accounted for using the installment method resulting in a deferral of profit, of
which $1,557,311 remains deferred as of November 9, 2000, until the initial and
continuing investment criteria is sufficient. That amount and any contingent
profit have not been reflected in the Company's net income. The balance of the
mortgage on 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. In September 2000 Windemere and the
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Company agreed in principle to seek a purchaser for the Goshen property rather
than develop the subdivision, provided the purchase price is acceptable to both
and will be for an amount which would require Windemere to prepay the Company's
mortgage plus all accrued interest. As long as Windemere is attempting to sell
the property, the Company does not intend to pursue the collection of interest
on the mortgage. Negotiations have taken place with two potential purchasers. No
agreement has yet been reached and sale efforts are continuing.
East Granby, Connecticut. The Company owned a partially built two-story office
building located at 2 Gateway Boulevard in East Granby, Connecticut which was
carried at the value of $900,000 on February 28, 1995. In the fiscal year ended
February 29, 1996, the Company spent about $1,300,000 in developing the site and
improving a portion of the building. In February 1996, the property was sold to
Gateway Granby, LLC. ("Gateway"), a limited liability company of which certain
members are shareholders of 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 has two wholly-owned subsidiaries, Yolo Equities Corp.,
which owns the fee interest in properties in Hunter, New York, along with
co-investors, and Yolo Capital Corp., which owns a mortgage on a portion of the
property which will be discharged as and when the properties are sold. The
co-investors, together receive 35% of the proceeds of the sales of Hunter
Properties made after June 30, 2000 after deducting the net costs of carrying
the properties paid by Yolo Equities Corp. after June 30, 2000 and the costs of
the sales (the "net proceed"). Yolo Equities Corp. receives 65% of the said net
proceeds. The properties consist of acreage in an area known as Hunter
Highlands, which is adjacent to the Hunter Mountain Ski Slopes in the town of
Hunter, Greene County, New York. The undeveloped portion of the acreage, which
Yolo Equities Corp. plans to develop, is zoned for single family residences,
condominium units and a hotel site. There is already constructed on the property
(i) a water treatment plant (owned by a wholly-owned subsidiary of the Yolo
Capital Corp., Highlands Pollution Control Corp.), (ii) a Clubhouse with
swimming pool and six tennis courts, (iii) a small office building and (iv) 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, based on one completed sale and sale
negotiations, that these properties have a fair market value at least equal to
the amount carried on its balance sheet at August 31, 2000. See Note 4 of Notes
to Consolidated Financial Statements.
On November 7, 2000 Yolo Equities Corp. received site approval from the
Planning Board of the Town of Hunter for the construction of a 200 room hotel on
the 10 acre hotel site which is contiguous to the ski slopes at Hunter Mountain.
In connection therewith the Company is proceeding to double the capacity of the
waste water treatment plant owned by Highlands Pollution Control Corp. That
corporation has the standard formal contract with the City of New York pursuant
to which the City has agreed to pay for the upgrade of all the
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waste water treatment facilities in New York City's Catskill watershed area (in
which Hunter is located) incorporating the latest technology in order to improve
the water quality in New York City. This expansion and upgrade is expected to
enhance the value of the Company's remaining property in Hunter, New York either
for development by Yolo Equities Corp. or sale to others.
Yolo Equities Corp. will seek to sell the clubhouse and office building
during the next year. The hotel site will be offered to a hotel or development
company with whom Yolo Equities Corp. can participate in the project without
further cash outlay. This will then leave Yolo Equities Corp. with about 70
acres of undeveloped land up the mountain contiguous to the Hunter ski slopes
for which there are no present plans for development. The owner of the ski
slopes expressed an interest recently in purchasing this land from Yolo Equities
Corp. and the capital stock of Highlands Pollution Control Corp. from Yolo
Capital Corp. While one meeting was held to explore the price, there have been
no further discussions since that time and Yolo Equities Corp. has decided to
defer any development or sale of those 70 acres while it is proceeding with the
hotel project.
Other Properties. The Company previously owned two parcels of undeveloped land
in Brookfield, Connecticut which it sold in December 1999. The property had a
carrying value of $490,000 and was sold for approximately $538,000, resulting in
a gain of approximately $44,000, net of closing costs. MFC, alone or with
co-investors and joint ventures, intends to acquire other lands for development
of residential, commercial and office structures, when management identifies
opportunities for enhancement of shareholder values.
THE MEDICAL DIVISION consists of (i) the three Limited Liability Companies
(Nexus Garden City, LLC, FRM Court Street, LLC and Nexus Borough Park) shown in
the chart at page 4, which act as service organizations for providers of medical
services and (ii) a wholly-owned subsidiary, Medical Financial Corp., which
purchases insurance company receivables, paying cash to the medical provider in
return for a negotiated fee. In the fiscal year ended February 29, 2000 and the
six months ended August 31, 2000, the total revenues of the Medical Division
were $1,033,139 and $863,329, respectively, constituting 45% and 84% of total
revenues of the Company. For its clients, this Division delivers management
services and increased liquidity, which is normally unavailable to medical
groups from traditional sources. The management services include inputting the
data on the customers' receivables into the Company's computer system,
processing the data and presenting the customers' bills to the insurance company
in compliance with regulations to facilitate payment, following up with
collection efforts if the bills are not paid promptly, furnishing weekly or
other periodic status reports of the customers' receivables and other
information relating to their medical practices. This division has not been
profitable due to insufficient business to cover the operating costs calculated
to service the additional clients which the Company anticipated and which have
been gradually added since August 31, 2000. Management believes that the
division will be profitable during the Company's next fiscal year because
purchases of receivables have increased in September and October 2000 due to new
business and increases from existing customers, a trend which the Company
expects to continue so that revenues will be higher as the receivables are
collected.
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THE CAPCO DIVISION was recently commenced by the filing on September 14, 2000 of
Articles of Organization in New York State for FRM N.Y. Capital LLC which is an
80% majority owned subsidiary of PSI Capital Corp., a wholly owned subsidiary of
MFC. This LLC was formed for the purpose of being approved as a "certified
capital company" pursuant to Sections 11 and 1511 of the New York State Tax Law
(herein a "Capco") under the Capco Program Three. A "certified capital company"
as used in this context is a "for profit" entity, such as a limited liability
company, located and qualified to conduct business in New York State which is
certified by the New York State Insurance Department ("Department") based on
standards set forth in the New York Tax Law (the "Statute"). The Capco was
approved on November 28, 2000 and certified to participate in New York's Capco
Program Three. The Statute creates a tax credit incentive mechanism to increase
investment of financial resources of insurance companies into providing venture
capital to businesses approved by the Department as qualified to provide jobs
and promote the growth of the economy in New York State ("Qualified
Businesses").
Now that the Capco has been certified, an insurance company can
purchase debt of the Capco up to $10 million and receive a dollar-for-dollar tax
credit spread out over a 10 year period beginning in 2002. Such an investing
insurance company is called a "Certified Investor" and the Capco will seek one
or more such investors for $10 million. Capco Program Three authorizes state tax
credits of up to $150 million for all insurance company participants. The Capco
will use (i) its own capital of $500,000, 80% of which was supplied by the
Company and 20% by Daniel Elstein who was a director of FRM Corp. in 1997-1998,
plus (ii) the investment of the Certified Investor to take substantial equity
interests in New York companies in order to encourage and assist them in
creating, developing and expanding their business. The Capco's emphasis will be
on viable small business enterprises which have had difficulty in attracting
institutional venture capital and which will expand employment opportunities in
New York thereby promoting the growth of the State's economy. By virtue of the
equity interests the 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 an active participant with the management of
its selected companies, in order to grow the values of the qualified company,
its own investment therein and the interest of the Certified Investor at the
same time that the enterprise contributes to more jobs and growth in New York
State.
MARKETING
The Company's marketing in its real estate activities is limited to
working with real estate brokers to sell the Goshen property and properties held
for sale in Hunter, N.Y.
The Medical Division has heretofore marketed its services to medical
groups through its own individual employees and consultants by direct contact
with potential customers recommended by existing customers and those who contact
MFC after receiving its brochure
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by direct mail solicitation. MFC designs its own brochure for such
solicitations. In fiscal 2000, MFC designed and obtained the names for two
websites, "medicalfinancial.com" and "mdhelp.com" and both websites will be
activated for marketing purposes by December 1, 2000.
The Capco Program will be marketed by the Managers of FRM N.Y. Capital
LLC who are experienced in the venture capital field.
COMPETITION
Real Estate Division:
The Company's presently owned real estate held for development and sale
is located in Hunter, New York and in joint venture with Windemere in Goshen,
New York. The real estate markets in those communities have been depressed in
the past years, so that competition has not been a factor. With the expectation
of improved demand and financing for purchasers, the Company will be competing
with many owners and developers in the locale to market properties which it
presently owns and which will be developed for sale.
Medical Division:
MFC competes with a wide variety of management and financial service
companies, including public companies, banks, and factoring companies (which
advance funds on the security of purchased receivables). The Company is very
small in relation to such competitors. However the Company's services are also
designed to serve a niche market and in its focus on purchasing and collecting
medical insurance claims of certain medical groups, the competition is limited
to only a few companies.
Capco:
The Company competes with many other Capco organizations for approval
by the New York Insurance Department for its Capco Programs. 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 about five larger and older Capcos for access
to such credits for the calendar year 2002.
TRADEMARKS - None.
EMPLOYEES
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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 October 2, 2000 Agreement is consummated after the spin-off
distribution date, the FRM Control Group, which includes the Stahl-Bregman Group
and the individuals listed on page 14-15 will own 95% of the 36,000,000 shares
of issued and outstanding common stock of FRM Corp. That Agreement provides that
said shares will be voted for the persons listed below as directors and officers
of FRM Corp. The business experience of the two persons who will be the
Chairman, Chief Executive Officer and President, Chief Operating Officer of FRM
Corp. after the proposed transaction is consummated, 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
management's 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. The continuing business of FRM Corp. in the context of the
overall transaction is, in the judgment of the present directors of FRM Corp.,
an important business consideration of the transaction.
FRM Corp. after the spin-off, will not be a development stage company
because its business plan will be commenced promptly after the October 22
Agreement is closed. Specifically a consulting arrangement is to be signed
effective January 1, 2001 whereby FRM Corp. will receive $21,600 a year from the
manager of Santa Monica Partners, L.P. for up to 54 hours per annum of access to
consultations with persons designated by Messrs. Stahl and Bregman, including
themselves. Other specific business activities which FRM Corp. expects to begin
very early in 2001 include (i) earning compensation for consulting on a
"synthetic short strategy" with managers of a private investment fund, (ii)
providing advisory services for special opportunities employing an intellectual
capital strategy and (iii) participating in a venture capital transaction
whereby FRM Corp. will have an interest and receive earnings based on the
contribution of the services of its personnel (its intellectual capital) rather
than an investment solely of financial capital.
In addition to these current specific activities, FRM Corp. will use
the experience of its management to identify companies in the early stages of
promising business strategies and to participate with them in ways that are
feasible and calculated to increase the value of the
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<PAGE> 13
shareholders' interest in FRM Corp. Such companies are expected to include, but
are not limited to, those whose values and earnings are based on intellectual
capital. The identification of the business opportunities will follow the
process whereby Horizon Research Group selects companies or strategies.
Horizon Research Group was co-founded by Murray Stahl and Steven
Bregman in 1994. It is an independent research firm serving primarily mutual
fund managers and the hedge fund community. Independent research is distinct
from traditional "sell side" research because it is paid for by subscription
directly by its readers rather than by the trading commissions and corporate
finance fees that support brokerage firm research. The great majority of "Wall
Street" research is produced by brokerage firms.
Horizon Research Group provides in-depth analysis of information-poor,
under-researched companies and strategies to find the complex or overlooked
situations which can offer an advantage to the investor. Horizon's research
periodicals are primarily The Contrarian Research Report, The Spin-Off Report,
The Intangible Asset Report, The Hidden Asset Report and The IPO Companion.
These reports are addressed to investment managers but the concepts and process
behind the reports are expected to identify business opportunities for FRM Corp.
in public and private companies.
The Contrarian Research Report identifies any company that offers investors an
asymmetric return - that is, where the likelihood of a positive return far
outweighs the likelihood of a loss. Its philosophy is to seek out of favor
investments whose low valuations serve to minimize risk. This contrasts with
conventional equity research that seeks to maximize the magnitude of a positive
return, with rather less focus on the consequences of being in error.
The Spin-Off Report provides an in-depth fundamental analysis of every domestic
tax-free spin-off, as well as a monthly calendar that monitors spin-offs in
progress, and interim facsimile notification of new announcements. It is the
only such publication of its kind and the only comprehensive source of
information about spin-off activity. Another adjunct to the service is a second
monthly calendar that highlights selected taxable spin-offs and arbitrage
opportunities that are worthy of interest. Spin-offs can be complex, typically
under-researched and represent a sub-set of the universe of companies that might
otherwise be considered Contrarian Research candidates.
The Intangible Asset Report is dedicated to the identification of companies that
are notable for the intangible human element behind value creation. Typical
examples include companies undergoing a change in management or whose management
is engaged in a focused or unique strategy that is creating shareholder value.
Like The Spin-Off Report, this service provides both a monthly calendar or
digest of companies, grouped by activist shareholder and management niche, and
monthly research reports that focus on individual companies worthy of
recommendation.
The Hidden Asset Report is a monthly publication that focuses on growth stocks
that either represent an underevaluation opportunity relative to typical growth
stock benchmarks, or an
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<PAGE> 14
emerging theme. They usually include an asset or strategic opportunity that has
not yet been expressed in the financial statements, which are backward-looking
and therefore cannot be screened for forward-looking evaluation. The risk
profile is typically higher than for Contrarian Research.
The IPO Companion serves to identify what might be referred to as a proto-IPO,
which is a successful venture capital investment contained within a company and
for which one can visualize a circumstance in which the so-called proto-IPO will
become a publicly traded vehicle. Consequently, a purchase of an otherwise
pedestrian company will in reality be a purchase of an IPO before it actually
becomes an IPO. The goal is to provide superior valuations as well as superior
investment characteristics.
The present directors of FRM Corp. have exercised their business
judgment in concluding that this transaction will enhance the shareholders'
prospects for growth in the values of both corporations once they are separated.
The shareholders of FRM Corp. will receive the shares of MFC without any payment
for them. Shareholders do not surrender their shares of FRM Corp. and need take
no action in order to receive the shares of MFC.
FRM CONTROL GROUP
MURRAY STAHL and STEVEN BREGMAN are not current officers of FRM. They
are the principal persons in the Stahl-Bregman Group which is expected to
control FRM Corp. after the spin-off distribution date by purchasing the
additional common stock of FRM Corp., with the other persons in the FRM Control
Corp., for the consideration stated on the next page. They have worked together
at Horizon Asset Management, Inc. and before that at Bankers Trust Company. They
are also part of the ownership at Kinetics Asset Management, Inc. which is the
investment adviser to nine mutual funds, including The Internet Fund, the
largest of the nine funds.
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 division of
Bankers Trust Company. Mr. Stahl was also deeply involved in new product
development. If the transaction described at pages 1-4 above is completed, it is
expected that Murray Stahl will be elected Chairman and Chief Executive Officer
of FRM Corp.
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
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<PAGE> 15
small and large for equity investment. If the transaction described at pages 1-4
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 division of Bankers Trust Company.
Steven Bregman served as a 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.
The 34,200,000 shares of common stock of FRM Corp. expected to be sold
after the spin-off distribution date described at pages 1-4 above, will be
issued to the FRM Control Group as follows:
(i) 28,800,000 shares of common stock of FRM Corp. will be
issued to Peter Doyle, as Voting Trustee of 8.1% of the issued and
outstanding shares of Kinetics Asset Management Inc. ("Kinetics") and
Murray Stahl (the "Stahl Bregman Group") for $2,880,000, payable as set
forth below. The Stahl Bregman Group includes Murray Stahl, Steven
Bregman, John Meditz, Peter Doyle, Catherine Bradford, Thomas C. Ewing
and Katherine Ewing. That group will be in control of FRM Corp. and
together with the persons named below are referred to herein as the
"FRM Control Group". None of the seven persons in the Stahl Bregman
Group are presently officers, directors or owners of as much as 5% of
the outstanding common stock of FRM Corp. The 28,800,000 shares will be
issued to the Stahl Bregman Group at the Closing but will be held in
escrow and delivered as paid at the rate of ten cents ($.10) per share.
The Stahl Bregman Group is obligated to pay to FRM Corp. the after tax
amount (fixed at 54% of the dividend) of all dividends they receive
from Kinetics until the total of $2,880,000 has been paid. Presently
those dividends are in the range of $1,000,000 per annum ($540,000
after taxes) and as received (presently monthly) they must be paid to
FRM Corp. in exchange for which shares of FRM Corp. will delivered by
the escrow agent at the rate of $.10 per share. Based on the current
rate of the Kinetics dividends the total paid to FRM over five years
would be $2,700,000 but, for the reasons set forth in the next
sentence, the Stahl Bregman Group expects the $2,880,000 to be paid to
FRM in five years or less. The aforesaid installment payments may be
higher or lower than the aforesaid rate depending on actual future
dividends and the Stahl Bregman Group may make other payments in
addition each month at its discretion but the payment based on the
Kinetics dividend shall be obligatory until the fixed purchase is paid.
The members of the Stahl Bregman Group have no obligation other than to
pay the net dividends from Kinetics until the fixed purchase price is
paid. The Stahl Bregman Group agrees that it will not divest itself of
any part of its Kinetics shares or change the character of its
ownership so as to reduce the pro-rata share of the dividends it
currently receives from Kinetics without, as a condition thereof,
paying toward the
14
<PAGE> 16
fixed purchase price of its FRM shares the after-tax proceeds of that
part divested, as if the divestment had not occurred.
(ii) 3,600,000 shares of common stock of FRM Corp. will be
issued to Lestar Partners, LLC, ("LPC") a New York Limited Liability
Company owned by Lester Tanner, President and a director of FRM and
MFC, together with members of his family, for $360,000 payable as set
forth below. The 3,600,000 shares will be issued to LPC at the Closing
but will be held in escrow and delivered as paid at the rate of ten
cents ($.10) per share. LPC is obligated to pay to FRM Corp. in cash an
amount equal to 12.5% of each payment made by the Stahl Bregman Group
until the purchase price of $360,000 is paid.
(iii) 1,800,000 shares of common stock of FRM Corp. will be
issued to Lawrence J. Goldstein at the Closing for $18,000 payable at
the Closing. Mr. Goldstein is the General Partner of Santa Monica
Partners, LP, a private fund which owns 200,000 shares of common stock
of FRM Corp.
FORWARD-LOOKING STATEMENTS AND RISK FACTORS
Some of the information in this Form 10, including the risk factors
listed below, contain "forward looking statements" that involve risk and
uncertainties. "Forward-looking statements" are those that relate to continuing
business and the Company's future financial performance. In many cases,
forward-looking statements can be identified by words such as: "anticipate",
"believe", "continue", "estimate", "expect", "may", "plan", "potential",
"predict", "should", "will", or the negative of such words and other comparable
terminology that bespeak of the future rather than historical fact.
Undue reliance should not be placed on these statements, which speak
only as of the date that they were made. Actual results could differ materially
from those anticipated in these forward-looking statements as a result of
certain factors, including the risks described below and elsewhere in this Form
10. The Company does not undertake any obligation to publicly update any
revisions to forward-looking statements to reflect later circumstances or to
reflect the occurrence of unanticipated events.
The Company believes it is important to communicate its expectations to
shareholders. However, there may be events in the future that management is not
able to predict accurately or over which it has no control. The risk factors
listed below, as well as any cautionary language in this Form 10 provide
examples of risks, uncertainties and events that may cause actual results to
differ materially from the expectations described in the forward-looking
statements.
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<PAGE> 17
RISK FACTORS
THE COMPANY INCURRED NET LOSSES OF $366,569, $692,280 AND $313,905 FOR THE
FISCAL YEARS ENDED FEBRUARY 28, 1999, FEBRUARY 29, 2000 AND THE SIX MONTHS ENDED
AUGUST 31, 2000, RESPECTIVELY, AND MAY NEVER BECOME PROFITABLE.
There is a risk that the Company may never become profitable. In
addition to the Company-wide net losses described above the Company's Medical
Division has never been profitable and has reported negative cash flows from
operating activities since it was formed by the Company in 1994. The results in
the Company's 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 deferred to a future period. The profitability of the Real
Estate Division will depend on the availability of financing and the market for
development and sales in upstate New York at Hunter and Goshen, areas which have
lagged behind the general economy in New York City and the nation. The Company's
new Capco Division is not expected to begin its operations until 2001 and will
not contribute to the Company's net income, if at all, until later years because
the Qualified Businesses in which it will invest will be in early stages of
development and will have limited or no revenues.
THE COMPANY MAY LACK THE FINANCIAL RESOURCES NEEDED TO CONDUCT AND EXPAND ITS
BUSINESS.
The Company's Medical Division requires increased amounts of cash as
its customer base expands in order to purchase the growing receivables from that
base and realize net income in the division. The Company believes that its cash
needs for this fiscal year will be met from an existing $500,000 credit line,
the continued sale of real estate and available cash. Depending on the rate of
growth of this division's business, the Company expects to require an increased
credit line in the fiscal year beginning March 1, 2001 and if this does not
become available from banks or other institutional lenders, it will have to pay
interest rates higher than the prevailing prime rate. The existing credit line
of $500,000 is from a related party and bears an annual interest rate at 5 1/2%
above the current 9 1/2% prime rate, and it is prepayable only on six months
prior notice. The business of the Company's Capco Division depends on its
ability to raise capital from one or more insurance companies which can receive
state income tax credit incentives for their investment in this New York State
program. The Real Estate Division's real properties in Hunter, New York are
owned free and clear of mortgages but further development, at any significant
cost, has to be funded by asset-based financing and/or joint ventures with other
developers. The profitability of the Company's interest in the real estate at
Goshen, NY depends on whether the property is sold or developed by the Windemere
Group.
THE COMPANY'S COMMON STOCK HAS NEVER BEEN PUBLICLY TRADED, THE PRICE MAY
FLUCTUATE SIGNIFICANTLY AND A MARKET MAY NOT DEVELOP FOR ITS SHARES.
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<PAGE> 18
There has never been a market for the common stock of MFC Development
Corp. and trading on the NASDAQ Bulletin Board may not happen promptly or at
all. An active trading market may not develop even if listed on the NASDAQ
Bulletin Board or, if developed, may not be sustained.
BECAUSE THERE ARE A FEW SHAREHOLDERS WHO OWN MORE THAN 50% OF THE COMPANY'S
COMMON STOCK, OTHER SHAREHOLDERS MAY HAVE NO EFFECTIVE VOTING POWER OR CONTROL
OVER THE COMPANY'S AFFAIRS OR DECISIONS.
After the distribution date of the spin-off, there will be six officers
and directors of the Company who, together with one former director and one
shareholder, hold just over 50% of the issued and outstanding shares of common
stock (see page 16) and the other shareholders will effectively have no control
over the Company's operations or future business decisions. The Company's
management control over its affairs will include the power to (i) elect
directors, (ii) appoint management and (iii) approve, without a shareholders'
meeting or vote, any action that usually requires shareholder authorization,
including the adoption of amendments to the certificate of incorporation and
approval of mergers or sales of substantially all of the Company's assets.
BECAUSE THE COMPANY MAY, AT SOME TIME IN THE FUTURE, ISSUE ADDITIONAL
SECURITIES, SHAREHOLDERS ARE SUBJECT TO DILUTION OF THEIR OWNERSHIP.
Although the Company has no present intention to raise additional
capital through the issuance of additional shares of common stock or convertible
preferred stock, it may at some time in the future do so. Any such issuance
would likely dilute shareholders' ownership interest in the Company and may have
an adverse impact on the price of the Company's common stock. In addition shares
of common stock issued upon exercise of the Company's presently outstanding
options for 3,000 shares and future annual stock options for 1,500 shares to
each non-employee director, who does not own as much as 5% of the Company's
stock, will dilute the shareholders' ownership interest. The Company does not
presently have a Stock Option Plan for key management personnel but plans to
adopt one in the future and the exercise of options issued under such a plan
will also dilute the shareholders' ownership interest.
GOVERNMENT REGULATIONS AND LEGAL UNCERTAINTIES MAY PLACE FINANCIAL BURDENS ON
THE COMPANY'S BUSINESS.
The Company's customers in the Medical Division are medical
practitioners who are currently subject to federal and state laws and
regulations directly affecting their practices, including the manner and extent
of providing medical care, billing, collection and reimbursement requirements.
Moreover new laws and regulations may be adopted which will adversely affect the
customers of the Company as well as the Company's ability to be profitable on
its business dealings with its customers. These factors may place additional
burdens on the Company's business, decrease revenues from the Medical Division
and impede its growth. The Company's Capco Division is, and will continue to be,
subject to
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New York State law requirements and a failure by the division to meet any of
these requirements could subject the Capco to a material loss.
MARKET PRICES OF FRM CORP.'S COMMON STOCK
There has never been a public market for the Company's common stock. However,
the Company's present parent company is FRM Corp. and its common stock commenced
trading on the NASDAQ Bulletin Board after August 28, 1998 under the symbol
FRMO. The following table sets forth the range of high and low bid quotations of
FRM Corp. common stock for the periods set forth below, as reported by the
National Quotation Bureau, Inc. Such quotations represent inter-dealer
quotations, without adjustment for retail markets, markdowns or commissions, and
do not necessarily represent actual transactions.
<TABLE>
<CAPTION>
FISCAL PERIOD
COMMON STOCK
------------
HIGH BID LOW BID
-------- -------
<S> <C> <C>
1999
3rd Fiscal Quarter (9/1/98 - 11/30/98) $3.75 $0.5625
4th Fiscal Quarter (12/1/98 - 2/28/99) $1.875 $0.875
2000
1st Fiscal Quarter (3/1 - 5/31/99) $1.375 $0.875
2nd Fiscal Quarter (6/1 - 8/31/99) $1.0625 $1.75
3rd Fiscal Quarter (9/1/99 - 11/30/99) $1.8125 $1.75
4th Fiscal Quarter (12/1/99 - 2/28/00) $1.5625 $1.125
2001
1st Fiscal Quarter (3/1 - 5/31/00) $2.5 $1.03125
2nd Fiscal Quarter (6/1 - 8/31/00) $1.96875 $1.0456
</TABLE>
The bid and asked quote on November 30, 2000 was $1.25 bid and $1.375 asked.
DIVIDENDS
No cash dividend has been paid by the FRM Corp. or the Company since their
inception. The Company has no present intention of paying any cash dividends on
its common stock. FRM Corp. had a stock split in 1998 on a 3 for 2 basis, which
was accounted for as a common stock dividend of one share of common stock for
every two shares of common
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stock owned of record on June 24, 1998. Holders of record on that date received
the additional shares on July 14, 1998. FRM Corp. is spinning-off the common
stock of the Company on the distribution date as described herein and that
distribution will be accounted for as a dividend.
HOLDERS
As of November 1, 2000, there were approximately 1,100 holders of record of FRM
Corp. common stock representing about 2,500 beneficial owners of its shares.
There are no options or warrants to purchase common stock of FRM Corp. or the
Company outstanding except for two options to purchase a total of 3,000 shares
held by Allan Kornfeld, Chairman of the Company. The Company does not know of
any shares of common stock of FRM Corp. that are held by any director, officer
or holder of as much as 5% of the outstanding stock for sale pursuant to a
filing under Rule 144 of the Securities Act. The Company has not agreed to
register any common stock for sale under the Securities by any shareholder or
the Company, the offering of which could have a material effect on the market
price of the Company's common equity.
PRESENT BENEFICIAL OWNERSHIP OF COMMON SHARES
The table below is as of November 1, 2000 and shows the beneficial ownership of
the FRM Corp. common stock by (i) each person who is the beneficial owner of
more than 5% of the outstanding common shares, (ii) each executive officer and
director, (iii) all executive officers and directors of the Company as a group
and (iv) all of the nine shareholders as a group. After the spin-off
distribution date said persons will own the same number of shares of the
Company's common stock and the same percentage as shown below.
<TABLE>
<CAPTION>
NUMBER OF COMMON SHARES PERCENT
BENEFICIALLY OWNED OF CLASS
----------------------- --------
<S> <C> <C>
Seth Grossman (a)(b) 169,156 9.4%
Victor Brodsky (b) 22,400 1.2%
Deborah Knowlton (b) 150 --
Allan Kornfeld (c) 550 --
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 8.5%
Santa Monica Partners, LP (c) 200,000 11.1%
</TABLE>
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<PAGE> 21
<TABLE>
<S> <C> <C>
All executive officers and directors (7 persons) 551,446 30.6%
All nine shareholders above as a group 904,102 50.2%
</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 is 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 July 20, 2004 and 1,500 shares of common
stock at $1.75 per share expiring 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, a former director of FRM Corp.,
is 24 Borden Lane, East Hampton, N.Y. 11937. The address of Santa Monica
Partners, L.P. 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.
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 herein and in the Company's reports filed and to be filed
from time to time with the Commission. The discussion and analysis below is
based on the Company's Consolidated Financial Statements and related Notes
thereto included herein and incorporated herein by reference.
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<PAGE> 22
OVERVIEW
MFC generates revenues from two business segments: real estate and medical. The
real estate segment consists of various parcels of real estate, held for future
development and sale, in which co-investors also have interests, and mortgage
notes receivable on two properties that were previously sold. The medical
segment consists of three Limited Liability Companies which act as service
organizations for providers of medical services and a wholly-owned subsidiary,
Medical Financial Corp., which purchases medical insurance claims receivable,
paying cash to the medical provider in return for a negotiated fee.
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. 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.
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 of $142,000 in the sales of real estate in 2000 as compared to 1999.
Rental income decreased by $5,000 in 2000 because rent is no longer being
received on the properties that were sold during the remainder of fiscal 2000.
The $71,000 decrease in interest from mortgages was attributable to a decrease
in accrued interest income on the mortgage receivable from the property located
in Goshen, NY. Interest is no longer being accrued on this mortgage because the
annual interest payment that was due in February 2000 has not been paid.
The $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
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<PAGE> 23
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. If the Company is more
selective in the determining which bills to purchase, the collection process
will be more efficient, since the insurance companies are less likely to delay
or question certain procedures. This reduces the cost and time of the Company's
collection effort for that batch and results in a more rapid collection of the
advance and the fee.
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 clients with properly
trained employees.
The increase in corporate expenses in the six month period ended in 2000 is
primarily due to cost
22
<PAGE> 24
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 the medical division, $38,000 in corporate
expenses and $32,000 in depreciation and amortization.
23
<PAGE> 25
The increase of $818,000 in costs and expenses in the real estate division is
attributable to cost of sales of the properties that were sold in the amount of
$892,000, offset by a decrease in operating expenses of $74,000. The cost of
sales of the Hunter property, which was $398,000, and the Brookfield property,
which was $494,000, resulted in a total gain of $49,000. The decrease in
operating expenses in 2000 was due to a greater amount of professional fees in
1999, which were incurred during the successful litigation regarding ownership
rights of the Hunter property. In addition, there was a decrease in operating
expenses after the Hunter and Brookfield properties were sold.
The costs and expenses in the medical division in 2000 was $1,533,000, an
increase of $478,000 from 1999. The greatest component of the increase in 2000
was attributable to additional expenses incurred that were needed to properly
service the existing and projected client base. These expenses included an
additional $219,000 on staff and related employment costs and $40,000 on
occupancy and office costs. The infrastructure of the company as established,
can now service a greater number of clients than currently exists. This is
necessary to efficiently service expected new clients with properly trained
employees. In 2000, to provide additional services to finance clients, three new
subsidiaries were formed to manage the operations of certain medical practices.
These new subsidiaries, also referred to as management companies, incurred
approximately $79,000 of start up costs in 2000. In addition, the reserve for
bad debts was increased by $126,000 in 2000. The increase in reserves is due to
three major insurance companies challenging the corporate structure of a
significant client. Management has commenced additional collection procedures to
mitigate the effect of this challenge. The Company may incur a bad debt loss
when the portion of a medical claim collected does not exceed the advance
(including the fee charged) given to the client. The Company also has other
contractual rights to help minimize its risk of loss. The Company continually
monitors the aging of the uncollected medical claims as it relates to its
advances and establishes a reserve deemed adequate to cover potential losses.
The $38,000 increase in corporate expenses in 2000 is primarily due to
additional professional fees incurred, offset by the reduction and stabilization
of new costs in 1999 related to the initial registration of the Company's common
stock pursuant to the Securities and Exchange Act of 1934 in 1998. The $32,000
net decrease in depreciation and amortization is attributable to the sale of the
Wendclark subsidiary on May 14, 1999, offset by additional depreciation as a
result of increased capital expenditures in the medical division.
Interest expense in 2000 was $42,000, a decrease of $17,000 from $59,000 in
1999. The decrease was attributable to the use of a portion of the proceeds from
the sale of the Wendclark subsidiary in May 1999, to repay amounts that had been
borrowed to finance the purchase of medical claims receivable.
Income from discontinued operations increased by $205,000, to $325,000 in 2000
from $120,000 in 1999. The net increase was due to (i) a $577,000 increase in
revenues offset by a $544,000 increase in costs and expenses from the eight
restaurants that operated in the Wendcello subsidiary, (ii) $96,000 gain on the
sale of the Wendclark subsidiary and (iii) the
24
<PAGE> 26
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
revenues 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 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
25
<PAGE> 27
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, which included the operations of the
Wendclark and Wendcello subsidiaries, 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 and discontinued operations
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 and
discontinued operations 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 based on
its on-going negotiations with prospective new clients which are expected to be
obtained in the next few months. These prospective clients will result in an
increase in the amount of cash needed to purchase their medical insurance claims
receivable. The funds for those needs are expected to be provided from the
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, due to the elimination of carrying costs on the real estate
that was sold during the year ended February 29, 2000 and the six months ended
August 31, 2000. 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
26
<PAGE> 28
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 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
$474,000, as compared to $122,000 being used in the same period in 1999. The
$352,000 increase in the use of cash in 2000 was due to a net loss for the six
months ended in 2000 of $314,000 (net of $381,000 gain on sale of subsidiary) as
compared to a net profit of $30,000 (includes gain on sale of subsidiary of
$96,000) 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 (including net assets of discontinued operations) primarily
caused by timing differences.
Cash provided by operations for the year ended in 2000 was $117,000, as compared
to $479,000 being used in 1999. The $596,000 increase in 2000 was due to
$845,000 of proceeds from the sale of real estate, offset by a $325,000 (net of
$381,000 gain on sale of subsidiary) increase in the net loss for the year and
fluctuations in operating assets and liabilities (including net assets of
discontinued operations) primarily caused by timing differences.
Cash provided by investing activities was $636,000 in for the six months ended
in 2000 as compared with $1,273,000 being provided in 1999. The net decrease of
$637,000 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 $600,000 from discontinued
operations, resulting from the sale of the Wendcello subsidiary in June 2000.
Cash provided by investing activities was $1,080,000 for the year ended in 2000
as compared with $770,000 being used in 1999. The net increase of $1,850,000 was
primarily due to the $975,000 proceeds from the sale of the Wendclark
subsidiary. 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
27
<PAGE> 29
$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 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.
28
<PAGE> 30
MFC Development Corp. and Subsidiaries
Selected Consolidated Financial Data
<TABLE>
<CAPTION>
Six Months Ended
--------------------------
August 31, August 31,
2000 1999
----------- -----------
(Unaudited)
<S> <C> <C>
Income Statement Data:
Total Revenue $ 1,025,259 $ 989,296
Costs and expenses 1,725,801 1,212,450
----------- -----------
(Loss) income from operations (700,542) (223,154)
Interest (expense) net of interest income (2,189) (29,318)
----------- -----------
(Loss) income from continuing
operations before provision for
income taxes and extraordinary item (702,731) (252,472)
Provision for income taxes 10,202 10,298
----------- -----------
(Loss) income from continuing operations (712,933) (262,770)
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
----------- -----------
(Loss) income before extraordinary items (313,905) 29,753
Extraordinary income net of taxes -- --
----------- -----------
Net (loss) income $ (313,905) $ 29,753
=========== ===========
(Loss) earnings per common share:
(Loss) income from continuing operations $ (0.39) $ (0.14)
Income from discontinued operations 0.22 0.16
----------- -----------
(Loss) income before extraordinary items (0.17) 0.02
Extraordinary income net of taxes -- --
----------- -----------
Basic and diluted earnings
(Loss) income per common share $ (0.17) $ 0.02
=========== ===========
Number of shares used in computation of
of basic and diluted earnings per share 1,814,404 1,816,462
=========== ===========
</TABLE>
<TABLE>
<CAPTION>
Fiscal Year Ended
------------------------------------------------------------------------
February 29, February 28, February 28, February 28, February 29,
2000 1999 1998 1997 1996
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Income Statement Data:
Total Revenue $ 2,283,267 $ 1,457,690 $ 3,182,249 $ 1,036,149 $ 546,359
Costs and expenses 3,258,798 1,893,223 1,859,984 2,252,700 711,202
----------- ----------- ----------- ----------- -----------
(Loss) income from operations (975,531) (435,533) 1,322,265 (1,216,551) (164,843)
Interest (expense) net of interest income (27,636) (44,874) (210,779) (129,463) 25,644
----------- ----------- ----------- ----------- -----------
(Loss) income from continuing
operations before provision for
income taxes and extraordinary item (1,003,167) (480,407) 1,111,486 (1,346,014) (139,199)
Provision for income taxes 14,328 5,676 112,937 (16,161) 33,189
----------- ----------- ----------- ----------- -----------
(Loss) income from continuing operations (1,017,495) (486,083) 998,549 (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 325,215 119,514 317,868 70,844 (54,584)
----------- ----------- ----------- ----------- -----------
(Loss) income before extraordinary items (692,280) (366,569) 1,316,417 (1,259,009) (226,972)
Extraordinary income net of taxes -- -- 91,674 -- --
----------- ----------- ----------- ----------- -----------
Net (loss) income $ (692,280) $ (366,569) $ 1,408,091 $(1,259,009) $ (226,972)
=========== =========== =========== =========== ===========
(Loss) earnings per common share:
(Loss) income from continuing operations $ (0.56) $ (0.27) $ 0.55 $ (0.73) $ (0.09)
Income from discontinued operations 0.18 0.07 0.17 0.04 (0.03)
----------- ----------- ----------- ----------- -----------
(Loss) income before extraordinary items (0.38) (0.20) 0.72 (0.69) (0.12)
Extraordinary income net of taxes -- -- 0.05 -- --
----------- ----------- ----------- ----------- -----------
Basic and diluted earnings
(Loss) income per common share $ (0.38) $ (0.20) $ 0.77 $ (0.69) $ (0.12)
=========== =========== =========== =========== ===========
Number of shares used in computation of
of basic and diluted earnings per share 1,816,462 1,816,462 1,816,462 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 $ 8,989,949 $ 9,235,088 $ 8,778,756 $10,483,028 $ 9,771,636 $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 $ 4,343,672 $ 5,407,945 $ 4,685,912 $ 5,378,192 $ 5,745,076 $ 4,336,985 $ 5,606,310
=========== =========== =========== =========== =========== =========== ===========
Book value per share $ 2.39 $ 2.98 $ 2.58 $ 2.96 $ 3.16 $ 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.
29
<PAGE> 31
ITEM 2 (CONTINUED) QUANTITATIVE AND
QUALITATIVE DISCLOSURES OF MARKET RISK
The Company's market risk arises principally from the interest rate
risk related to its receivables. Interest rate risk is a consequence of having
fixed interest rate receivables. The Company is exposed to interest rate risk
arising from changes in the level of interest rates. It is anticipated that the
fair market value of debt with a fixed interest rate will increase as interest
rates fall and the fair market value will decrease as interest rates rise.
ITEM 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.
Item 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The table below is as of November 1, 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.
30
<PAGE> 32
<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, NY 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, NY 10001. The address of Anders Sterner is 195 Adams
Street, Brooklyn, NY 11201. The address of Jed Schutz, is 24 Borden
Lane, East Hampton, NY 11937. The address of Santa Monica Partners,
1865 Palmer Avenue, Larchmont, NY 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.
31
<PAGE> 33
ITEM 5. DIRECTORS AND EXECUTIVE OFFICERS.
DIRECTORS
The directors of the Company until the next annual meeting of shareholders on
July 19, 2001 are the following five persons:
--------------------------------------------------------------------------------
SETH GROSSMAN
Age: 33
Director Since: January 1994
Principal Occupation: Chairman and CEO of Panacea Medical Services
Recent Business
Experience: Mr. Grossman was the President and CEO of FRM Corp.
and PSI Food Services Corp. 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 FRM
Corp. from March 1, 1998 to date and of PSI Food
Services
32
<PAGE> 34
Corp., from March 1, 1998 until its name was changed
to MFC Development Corp. where he has continued to be
Chairman to date.
--------------------------------------------------------------------------------
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 FRM Corp. since August 1, 2000,
President of MFC since August 9, 2000 and a partner
at Tanner Propp,
33
<PAGE> 35
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.
OFFICERS
The executive officers of the Company until the next annual meeting of the Board
of Directors on July 19, 2001 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>
Victor Brodsky, 42, has been Vice President and Chief Financial Officer of PSI
Food Services Corp. from April 8, 1998 until its name was changed to MFC and
since then to the present date. He is a certified public accountant and for the
period 1982-1998 he was a Manager at the CPA firm of Michael & Adest. Deborah
Knowlton, 49, has been Secretary, Treasurer of PSI Food Services Corp. (and MFC
after the name change) from February 28, 1997 to date. For 8 years prior thereto
Ms. Knowlton was the office manager of Somersault, Inc., a distributor of
watches.
MEETINGS AND COMMITTEES
Since the last annual meeting of shareholders on July 20, 2000, the
Board of Directors held three 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
34
<PAGE> 36
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.
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.
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
35
<PAGE> 37
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 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, Allan Kornfeld
since March 1, 1998, received $10,000 per
36
<PAGE> 38
annum (increased to $12,500 per annum as of June 1, 2000) as a director in
addition to the compensation for attending meetings and the options described
below in this paragraph. 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. See also Item 12 herein.
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 that line of credit was
terminated after the then outstanding balance of $200,000 was paid. On October
31., 2000 NWM Capital, LLC ("NWM") which is owned by Northwest Management Corp.,
Lester Tanner and members of his family, gave the Company a $500,000 secured
line of credit pursuant to which the Company may borrow up to that amount at an
interest rate of 1 -1/4% per month. Commencing October 31, 2002 the Company will
amortize any outstanding principal balance at the rate of $34,000 per month with
any remaining balance payable at October 31, 2003, the maturity date. The
advances may be prepaid by the Company before October 31, 2003 at any time on
six months prior notice without any prepayment charge or penalty. The borrowings
are secured by accounts receivable purchased by the Company with the advances
made by NWM and by the second mortgage owned by the Company on the Granby
property. At November 30, 2000, $258,000 was outstanding on the line of credit
and interest expense through November 30, 2000 was $1,863.
Northwest Management Corp. is in the real estate business and makes
loans secured by real estate and/or accounts receivable. One of its
shareholders, Shari Stack, the daughter of Lester Tanner, is a 24% owner of the
limited liability company which owns the building
37
<PAGE> 39
at East Granby, Connecticut (the "Landlord"). 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 FRM Corp. at the time they took place.
ITEM 8. LEGAL PROCEEDINGS
None.
ITEM 9. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND
38
<PAGE> 40
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 Board.
The Company has obtained a CUSIP number for its common stock and has
contacted NASDAQ to begin the procedure for listing the common stock on NASDAQ
Bulletin Board, as a result of which the trading symbol MFCDV has been assigned
to the Company. The Company believes its common stock will be so listed after
the distribution date but there is no assurance when or if this will occur.
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. 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.
COMMON STOCK
Subject to any prior rights of the Company's preferred
shareholders, MFC's common shareholders are entitled:
- to receive dividends as are declared by MFC's Board
of Directors out of funds legally available; and
- to full voting rights, each share being entitled to
one vote.
The MFC Board of Directors may issue additional authorized shares of
MFC common stock without shareholder approval. MFC common shareholders do not
have any cumulative rights or any preemptive rights to subscribe for additional
securities
39
<PAGE> 41
that MFC may issue without obtaining shareholder consent. Subject to any prior
rights of the holders of any MFC preferred stock then outstanding, in the event
of liquidation, dissolution, or winding up of the company, MFC common
shareholders would be entitled to receive, on a pro rate basis, any assets
distributable to shareholders in respect of shares held by them.
PREFERRED STOCK
The MFC certificate of incorporation authorizes the issuance by MFC of up to
2,000,000 shares of MFC preferred stock, none of which was issued and
outstanding as of November 9, 2000. The MFC Board of Directors may issue its
preferred stock without obtaining shareholder consent in one or more series at a
time or times and for consideration or considerations as its Board of Directors
may determine. The Board of Directors is authorized by the MFC certificate of
incorporation to provide at any time for the issuance of MFC preferred stock
with the rights, preferences, and limitations as established by the Board.
ITEM 12. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Pursuant to Article VII of the Company's By-Laws MFC will indemnify its
directors, officers, employees and agents to the extent allowed by Section 145
of the General Corporation Law of the State of Delaware (the "Indemnitee").
Section 145 authorized MFC to indemnify any person who is a party to an action
by reason of the fact of being a director, officer, employee or agent of MFC
against expenses (including attorneys' fees) judgments, fines and amounts paid
in settlement if said person acted in good faith and in a manner he reasonable
believed to be in or not opposed to the best interests of MFC. Accordingly MFC
shall, and is obligated to, indemnify and advance the expenses of the Indemnitee
in every situation where MFC has 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 interests of the Company. The statute and MFC's
indemnification also covers any criminal action or proceeding if the Indemnitee
did not have 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
40
<PAGE> 42
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: Exhibits 3.01 and 3.03 were filed with Form 10 on
October 2, 2000. Exhibits 21.01, 27.01 and 27.02 were filed
with Amendment No. 1 on November 20, 2000. Exhibit 5.01 was
filed with Amendment No. 2 on December 6, 2000.
<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 *
21.01 A list of subsidiaries of the Company. *
27.01 Financial data schedule for the six months ended August 31, 2000. *
27.02 Financial data schedule for the year ended February 29, 2000. *
</TABLE>
---------
* Previously filed.
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange
Act of 1934, the registrant has duly cause this Amendment No. 2 to the
registration statement to be signed on its behalf by the undersigned, thereunto
duly authorized.
MFC DEVELOPMENT CORP.
(Registrant)
By /s/ Lester Tanner
-------------------------------
January 17, 2001 Lester Tanner, President
41
<PAGE> 43
MFC Development Corp. and Subsidiaries
(A Subsidiary of FRMO Corp.)
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.
<PAGE> 44
Report of Independent Auditors
The Board of Directors and Shareholders
MFC Development Corp., Inc. and Subsidiaries
(A Subsidiary of FRMO Corp., formerly FRM Nexus, Inc.)
We have audited the accompanying consolidated balance sheets of MFC Development
Corp., Inc. and its subsidiaries (A Subsidiary of FRMO Corp., formerly 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 FRMO Corp.,
formerly 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> 45
MFC Development Corp. and Subsidiaries
(A Subsidiary of FRMO Corp.)
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 3,138,463 3,152,683 3,179,281
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 4,138,287 5,353,977 6,955,302
----------- ----------- -----------
Total assets $ 8,989,949 $ 8,778,756 $10,483,028
=========== =========== ===========
</TABLE>
See accompanying notes.
F-3
<PAGE> 46
MFC Development Corp. and Subsidiaries
(A Subsidiary of FRMO Corp.)
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 2,407,311 2,407,311 2,407,311
------------ ------------ ------------
Total other liabilities 2,494,285 2,431,966 3,206,791
------------ ------------ ------------
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
Accumulated deficit (1,626,548) (1,312,643) (620,363)
------------ ------------ ------------
Total stockholders' equity 4,343,672 4,685,912 5,378,192
------------ ------------ ------------
Total liabilities and stockholders' equity $ 8,989,949 $ 8,778,756 $ 10,483,028
============ ============ ============
</TABLE>
See accompanying notes
F-4
<PAGE> 47
MFC Development Corp. and Subsidiaries
(A Subsidiary of FRMO Corp.)
Consolidated Statements of Operations
<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>
REVENUES
Sale of real estate $ 69,000 $ 211,000 $ 941,000 $ 40,678 $ 2,125,696
Rental income 46,820 52,185 111,264 140,633 115,951
Interest from mortgages 46,110 116,530 197,864 234,609 167,128
Income from the purchase
and collections of medical receivables 443,379 609,581 1,033,139 1,041,770 773,474
Medical management service fees 419,950 -- -- -- --
----------- ----------- ----------- ----------- -----------
Total income 1,025,259 989,296 2,283,267 1,457,690 3,182,249
----------- ----------- ----------- ----------- -----------
COSTS AND EXPENSES
Real estate 228,213 364,435 1,211,711 393,727 777,861
Medical receivables 739,726 630,816 1,533,127 1,055,439 826,085
Medical management services 510,935 -- -- -- --
Corporate expenses 204,027 188,944 452,234 414,148 182,729
Depreciation and amortization 42,900 28,255 61,726 29,909 73,309
----------- ----------- ----------- ----------- -----------
Total 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
----------- ----------- ----------- ----------- -----------
Other income (expense):
Interest income 11,685 2,394 14,801 13,817 30,746
Interest expense (13,874) (31,712) (42,437) (58,691) (241,525)
----------- ----------- ----------- ----------- -----------
(2,189) (29,318) (27,636) (44,874) (210,779)
----------- ----------- ----------- ----------- -----------
(Loss) income from continuing operations before
provision (credit) for income taxes and
extraordinary item (702,731) (252,472) (1,003,167) (480,407) 1,111,486
Provision (credit) for income taxes 10,202 10,298 14,328 5,676 112,937
----------- ----------- ----------- ----------- -----------
(Loss) income from continuing operations
before extraordinary item (712,933) (262,770) (1,017,495) (486,083) 998,549
Income from discontinued operations, net of taxes
(including gain on sale of subsidiary of $381,182 for
the six months ended August 31, 2000 and $96,303 for
the for the six months ended August 31, 1999 and the
year ended February 29, 2000) 399,028 292,523 325,215 119,514 317,868
----------- ----------- ----------- ----------- -----------
(313,905) 29,753 (692,280) (366,569) 1,316,417
(Loss) income before extraordinary item
Extraordinary item, net of applicable taxes of $0 -- -- -- -- 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 item (0.17) 0.02 (0.38) (0.20) 0.72
Extraordinary income, net of taxes -- -- -- -- 0.05
----------- ----------- ----------- ----------- -----------
Basic and diluted (loss) earnings per common share $ (0.17) $ 0.02 $ (0.38) $ (0.20) $ 0.77
=========== =========== =========== =========== ===========
Number of shares used in computation of basic and
diluted earnings per share 1,814,404 1,816,462 1,816,462 1,816,462 1,816,462
=========== =========== =========== =========== ===========
</TABLE>
See accompanying notes
F-5
<PAGE> 48
MFC Development Corp. and Subsidiaries
(A Subsidiary of FRMO Corp.)
Consolidated Statements of Stockholders' Equity
<TABLE>
<CAPTION>
ADDITIONAL TOTAL
COMMON STOCK PAID-IN (ACCUMULATED STOCKHOLDERS' COMPREHENSIVE
SHARES AMOUNT CAPITAL DEFICIT) EQUITY (LOSS)INCOME
--------- ----------- ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balance, as previously reported,
February 28, 1997 100 $ -- $ 950,000 $ 470,924 $ 1,420,924
Adjustment related to transfer of
ownership of FRMO Corp. assets 1,816,362 1,816 5,047,054 (2,132,809) 2,916,061
--------- ----------- ----------- ----------- -----------
Balance, February 28, 1997 1,816,462 1,816 5,997,054 (1,661,885) 4,336,985
Net income -- -- -- 1,408,091 1,408,091 $ 1,408,091
-----------
Comprehensive income -- -- -- -- -- $ 1,408,091
--------- ----------- ----------- ----------- ----------- ===========
Balance, February 28, 1998 1,816,462 1,816 5,997,054 (253,794) 5,745,076
Payment of fractional shares -- -- (315) -- (315)
Net loss -- -- -- (366,569) (366,569) $ (366,569)
-----------
Comprehensive (loss) income -- -- -- -- -- $ (366,569)
--------- ----------- ----------- ----------- ----------- ===========
BALANCE, FEBRUARY 28, 1999 1,816,462 1,816 5,996,739 (620,363) 5,378,192
NET LOSS -- -- -- (692,280) (692,280) $ (692,280)
-----------
COMPREHENSIVE LOSS -- -- -- -- -- $ (692,280)
--------- ----------- ----------- ----------- ----------- ===========
BALANCE, FEBRUARY 29, 2000 1,816,462 1,816 5,996,739 (1,312,643) 4,685,912
PURCHASE AND RETIREMENT OF
TREASURY STOCK (UNAUDITED) (16,462) (16) (28,319) -- (28,335)
NET LOSS (UNAUDITED) -- -- -- (313,905) (313,905) $ (313,905)
-----------
COMPREHENSIVE LOSS (UNAUDITED) -- -- -- -- -- $ (313,905)
--------- ----------- ----------- ----------- ----------- ===========
BALANCE, AUGUST 31, 2000 (UNAUDITED) 1,800,000 $ 1,800 $ 5,968,420 $(1,626,548) $ 4,343,672
========= =========== =========== =========== ===========
</TABLE>
See accompanying notes
F-6
<PAGE> 49
MFC Development Corp. and Subsidiaries
(A Subsidiary of FRMO Corp.)
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)
Gain on sale of subsidiaries (381,182) (96,303) (96,303) -- --
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)
Net assets of discontinued operations (18,926) (152,220) 29,354 113,549 (178,116)
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 (473,624) (121,869) 116,768 (478,864) (650,269)
----------- ----------- ----------- ----------- -----------
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 -- --
Proceeds from sale of subsidiaries 1,575,000 975,000 975,000 -- --
----------- ----------- ----------- ----------- -----------
Net cash provided by (used in) investing activities 636,437 1,272,744 1,080,279 (769,697) (985,568)
----------- ----------- ----------- ----------- -----------
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> 50
MFC Development Corp. and Subsidiaries
(A Subsidiary of FRMO Corp.)
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> 51
MFC Development Corp. and Subsidiaries
(A Subsidiary of FRMO Corp.)
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 FRMO Corp., formerly FRM Nexus, Inc. ("FRM or Nexus"). All of
FRM's assets and liabilities were transferred to MFC on August 31, 2000, except
for $10,000. Because such entities are under common control, this transaction
has been accounted for in a manner similar to a pooling of interests on MFC's
books.
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> 52
MFC Development Corp. and Subsidiaries
(A Subsidiary of FRMO Corp.)
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.
Purchase and Collection of Medical Insurance Claims Receivable: A fee is charged
to medical providers upon the purchase of their accounts receivable by the
Company. The fee is for the up-front payment that the Company makes upon
purchase of the receivables and for collection services rendered to collect the
receivables. This fee income is deferred and recognized over the contractual
collection period on a pro-rata basis as the related net collectible value (see
discussion below, under finance receivables) of the receivables are collected.
The deferred fee income is netted against finance receivables (see note 5). The
Company is not entitled to interest on unpaid principal balances.
F-10
<PAGE> 53
MFC Development Corp. and Subsidiaries
(A Subsidiary of FRMO Corp.)
Notes to Consolidated Financial Statements
3. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REVENUE RECOGNITION (CONTINUED)
Medical Management Service Fees: Three subsidiaries provide additional
management services to certain medical practices. Management fees are billed to
these medical practices monthly in amounts that are relative to the expenses and
services provided by the Company for that month. The accrual method of
accounting is used to record all management service fees.
Food Service Companies: The accrual method of accounting is used to record all
income.
RECEIVABLES
MORTGAGE AND NOTES RECEIVABLE
Mortgages and notes receivable results from the sale of real estate. These
receivables bear interest and are recorded at face value, less unamortized
discount.
Impairment Assessment: The Company evaluates the credit positions on its notes
receivable and the value of the related collateral on an ongoing basis. The
Company estimates that all of its notes receivable are fully collectible and the
collateral is in excess of the related receivables. The Company continually
evaluates its notes receivable that are past due as to the collectibility of
principal and interest. The Company considers the financial condition of the
debtor, the outlook of the debtor's industry, decrease in the ratio of
collateral values to loans and any prior write downs on loans. The above
considerations are all used in determining whether the Company should suspend
recording interest income on any notes receivable or provide for any loss
reserves.
FINANCE RECEIVABLES
The Company purchases the net collectible value of medical insurance claims on a
limited recourse basis. Net collectible value is the amount that the insurance
companies will pay based on established fee schedules used by insurance
companies. The net collectible value is often less than the face value of the
claim due to the difference in billing rates between the established fee
schedules and what the medical practice ordinarily would bill for a particular
procedure. The company is only responsible to collect the fee scheduled amount.
If any amounts are collected in excess of the purchased amount and the Company's
fee, that amount will be applied to the client's loan balance. Finance
receivables are reported at their outstanding unpaid principal balances, reduced
by any charge-off or valuation allowance and net of unearned revenues. The
recourse basis is limited to the extent any receivables purchased by the Company
are disputed and/or referred to arbitration proceedings. Such receivables are
deemed to be invalid and are immediately substituted. The Company is still
entitled to the collection of its fees from customers regardless of whether or
not the underlying accounts receivable are collectible. Performance of these
receivables is personally guaranteed by the owner of the practice and principals
of the related management companies.
F-11
<PAGE> 54
MFC Development Corp. and Subsidiaries
(A Subsidiary of FRMO Corp.)
Notes to Consolidated Financial Statements
3. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RECEIVABLES (CONTINUED)
The Company purchases the receivables and has the right to return the "invalid
receivables". By contractual definition, these are receivables that have not
been recovered from insurance companies because of denials, requests for
additional information not readily available, or a matter under investigation
within 180 days of the purchase date. For receivables purchased in the years
ended February 29, 2000 and February 28, 1999 and the three months ended May
31, 2000 (unaudited), the Company returned approximately 21%, 17% and 19%,
respectively.
In addition to the right to return the invalid receivables to the Seller, the
Company has the right to offset any of its obligations to the Seller by any
invalid receivables. As a result of the right of return and right of offset
features, the Company believes that a valuation allowance generally is not
required for these receivables.
Impairment Assessment: Management's periodic evaluation of the adequacy of the
allowance for loan losses is based on the Company's past loan loss experience,
known and inherent risks in the portfolio, adverse situations that may affect
the customer's ability to repay, the estimated value of any underlying
collateral and current economic conditions.
DEPRECIATION AND AMORTIZATION
Depreciation of property and equipment is provided by application of the
straight-line method over estimated useful lives as follows:
<TABLE>
<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
F-12
<PAGE> 55
MFC Development Corp. and Subsidiaries
(A Subsidiary of FRMO Corp.)
Notes to Consolidated Financial Statements
3. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
LEASES AND LEASEHOLD COSTS (CONTINUED)
present value of the minimum lease payments or the fair value of the leased
properties at the beginning of the respective lease terms. Such assets are
amortized in the same manner as owned assets are depreciated. Interest expenses
relating to the lease liabilities are recorded to effect constant rates of
interest over the terms of the leases. Leases which do not meet such criteria
are classified as operating leases and the related rentals are charged to
expense as incurred.
The Company has capitalized the applicable leasehold costs related to acquiring
the leases for its various restaurants and is amortizing them over the terms of
the applicable leases ranging from 10 to 20 years.
TECHNICAL ASSISTANCE FEES
Technical assistance fees represent initial franchise fees paid to Wendy's
International at the inception of each franchised location and are amortized on
a straight-line basis over the term of the related franchises, ranging from 15
to 20 years.
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
F-13
<PAGE> 56
MFC Development Corp. and Subsidiaries
(A Subsidiary of FRMO Corp.)
Notes to Consolidated Financial Statements
3. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CONCENTRATION OF RISK (CONTINUED)
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 9, 2000, claims receivable from one
insurance company comprised 26% of total finance 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> 57
MFC Development Corp. and Subsidiaries
(A Subsidiary of FRMO Corp.)
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 $ 243,01 $ 243,012
Mortgage and notes 3,166,281 3,166,281 3,179,280 3,179,280 3,203,598 3,203,598
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
current liabilities 2,095,259 2,095,259 1,641,596 1,641,596 1,794,937 1,794,937
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.
EFFECTS OF NEW ACCOUNTING PRONOUNCEMENTS
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
In June 1999, the Financial Accounting Standards Board issued Statement No. 137,
amending Statement No. 133, "Accounting for Derivative Instruments and Hedging
Activities", which extended the required date of adoption to the years beginning
after June 15, 2000. The Statement permits early adoption as of the beginning of
any fiscal quarter after its issuance. The Company expects to adopt the new
Statement effective March 1, 2001. The Company does not anticipate that the
adoption of this Statement will have any effect on its results of operations or
financial position.
F-15
<PAGE> 58
MFC Development Corp. and Subsidiaries
(A Subsidiary of FRMO Corp.)
Notes to Consolidated Financial Statements
3. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
EFFECTS OF NEW ACCOUNTING PRONOUNCEMENTS (CONTINUED)
REVENUE RECOGNITION IN FINANCIAL STATEMENTS
The Company expects to adopt Securities and Exchange Commission Staff Accounting
Bulletin 101 ("SAB 101"), Revenue Recognition in Financial Statements in the
quarter starting December 1, 2000. SAB 101 requires revenue to either be
realized or realizable and earned prior to recognition. This generally does not
occur until there is persuasive evidence of an arrangement, delivery has
occurred or services have been rendered, the price is fixed or determinable, and
collectibility is reasonably assured.The Company does not anticipate that the
adoption of SAB 101 will have any impact on the Company's current and prior
revenue recognition policies and its results of operations or financial
position.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the current year
presentation.
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 $1,557,311 of deferred profit remains at August 31, 2000, (unaudited)
February 29, 2000 and February 28, 1999.
F-16
<PAGE> 59
MFC Development Corp. and Subsidiaries
(A Subsidiary of FRMO Corp.)
Notes to Consolidated Financial Statements
4. REAL ESTATE ACTIVITIES (CONTINUED)
SALE OF REAL ESTATE (CONTINUED)
GOSHEN, NEW YORK (CONTINUED)
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>
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
F-17
<PAGE> 60
MFC Development Corp. and Subsidiaries
(A Subsidiary of FRMO Corp.)
Notes to Consolidated Financial Statements
4. REAL ESTATE ACTIVITIES (CONTINUED)
SALE OF REAL ESTATE (CONTINUED)
GRANBY, CONNECTICUT (CONTINUED)
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.
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).
F-18
<PAGE> 61
MFC Development Corp. and Subsidiaries
(A Subsidiary of FRMO Corp.)
Notes to Consolidated Financial Statements
4. REAL ESTATE ACTIVITIES (CONTINUED)
MORTGAGES AND NOTES RECEIVABLE
Mortgages and notes receivable, arising from the sale of real estate, consist of
the following:
<TABLE>
<CAPTION>
AUGUST 31 FEBRUARY 29 FEBRUARY 28
2000 2000 1999
---------------------------------------------
(UNAUDITED)
<S> <C> <C> <C>
Goshen, New York (Construction Company)
(Net of unamortized discount of $162,202) $ 2,147,798 $ 2,147,798 $ 2,147,798
Granby, Connecticut (Real Estate Operator) 1,018,483 1,031,482 1,055,800
----------- ----------- -----------
3,166,281 3,179,280 3,203,598
Less current portion (27,818) (26,597) (24,317)
----------- ----------- -----------
$ 3,138,463 $ 3,152,683 $ 3,179,281
=========== =========== ===========
</TABLE>
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>
<S> <C>
FISCAL YEAR
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).
F-19
<PAGE> 62
MFC Development Corp. and Subsidiaries
(A Subsidiary of FRMO Corp.)
Notes to Consolidated Financial Statements
5. REAL ESTATE ACTIVITIES (CONTINUED)
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 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).
F-20
<PAGE> 63
MFC Development Corp. and Subsidiaries
(A Subsidiary of FRMO Corp.)
Notes to Consolidated Financial Statements
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>
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 an agreement to
provide management services to a finance client's radiology practice. These
services include operating an MRI facility that the Company leases from a third
party. In February 2000, the Company entered into an additional agreement to pay
the prior operator ("the manager") of the MRI facility a management fee of 50%
of the positive cash flow from the services derived from that facility, in
exchange for the continuation of his management and business development
services. The remainder of the cash flow is retained by the Company. As part of
this agreement, the Company agreed to administer the repayment of certain debts
of the manager from various sources of funds that are due to him. The Company
may, in its discretion advance cash to meet the schedule of payments if the
source of funds is insufficient to do so. These advances bear interest at the
rate of prime plus 2%, with a minimum rate of 12%. The outstanding balance on
this loan was $137,751 (unaudited) at August 31, 2000 and $98,381 at February
29, 2000.
F-21
<PAGE> 64
MFC Development Corp. and Subsidiaries
(A Subsidiary of FRMO Corp.)
Notes to Consolidated Financial Statements
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>
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 1999, the line of credit was increased to $785,000.
The president of NMC, who is also a shareholder of the Company, has the power to
vote NMC shares which are owned by his two children. The line, under which there
was no outstanding balance at February 29, 2000, was terminated by mutual
consent of both parties upon full repayment on June 21, 2000 of the outstanding
balance of $200,000 (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
place in an escrow account 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 Company, being the primary obligor on the margin
loans, is responsible for the repayment of the loans. 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.
F-22
<PAGE> 65
MFC Development Corp. and Subsidiaries
(A Subsidiary of FRMO Corp.)
Notes to Consolidated Financial Statements
8. NOTES PAYABLE (CONTINUED)
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%.
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 (unaudited).
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.
F-23
<PAGE> 66
MFC Development Corp. and Subsidiaries
(A Subsidiary of FRMO Corp.)
Notes to Consolidated Financial Statements
9. COMMITMENTS AND CONTINGENCIES (CONTINUED)
MINIMUM OPERATING LEASE COMMITMENTS (CONTINUED)
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.
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>
<CAPTION>
<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> 67
MFC Development Corp. and Subsidiaries
(A Subsidiary of FRMO Corp.)
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
<S> <C> <C> <C> <C> <C>
(UNAUDITED) (UNAUDITED)
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> 68
MFC Development Corp. and Subsidiaries
(A Subsidiary of FRMO Corp.)
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, which was recorded during the three months
ended May 31, 1999. As a result of this sale, $2,342,555 of debt that was
carried on Wendclark was assumed by the buyer. On May 23, 2000, the Company
committed to sell Wendcello Corp., the remaining subsidiary that operated in the
food service division. On June 20, 2000, the Company completed the sale of
Wendcello Corp., including all of its assets and liabilities, and received
$1,575,000 (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. During the period from May 23, 2000 (the measurement
date for discontinuing operations of the food service division) to June 20, 2000
(disposal date), net income from operations of the discontinued food service
division was $11,700. The results of operations of both subsidiaries have been
classified as discontinued operations and prior periods have been restated.
F-26
<PAGE> 69
MFC Development Corp. and Subsidiaries
(A Subsidiary of FRMO Corp.)
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 for the six
months ended August 31, 2000 and $96,303 for
the six months ended August 31, 1999 and the
year ended February 29, 2000 $ 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> 70
MFC Development Corp. and Subsidiaries
(A Subsidiary of FRMO Corp.)
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> 71
MFC Development Corp. and Subsidiaries
(A Subsidiary of FRMO Corp.)
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 4,605,444 2,996,317 2,103 7,603,864
Assets - discontinued -- -- 1,174,892 1,174,892
Total assets 4,605,444 2,996,317 1,176,995 8,778,756
Capital expenditures 4,185 131,033 1,248 136,466
Depreciation and amortization 7,280 54,196 250 61,726
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 4,902,772 3,494,477 2,836 8,400,085
Assets - discontinued -- 2,082,943 2,082,943
Total assets 4,902,772 3,494,477 2,085,779 10,483,028
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 5,441,993 2,129,690 3,461 7,575,144
Assets - discontinued -- -- 2,196,492 2,196,492
Total assets 5,441,993 2,129,690 2,199,953 9,771,636
Capital expenditures 570,653 73,933 -- 644,586
Depreciation and amortization 54,885 18,424 -- 73,309
</TABLE>
F-29
<PAGE> 72
MFC Development Corp. and Subsidiaries
(A Subsidiary of FRMO Corp.)
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 4,524,045 4,447,413 18,491 8,989,949
Assets - discontinued -- -- -- --
Total assets 4,524,045 4,447,413 18,491 8,989,949
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 4,906,228 2,969,225 3,169 7,878,622
Assets - discontinued -- -- 1,356,466 1,356,466
Total assets 4,906,228 2,969,225 1,359,635 9,235,088
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> 73
MFC Development Corp. and Subsidiaries
(A Subsidiary of FRMO Corp.)
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 OTHER BALANCE
AT BEGINNING COSTS AND ACCOUNTS DESCRIBED AT END
DESCRIPTION OF PERIOD EXPENSES DEDUCTIONS OF PERIOD
--------------------------- ------------ ---------- ------------------ ---------- ---------
<S> <C> <C> <C> <C> <C>
FEBRUARY 28, 1998
Allowance for credit losses $145,218 $ -- $ -- $ 72,352 $ 72,866
======== ======== ======= ======== ========
Valuation allowance -
Deferred tax asset $218,743 $ 96,030 $ -- $ -- $314,773
======== ======== ======= ======== ========
FEBRUARY 28, 1999
Allowance for credit losses $ 72,866 $ 13,134 $ -- $ -- $ 86,000
======== ======== ======= ======== ========
Valuation allowance -
Deferred tax asset $314,773 $243,455 $ -- $ -- $558,228
======== ======== ======= ======== ========
FEBRUARY 29, 2000
ALLOWANCE FOR CREDIT LOSSES $ 86,000 $126,488 $ -- $ -- $212,488
======== ======== ======= ======== ========
VALUATION ALLOWANCE -
DEFERRED TAX ASSET $558,228 $169,941 $ -- $ -- $728,169
======== ======== ======= ======== ========
</TABLE>
F-31
<PAGE> 74
MFC Development Corp. and Subsidiaries
(A Subsidiary of FRMO Corp.)
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 COLUMN F
-------------------------------------------------------------------------------------------------------------------------
COST CAPITALIZED GROSS AMOUNT
INITIAL COST SUBSEQUENT AT WHICH CARRIED
TO COMPANY TO ACQUISITION AT CLOSE OF PERIOD
--------------------------------------------------------------
BUILDINGS BUILDINGS
AND AND
ENCUM- IMPROVE- IMPROVE- CARRYING IMPROVE- ACCUMULATED
DESCRIPTIONS BRANCES LAND MENTS MENTS COST LAND MENTS TOTAL DEPRECIATION
-------------------------------------------------------------------------------------------------------------------------
<S> <C> <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 G COLUMN H COLUMN I
------------------------------------------------------------------
LIFE ON
WHICH
DEPRECIATION
IN LATEST
INCOME
DATE OF DATE STATEMENTS
DESCRIPTIONS CONSTRUCTION ACQUIRED IS COMPUTED
------------------------------------------------------------------
<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> 75
MFC Development Corp. and Subsidiaries
(A Subsidiary of FRMO Corp.)
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 COLUMN F COLUMN G COLUMN H
--------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL
AMOUNT OF LOANS
SUBJECT TO
FINAL PERIODIC FACE CARRYING DELINQUENT
INTEREST MATURITY PAYMENT PRIOR AMOUNT OF AMOUNT OF PRINCIPAL OR
DESCRIPTIONS RATE DATE TERM LIENS MORTGAGES MORTGAGES INTEREST
--------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
First Mortgages:
Unimproved land, Goshen, NY 6% 2/28/02 Interest only to - $ 500,000 $ 464,891 $500,000
maturity
Unimproved land, Goshen, NY 6 2/28/02 None - 1,810,000 1,682,907 -
Office building, Granby, CT 9 3/08/17 9,863 per month $2,600,000 1,031,482 1,031,482 -
----------------------------------------
$3,341,482 $3,179,280 $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 $3,203,598 $3,225,830 $2,341,034
Additions during period:
New mortgage loans $ - $ - $1,081,547
-------- -------- ----------
- - 1,081,547
---------- ---------- ----------
3,203,598 3,225,830 3,422,581
Deductions during period:
Collection of principal 24,318 22,232 159,717
Other -- bad debts - - 37,034
-------- -------- ----------
24,318 22,232 196,751
---------- ---------- ----------
Balance at close of period $3,179,280 $3,203,598 $3,225,830
========== ========== ==========
</TABLE>
F-33
