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

FORM 10-K

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

For the fiscal year ended February 28, 2005

Commission file number: 0-3579974

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, $.001 par value

Indicate by check mark whether the 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( )

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. (x)

DOCUMENTS INCORPORATED BY REFERENCE

The information required by Part III of this Report, to the extent not set forth herein, is incorporated by reference from the Registrant's definitive proxy statement relating to the annual meeting of stockholders to be held in July 2005, which definitive proxy statement will be filed with the Securities and Exchange Commission within 120 days after the close of the year ended February 28, 2005.

TABLE OF CONTENTS

PART I

ITEM 1. BUSINESS

ITEM 2. PROPERTIES

ITEM 3. LEGAL PROCEEDINGS

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS AND OTHER INFORMATION

 

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES OF MARKET RISK

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

ITEM 9A. CONTROLS AND PROCEDURES

 

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

ITEM 11. EXECUTIVE COMPENSATION

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

ITEM 14. PRINCIPAL ACCOUNTANTS FEES AND SERVICES

 

PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

 

SIGNATURES

PART I

ITEM 1. BUSINESS

General

MFC DEVELOPMENT CORP. (the "Company" or "MFC") was incorporated in the State of Delaware on May 18, 1990 under the name of PSI Food Services Corp., which had been a wholly-owned subsidiary of FRMO Corp., formerly FRM Nexus, Inc., a Delaware corporation ("FRM"), since November 1993. All of FRM's assets and liabilities were transferred to MFC on August 31, 2000, except for $10,000. Because such entities were under common control, this transaction was accounted for in a manner similar to a pooling of interests on MFC's books. On January 23, 2001, all of the outstanding shares of MFC were distributed to shareholders of FRM, which no longer owns any shares of MFC.

Business Description

MFC is engaged in the business of developing real estate and liquidating the discontinued operations of the Medical Division.

Real Estate Division

The Real Estate Division of the Company presently owns the interests in parcels of real estate described below. For the fiscal year ended February 28, 2005, the total revenues derived from the Real Estate Division were $1,776,877, constituting 100% of the total revenues from continuing operations of MFC. A brief description of each parcel follows:

East Granby, Connecticut

The Company owned a partially built two-story office building located at 2 Gateway Boulevard in East Granby, Connecticut which was carried at the value of $900,000 on February 28, 1995. In the fiscal year ended February 29, 1996, the Company spent approximately $1,300,000 in developing the site and improving a portion of the building. In February 1996, the property was sold to Gateway Granby, LLC. ("Gateway"), a limited liability company of which certain members are shareholders of MFC, for $4,800,000, of which $3,853,268 has been paid and $946,732  was due to the Company as of February 28, 2005, pursuant to a purchase money second mortgage. The gain on the sale of this property was recognized on the accrual method in prior years, except for a reserve of $850,000 which was recognized in January 2003 upon the release of the Company from a contingent liability for certain rental payments. On May 17, 2005, the $946,732 second mortgage was exchanged for a $1,000,000 equity investment in Granby.

Hunter, New York

MFC's wholly-owned subsidiary, Yolo Equities Corp. owns the fee interest in properties in Hunter, New York, along with co-investors. The co-investors are entitled to receive 35% of the cash proceeds of the sales of Hunter Properties made after June 30, 2000, after deducting the net costs of carrying the properties after June 30, 2000 and the costs of the sales (the "net proceeds"). Yolo Equities Corp. is entitled to receive 65% of the said net proceeds. As of February 28, 2005, the properties consisted of acreage in an area known as Hunter Highlands, which is adjacent to the Hunter Mountain Ski Slopes in the Town of Hunter, Greene County, New York. The undeveloped portion of the acreage, which Yolo Equities Corp. plans to sell or develop, is available for single family residences, townhouses, and condominium units. The developed portion, consisting of (i) a waste water treatment plant owned by Highlands Pollution Control Corp. (a wholly-owned subsidiary of the Yolo Equities Corp.), and (ii) a Clubhouse with swimming pool and six tennis courts, were sold in May 2005. A small office building was renovated and converted into three townhouse units. One of the townhouse units was sold in February 2004, and the remaining two units were sold in the fiscal year ended February 28, 2005. Adjoining the undeveloped portion of the acreage are 200 condominium units owned by unrelated persons.

The waste water treatment plant was upgraded in the fiscal year ended February 28, 2003, under an agreement with the City of New York. Prior to the sale of the plant on May 10, 2005, the City of New York was reimbursing the Company for all costs incurred with the upgrade of the facility. See Note 4 of Notes to Consolidated Financial Statements.

The Company completed a sale of the Clubhouse on May 17, 2005.

The hotel site, consisting of 10 plus acres, was sold on September 23, 2004. See Note 4 of Notes to Consolidated Financial.

After the sales in May 2005, Yolo Equities Corp. continues to retain about 65 acres of land for development or sale. The future development of this acreage will require an increase in the capacity of the waste water treatment plant, for which State permits already exist, and which Yolo Equities Corp. has the right to obtain by participating in the financing of the expansion.

Other Properties

The Company, alone or with co-investors and joint ventures, may acquire other real property for development of residential, commercial and office structures, when management identifies opportunities for enhancement of shareholder values.

Medical Division (Discontinued)

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 each of the three years ended February 28, 2005 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 February 28, 2005 and February 29, 2004. See Note 11 of Notes to Consolidated Financial Statements.

Marketing

The Company's marketing in its real estate activities is limited to working with real estate brokers in New York and Connecticut.

Competition

Real Estate Division

The Company's presently owned acreage held for development or sale is located in Hunter, New York. The real estate market for second homes in this resort community is presently experiencing improved demand. The Company will be competing with many owners and developers in the locale in connection with the development and sale of this land. After May 17, 2005, the Company has a 49% equity interest in Gateway Granby, LLC, which owns an office building, subject to a first mortgage of $2,200,000. The building is currently 93% occupied by unrelated tenants. Gateway competes with many owners of office buildings in the Northern Hartford, Connecticut area for leasing and lease renewals.

Trademarks

None.

Employees

As of February 28, 2005, the Company had 7 employees. None of the Company's employees are represented by a labor union. MFC considers its relationship with its employees to be good.

Regulatory Laws

The Company is in compliance with all environmental laws relating to hazardous substances in real property. Future compliance with environmental laws is not expected to have a material effect on its business.

ITEM 2. PROPERTIES

In addition to the real property as set forth in Item 1 above, MFC leases its offices in New Rochelle, New York, under a lease expiring on February 28, 2007. All of the space leased by the Company is leased from an unaffiliated third party.

ITEM 3. LEGAL PROCEEDINGS

MFC is not presently a party to any material litigation, except (i) a lawsuit relating to the title issue on the sale of the hotel site set forth in Note 4 of the Notes to the Consolidated Financial Statements, which involves $125,000 for which the Company has taken a 100% valuation allowance, and (ii) a lawsuit by the co-investors of the Hunter property set forth in Note 8 of Notes to the Consolidated Financial Statements, which has been deferred pending review of the recent accounting given to the co-investors as of February 28, 2005.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS AND OTHER INFORMATION

None, other than the election of directors on July 15, 2004.

Other Information

Cautionary Statement

In connection with the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995, the Company is hereby filing cautionary statements identifying important risk factors that could cause the Company's actual results to differ materially from those projected in forward looking statements of the Company made by or on behalf of the Company.

Such statements may relate, but are not limited, to projections of revenues, earnings, capital expenditures, plans for growth and future operations, and  competition, as well as assumptions relating to the foregoing. Forward-looking statements are inherently subject to risks and uncertainties, many of which cannot be predicted or quantified.

When the Company uses the words "estimates," "expects," "anticipates," "believes," "plans," "intends," and variations of such words or similar expressions, they are intended to identify forward-looking statements that involve risks and uncertainties. Future events and actual results could differ materially from those underlying the forward-looking statements. The factors that could cause actual results to differ materially from those suggested by any such statements include, but are not limited to, those discussed or identified from time to time in the Company's public filings, including general economic and market conditions, changes in domestic laws, regulations and taxes, changes in competition and pricing environments, and regional or general changes in real estate values.

Undue reliance should not be placed on these forward-looking statements, which are applicable only as of the date they are made. The Company undertakes no obligation to revise or update these forward-looking statements to reflect events or circumstances that arise after that date or to reflect the occurrence of anticipated events.

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Registration and Market Prices of Common Stock

The Form 10 Registration of the common stock of MFC Development Corp. pursuant to Section 12(g) of the Securities Exchange Act of 1934 as finally amended on January 17, 2001 was effective as of November 30, 2000 and MFC has been a reporting company since that date, filing its first quarterly statement for the nine months ended November 30, 2000, on January 16, 2001.

The Company's common stock was distributed on January 23, 2001 in a spin-off from FRM. Shareholders' basis in the Company's shares is equal to the market value when distributed, which was $1.00 per share based on its trading on the NASDAQ Bulletin Board under the symbol MFCD. The following table sets forth the range of high and low bid quotations of the Company's common stock for the periods set forth below, as reported by the National Quotation Bureau, Inc. Such quotations represent inter-dealer quotations, without adjustment for retail markets, markdowns or commissions, and do not necessarily represent actual transactions.

The last trade on May 20, 2005 was $1.05

Dividends

No cash dividend has been paid by MFC since its inception. The Company has no present intention of paying any cash dividends on its common stock.

Holders

As of May 1, 2005, there were approximately 1,000 holders of record of MFC common stock representing about 2,100 beneficial owners of its shares. There are no options or warrants to purchase common stock of the Company outstanding except for options to purchase a total of (i) 4,500 shares held by Allan Kornfeld, former Chairman of the Company, (ii) 4,500 shares held by David Michael, a former Director, (iii) 6,000 shares held by Anders Sterner, presently a Director of the Company, and (iv) 1,500 shares each held by Jay Hirschson and Steven Kevorkian, both presently Directors of the Company. The Company does not know of any shares of common stock of MFC that are held by any director, officer or holder of as much as 5% of the outstanding stock for sale pursuant to a filing under Rule 144 of the Securities Act. The Company has not agreed to register any common stock for sale under the Securities Act by any shareholder or the Company, the offering of which could have a material effect on the market price of the Company's common equity.

ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA

ITEM 7. 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 Consolidated Financial Statements and related Notes thereto included herein and incorporated herein by reference.

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.

In February 2003, the Company was released from a rental obligation to a related party arising from the sale of real estate in a prior period. The obligation was to a limited liability company, 24% owned by Lester Tanner's daughter. Lester Tanner is a shareholder, director and president of the Company. As a result of the termination of the contingent obligation, the Company recorded a gain of $850,000 during the year ended February 28, 2003.

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.

Going Concern

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern.  However, the Company incurred net losses of approximately $2,492,000 and $1,433,000 during the years ended February 28, 2005 and February 29, 2004, respectively, principally from discontinued operations.  This factor raises substantial doubt about the Company's ability to continue as a going concern. 

Management is making efforts to sell its real estate held for development or sale in the normal course of business and significantly reduce operating expenses.  In addition, the Company is seeking to raise equity capital and is considering business combinations with other entities. The consolidated financial statements do not include any adjustments that might be necessary should the Company be unable to continue as a going concern.   

Results of Operations

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 year ended February 28, 2005 ("2005") were $1,777,000, an increase of $1,158,000 or 187% as compared to the year ended February 29, 2004 ("2004"). The Company's revenues from continuing operations for the year ended February 29, 2004 ("2004") were $619,000, a decrease of $418,000 or 40% as compared to the year ended February 28, 2003 ("2003").

In 2005 the Company sold the 10 acres of land for the hotel site ("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). In 2005, the Company also completed the renovation of the final two townhouse units that it owned at its Hunter, NY property. The sales price for these units was $502,000 in 2005, as compared to the one unit that was sold in 2004 for $200,000.

The decrease in other real estate income was a result from net adjustments in 2004 to amounts that were due to co-investors of $250,000. 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 increase of rental income in 2005 was a result of a rate increase for sewage charges to the condominium development for the sewage treatment plant services. The $17,000 increase in interest from mortgages in 2005 was a result of the mortgage on the property that was sold.

The increase in real estate sales of $200,000 in 2004 was a result of one townhouse unit being sold in 2004, compared to none in 2003. The decrease in other real estate revenue in 2004, reflects the 2003 recognition of $850,000 of deferred income attributable to the termination of a contingent obligation related to a sale-leaseback. In 2004, other real estate revenue consisted of adjustments to amounts due to co-investors of $275,000, offset by $25,000 paid in settlement of a dispute with a prior co-investor. The decrease in interest from mortgages in 2004 was due to a temporary reduction of the interest rate from the Granby mortgage as consideration for the termination of the contingent obligation related to a sale-leaseback.

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 $1,272,000, to $2,055,000 in 2005. The net increase in 2005 was due to an increase in real estate expenses, offset by a decrease in corporate expenses. The increase in real estate expenses of $1,330,000 was primarily attributable to the cost of the properties that were sold during 2005 (Hotel Site and two townhouses), which was $1,308,000, compared to the cost of $182,000 for the one townhouse that was sold in 2004. In addition, the Company incurred an additional cost of $143,000 in 2005 when amounts due to co-investors were adjusted to reflect the sales and cash flow in the current year.

The $58,000 decrease in corporate expenses in 2005 was attributable to (i) a $35,000 reimbursement by another company that was involved with the Company in a previously disclosed proposed transaction, which has since been canceled, (ii) a reduction in the amount of accounting billing, and (iii) a decrease in directors' fees due to fewer meetings.

Costs and expenses from continuing operations increased by $218,000, to $783,000 in 2004. The net increase in 2004 was due to increases in real estate and corporate expenses, offset by a decrease in depreciation and amortization. The increase in real estate expenses of $183,000 was primarily attributable to the $182,000 cost of real estate sold in 2004 compared to none being sold in 2003.

The $36,000 increase in corporate expenses in 2004 was due to (i) an increase of $17,000 in accounting fees due to a billing adjustment for the prior year's annual audit, (ii) an increase of $12,000 in directors' fees due to additional meetings, (iii) a $25,000 reallocation of administrative salaries from the real estate division, and (iv) an increase in other various expenses, offset by a decrease in director and officer liability insurance of $34,000.

Net interest expense in 2005 was $87,000, compared to $80,000 in 2004. 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 2005 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.

Net interest expense in 2004 was $80,000, compared to $11,000 in 2003. The increase in 2004 was caused by additional borrowing due to the amount of time insurance claims receivable were remaining outstanding as a result of new regulations that made the collection process more difficult. The collection delays, which were timing issues rather than credit issues, have caused the Company to increase its borrowings to finance the additional receivables.

Through 2005, the Company had accumulated net operating losses ("NOLs") of $7,396,000 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 $2,425,000 against the deferred tax asset of $2,515,000 that these NOLs would generate. In addition, the Company has also taken a 100% valuation allowance of $542,000 against other timing differences. The benefit for income taxes of $76,000 in 2003 reflected the current year estimated benefit of $90,000.

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

The Company's revenues from discontinued operations in 2005 were $223,000, a decrease of $2,574,000 as compared to 2004. The Company's revenues from discontinued operations in 2004 were $2,797,000, a decrease of $1,426,000 as compared to 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. The decrease in revenues in 2004 was also attributable to the elimination throughout the year 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 made collections more difficult. In addition, management service fees decreased in 2004 due to a decrease in the size of the medical practices that were managed. 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 were net of billing adjustments. Management service fees were 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, were not enough to satisfy the billed fees, an allowance for billing adjustments was recorded to reduce the Company's net receivables to an amount that is equal to the assets of the client that were available for payment.

Costs and expenses from discontinued operations in 2005 decreased by $1,620,000, to $2,339,000. The decrease in 2005 was due to decreases in medical receivable expenses, medical management service expenses, bad debts, and depreciation and amortization, offset by increases in impairment loss and loss on disposal of assets. The decrease in medical receivable expenses of $739,000 is due to a reduction in employment costs of $637,000 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 $986,000 in 2005.

Costs and expenses from discontinued operations in 2004 increased by $169,000, to $3,959,000. The increase in 2004 was due to increases in medical receivable expenses, bad debts, and depreciation and amortization, offset by a decrease in medical management service expenses. The $43,000 increase in medical receivable expenses in 2004 was primarily due to (i) an increase of  $68,000 in the costs of filing arbitrations against insurance companies on denied and unpaid medical bills, which was a result of an increase in the amount of arbitrations that were closed in 2004 as compared to 2003, and (ii) an increase of $14,000 in computer related expenses, due to a reduction in the allocation of capitalized costs, offset by a decrease in postage costs of $69,000. The decrease in postage expenses in 2004 was due to a less costly method of mailing medical bills and the related packages to the insurance carriers and a decrease in the quantity of mailings due to the reduction in the amount of bills purchased.

The $704,000 decrease in medical management expenses in 2004 was due to a net decrease  in operating expenses from managing  a radiologist's practices, and (ii) a reduction in operating expenses from a former client's office that is now closed. A decrease in operating expenses occurs when there is a decrease in a management client's radiology practice. The reduction in operating expenses was related to the reduction in the size of the radiologist's practice. As the size of the radiologist's practice decreases, expenses also decrease.

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 that occurred during the years ended February 28, 2005 and February 29, 2004 was based on an increase in adverse arbitration decisions from the hearings that were decided during those periods. 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 during the last two fiscal years. Management believes that it will be increasingly more difficult to collect on outstanding receivables, and has initiated an additional 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 during the years ended February 28, 2005 and February 29, 2004. The Company increased the bad debt reserves during those periods, 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 losses of $271,000 in 2005 and $229,000 in 2004 were a result of management's estimate as to the excess of the carrying value of the net assets over the estimated (i) future cash flow generated from these assets and (ii) proceeds from their ultimate sale.

The loss on disposal of assets of $218,000 in 2005 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.

The decrease in depreciation and amortization of $70,000, to $160,000 in 2005 was a result of the disposal of the assets of the two MRI facilities that the Company closed in 2005. 

The increase in depreciation expense of $77,000 in 2004 was a result of the opening of an additional MRI facility in November 2002 and the continuing upgrades of the MRI machines that the Company owned and utilized in providing its management services.

For the reasons described above, most notably, the decrease in revenues from discontinued operations, compared to changes in costs and expenses, the Company recorded a net loss of $2,492,000 in 2005, an increase of $1,059,000 from the net loss of $1,433,000 in 2004. For the same reasons as 2005, and in addition, the reduction in other real estate revenue, the Company recorded a net loss of $1,433,000 in 2004, a decrease in earnings of $2,398,000 from the net income of $965,000 in 2003.

Liquidity and Capital Resources

The Company's two business activities during the year ended February 28, 2005 resulted in an increase of cash in the amount of $204,000. 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 (i) Medical Financial Corp., a wholly owned subsidiary, which 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) the focus of 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 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 common 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 and development 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, issuance of common stock, the proceeds from mortgage note on the hotel site, issuance of Series B Bonds, other asset-based financing, and the sale of other property in Hunter.

The Company believes that its present cash resources, the cash available from financing activities, and issuance of additional common stock will be sufficient on a short-term basis and over the next 12 months to fund its existing real estate business and discontinued operations, its company-wide working capital needs, and its expected investments in property and equipment. The Company expects that the collection of its existing receivables from discontinued operations will enable funds to be provided internally and from its financing activities.

The Company's significant sources of financing have been 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 repaid the outstanding balance of its construction loan from the proceeds of the sales of the townhouses that secured the loan.

Cash provided by operations in 2005 was $212,000, as compared to $405,000 being used in 2004. The $617,000 net increase in cash provided by operations in 2005 was due to an increase in (i) collections from the sale of real estate of $509,000, (ii) decrease in net assets of discontinued operations of $1,114,000 in 2005, compared to a decrease of $422,000 in 2004, primarily caused by the reduction of outstanding receivables, due to the discontinuation of the medical division, and (iii) fluctuations in operating assets and liabilities of $227,000, primarily caused by timing differences. The increases in cash provided by operations were offset by an increase in real estate held for development or sale of $71,000 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) adjustment of amounts due to co-investors, (v) provision for bad debts and (vi) impairment losses and disposal losses from discontinued operations, the net of these items totaling $740,000.

Cash used by investing activities was $8,000 in 2005 as compared with no activity in 2003. The increase in the use of cash in 2005 was due to capital expenditures of $8,000 in 2005.

Net cash used by financing activities was $-0- in 2005 as compared with $172,000 being provided in 2004. The $172,000 decrease in cash being provided in 2005 was due to net loan borrowing in 2004, as compared to $-0- net borrowing in 2005. The proceeds from the additional borrowings in 2004 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 February 28, 2005.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES OF MARKET RISK

At February 28, 2005, the Company's debt that is sensitive to changes in interest rates includes (i) Series A bonds of $750,000 maturing through February 2006, and (ii) Series B bonds of $200,000 maturing through September 2005. Interest on both of the Series A and Series B bonds 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. An interest rate increase would have a negative impact to the extent that the prime rate rises to above 6% and the Company maintains a balance in either of the Series A or Series B bonds. As of February 28, 2005, an increase in the prime rate to 7% would have a maximum negative impact of approximately $10,000 per annum and each additional 1% increase in the prime rate would have a maximum negative impact of approximately $10,000 per annum. As of February 29, 2004, an increase in the prime rate to 7% would have had a negative impact of approximately $18,000 and each additional 1% increase in the prime rate would have had a negative impact of approximately $13,000.

An interest rate change would not impact the Company's cash flows on the fixed rate mortgage receivable.

The Company's is also exposed to interest rate risk related to its receivables as a consequence of having fixed interest rate receivables. The Company is exposed to interest rate risk arising from changes in the level of interest rates. It is anticipated that the fair market value of receivables with a fixed interest rate will increase as interest rates fall and the fair market value will decrease as interest rates rise.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The financial statements required by this Item 8 are set forth in Item 15 of this Form 10-K. All information which has been omitted is either inapplicable or not required.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

ITEM 9A. 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 III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The information required by this Item is set forth in the Company's definitive proxy statement, which will be filed with the Securities and Exchange Commission within 120 days of February 28, 2005. Such information is incorporated herein by reference and made a part hereof.

ITEM 11. EXECUTIVE COMPENSATION

The information required by this Item is set forth in the Company's definitive proxy statement, which will be filed with the Securities and Exchange Commission within 120 days of February 28, 2005. Such information is incorporated herein by reference and made a part hereof.

Code of Ethics

The Company has adopted a written Code of Ethics that applies to all of its directors, officers and employees.  It is available on the Company's website at www.mfcdevelopment.com and shareholders may obtain a paper copy by writing to the Secretary at the address set forth on page 1.  Any amendment to the Code of Ethics, or waiver thereof, will be disclosed on the website promptly after its date.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information required by this Item is set forth in the Company's definitive proxy statement, which will be filed with the Securities and Exchange Commission within 120 days of February 28, 2005. Such information is incorporated herein by reference and made a part hereof.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required by this Item is set forth in the Company's definitive proxy statement, which will be filed with the Securities and Exchange Commission within 120 days of February 28, 2005. Such information is incorporated herein by reference and made a part hereof.

ITEM 14. PRINCIPAL ACCOUNTANTS FEES AND SERVICES

The information required by this Item is set forth in the Company's definitive proxy statement, which will be filed with the Securities and Exchange Commission within 120 days of February 28, 2005. Such information is incorporated herein by reference and made a part hereof.

PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

(a) The following documents are filed as part of this report:

1. Consolidated Financial Statements

As of February 28, 2005 and February 29, 2004 and for the fiscal years ended February 28, 2005, February 29, 2004 and February 28,  2003.

Report of Holtz Rubenstein Reminick LLP

Consolidated Balance Sheets

Consolidated Statements of Operations

Consolidated Statement of Stockholders' Equity

Consolidated Statements of Cash Flows

Notes to Consolidated Financial Statements

2. Financial Statement Schedules

Schedule II - Valuation and Qualifying Accounts

Schedule III - Real Estate and Accumulated Depreciation

Schedule IV - Mortgage Loans on Real Estate

The data required by all other schedules is either included in the consolidated financial statements or is not required.

3. Reports Filed on Form 8-K:

On April 9, 2004 and June 4, 2004, the Company filed Current Reports on Form 8-K relating to the announcement of the signing of an Acquisition Agreement with Creative Marketing Group, Inc. ("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 would have a majority ownership. The Form 8-K that was filed on June 4, 2004 also included a copy of the Code of Ethics that had been approved by the Company's Board of Directors on May 27, 2004.

On May 3, 2005, the Company filed a Current Report on Form 8-K announcing that:

(1) The Company has terminated acquisition negotiations with CMG after the Board of Directors of the Company determined that CMG would not be able to meet the conditions specified in a previously reported agreement for the acquisition of that company.

(2) The Company's Board of Directors authorized management to obtain additional capital through the issuance of up to 500,000 shares of common stock in a private sale.

(3) The Company's Board of Directors authorized management to commence discussions with a direct marketing company that expressed interest to be acquired by the Company.

 

On May 23, 2005, the Company filed a Current Report on Form 8-K announcing that:

 

(1) A non-binding letter of intent had been signed with the direct marketing company, Worldwide Excellence, Inc. of Los Angeles, California, to negotiate for its acquisition by the Company.

 

(2) On May 19, 2005, the Company exchanged its $946,732 second mortgage on the office building in East Granby, Connecticut owned by Gateway Granby, LLC ("Gateway") for a $1,000,000 equity investment in Gateway, constituting 49% of the equity ownership of Gateway.

Report of Independent Registered Public Accounting Firm

The Board of Directors and Shareholders
MFC Development Corp., Inc. and Subsidiaries

We have audited the accompanying consolidated balance sheets of MFC Development Corp., Inc. and its subsidiaries as of February 28, 2005 and February 29, 2004 and the related consolidated statements of operations, stockholders' equity and cash flows for the three years ended February 28, 2005. Our audits also included the consolidated financial statement schedules listed in the Index at Item 15(a) for the three years ended February 28, 2005. These consolidated financial statements and consolidated financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and consolidated financial statement schedules based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of MFC Development Corp., Inc. and its subsidiaries at February 28, 2005 and February 29, 2004 and the consolidated results of their operations and their cash flows for the three years ended February 28, 2005 in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the related consolidated financial statement schedules for the three years ended February 28, 2005, when considered in relation to the basic financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.

The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern.  As discussed in Note 1 to the consolidated financial statements, the Company's recurring losses from operations raise substantial doubt about its ability to continue as a going concern.  Management's plans in regard to these matters are also described in Note 1.  The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

MFC Development Corp. and Subsidiaries

Consolidated Balance Sheets

MFC Development Corp. and Subsidiaries

Consolidated Statements of Operations

MFC Development Corp. and Subsidiaries

Consolidated Statement of Stockholders' Equity

MFC Development Corp. and Subsidiaries

Consolidated Statements of Cash Flows

MFC Development Corp. and Subsidiaries

Notes to Consolidated Financial Statements

1. Organization of the Company

The consolidated financial statements consist of MFC Development Corp. (the "Company" or "MFC") and its wholly-owned subsidiaries. MFC was a wholly-owned subsidiary of FRMO Corp., formerly FRM Nexus, Inc. ("FRM or Nexus"). All of FRM's assets and liabilities were transferred to MFC on August 31, 2000, except for $10,000. Because such entities are under common control, this transaction has been accounted for in a manner similar to a pooling of interests on MFC's books.

The Company was incorporated on May 18, 1990 under the laws of the State of Delaware as PSI Food Services, Inc. On August 9, 2000, the Company changed its name to MFC Development Corp. and increased authorized capital stock from 2,000,000 shares common stock, par value $.10 per share to 2,000,000 shares preferred stock, par value $.001 per share and 40,000,000 shares common stock, par value $.001 per share. The Board of Directors is authorized to provide at anytime for the issuance of MFC preferred stock with the rights, preferences and limitations as established by the Board.

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern.  However, the Company incurred net losses of approximately $2,492,000 and $1,433,000 during the years ended February 28, 2005 and February 29, 2004, respectively, principally from discontinued operations.  This factor raises substantial doubt about the Company's ability to continue as a going concern. 

Management is making efforts to sell its real estate held for development or sale in the normal course of business and significantly reduce operating expenses.  In addition, the Company is seeking to raise equity capital and is considering business combinations with other entities. The consolidated financial statements do not include any adjustments that might be necessary should the Company be unable to continue as a going concern.   

2. Basis of Presentation

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 holds a mortgage on a real estate parcel and owns real estate in Hunter, New York, which is currently held for development or sale. The Company also holds a mortgage on a real estate parcel in Connecticut.

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

Principles of Consolidation

The consolidated financial statements include the accounts of the Company and all of its subsidiaries (hereinafter also referred to as the "Company"). All significant intercompany accounts and transactions have been eliminated in consolidation.

3. Significant Accounting Policies

Revenue Recognition

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.

Receivables

Mortgages and notes receivable result from the sale of real estate. These receivables bear interest and are recorded at face value, less unamortized discount.

Impairment Assessment The Company evaluates the credit positions on its notes receivable and the value of the related collateral on an ongoing basis. The Company estimates that all of its notes receivable are fully collectible and the collateral is in excess of the related receivables. The Company continually evaluates its notes receivable that are past due as to the collectibility of principal and interest. The Company considers the financial condition of the debtor, the outlook of the debtor's industry, decrease in the ratio of collateral values to loans and any prior write downs on loans. The above considerations are all used in determining whether the Company should suspend recording interest income on any notes receivable or provide for any loss reserves.

Depreciation and Amortization

Depreciation of property and equipment is provided by application of the straight-line method over estimated useful lives as follows:

Amortization of leasehold improvements is provided by the application of the straight-line method over the shorter of their estimated useful lives or the terms of the related leases and range from three to six years.

Real Estate Held for Development or Sale

Properties are carried at the lower of acquisition cost or market, less the costs to sell. The methods for valuing property and mortgages where current appraisals are unobtainable are based on management's best judgments regarding the economy and market trends. As a result, estimates may change based on ongoing evaluation of future economic and market trends. Such judgments are based on management's knowledge of real estate markets in general and of sale or rental prices of comparable properties in particular.

Leases

Leases which transfer substantially all of the risk and benefits of ownership are classified as capital leases, and assets and liabilities are recorded at amounts equal to the lesser of the present value of the minimum lease payments or the fair value of the leased properties at the beginning of the respective lease terms. Such assets are amortized in the same manner as owned assets are depreciated. Interest expenses relating to the lease liabilities are recorded to effect constant rates of interest over the terms of the leases. Leases which do not meet such criteria are classified as operating leases and the related rentals are charged to expense as incurred.

Income Taxes

Deferred income taxes are recognized for all temporary differences between the tax and financial reporting bases of the Company's assets and liabilities based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income.

Earnings per Share

Earnings per common share for each of the three years ended February 28, 2005, 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.

Cash and Cash Equivalents

For purposes of the consolidated statements of cash flows, the Company considers all highly liquid, short-term investments with an original maturity of three months or less to be cash equivalents.

Concentration of Risk

Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of cash, money market mutual funds, commercial paper and trade and notes receivable.

All note receivables are from the sale of real estate in New York and Connecticut.

Advertising Costs

The Company expenses the cost of advertising as incurred. For the years ended February 28, 2005, February 29, 2004 and February 28, 2003, advertising expense totaled approximately $-0-, $1,000, and $4,000.

Fair Value of Financial Instruments

The following disclosure of the estimated fair value of financial instruments is made in accordance with the requirements of Statement of Financial Accounting Standards No. 107, "Disclosures about Fair Value of Financial Instruments". The estimated fair values of financial instruments have been determined by the Company using available market information and appropriate valuation methodologies. Considerable judgment is required in interpreting market data to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts that the Company could realize in a sale.

The carrying amounts and estimated fair values of financial instruments approximated their carrying values for all periods presented.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Stock Based Compensation

As allowed by SFAS 123, "Accounting for Stock-Based Compensation," the Company has elected to continue to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25), in accounting for its stock option grants to board members. Under APB 25, the Company does not recognize compensation expense upon the issuance of its stock options because the option terms are fixed and the exercise price equals the market price of the underlying stock on the grant date. The Company has determined that utilizing the fair value method of SFAS 123 would have an immaterial effect on its results of operations for all periods presented.

Effects of New Accounting Pronouncements

In December 2004, the FASB issued SFAS No. 123(R), "Accounting for Stock-Based Compensation" ("SFAS No. 123(R)"). SFAS No. 123(R) establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services. This statement focuses primarily on accounting for transactions in which an entity obtains employee services in share-based payment transactions. SFAS No. 123(R) requires that the fair value of such equity instruments be recognized as an expense in the historical financial statements as services are performed. Prior to SFAS No. 123(R), only certain pro forma disclosures of fair value were required. The provisions of this statement, as amended by the SEC, are effective as of the beginning of the first fiscal year that begins after June 15, 2005.  The adoption of SFAS No.123(R) is not expected to have a material impact on the Company's financial position or results of operations.

On December 16, 2004, the FASB issued SFAS No. 153, "Exchange of Non-monetary Assets", an amendment of Accounting Principles Board ("APB") Opinion No. 29, which differed from the International Accounting Standards Board's ("IASB") method of accounting for exchanges of similar productive assets.  Statement No. 153 replaces the exception from fair value measurement in APB No. 29, with a general exception from fair value measurement for exchanges of non-monetary assets that do not have commercial substance. The statement is to be applied prospectively and is effective for non-monetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. The adoption of SFAS No.153 is not expected to have a material impact on the Company's financial position or result of operations.

4. Real Estate Activities

Mortgages and Notes Receivable

Mortgages and notes receivable, arising from the sale of real estate, consists 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 (Related Party) - 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. For the years ended February 28, 2005, February 29, 2004 and February 28, 2003, interest income from this note was approximately $66,000, $66,000 and $84,000.

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

Real Estate Held for Development or Sale

The Hunter property that the Company owns is adjacent to an existing condominium development located at the base of Hunter Mountain in Greene County, New York. The Company's property includes approximately 65 acres of undeveloped land, a clubhouse with a recreational facility, and a sewage treatment plant that serves the condominium development. This property was acquired through foreclosure and was written down to its fair market value. The net proceeds of any sales of this property will be allocated 65% to the Company and 35% to co-investors, after deducting the cost of carrying all of the Hunter properties. This property is being used as collateral for a line of credit.

The Hunter property consists of the following:

Waste Water Treatment Plant

Highlands Pollution Control Corp. (HPCC), a subsidiary of the Company, owns a wastewater treatment facility at the Hunter property, which is located in the New York City ("NYC") watershed area. NYC has modified the environmental regulations for the watershed area to ensure clean drinking water is available to its residents. NYC entered into an agreement with HPCC to bring the facility in compliance with the new regulations. Under the terms of the agreement, NYC has agreed to reimburse HPCC for all costs incurred with the upgrade of the facility and a portion of the additional costs incurred to operate the upgraded facility. During the years ended February 28, 2005, February 29, 2004 and February 28, 2003, HPCC has incurred costs and has been reimbursed by NYC for amounts approximating $118,000, $394,000 and $1,448,000. The costs and reimbursements have been netted in the accompanying balance sheet.

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 and the related mortgage receivable 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 was 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 loss of $5,000 during the year ended February 28, 2005 and a gain of $18,000 during the year ended February 29, 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. Capitalized interest and loan acquisition costs for the years ended February 28, 2005, February 29, 2004 and February 28, 2003, was $3,000, $16,000 and $9,000.

The sale of the ten acre hotel site on September 23, 2004, as described above in mortgages and notes receivable, resulted in a gain of $280,000.

The sale of real estate is summarized as follows:

Other Real Estate Revenue

Other real estate revenue includes the following:

Adjustments of Amounts Due to Co-investors - 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 year ended February 29, 2004, 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 year ended February 29, 2004 of $275,000, which was included in other real estate revenue, and a (ii) net loss for the year ended February 28, 2005 of $143,000 which was included in costs and expenses from real estate.

Sale of Real Estate, Granby, Connecticut (Related Party) - The Company had sold an office building in East Granby, Connecticut during fiscal 1996 and leased back a portion of the space, which was then subleased to a third party through August 31, 2002. The Company remained obligated on its leaseback for a 42 month period from September 1, 2002 through February 28, 2006 (the Vacancy Period) for monthly rentals of $31,062. As a result, $850,000 of the gain recorded on the sale in 1996, representing the present value of the monthly rental for 42 months, was deferred. In fiscal 1998, Northwest Management Corp. ("NWM"), a shareholder of the Company signed an agreement to indemnify the Company for any payments made during the Vacancy Period in consideration for keeping any rentals from a new sublease which might be obtained during the Vacancy Period in excess of $31,062 per month. The president of NWM, Lester Tanner, also a shareholder, director and president of the Company, has the power to vote NWM shares, which are owned by his two children. From September 1, 2002 through January 31, 2003 the Company paid the monthly rentals for the vacant space of $31,062, all of which were reimbursed to the Company by NWM pursuant to its indemnity agreement.

On February 1, 2003, the Company was released from its obligation under the 1996 leaseback, when NWM provided a substitute lease for the Vacancy Period at $31,062 per month, which was accepted by the owner of the property. The owner of the property is a limited liability company, 24% owned by Lester Tanner's daughter. The Company agreed with the owner to reduce, from 9% per annum to 7% per annum, the interest rate on the second mortgage that the Company holds on the property for the period from February 1, 2003 through March 1, 2006 and to defer principal payments during the same period. As a result of the termination of its leaseback, the Company recorded a gain of  $850,000 in the fiscal year ending February 28, 2003.

Real Estate Costs and Expenses

Real estate costs and expenses consist of the following:

5. Property and Equipment

Property and equipment consists of the following:

For the years ended February 28, 2005, February 29, 2004 and February 28, 2003, depreciation expense was $4,296, $4,265 and $4,735.

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 February 28, 2005. 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 February 28, 2005 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 February 28, 2005, 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 February 28, 2005 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 years ended February 28, 2005, February 29, 2004 February 28, 2003 was $5,063, $5,250 and $661.

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. This loan was paid in full on June 25, 2004 when a portion of the property was sold. 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 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.

Aggregate maturities of the amount of notes payable at February 28, 2005 is as follows:

7. Treasury Stock

On November 27, 2002, the Company mailed to its shareholders who own 99 or fewer shares of its common stock an offer to purchase the shares at $2.00 per share before January 8, 2003. The total number of shares owned by said small shareholders is less than 5% of the Company's outstanding shares. The total amount of shares repurchased was 9,447, for a total amount of $18,894. The Company purchased an additional 5,500 shares of common stock for $8,445 in 2003.

8.  Commitments and Contingencies

 Minimum Operating Lease Commitments

In April 2000, MFC signed a lease extension for its executive offices under a seven year lease expiring on February 28, 2007.

Subject to annual real estate adjustments, the following is a schedule of future minimum rental payments required under the above operating leases:

For the years ended February 28, 2005, February 29 2004 and February 28, 2003,  rent expense totaled approximately $83,000 for each year.

Other Commitments and Contingencies

As stated in Note 4, 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, was the subject of the Company's current accounting to the co-investors as of February 28, 2005, the close of the Company's most recent fiscal year. On November 16, 2004, prior to the receipt of the most recent accounting, 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 if acceptable, by the co-investors, their lawsuit will be discontinued. The Company has provided that accounting and is waiting for a response.

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. Stock Options

Each non-employee director who owns less than 5% of the Company's stock is annually granted a five year option to purchase 1,500 shares of common stock. The exercise price of the options is the mean between the high and low asked price at the close of trading on the grant date. As of February 28, 2005, five current and former directors had been issued options totaling 18,000 shares, expiring through July 15, 2009, at option prices ranging from $1.00 to $2.00 per share.

10. Income Taxes

The provision (benefit) for income taxes from continuing operations consist of the following:

After the spin-off from FRM on January 23, 2001, MFC and its subsidiaries filed consolidated Federal tax returns. MFC and its subsidiaries file individual state tax returns. The gain on sale of real estate, resulting from the recognition of deferred income from the sale of the Granby, Ct property in fiscal 2003 was included in taxable income of the Company's former parent in the year that the property were sold.

The Company has net operating loss ("NOL") carryforwards for Federal purposes of approximately $7,456,000. These losses will be available for future years, expiring through February 28, 2024. During fiscal 2003, the Company utilized $32,000 of its Federal NOL carryforwards. The Company, however, 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.

Significant components of deferred tax assets (liabilities) were as follows:

The following is a reconciliation of the statutory federal and effective income tax rates for the years ended:

11. 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 each of the three years ended February 28, 2005 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 February 28, 2005 and February 29, 2004.

The Company recorded impairment loss of (i) $229,000, for the year ended February 29, 2004 and (ii) an additional impairment loss of $271,000 during the year ended February 28, 2005, in connection with the write-down of the assets that were to be disposed of. During the year ended February 28, 2005, 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.

Revenue Recognition

Purchase and Collection of Medical Insurance Claims Receivables

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 ("Funding Balance") on purchased receivables are not collected or offset in full after the contractual collection period, usually 180 days.

Purchase Discount. The purchase discount was deferred and recognized over the contractual collection period in proportion to the costs of collection. The deferred income was netted against finance receivables. The Company was not entitled to interest on unpaid Funding Balances within the contractual collection period.

Other Collection Fees. Through August 24, 2004, the Company charged some of its clients an additional collection fee on the proceeds from collections on cases that required a legal action to receive payment. No revenue was recorded on unresolved cases, which represented a gain contingency. Revenue was recorded when the proceeds from collections were received by the Company.

Interest Income. Interest was charged to certain clients at a predetermined rate on Funding Balances that have not been fully collected after the contractual collection period. Interest income was recorded monthly based on the unpaid Funding Balance from the prior month. Interest income from insurance companies is only recorded when cases are won by the Company. No revenue is recorded on unresolved cases, which represent a gain contingency. Interest income from insurance companies is recorded when the amount is determinable, which is the earlier of notification that a case was lost by the insurance companies or when the interest payment is paid if there is no advance notification.

Reimbursed Expenses. Through August 24, 2004, the Company was reimbursed by insurance companies for statutory legal fees and is still being reimbursed for the cost of filing on cases when the insurance companies have lost legal actions. The Company was reimbursed by its clients for the costs of postage and lock box charges that were incurred on the clients' behalf. Income from reimbursed expenses from insurance companies is recorded when the amount is determinable. Income from reimbursed expenses from clients was recorded when the amounts were known and when management estimates that the amounts were collectible.

Medical Management Service Fees

Three subsidiaries provided additional management services to certain medical practices. Management fees were billed to these medical practices monthly in amounts that are relative to the expenses and services provided by the Company for that month. The accrual method of accounting was used to record all management service fees.

Finance and Management Fee Receivables

The Company purchased the net collectible value of medical insurance claims on a limited recourse basis. Net collectible value is the amount that the insurance companies will pay based on established fee schedules used by insurance companies. The net collectible value is often less than the face value of the claim due to the difference in billing rates between the established fee schedules and what the medical practice ordinarily would bill for a particular procedure. The Company is only responsible to collect the fee scheduled amount. If any amounts are collected in excess of the purchased amount and the Company's fee, that amount will be applied to the client's Funding Balance. Finance receivables are reported at their outstanding unpaid principal balances, reduced by any charge-off or valuation allowance and net of unearned revenues. The recourse basis is limited to the extent any receivables purchased by the Company are disputed. Such receivables are deemed to be invalid and were substituted or repaid at the end of the contractual period. The Company was still entitled to the collection of its fees from customers regardless of whether or not the underlying accounts receivable were collectible. Performance of these receivables are personally guaranteed by the owner of the practice and/or the principals of the related management companies.

The Company purchases the receivables and has the right to return the "invalid receivables." By contractual definition, these are receivables that have not been recovered from insurance companies because of denials, requests for additional information not readily available, or a matter under investigation within 180 days of the purchase date. In addition to the right to return the invalid receivables to the Seller, the Company has the right to offset any of its obligations to the Seller by any invalid receivables.

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 years ended February 28, 2005 and February 29, 2004  was based on an increase in adverse arbitration decisions from the hearings that were decided during those periods. 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 during the last two fiscal years. Management believes that it will be increasingly more difficult to collect on outstanding receivables, and has initiated an additional 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 February 28, 2005, there were approximately $1,299,000 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, including management fee receivables.

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. Management's periodic evaluation of the adequacy of the allowance is based on the Company's past loss experience, known and inherent risks in the portfolio, adverse situations that may affect the customer's ability to repay, the estimated value of any underlying collateral and current economic conditions.

Net finance receivable and management fees receivable 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) an insurance carrier suffers a financial inability to pay.

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.

These receivables are collateral for a line of credit.

Summarized financial information of the medical financing segment as discontinued operations for each of the three years ended February 28, 2005 follows:

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

12. Subsequent Events

On May 10, 2005, Yolo Equities Corp. sold all the outstanding shares of its subsidiary, Highlands Pollution Control Corp. for $75,000, subject to a recorded agreement by which it has the right to obtain a share of the increased capacity of the waste water treatment plant for the development of its remaining 65 acres of undeveloped land in Hunter, NY by participating in the financing of the expansion for which State permits already exist. The Company will record a gain of approximately $ 92,000 on the sale of Highlands Pollution Control Corp.

On May 17, 2005, Yolo Equities Corp. completed the sale of the Clubhouse in Hunter, New York for $320,000 payable by a second mortgage on the real estate, bearing interest at the rate of 8% per annum, commencing on September 1, 2005. Since 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. The deferred gain on the sale of this property is approximately $20,000.

On May 19, 2005, the Company exchanged its $946,732 second mortgage on the office building in East Granby, Connecticut owned by Gateway Granby, LLC ("Gateway") for a $1,000,000 equity investment in Gateway, constituting 49% of the equity ownership of Gateway. The Company sold the office building to Gateway in 1996 for $4,800,000, of which $3,853,268 has been paid and $946,732 is the purchase money second mortgage maturing on March 8, 2017. The total equity investment in Gateway after the exchange is $2,050,000, of which $265,000 is owned by Shari Stack, the daughter of Lester Tanner (a shareholder, director and president of the Company), and $785,000 is owned by unrelated parties. Gateway owns the office building subject to a non-recourse first mortgage held by Banknorth, N.A. in the amount of $2,200,000.

13. Supplemental Financial Information

Selected Quarterly Financial Data (Unaudited)

MFC Development Corp. and Subsidiaries

Financial Statement Schedules

Schedule II - Valuation and Qualifying Accounts

Year ended February 28, 2005

Allowance for Credit Losses and Bad Debts: A periodic evaluation of the allowance for credit losses and bad debts on finance receivables and management fee receivables is based on the Company's past 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 allowance calculation.

Allowance for 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.

Schedule III - Real Estate and Accumulated Depreciation

Year ended February 28, 2005

The following is a reconciliation of the total amount at which real estate was carried for the years ended:

Schedule IV - Mortgage Loans on Real Estate

Year ended February 28, 2005

The following is a reconciliation of the total amount at which mortgage loans were carried for the years ended:

EXHIBIT INDEX

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.

The following exhibits are incorporated herein by reference to Amendment No. 3 to Form 10 dated January 17, 2001.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d)2 of the Securities Exchange Act of 1934 as amended, the Registrant has duly cause this Report to be signed on its behalf by the undersigned, thereunto duly authorized, on May 26, 2005.

MFC DEVELOPMENT CORP.

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated on May 26, 2005.

CERTIFICATION

Each of the undersigned hereby certifies in his capacity as an officer of MFC Development Corp. (the "Company") that the Annual Report of the Company on Form 10-K for the period ended February 28, 2005 fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934 and that the information contained in such report fairly presents, in all material respects, the financial condition of the Company at the end of such period and the results of operations of the Company for such period.

May 26, 2005

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 annual report on Form 10-K of MFC Development Corp;

2. Based on my knowledge, this annual 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 annual report;

3. Based on my knowledge, the financial statements, and other financial information included in this annual 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 annual 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 annual 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.

    

   May 26, 2005

   /s/ LESTER TANNER Lester Tanner President and Chief Executive Officer

   ---

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 annual report on Form 10-K 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 annual report;

3. Based on my knowledge, the financial statements, and other financial information included in this annual 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 annual 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 annual 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 Annual Report of MFC Development Corporation (the "Company") on Form 10-K for the period ended February 28, 2005 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.

May 26, 2005		May 26, 2005
/s/ LESTER TANNER Lester Tanner President and Chief Executive Officer		/s/ VICTOR BRODSKY Victor Brodsky Vice President and Chief Financial Officer

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-K 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.