Back to GetFilings.com

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended May 31, 2004

Commission file number: 000-31667

Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes (x)  No( )

As of the close of business on July 14, 2004, 1,775,053 shares of the issuer's classes of common stock, par value of $.001 per share, were outstanding.

TABLE OF CONTENTS

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

MFC DEVELOPMENT CORP. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

The accompanying notes are an integral part of these financial statements.

MFC DEVELOPMENT CORP. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

The accompanying notes are an integral part of these financial statements.

MFC DEVELOPMENT CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

The accompanying notes are an integral part of these financial statements.

MFC DEVELOPMENT CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (UNAUDITED)

The accompanying notes are an integral part of these financial statements.

MFC DEVELOPMENT CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

The accompanying notes are an integral part of these financial statements.

MFC DEVELOPMENT CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1. Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information in response to the requirements of Article 10 of Regulation S-X. Accordingly they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments (consisting only of normal recurring items) necessary to present fairly the financial position as of May 31, 2004; results of operations for the three months ended May 31, 2004 and 2003; cash flows for the three months ended May 31, 2004 and 2003; and changes in stockholders' equity for the three months ended May 31, 2004. For further information, refer to the Company's financial statements and notes thereto included in the Company's Form 10-K for the year ended February 29, 2004. The consolidated balance sheet at February 29, 2004 was derived from the audited financial statements as of that date. Results of operations for interim periods are not necessarily indicative of annual results of operations.

Certain prior year amounts were reclassified to conform with the current year presentation.

2. Business Activities of the Company

The Company operates in two distinct industries consisting of real estate and medical financing.

The real estate business is conducted by the Company through various subsidiaries. It owns real estate in New York, which is currently held for development or sale, and holds a mortgage on a real estate parcel in Connecticut.

The medical financing business is conducted through Medical Financial Corp., a wholly owned subsidiary, which (i) purchases insurance claims receivables from medical practices and provides certain services to those practices; and (ii) three other subsidiaries were formed to provide additional management services to certain medical practices. On February 4, 2004, the Company decided to restructure the medical financing segment. The plan of restructuring calls for (i) the purchase of insurance claims receivables from medical practices to be discontinued, (ii) the sale of the assets of the three subsidiaries that were formed to provide additional management services to certain medical practices, and (iii) focus the operations of the medical segment on collections and other services. As a result of this decision, management services has been reclassified as discontinued operations and prior periods have been restated.

In addition to the two operating divisions of the Company, a new division, Capco, was formed during 2000. Capco, which had never conducted the business for which it was formed, was also discontinued on February 4, 2004.

3. Property and Equipment

Property and equipment consists of the following:

As of May 31, 2004 and February 29, 2004, accumulated amortization of equipment under capital leases was $32,788 and $28,490.

4. Finance and Management Fee Receivables, Net

Medical Financial Corp., a wholly owned subsidiary of the Company purchases insurance claims receivable from medical practices and provides collection services to those practices. The Company charges a fee (purchase discount) upon the purchase of those receivables, which compensates the Company for the advance payment that is paid to the client and for the collection services rendered to collect the receivables. The Company also charges additional fees for other services, such as a percentage of collections when the receivables need to be litigated when the insurance companies improperly delay payment or deny claims. The insurance companies also pay interest on late payments, and reimbursements for litigation filing fees and attorney's fees on cases that they lost. The Company also charges its clients interest if the advance payment and purchase discount on purchased receivables are not collected or offset in full after the contractual collection period, usually 180 days.

Net finance receivables consist of the following:

Due to finance customers represents the amount of the unpaid receivables less the advance payment and fee that the Company charges. The Company is liable for this amount only if (i) it is collected or (ii) if an insurance carrier suffers a financial inability to pay.

The Company may incur a finance receivable 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 increase in bad debt expense that occurred during the year ended February 29, 2004 was based on an increase in adverse arbitration decisions from the hearings that were decided on during the last several months of that year. An increase in the amount of closed arbitration cases has provided management with a larger base of information to better estimate the reserve for bad debts. Management's decision to increase the bad debt reserve was based on the overall decrease in the collections rate from the arbitrations that have been closed in the last fiscal year. Management believes that it will be increasingly more difficult to collect on outstanding receivables, and has initiated a new program that it believes could increase the collections rate. Management has also taken other measures to reduce its bad debts, such as eliminating poorly collecting clients and  reducing the upfront advance percentage that it makes when receivables are purchased. Management will monitor the results of these efforts as to the effect on collection rates, and whether the reserve for bad debts is adequate based on actual collections.

From the date the Company purchases insurance claims receivable from medical practices and the advance payment is made to the client, the Company has 180 days to collect or determine that the bills were invalid as contractually defined. If the Company collects the advance payment and fee, all additional amounts, if any, that are collected are given to the client. While by contract, the Company considers these receivables invalid, in reality, for reasons outside of the Company's control, such as the customer being able to provide additional information to overturn a denial, the receivables will get paid and are then not uncollectible. The collections from these written-off receivables are the same collections that may be used as an offset to other obligations that the Company may have with the client. Recoveries from these written-off receivables are paid to the customer or used as an offset, when necessary. As of May 31, 2004, there were approximately $3,932,000 of receivables that were outside of the contractual collection period, written-off, but are still collectible and historically, collected in significant amounts and were used to offset other obligations from the client to the Company. The write-offs and recoveries are a balance sheet item only, and do not affect the income statement. The income statement would only be affected if any part of the advance payment or fee was not collected in the 180 day period. For that situation, a reserve has been established.

Certain of these receivables are collateral for a line of credit.

Detail of income from the purchase and collection of medical receivables and medical receivable costs and expenses were as follows:

5. Real Estate Held for Development or Sale

In October 2002, the Company commenced construction at its Hunter, New York property of the renovation of a vacant office building into three townhouse units. A construction loan in the amount of $290,000 was obtained, which is secured by the Hunter property. One of the completed units was sold in February 2004 for $200,000, of which $170,000 of the proceeds was used to reduce the construction loan. The balance of the construction loan at May 31, 2004 was $106,000. The Company is capitalizing interest and loan acquisition costs during the construction period. For the three months ended May 31, 2004 and May 31, 2003, $2,000 and $3,000 of interest and loan acquisition costs were capitalized.

6. Other Real Estate Revenue

The Company's real estate assets currently include property held for development and sale in Hunter, New York and a mortgage and note receivable on property previously sold. The net proceeds of any sales of the Hunter, New York property will be allocated 65% to the Company and 35% to co-investors, after deducting the cost of carrying all of the Hunter properties. Upon payment in full of the Granby mortgage note, co-investors will share in the positive cash flow from the collections of the note, after deducting costs and expenses of carrying and developing the related property. During the quarter ended May 31, 2003, the Company paid $25,000 in settlement of a dispute with a prior co-investor and the Company reevaluated balances owed to the current co-investors as a result of the current development at the Hunter property. Accordingly, amounts payable to all co-investors were adjusted, resulting in a net gain of $175,000.

7. Due to Co-investors

Amounts payable to co-investors on property that has not yet been sold are included in real estate held for development or sale, as reductions to the asset. Amounts payable to co-investors on property that has previously been sold, and is subject to the final collection of a mortgage note receivable, are recorded as liabilities.

8. Notes Payable

Notes payable include the following:

Series A Bonds: In July 2002, the board of directors authorized the Company to issue an aggregate of $750,000 of Series A Bonds ("Bonds") in $25,000 increments to finance additional growth of the medical division. There were $750,000 of Bonds outstanding at May 31, 2004. Each Bond matures eighteen months after the issue date and may be extended for additional six month periods by mutual consent of the Company and the individual bondholders. Interest is payable monthly, and is calculated at a rate of prime plus 3% but not less than 9% per annum nor more than 15% per annum. The rate of interest will be adjusted at the end of each calendar quarter. The rate of interest as of May 31, 2004 was 9%. Monthly interest-only payments are due through maturity. The Bonds may only be prepaid on 120 days prior written notice. The Company, at the option of the bondholders, may be required to prepay on 60 days prior written notice, up to an aggregate of $50,000 per bondholder per 60 day period. The Company may not issue more than $100,000 of Bonds to each bondholder. A director, officer and shareholder of the Company is related to six of the bondholders. Two other directors-shareholders, each hold a $25,000 bond, and one of them is related to one other bondholder.

The Bonds are a joint and several obligation of the Company and its subsidiary, Medical Financial Corp. The Bonds are collateralized by insurance claims receivable purchased by Medical Financial Corp., which are not older than six months, equal to at least 333% of the principal sum outstanding under the line.

Series B Bonds: In February 2003, the board of directors authorized the Company to issue an aggregate of $450,000 of Series B Bonds ("Bonds") in $25,000 increments to finance the development of the real estate in Hunter, New York and elsewhere, except for $25,000, which may be used by the Company for the purchase of additional shares of its common stock and $200,000 for working capital. There were $200,000 of Bonds outstanding at May 31, 2004, one of which was held by NWM Capital, LLC., a related party that is owned by an officer, director and shareholder of the Company. Another director, officer and shareholder of the Company is related to two of the bondholders. Each Bond matures eighteen months after the issue date and may be extended for additional six month periods by mutual consent of the Company and the individual bondholders. Interest is payable monthly, and is calculated at a rate of prime plus 3% but not less than 9% per annum nor more than 15% per annum. The rate of interest will be adjusted at the end of each calendar quarter. The rate of interest as of May 31, 2004 was 9%. Monthly interest only payments are due through maturity. The Bonds may only be prepaid on 120 days prior written notice. The Company, at the option of the bondholders, may be required to prepay on 60 days prior written notice, up to an aggregate of $50,000 per bondholder per 60 day period. The Company may not issue more than $100,000 of Bonds to each bondholder.

The Bonds are a joint and several obligation of the Company and its subsidiary, Yolo Equities Corp. The Bonds are collateralized by the mortgage note receivable on the property located in Granby, Connecticut.

Interest expense on related party borrowings for the three months ended May 31, 2004 and 2003 was $1,689 and $1,132.

Bank Loan - Construction: In October 2002, the Company obtained a $290,000 construction loan to be used for development at its Hunter, New York property. The balance of the loan at May 31, 2004 and February 29, 2004  was $106,347 and $111,953. The terms of the loan call for monthly payments of interest through June 1, 2003, at which time it converted into a term loan with monthly payments of principal and interest that will amortize the loan in 15 years. Interest is at a rate of prime plus 1.5% but not less than 6.25% per annum nor more than 14% per annum. The rate of interest and monthly payment will be adjusted once every year beginning on May 1, 2004. The current rate of interest is 6.25%. This loan was paid in full on June 25, 2004 when a portion of the property was sold. This loan was secured by the Hunter property and was guaranteed by Lester Tanner, who is a director, shareholder and President of the Company. There were $2,900 of commitment fees paid in connection with this loan.

Bank Loan - Equipment: In September 2002, the Company obtained a $27,000 loan secured by certain existing computer equipment. This loan is for a term of 36 months with monthly payments of $916 for principal and interest at the rate of 14% per annum. There were no commitment fees paid in connection with this loan.

Capital Lease Obligations. The Company has acquired certain equipment under various capital leases expiring in 2007. The leases provide for monthly payments of principal and interest of $3,280 and have been capitalized at imputed interest rates of 14.37% to 19.12%.

Aggregate maturities of the amount of notes payable and capital leases at May 31, 2004 are as follows:

9. Income Taxes

The provision for income taxes consist of the following:

The Company has net operating loss ("NOL") carryforwards for Federal purposes of approximately $5,328,000 as of February 29, 2004, the close of its last fiscal tax year. The Company's taxable loss for the three months ended May 31, 2004 is approximately $482,000. These losses will be available for future years, expiring through February 28, 2024. The Company has taken a 95% valuation allowance against Federal NOL carryforwards due to a prior history of operating tax losses and the uncertainty of generating enough taxable income throughout the carryforward period to utilize the full amount available.

10. Commitments and Contingencies

In the normal course of business, the Company becomes a party to various legal claims, actions and complaints. The Company's management does not expect that the results in any of these legal proceedings will have a material adverse effect on the Company's results of operations, financial position or cash flows.

11. Earnings per Share

Earnings (loss) per common share for each of the periods presented is calculated by dividing net income by weighted average common shares outstanding during the period. The effect of outstanding stock options on earnings per share does not have a material effect in calculation of earnings per share during any of the periods presented.

12. Discontinued Operations

On February 4, 2004, the Company instituted a plan to restructure the medical financing segment. The plan of restructuring calls for the Company to sell the assets of the three subsidiaries that were formed to provide additional management services to certain medical practices. Accordingly, the operating results of management services for the three months ended May 31, 2004 and 2003 has been presented as "Income (loss) from discontinued operations, net of income taxes". Net assets to be disposed of or liquidated, at their book value, have been separately classified in the accompanying balance sheets at May 31, 2004 and February 29, 2004. The Company recorded an impairment loss of $229,285, for the year ended February 29, 2004 and an additional impairment loss of $62,778 during the three months ended May 31, 2004 in connection with the write-down of the assets that are to be disposed of. Due to operating losses, there was no income tax benefit from the write-down of assets. In addition, the Capco division, which was formed during 2000 and had never conducted the business for which it was formed, was also discontinued on February 4, 2004. The results of operations of the Capco division were immaterial and have been combined with the results of operations of the management services.

Summarized financial information for management services as discontinued operations for the three months ended May 31, 2004 and 2003 follows:

The components of assets and liabilities of discontinued operations are as follows:

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. The real estate segment operates in New York and Connecticut. The medical financing segment operates in New York.

The accounting policies of the segments are the same as those described in the summary of significant accounting policies. All inter-segment balances have been eliminated.

Business segment information follows:

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

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 affecting the business of the Company's medical service organization and medical provider clients, a legislative change in insurance regulations affecting the future collections of medical receivables, changes in the real estate and financial markets, adverse arbitration or court decisions on collectibility of purchased receivables, environmental action by governments affecting development of real estate, and other risk factors described herein and in the Company's reports filed and to be filed from time to time with the Commission. The discussion and analysis below is based on the Company's unaudited consolidated financial statements for the three months ended May 31, 2004 and 2003. The following should be read in conjunction with the Management's Discussion and Analysis of results of operations and financial condition included in Form 10-K for the year ended February 29, 2004.

Overview

MFC presently generates revenues from two business segments: real estate and medical. The real estate segment consists of parcels of real estate in Hunter, New York held for future development or sale, in which co-investors also have interests, and of a mortgage note receivable on a property that was previously sold. Revenues in the real estate division vary substantially from period to period depending on when a particular transaction closes and depending on whether the closed transaction is recognized for accounting purposes as a sale, or is reflected as a financing, or is deferred to a future period.

The medical segment is conducted through Medical Financial Corp., a wholly owned subsidiary, which purchases insurance claims receivables from medical practices, paying cash to the medical provider in return for a negotiated fee, and provides other collection services to those practices; and (ii) three other subsidiaries which were formed to provide additional management services to certain medical practices. On February 4, 2004, the Company decided to restructure the medical financing segment. The plan of restructuring calls for (i) the purchase of insurance claims receivables from medical practices to be discontinued, (ii) the sale of the assets of the three subsidiaries that were formed to provide additional management services to certain medical practices, and (iii) focus the operations of the medical segment on collections and other services. As a result of this decision, management services has been reclassified as discontinued operations and prior periods have been restated.

Proposed Transaction

On April  9, 2004, the Company filed a Current Report on Form 8-K announcing the signing on March 26, 2004 of an Acquisition Agreement with Creative Marketing Group, Inc, ("CMG") and its shareholders to acquire 100% of CMG's outstanding capital stock in exchange for shares of common stock of MFC.  After the closing, MFC shall issue approximately 7,900,000 shares (approximately 80%) of common stock to CMG stockholders and holders of CMG debt out of approximately 10,000,000 shares of common stock which will then be issued and outstanding.  The completion of the acquisition is subject to several conditions including, but not limited to, the closing of a private offering raising a minimum of $1,000,000 and a maximum of $2,500,000.  

CMG is a sales and marketing company which since the year 2000 has been exclusively working with a national brand name in the coffee industry which has a brand name recognition in excess of 90% among consumers.  In late 2002 CMG obtained exclusive licensing agreements permitting it to use the trademark of such national brand name in the production and sale of coffee and coffee filters through retailers, food service, hospitality and in-office locations throughout the United States.  CMG's relationship with this national brand name creates marketing opportunities to enhance the awareness and availability of such national brand name's coffee makers and the coffee and coffee filters which CMG may produce and sell under its licenses in the United States.

Completion of the transaction described is subject to the satisfaction of a number of conditions and there can be no assurance that all of the conditions will be met or that the registrant will successfully complete the acquisition or that CMG will raise adequate funds in the private placement.

Critical Accounting Policies

Management's discussion and analysis of its financial position and results of operations are based upon the Company's consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and the related disclosure of contingent assets and liabilities. Actual results could differ from those estimates. Management believes that the critical accounting policies and areas that require the most significant judgments and estimates to be used in the preparation of the consolidated financial statements are allowance for doubtful accounts and the valuation allowance against its deferred tax asset, and revenue recognition.

Allowance for Doubtful Accounts

Mortgage and note receivable: 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 value of 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: 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, the outlook of the debtor's industry, and current economic conditions. When the Company estimates that it may be probable that a specific customer account may be uncollectible, that balance is included in the reserve calculation. Actual results could differ from these estimates under different assumptions.

Deferred tax assets: The Company records a valuation allowance to reduce the carrying value of its deferred tax assets to an amount that is more likely than not to be realized. While the Company has considered future taxable income and prudent and feasible tax planning strategies in assessing the need for the valuation allowance, should the Company determine that it would not be able to realize all or part of its net deferred tax assets in the future, an adjustment to the valuation allowance would be charged to income in the period in which such determination was made. A reduction in the valuation allowance and corresponding credit to income may be required if the likelihood of realizing existing deferred tax assets were to increase.

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 Receivables: A fee is charged to medical providers upon the purchase of their accounts receivable by the Company. The fee is for the up-front payment that the Company makes upon purchase of the receivables and for collection services rendered to collect the receivables. This fee income is deferred and recognized over the contractual collection period in proportion to the costs of collection. The deferred fee income is netted against finance receivables. The Company is not entitled to interest on unpaid principal balances.

RESULTS OF OPERATIONS

2004 Period Compared to the 2003 Period

The following table summarizes the Company's changes in revenue from continuing operations (in thousands) for the periods indicated:

The Company's revenues from continuing operations for the three months ended May 31, 2004 ("2004") were $147,000, a decrease of $498,000 or 77% as compared to the three months ended May 31, 2003 ("2003"). The change was a result of decreases in both the real estate and medical divisions.

Revenue in the real estate division decreased by $175,000, to $42,000, in 2004. The decrease in 2004 was due to net adjustments in 2003 to amounts due to co-investors of $175,000. During the quarter ended May 31, 2003, the Company paid $25,000 in settlement of a dispute with a prior co-investor and reevaluated the balances owed to the current co-investors as a result of the development at the Hunter property.

Revenue in the medical division decreased by $323,000, to $105,000, in 2004. The decrease in 2004 was due to decreases in the amount of insurance claims purchased, resulting in a $201,000 decrease in fees and a decrease of $122,000 in income from additional collection services. The decrease in earned fees is a result of the Company's restructuring in February 2004 and the elimination of poorly collecting clients, which was used as a way  to be more selective in the bill purchasing process due to new State insurance department regulations that make collections more difficult. The decrease in the additional collection services in 2004 was due to reductions in collections. The reductions in 2004 were due to the Company being less successful in its collection efforts as a result of increased efforts by insurance companies to delay and deny medical bills. These additional services also generate interest income received from insurance companies for delayed payments on improperly denied and delayed receivables.

The following table summarizes the Company's changes in costs and expenses from continuing operations (in thousands) for the periods indicated:

Costs and expenses in the real estate division increased in 2004 by $8,000 to $62,000. The increase was primarily due to a change in the allocation of a portion of executive salaries from the medical division to the real estate division.

The $85,000 decrease in medical receivable expenses in 2004 was primarily due to a decrease in employment costs as a result of the Company's decision to  restructure the medical division. The reduction in the purchase of insurance claims and the investment in technology that the Company made during previous years allows the Company to operate with fewer employees.

The $5,000 increase in bad debt expense in 2004 is due to increases of bad debt reserves. The Company may incur a medical receivable 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 increase in bad debt expense is based on an increase in adverse arbitration decisions from the hearings that were decided during the year ended February 29, 2004. An increase in the amount of closed arbitration cases has provided management with a larger base of information to better estimate the reserve for bad debts. Management's decision to increase the bad debt reserve was based on the overall decrease in the collections rate from the arbitrations that have been closed in the last half of  fiscal 2004. Management believes that it will be increasingly more difficult to collect on outstanding receivables, and has initiated a new program that it believes could increase the collections rate. Management used this information when it made the decision in February 2004 to eliminate the purchase of additional receivables and change the focus of the operations of the medical segment to collections and other services. Management had also taken other measures during fiscal 2004 to reduce its bad debts, such as eliminating poorly collecting clients and  reducing the upfront advance percentage that it pays when receivables are purchased. Management will monitor the results of these efforts as to the effect on collection rates, and whether the reserve for bad debts is adequate based on actual collections.

The $10,000 increase in corporate expenses in 2004 was primarily due to a change in the allocation of a portion of executive salaries from the medical division to corporate expenses.

The increase in depreciation and amortization of $6,000 in 2004 was attributable to increased capital expenditures in the medical financing division in the prior fiscal year, which resulted in a partial depreciation expense in 2003 compared to a full expense in 2004. The Company's investment in technology to perform formerly labor intensive functions is now complete.

Net interest expense in 2004 was $24,000, compared to $19,000 in 2003. The increase in 2004 was caused by additional borrowing due to the amount of time insurance claims receivable are now remaining outstanding as a result of new regulations that make the collection process more difficult. The collection delays, which are timing issues rather than credit issues, have caused the Company to increase its borrowings to finance the additional receivables.

Through February 29, 2004, the end of the last fiscal year, the Company had accumulated net operating losses ("NOLs") of $5,328,000. The Company's taxable loss for the three months ended May 31, 2004 is approximately $482,000. These losses are available to be carried forward through February 28, 2024. The Company did not generate any taxable income since February 28, 2003, and estimated that it would not derive any additional minimum future tax savings in addition to the $90,000 that was estimated in 2003. The Company has taken a 95% valuation allowance of $1,885,000 against the deferred tax asset of $1,975,000 that these NOLs would generate.

The following table summarizes the Company's changes in discontinued operations (in thousands) for the periods indicated:

The decrease in management service fees of $402,000 in 2004 was a result of the decrease in management services that the Company provided to one of the two finance clients it manages. The decrease in management fees from that client is related to the discontinuation of the client's medical practice during the three months ended May 31, 2004. The Company bills for its services based on the amount of expenses that it incurs on behalf of those practices. If those practices decrease their size, the Company will not incur as much expense, resulting in a decrease in the amount of service fees. These fees are net of billing adjustments. Management service fees are billed monthly according to the cost of services rendered to the client. If the assets of the management client, which is also a finance client, are not enough to satisfy the billed fees, an allowance for billing adjustments is recorded to reduce the Company's net receivables to an amount that is equal to the assets of the client that are available for payment.

The $277,000 decrease in medical management expenses in 2004 was due to the discontinuation of one of the radiologist's practices.

The Company believes that as of May 31, 2004, the reserve for bad debts was adequate after increasing the reserve during the year ended February 29, 2004. The Company may incur a medical management bad debt loss when the assets of the management client, which is also a finance client, are potentially insufficient to satisfy the billed fees from prior periods. Since the management clients are also finance clients, the bad debt reserve is a result of the overall decrease in the collections rate from the arbitrations that have been closed in the last half of fiscal 2004. The Company increased the bad debt reserves during that period, because it now believes receivables available to pay management fees will be lower based on the information that had become available. The final bad debt expense will ultimately be determined after all receivables are litigated.

The impairment loss of $63,000 in 2004 is a result of management's estimate as to the excess of the carrying value of the net assets of the medical management service subsidiaries over the estimated proceeds from their ultimate sale.

The increase in depreciation expense of $6,000 in 2004 is a result of the opening of an additional MRI facility in November 2002 and the continuing upgrades of the MRI machines that the Company owns and utilizes in providing its management services.

For the reasons described above, the Company recorded a net loss of $554,000 in 2004, a decrease of $631,000 from the net income of $77,000 in 2003.

LIQUIDITY AND CAPITAL RESOURCES

The Company's two business activities during the three months ended May 31, 2004 resulted in a decrease of cash in the amount of $4,000. The changes in regulations that caused the increase in the length of the collection cycle of insurance claims resulted in an increase in the amount of cash needed to purchase medical insurance claims receivable. As a result of the increase in the collection cycle, the finance clients that are also management clients had less funds available to pay for management service fees, which then increased the management fee receivable collection cycle. On February 4, 2004, as a result of the increased collection cycle and the related use of cash, the Company decided to restructure the Medical Division.

As part of the restructuring, the Company decided to offer for sale the two MRI facilities that the Company owns and operates, discontinuing the medical management service business. For new prospective clients, the emphasis will be on less cash-intensive services, such as billing, collections and other management services. The Company is not seeking any new accounts receivable finance clients and is in the process of eliminating the purchase of additional medical insurance claims. The funds for its needs are expected to be provided from existing cash and proceeds from the collection of outstanding receivables. If those sources are insufficient, additional funds may be provided from asset-based borrowing facilities, refinancing of assets under capital leases, issuance of preferred stock, 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 prior periods. The Company's real estate assets in Hunter, New York are owned free and clear of mortgages, except for the construction loan that was used to finance the current property renovation, which is now complete. The construction loan was repaid on June 25, 2004 when a portion of that property was sold. Further development of this property, at any significant cost, is expected to be funded by the issuance of Series B Bonds, other asset-based financing, the sale of the renovated property or the sale of other property in Hunter.

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 its existing medical financing business, its company-wide working capital needs, and its expected investments in property and equipment. The Company expects that the reduction in both its client base and the advances it makes to its existing customers in the medical division will enable funds to be provided internally and from its financing activities.

The Company's significant sources of financing are from Series A and Series B bonds and construction loan financing. Both Series A and Series B bonds are issued for 18 month terms and may be redeemed with 60 days written notice in maximum increments of $50,000. Due to this redemption option, these bonds have been classified as current debt. As provided for in the debt instruments of the Series A and B bonds, the Company has extended maturity dates as evidenced by formal commitments. The Company may also refinance amounts that may be requested by bondholders for early redemptions through the issuance of new bonds. The Company also intends to use proceeds from the projected sale of real estate to repay or prepay debts. The construction loan is secured by the two remaining townhouses at the Hunter, New York property. One such townhouse was sold on June 25, 2004, and the remaining townhouse is under contract for sale.

Cash used by operations in 2004 was $384,000, as compared to $308,000 being used in 2003. The $76,000 increase in cash used by operations in 2004 was due to an increase in net loss, after adjustments for non-cash items of depreciation, real estate gains and provision for bad debts, the net of these items totaling $445,000. The increases in the use of cash were offset by (i) fluctuations in operating assets and liabilities of $148,000, primarily caused by timing differences, (ii) fluctuations in net assets of discontinued operations $196,000 and (iii) a decrease in payments to Co-investors of $25,000 in 2004.

Cash provided by investing activities was $396,000 in 2004 as compared with $13,000 being used in 2003. The change in cash from being used in 2003 to being provided in 2004 of $409,000 was due to a $368,000 net increase in proceeds from the collection of finance receivables and a reduction in capital expenditures of $41,000. The increase in funds from the collection of receivables of $400,000 in 2004 compared to $32,000 in 2003 was due to the decrease in receivable purchases in 2004 as compared to 2003. The decrease in receivable purchases in 2004 is a result of the Company's eliminating poorly collecting clients and plan to reduce and eliminate the purchase of receivables as part of its plan of restructuring that was implemented in February 2004. The decrease in capital expenditures in 2004 is due to the completion of the Company's investment in technology to perform formerly labor intensive functions.

Net cash used by financing activities was $16,000 in 2004 as compared with the $166,000 provided in 2003. The $182,000 decrease in cash being provided in 2004 was due to $16,000 of net loan repayments in 2004, as compared to $166,000 of net borrowing in 2003. The proceeds from the additional borrowings in 2003 were used to finance insurance claims receivable, which are outstanding for a longer period of time as a result of new regulations that create timing issues and make the collection process more difficult.

The table below summarizes aggregate maturities of future minimum note and lease payments under non-cancelable operating and capital leases as of May 31, 2004.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

There have been no material changes in reported market risks faced by the Company since February 29, 2004.

Item 4. Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Company's Securities Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to the Company's management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, as ours are designed to do, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

During the 90-day period prior to the date of this report, an evaluation was performed under the supervision and with the participation of our Company's management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based upon that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that our disclosure controls and procedures were effective. Subsequent to the date of this evaluation, there have been no significant changes in the Company's internal controls or in other factors that could significantly affect these controls, and no corrective actions taken with regard to significant deficiencies or material weaknesses in such controls.

PART II – OTHER INFORMATION

Item 6. Exhibits and Reports on Form 8-K

(a) Exhibits.

31.1 - Certification by the Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2 - Certification by the Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1 - Certification by the Chief Executive Officer and Chief Financial Officer Pursuant to Section 18 U.S.C. Section 1350 Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

(b) Reports on Form 8-K.

On June 4, 2004 and April 9, 2004, the Company filed Current Reports on Form 8-K relating to the announcement of the signing of an Acquisition Agreement with CMG to acquire 100% of CMG's outstanding capital stock in exchange for shares of common stock of the Company, after which the shareholders of CMG will have a majority ownership.

 

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

EXHIBITS

Exhibit 31.1

Certification by the Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

I, Lester Tanner, certify that:

1. I have reviewed this quarterly report on Form 10-Q of MFC Development Corp;

2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have:

   1. Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; and

   2. Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

   3. Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function):

   1. all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and

   2. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls.

Exhibit 31.2

Certification by the Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

I, Victor Brodsky, certify that:

1. I have reviewed this quarterly report on Form 10-Q of MFC Development Corp;

2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have:

   1. Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; and

   2. Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

   3. Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function):

   1. all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and

   2. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls.

Exhibit 32.1

Certification by the Chief Executive Officer and Chief Financial Officer Pursuant to Section 18 U.S.C. Section 1350
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

In connection with the Quarterly Report of MFC Development Corporation (the "Company") on Form 10-Q for the period ended May 31, 2004 as filed with the Securities and Exchange Commission on the date hereof (the "Report"),

We, Lester Tanner, Chief Executive Officer, and, Victor Brodsky, Chief Financial Officer of the Company, certify, pursuant to Section 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1)  The Report fully complies with the requirements of Section 13(a) and 15(d) of the Securities Exchange Act of 1934; and

(2)  The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.

This certification accompanies this Report on Form 10-Q pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by such Act, be deemed filed by the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended  (the "Exchange Act"). Such certification will not be deemed to be incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Exchange Act, except to the extent that the Company specifically incorporates it by reference.