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 November 30, 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 January 12, 2005, 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 November 30, 2004; results of operations for the nine months and three months ended November 30, 2004 and 2003; cash flows for the nine months ended November 30, 2004 and 2003; and changes in stockholders' equity for the nine months ended November 30, 2004. For further information, refer to the Company's financial statements and notes thereto included in the Company's Form 10-K/A Amendment No.1 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

Through August 26, 2004, the Company operated in two distinct industries consisting of real estate and medical financing. The medical financing business was conducted through Medical Financial Corp., a wholly owned subsidiary, which (i) purchased insurance claims receivables from medical practices and provided certain 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 called 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. On August 26, 2004 the Company sold its continuing service obligations and the related future revenue rights of its medical financing business in exchange for preferential collection rates on the receivables that are expected to be collected. As a result of the restructuring on February 4, 2004, and the sale of its continuing service obligations on August 26, 2004, the medical financing segment has been reclassified 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 in Hunter, New York, which is currently held for development or sale, and holds a mortgage on a real estate parcel in Connecticut.

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 discontinued on February 4, 2004.

3. Property and Equipment

Property and equipment consists of the following:

4. Finance and Management Fee Receivables, Net

As part of the discontinued operations of the Company, Medical Financial Corp., a wholly owned subsidiary of the Company, purchased insurance claims receivable from medical practices and provided collection services to those practices. The Company charged a fee (purchase discount) upon the purchase of those receivables, which compensated the Company for the advance payment that it paid to the client and for the collection services rendered to collect the receivables. The Company also charged additional fees for other services, such as a percentage of collections when the receivables needed to be litigated as the insurance companies improperly delayed payment or denied claims. The insurance companies also paid interest on late payments, and reimbursements for litigation filing fees and attorney's fees on cases that they lost. The Company also charged 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 included in assets from discontinued operations 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 and the nine months ended November 30, 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 had also taken other measures to reduce its bad debts, such as eliminating poorly collecting clients and reducing the upfront advance percentage that it paid when receivables were purchased. Management continues to 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. In addition, the Company has incurred actual bad debt losses when it determined that it was more cost effective to agree on a settlement for less than the full value of the receivables than to incur the additional collection costs.

From the date the Company purchased insurance claims receivable from medical practices and the advance payment was made to the client, the Company had 180 days to collect or determine that the bills were invalid as contractually defined. If the Company collected the advance payment and fee, all additional amounts, if any, that were collected were 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 November 30, 2004, there were approximately $1,857,079 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.

5. Real Estate Activities

Mortgages and Notes Receivable

Mortgage and notes receivable, arising from the sale of real estate, consist of the following:

Hunter, New York - On September 23, 2004, the Company sold the 10 acres of land for the hotel site that was in the beginning stages of development. The gross sales price was $1,250,000, which was comprised of a down-payment of $350,000 and a $900,000, non-interest bearing, balloon mortgage note that matures on November 10, 2005. The Company is using an imputed interest rate of 5% on the note. Due to a title issue on a 1.6 acre parcel contiguous to the hotel site, that parcel could not be conveyed at the time of closing. If the Company cannot freely convey the 1.6 acres by June 1, 2006, the mortgage note on the hotel site will be reduced by $125,000. The Company has taken a valuation allowance on the note receivable for the full amount and has reduced the gross sales price of the hotel site by $125,000 as a reserve against the possible reduction in the mortgage note. Co-investors will share in the positive cash flow from the collections of this note, after deducting costs and expenses of carrying and developing the Hunter property.

Granby, Connecticut - This mortgage calls for monthly payments of interest only at the rate of 7% per annum through March 1, 2006. Beginning on April 1, 2006, payments will include principal and interest at the rate of 9% per annum. The Granby note receivable is being used as collateral for certain debt. Co-investors will share in the positive cash flow from the collections of this note, after deducting costs and expenses of carrying and developing the Granby property. The owner of the property is a limited liability company, 24% owned by Lester Tanner's daughter. Lester Tanner is a shareholder, director and president of the Company. Interest income from this note was $17,000 for both of the three months ended November 30, 2004 and 2003 and $50,000 for both of the nine months ended November 30, 2004 and 2003.

Both mortgages are collateralized by the underlying real estate and mature as follows:

As of  November 30, 2004 and February 29, 2004, these mortgages and notes receivable were performing.

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. Amounts due to co-investors on property that has previously been sold is summarized as follows:

Sale of Real Estate, Hunter, New York

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 two remaining units were sold during the quarter ended August 31, 2004 for a total sales price of $502,000. The Company realized a net gain of $13,000 from the sale of these three townhouses, which included a gain of $18,000 during the year ended February 29, 2004 and a loss of $5,000 during the quarter ended August 31, 2004. The $106,000 balance of the construction loan was repaid on June 25, 2004 from the proceeds of the second unit. The Company capitalized interest and loan acquisition costs during the construction period. For the nine months ended November 30, 2004 and 2003, $3,000 and $12,000 of interest and loan acquisition costs were capitalized.

The sale of the ten acre hotel site on September 23, 2004, resulted in a gain of $280,000.

The sale of real estate is summarized as follows:

Other Real Estate Revenue

The Company's real estate assets currently include property held for development or 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 (i) net gain for the nine months ended November 30, 2003 of $175,000, which was included in other real estate revenue, and a (ii) net loss for the nine months ended November 30, 2004 of $136,000 which was included in costs and expenses from real estate.

Real Estate Costs and Expenses

Real estate costs and expenses consist of the following:

6. 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 November 30, 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 November 30, 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 five of the bondholders. One other director-shareholder holds a $25,000 bond, and 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 November 30, 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 one 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 November 30, 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 and nine months ended November 30, 2004 was $1,126 and $3,939. Interest expense on related party borrowings for the three months and nine months ended November 30, 2003 was $1,313 and $3,569.

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 November 30, 2004 and February 29, 2004  was $-0- and $111,953. The terms of the loan called 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 would amortize the loan in 15 years. Interest was at a rate of prime plus 1.5% but not less than 6.25% per annum nor more than 14% per annum. 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.

7. Income Taxes

The provision for income taxes consists entirely of various state and local franchise taxes.

The Company has net operating loss ("NOL") carryforwards for Federal purposes of approximately $5,543,000 as of February 29, 2004, the close of its last fiscal tax year. The Company's taxable loss for the nine months ended November 30, 2004 is approximately $1,974,000. These losses will be available for future years, expiring through February 28, 2024. The Company has taken a 96% 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.

8. Commitments and Contingencies

As stated in Note 5 to the consolidated financial statements, 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. The Company has periodically provided to the co-investors an accounting for their 35% interest. The sale of the ten acre parcel in Hunter, New York that was made on September 23, 2004, reported herein, will be the subject of the Company's next accounting to the co-investors as of February 28, 2005, the close of the Company's current fiscal year. On November 16, 2004, the co-investors of the Hunter property commenced a lawsuit against the Company in Westchester County, New York, in connection with their interests in the Hunter property.

On December 2, 2004, the Company filed its answer to the complaint, stating among other things that as a result of the recent sale of the Hunter property, and of the potential for the realization of the proceeds of the purchase money mortgage in November 2005, the periodic accounting to the co-investors to be made as of February 28, 2005, will begin to show in the Company's next fiscal year potentially positive amounts available to plaintiffs upon the advancement of the Hunter Highlands Development.

Discovery requested by the Company has been deferred at the request of  the co-investors' counsel, who has informed the Company's counsel that the co-investors wish to receive the details of the sale of the real property and the Company's accounting for their 35% interest after which their lawsuit will be discontinued. The Company will be providing that information beginning in February 2005.

In the normal course of business, the Company becomes a party to other 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.

9. Earnings per Share

Earnings (loss) per common share for each of the periods presented is calculated by dividing net income (loss) 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.

10. Discontinued Operations

On February 4, 2004, the Company instituted a plan to restructure the medical financing segment. The plan of restructuring called for the Company to sell the assets of the three subsidiaries that were formed to provide additional management services to certain medical practices. On August 26, 2004 the Company sold its continuing service obligations and the related future revenue rights of its medical financing business in exchange for preferential collection rates on the receivables that are expected to be collected. As part of the terms of the sale, the Company will retain half of the interest paid by insurance companies on late payments from improperly denied receivables. The Company expects that the interest income it receives will be great enough to cover the additional costs that will be due when the existing receivables are collected. The Company still expects to incur certain additional costs related to its discontinued operation, until all of the receivables are collected. The medical financing business was conducted through Medical Financial Corp., a wholly owned subsidiary, which (i) purchased insurance claims receivables from medical practices and provided certain services to those practices; and (ii) three other subsidiaries, which were formed to provide additional management services to certain medical practices. Accordingly, the operating results of the medical financing segment for the three months and nine months ended November 30, 2004 and 2003 has been presented as "(Loss) income from discontinued operations, net of income taxes". Net assets and liabilities to be disposed of or liquidated, at their book value, have been separately classified in the accompanying balance sheets at November 30, 2004 and February 29, 2004.

The Company recorded impairment loss of (i) $229,285, for the year ended February 29, 2004 and (ii) 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. During the three months ended August 31, 2004, the Company recorded a loss of $218,000 on the disposal of the assets from its medical management service business. Due to operating losses, there was no income tax benefit from the write-down and disposal of these assets. In addition, the Capco division, which was formed during 2000 and had never conducted the business for which it was formed, was 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 medical financing segment.

Summarized financial information for the medical financing segment as discontinued operations for the three months and nine months ended November 30, 2004 and 2003 follows:

The components of assets and liabilities of discontinued operations are as 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 and nine months ended November 30, 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/A Amendment No. 1 for the year ended February 29, 2004.

Overview

Through August 26, 2004, the Company operated in two distinct industries consisting of real estate and medical financing. The medical financing business was conducted through Medical Financial Corp., a wholly owned subsidiary, which (i) purchased insurance claims receivables from medical practices and provided certain 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 called 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. On August 26, 2004 the Company sold its continuing service obligations and the related future revenue rights of its medical financing business. As a result of the restructuring on February 4, 2004, and the sale of its continuing service obligations on August 26, 2004, the medical financing segment has been reclassified as discontinued operations and prior periods have been restated.

The real estate segment consists of parcels of real estate in Hunter, New York held for future development or sale, and of mortgage notes receivable on properties that were previously sold. Both the properties and mortgage notes receivable are subject to the interest of co-investors. 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.

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 (discontinued assets): 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 (discontinued operations): A fee was charged to medical providers upon the purchase of their accounts receivable by the Company. The fee was for the up-front payment that the Company paid upon purchase of the receivables and for collection services rendered to collect the receivables. This fee income was 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 November 30, 2004 ("2004") were $1,131,000, an increase of $1,088,000 or 2,530% as compared to the three months ended November 30, 2003 ("2003"). The Company's revenues from continuing operations for the nine months ended November 30, 2004 ("2004") were $1,718,000, an increase of $1,416,000 or 469% as compared to the nine months ended November 30, 2003 ("2003").

During the quarter ended November 30, 2004, the company sold the 10 acres of land for the hotel site that was in the beginning stages of development. The net sales price was $1,081,000 (gross sales price of $1,250,000, less an allowance of  $125,000 and deferred interest of $44,000). The $3,000 increase in interest from mortgages during the three months ended in 2004 was a result of the mortgage on the property that was sold.

The increase in revenues for the nine months ended in 2004 was a result of the sale described above and the sales during the quarter ended August 31, 2004, when the Company completed the renovation of the final two townhouse units that it owned at its Hunter, NY property. The net increase in revenues during the nine month period was offset by a reduction in other income from net adjustments in 2003 to amounts that were 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.

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

Costs and expenses from continuing operations increased by $823,000, to $984,000 in the three month period and increased by $1,446,000, to $1,895,000, in the nine month period. The net increase in both periods was due to increases in real estate, offset by decreases in corporate expenses. The increase in real estate expenses of $898,000 in the three month period and $1,487,000 in the nine month period was primarily attributable to the cost of the properties that were sold during the three months ended November 30, 2004 and August 31, 2004.

The $75,000 decreases in Corporate expenses for the three months ended in 2004 were attributable to (i) a $35,000 reimbursement by CMG for services provided by the Company on CMG's behalf, (ii) a reduction in the amount of accounting billing, and (iii) a decrease in directors fees due to fewer meetings. The $41,000 decreases in Corporate expenses for the nine months ended in 2004 were primarily attributable to the reimbursement by CMG and decrease in directors fees which occurred during the quarter ended November 30, 2004.

Net interest expense for the three months ended in 2004 was $22,000, compared to $22,000 in 2003. Net interest expense for the nine months ended in 2004 was $66,000, compared to $59,000 in 2003. Interest expense arises from the Company's obligations under its outstanding Series A and Series B bonds. While the proceeds of these bonds were used to finance the discontinued medical financing segment, the Company as guarantor  remains obligated as to their repayment. As such, interest expense on these notes are classified as continuing operations. The increase in nine month period ended 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 the Company believes are timing issues rather than credit issues of the insurance companies, 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 $5,543,000. The Company's taxable loss for the nine months ended August 31, 2004 is approximately $1,974,000. 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 96% valuation allowance of $2,296,000 against the deferred tax asset of $2,386,000 that these NOLs would generate.

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

The Company's revenues from discontinued operations for the three months ended in 2004 were $9,000, a decrease of $621,000 as compared to the three months ended in 2003. The Company's revenues from discontinued operations for the nine months ended in 2004 were $198,000, a decrease of $2,197,000 as compared to the nine months ended in 2003. The decreases in both periods were due to the elimination of revenues as part of the Company's decision on February 4, 2004 to restructure the medical financing segment.

Costs and expenses from discontinued operations decreased by $1,000,000, to $301,000 in the three month period and decreased by $1,312,000, to $1,668,000 in the nine month period. The decrease in the three month period is primarily due to decreases in medical receivable, medical management service expenses, bad debts, loss on disposal of assets, and depreciation and amortization. The decrease in medical receivable expenses of $264,000 is due to a reduction in employment costs of $209,000 and other expenses due to the decrease in services provided as a result of the of the Company's decision on February 4, 2004 to restructure the medical financing segment. For the same reason, medical management service expenses decreased by $291,000 in the three month period ended in 2004.

The decrease in the nine month period is primarily due to decreases in medical receivable, medical management service expenses, bad debts, loss on disposal of assets, and depreciation and amortization. The decrease in medical receivable expenses of $537,000 is due to a reduction in employment costs of $436,000 and other expenses due to the decrease in services provided as a result of the of the Company's decision on February 4, 2004 to restructure the medical financing segment. For the same reason, medical management service expenses decreased by $830,000 in the nine month period ended in 2004.

The Company increased its bad debt reserves by $217,000 and incurred actual bad debts of $69,000 during the nine months ended November 30, 2004. Actual bad debts were incurred because the Company made certain settlements on its receivables and it believes that the costs that would have been incurred to collect the full amount of the receivables would have been approximately the same as the bad debt incurred. For the same reason, the Company is anticipating future settlements and $56,000 of the increase in bad debt reserve is attributable to this strategy.

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, then, 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. 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 paid when receivables were 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 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 all of 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, and an additional $8,000 and $103,000 during the three months and nine months ended November 30, 2004, because it believes receivables available to pay management fees will be lower based on the information that had become and is currently becoming 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 of May 31, 2004, 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 loss on disposal of assets of $218,000 in the nine months ended November, 2004 was a result of (i) the loss of $8,000 from the final disposition and sale of one MRI facility and (ii) the $210,000 loss incurred as a result of the decision in August 2004 to abandon the remaining MRI facility, rather than continuing to pay the carrying costs of the closed operation and trying to sell the assets before the lease expired on February 28, 2005.

For the reasons described above, most notably the profit from the sale of real estate of $280,000 and the decrease in the loss from discontinued operations of $383,000, the Company recorded a net loss of $169,000 for the three months ended November 30, 2004, a decrease of $650,000 from the net loss of $819,000 for the three months ended November, 2003. The increase in loss from discontinued operations of $874,000 resulted in the Company recording a net loss of $1,725,000 for the nine months ended November, 2004, an increase of $909,000 from the net loss of $816,000 for the nine months ended November 30, 2003.

LIQUIDITY AND CAPITAL RESOURCES

The Company's two business activities during the nine months ended November 30, 2004 resulted in an increase of cash in the amount of $389,000. 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 owned and operated, discontinuing the medical management service business. During the quarter ended August 31, 2004, one of the facilities was sold, and the other facility was abandoned. The result was an immediate decrease in cash requirements. On August 26, 2004 the Company sold its continuing service obligations and the related future revenue rights of its medical financing business, in exchange for preferential collection rates on the receivables that are expected to be collected. This will preserve the Company's cash by eliminating the need to incur on-going collection costs. As part of the terms of the sale, the Company will retain half of the interest paid by insurance companies on late payments from improperly denied receivables. The Company expects that the interest income it receives will be sufficient to cover the additional costs that will be due when the existing receivables are collected. The Company still expects to incur certain additional costs related to its discontinued operations until all of the receivables are collected. These costs also include interest expense on the outstanding balances of the Series A and Series B bonds that were used to finance the medical financing segment. 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 the current and prior periods. The Company's real estate assets in Hunter, New York are owned free and clear of mortgages. On September 23, 2004, the company sold the 10 acres of land for the hotel site that was in the beginning stages of development. The gross sales price was $1,250,000, which was comprised of a down-payment of $350,000 and a $900,000, non-interest bearing, balloon mortgage note that matures on November 10, 2005. The Company is using an imputed interest rate of 5% on the note. Due to a title issue on a 1.6 acre parcel contiguous to the hotel site, that parcel could not be conveyed at the time of closing. If the Company cannot freely convey the 1.6 acres by June 1, 2006, the mortgage note on the hotel site will be reduced by $125,000. The Company reduced the gross sales price of the hotel site by $125,000 as a reserve against the possible reduction in the mortgage note.  Further development of the Hunter property, at any significant cost, is expected to be funded by existing cash, the proceeds from mortgage note on the hotel site,  issuance of Series B Bonds, other asset-based financing, the sale 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 the discontinued operations of medical financing business, its company-wide working capital needs, and its expected investments in property and equipment.

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.

Cash provided by total operations in 2004 was $397,000, as compared to $510,000 being used in 2003. The $907,000 net increase in cash provided by operations in 2004 was due to an increase in (i) collections from the sale of real estate of $709,000, (ii) decrease in net assets of discontinued operations of $877,000 in 2004, compared to a decrease of $99,000 in 2003, primarily caused by the reduction of outstanding receivables, due to the discontinuation of the medical division, (iii) fluctuations in operating assets and liabilities of $266,000, primarily caused by timing differences, and (iv) a decrease in payments to Co-investors of $25,000 in 2004. The increases in cash provided by operations was offset by an increase in real estate held for development or sale of $85,000 and an increase in net loss, after adjustments for non-cash items of (i) depreciation, (ii) real estate gains and losses, (iii) deferred interest income, (iv) provision for bad debts and (v) impairment losses and disposal losses from discontinued operations, the net of these items totaling $786,000.

Cash used by investing activities was $8,000 in 2004 as compared with no activity in 2003. The increase in the use of cash in 2004 was due to capital expenditures of $8,000 in 2004.

Net cash used by financing activities was $-0- in 2004 as compared with $345,000 being provided in 2003. The $345,000 decrease in cash being provided in 2004 was due to net loan borrowing in 2003, as compared to $-0- net borrowing in 2004. 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 for continuing operations as of November 30, 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 4. Submission of Matters to a Vote of Security Holders

None.

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 November 30, 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.