<PAGE>
As Filed with the Securities and Exchange Commission on August ___, 1997
Registration No. 0-22541
- ------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------
AMENDMENT NO. 2
TO
FORM 10
GENERAL FORM FOR REGISTRATION OF SECURITIES
Pursuant to Section 12(b) or (g) of
The Securities Exchange Act of 1934
MERCRISTO DEVELOPMENTS, INC.
(FORMERLY [email protected] INC., FORMERLY MAC SYSTEMS INC.)
DELAWARE 98-0166912
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
240 Argyle Avenue,
Ottawa, Ontario, Canada K2P 1B9
(Address of Principal Executive Offices) (Zip Code)
Company's telephone number, including area code is (613)-230-9803,
(800)-565-6671
COPIES TO:
JEFFREY H. BOWEN, ESQ.
HARTER, SECREST & EMERY
700 MIDTOWN TOWER
ROCHESTER, NEW YORK 14604
(716) 232-6500
Securities to be registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which
to be so registered each class is to be registered
- ------------------- ------------------------------
None None
---- ----
Securities to be registered pursuant to Section 12(g) of the Act:
Common Stock $.001 par value
(Title of Class)
- ------------------------------------------------------------------------------
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
ITEM PAGE NO.
<S> <C> <C>
1. BUSINESS.................................................................................................... 1
2. FINANCIAL INFORMATION...................................................................................... 13
3. PROPERTIES................................................................................................. 22
4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT................................................................................................. 23
5. DIRECTORS AND EXECUTIVE OFFICERS........................................................................... 24
6. EXECUTIVE COMPENSATION..................................................................................... 26
7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............................................................. 27
8. LEGAL PROCEEDINGS.......................................................................................... 28
9. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON
EQUITY AND RELATED STOCKHOLDER MATTERS..................................................................... 29
10. RECENT SALES OF UNREGISTERED SECURITIES.................................................................... 31
11. DESCRIPTION OF REGISTRANT'S SECURITIES TO BE REGISTERED.................................................... 32
12. INDEMNIFICATION OF DIRECTORS AND OFFICERS.................................................................. 33
13. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................................................................ 34
14. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE........................................................................ 36
15. FINANCIAL STATEMENTS AND EXHIBITS.......................................................................... 37
SIGNATURE PAGE................................................................................................... 38
INDEX TO EXHIBITS................................................................................................ 39
</TABLE>
<PAGE>
ITEM 1. BUSINESS
GENERAL ORGANIZATIONAL HISTORY OF THE COMPANY
---------------------------------------------
The Company was incorporated in the State of Delaware on January 4,
1996 as MAC Systems Inc. ("MAC") and was initially capitalized with the issuance
of 4,090,448 shares of common stock. On or about January 19, 1996, approximately
90% of the 4,090,448 then outstanding shares of common stock of the Company was
acquired by Janmur Investments Inc. ("Janmur") on behalf of 84133 Investments
Inc. ("84133"), both Janmur and 84133 being owned by a non-citizen and
non-resident of the United States. Prior officers and directors of MAC were
replaced by persons who had no past relationships with the stockholders, and
prior directors and officers of MAC. On January 22, 1996, MAC effected a
20-for-1 reverse split which resulted in 204,719 shares of common stock being
outstanding, with approximately 10% continuing to be held by the original
stockholders of MAC.
On or about February 4, 1996, in exchange for 6,000,000 shares of
legended common stock of MAC, 84133 transferred to MAC all of the outstanding
shares of common stock of 84133's wholly-owned subsidiary, ComputerLink Online
Inc. ("ComputerLink"), at exactly the same cash value for which 84133 acquired
ComputerLink from the unrelated original founders of ComputerLink on January 1,
1996. ComputerLink, a private Canadian corporation providing Internet access,
software, and World Wide Web services thereby became a wholly-owned subsidiary
of MAC. The original founders of ComputerLink, in recognition of their technical
experience and familiarity with ComputerLink's operations, were retained under
management contracts as the senior executive management team and members of the
Board of Directors of MAC. In March 1996, MAC changed its name to Internet @
iDirect.com Inc. ("INTERNET") to reflect more accurately the consolidated
operations of MAC and ComputerLink. In June 1996, in exchange for 1,000,000
shares of legended common stock of Internet, Internet acquired Tucows Ltd.
("Tucows"), one of the world's top 5 providers of World Wide Web services, from
84133.
By agreements executed January 15, 1997, Internet and 84133 rescinded
the transactions pursuant to which the Company acquired ComputerLink and Tucows.
Contemporaneously with this rescission transaction, all ComputerLink affiliates
resigned from Internet's Board of Directors and any offices that they may have
held with Internet. There are no ongoing relationships or affiliations between
the Company and ComputerLink, Tucows and their shareholders, directors, officers
and management. As the acquisition transactions were rescinded, so were the
issuances of the 7,000,000 shares of the Company's Common Stock. As a result of
these rescission transactions, the Company had no operations and no operating
assets.
THE COMPANY - MERCRISTO DEVELOPMENTS, INC.
------------------------------------------
On or about January 27, 1997, David G. Edwards, principal shareholder
and owner of 622291 Ontario Limited ("622291"), a private Canadian company with
diversified financial investment/operational interests located in Ottawa,
Ontario, Canada, purchased 200,000 shares of the Company's Common Stock from
Janmur. By Board of Directors and stockholder action on February 10, 1997, Mr.
Edwards, his wife and his brother became the Company's Directors and officers.
The new stockholders, officers and Directors have no past relationship with the
Company's prior management.
<PAGE>
The Company changed its name from Internet @ iDirect.com Inc. to
Mercristo Developments, Inc. on February 10, 1997.
Effective January 31, 1997, pursuant to the terms and conditions of an
Agreement and Plan of Reorganization by and among the Company, Egyptian Arabians
Inc. and Egyptian Arabians' sole stockholder, Egyptian Arabians Inc. became a
wholly-owned subsidiary of the Company. Simultaneous with that transaction,
622291 became a wholly-owned subsidiary of the Egyptian Arabians and, 622291 was
reorganized pursuant to which operations of 622291 other than the Blue Moon
Farms breeding and care operations of 622291's wholly-owned subsidiary, Edwards
Arabian Inc., were spun off from 622291. The transaction pursuant to which
Egyptian Arabians Inc. (including directly and indirectly its wholly-owned
subsidiaries, 622291 and Edwards Arabians) became a wholly-owned subsidiary of
the Company has been accounted for as a recapitalization, resulting in the
historical operations of 622291 being treated as the historical operations of
the Company. Accordingly, the following discussion and analysis of financial
condition and results of operations is a discussion of the historical financial
performance of 622291's operations relating to the Blue Moon Farms operations
and the operations of 622291's wholly-owned subsidiary, Edwards Arabians Inc.
As a result of the above transactions, the breeding and care operation
of 622291 and the sales and marketing activities of 622291's wholly-owned
subsidiary, Edwards Arabians Inc., are presented as the Company's historical
operations. The Company has generated revenue primarily by selling Straight
Egyptian Arabian horses to investment limited partnerships and individual
investors and by operating the breeding and care facilities at its Blue Moon
Farms facility. The Company has increased sales primarily as a result of
increased levels of investing activities promoted by Edwards Securities Inc. See
"CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS". The Company receives cash
consideration from the limited partnerships and individual investors to whom it
sells horses and takes from each of the limited partnerships to which horses
were sold a promissory note in an amount equal to the cost for providing board
and care of the horses sold. These notes generate interest which is paid to the
Company on a monthly basis, and the principal amount of the notes gets repaid
when the investment partnerships sell the horses or transfer ownership of the
horses to corporations into which the partnership's assets are transferred.
The Company has an authorized capitalization of 100,000,000 shares of
Common Stock, par value of $.001 US, of which 16,560,519 shares of common stock
are issued and outstanding, giving effect to the transactions contemplated by
the Agreement and Plan of Reorganization. See "Security Ownership of Certain
Beneficial Owners and Management," "Recent Sales of Unregistered Securities" and
"Description of Registrant's Securities to be Registered."
Unless otherwise indicated herein, the information set forth herein
assumes the closing of the transactions contemplated by the Agreement and Plan
of Reorganization, and all references to the "Registrant" or the "Company"
herein include Mercristo Developments, Inc., the Company's wholly-owned
subsidiary, Egyptian Arabians Inc., and the direct and indirect wholly-owned
subsidiaries of Egyptian Arabians Inc., 622291 Ontario Limited and Edwards
Arabians Inc., respectively. Also, unless otherwise indicated herein, the
financial information set forth herein is expressed in terms of Canadian
dollars.
2
<PAGE>
CORPORATE STRUCTURE
-------------------
The Company's corporate structure is as follows:
Company:
a Delaware Corporation Mercristo Developments, Inc.
Canadian Subsidiary:
an Ontario Corporation Egyptian Arabians Inc.
(100% Subsidiary of
Mercristo Developments)
Original Holding Company:
Includes Blue Moon Farms 622291 Ontario Limited
operations, and the corporate
offices at 240 Argyle Avenue,
Ottawa
(100% Subsidiary of
Egyptian Arabians)
Marketing & Sales:
(100% Subsidiary of 622291) Edwards Arabians Inc.
OVERVIEW - COMPANY'S OPERATIONS
-------------------------------
The Company, through its wholly-owned subsidiary, Egyptian Arabians
Inc., is a private breeder of Straight Egyptian Arabian horses. Straight
Egyptian Arabian horses are the finest and rarest of Arabian horses in the
world. Out of an estimated 100 million world general horse population,
approximately 6,000 are Straight Egyptian Arabian horses. An Egyptian Arabian
horse is a pure-bred Arabian horse that has been bred or that is descended from
horses that were bred in Egypt. A Straight Egyptian Arabian horse is an Egyptian
Arabian horse whose pedigree is unmixed with other blood-line groups. The
characterization "Straight Egyptian" is officially recognized in the Arabian
horse arena.
North America is the world's foremost repository of these highly prized
and rare creatures. Egyptian Arabians Inc. is one of five large Canadian farms
which are solely dedicated to the breeding of Straight Egyptian Arabian horses.
Each of these five farms is independently owned and operates strictly on an arms
length basis from one another. The five farms utilize and access semen from a
major international organization which currently controls the largest collection
of senior, world class Straight Egyptian Arabian stallions available today. In
addition, subsidiaries of Egyptian Arabians Inc. have
3
<PAGE>
previously purchased semen from other senior stallions which are owned by other
independent North American breeders of Straight Egyptian Arabian horses.
Egyptian Arabians Inc. manages a large private breeding facility for
Straight Egyptian Arabian horses, with more than 325 Straight Egyptian Arabian
horses under its care and management with approximately 95 mares which will
produce foals in 1997. There are a total of 125 mares which are eligible and
will be bred in 1997 as well. As a result of the 1997 foaling and breeding
activities, it is expected that, by the summer of 1998, Egyptian Arabians Inc.
will provide care and management for approximately 380 Straight Egyptian Arabian
mares and fillies at its present facilities.
The Company operates through two subsidiaries of its main Canadian
subsidiary - Egyptian Arabians Inc. The two subsidiaries are:
(a) 622291 Ontario Limited, an Ontario company, located in Addison,
Ontario. The Company's Blue Moon Farms operations reside within
622291. Blue Moon Farms is the farm operating facility for the
breeding and care of the Straight Egyptian Arabian horses
tenanted there.
(b) Edwards Arabians Inc., an Ontario company, with its head office
located at 240 Argyle Avenue, Ottawa, Ontario. Edwards Arabians
Inc. is the marketing and sales arm for the
Company's Straight Egyptian Arabian horse business.
The Company, since the inception of its equine business in 1991, has
enjoyed strong revenue growth, solid operating margins, and high levels of
profitability. See "Financial Information" and "Financial Statements".
Management anticipates continued revenue growth. Except for commercial mortgages
on its 240 Argyle Avenue, Ottawa, Ontario corporate headquarters, and the Blue
Moon Farms facilities, it has no institutional debt or commercial lines of
credit.
In the past five years, the Company has generated revenue principally
by (a) selling Straight Egyptian Arabian horses to investment limited
partnerships, other breeders and to individual clients and (b) operating the
breeding and care facilities at Blue Moon Farms for the Straight Egyptian
Arabian horse assets of the limited partnerships and other individual owners.
These limited partnerships center around shared ownership by individual
clients of world class Straight Egyptian Arabian horses, and utilize various
Canadian legislation that exists in the area of farm-loss write-offs, registered
savings plans deductions through share ownership in private client owned
Canadian corporations, income splitting, and the deductibility of loan servicing
interest on investments loans. Additionally, individual clients have also
purchased Straight Egyptian Arabian mares in order to take advantage of their
breeding potential and the premium prices commanded by Straight Egyptian Arabian
horse fillies borne by these mares over an average 15 years breeding life.
The Company believes that its techniques for artificial insemination,
pregnancy care, foaling care, medical care and training are technologically
superior to those of other breeders and boarders of Straight Egyptian Arabian
horses. Coupled with a work force of approximately 25 highly trained staff and
management, these techniques have contributed to the Company's profitability.
Continued growth in revenues, tightly engineered cost optimization, and top
quality Straight Egyptian Arabian horse breeding rates exceeding 85% (compared
to the worldwide industry average of approximately 65% - 70%) have
4
<PAGE>
allowed the Company to become a major player in the Straight Egyptian Arabian
horse business in the short span of five years.
The Company, through its subsidiary, Edwards Arabians Inc., is
participating in an extensive R&D program with one of North America's leading
equine research centers - Guelph University, Guelph, Ontario. This research
program will investigate one of the leading causes of death among new born
foals, Rhodococcus Equi. The Company hopes that its sponsorship of this program
will provide it with access to technology that will reduce the death rate of new
born foals and thereby improve the Company's prospects for greater volumes of
annual foal production.
The Blue Moon Farms operation employs approximately 25 staff members
and has several local veterinarians on 24 hour call. The actual number of staff
at Blue Moon Farms varies with seasonal aspects of the business from 20 to 30
individuals. Staffing at the Company's Blue Moon Farms operations is heaviest
during the months of January through September, which months represent a full
breeding season, the entire foaling season and the time of year when
weather-related work such as fencing, pasture management and haying activities
are most commonly undertaken. The months of October, November and December see
fewer staff in that the major work load of the operations would have been
completed by the end of September. In addition, due to greater operating
efficiencies over the past two years, the Company's staff count has remained
relatively constant despite annual increases in the number of horses under
management or ownership. The entire Straight Egyptian Arabian horse breeding and
care system is continuously and carefully monitored, electronically and
physically, to ensure maximum productivity of Straight Egyptian Arabian
foalings. Leading edge medical and electronic equipment and highly trained staff
enable minimization of costs and optimization of Straight Egyptian Arabian horse
production output.
The Company's marketing and sales organization, housed within Edwards
Arabians Inc., employs five individuals at its Ottawa, Canada facility.
It is the Company's objective to become the world's largest private
breeder of Straight Egyptian Arabian horses. Management intends to do this
through both external growth through acquisitions, primarily in the United
States, and internal growth through increased revenue generation and
profitability. It has its executive, financial, and marketing offices at 240
Argyle Avenue in Ottawa, Canada, and operates its breeding and equine care
facilities at and adjacent to its Blue Moon Farms location in Addison, Ontario,
Canada covering 220 acres, currently housing over 325 Straight Egyptian Arabian
horses.
COMPANY'S MISSION AND STRATEGY
------------------------------
The Company has a primary mission to profitably carry on the business
of breeding, raising, showing, exhibiting, and selling Straight Egyptian Arabian
horses for the purpose of supporting external and internal growth and returning
value to the Company's stockholders. The Company's ultimate goal is to become
the largest private breeder of Straight Egyptian Arabian horses in the world. To
accomplish this goal, the Company has made major investments in re-engineering
the Straight Egyptian Arabian horse breeding and care operations at the
Company's Blue Moon Farms facilities in Addison, Ontario, using the most
advanced technologies for breeding, maternity care and monitoring, physical
security, safety, and medical care.
5
<PAGE>
SHORT-TERM AND MEDIUM-TERM STRATEGIES
-------------------------------------
The Company's strategy is to improve the Company's position in the
Straight-Egyptian Arabian marketplace. In the short term, the Company intends to
pursue the following core strategies:
Complete the re-engineering and modernization of the Company's
facilities at Blue Moon Farms.
Identify potential acquisition targets of North American
Straight-Egyptian Arabian horse breeders.
Establish North American market awareness of the Company and its
business.
Establish market awareness of the Company and its business in select
international markets.
In the medium term, the Company intends to pursue the additional
following strategies:
Fuel external growth by U.S. acquisitions of Straight-Egyptian Arabian
horse breeders whose operations will be compatible with those of the
Company.
Establish a Straight Egyptian Arabian horse export market from North
America to select international markets.
Create a niche lifestyle awareness in North America as to the benefits,
both social and economic, of participation in the ownership of
Straight-Egyptian Arabian horses.
Although the Company intends to grow through external acquisitions, the
Company has no understanding or agreements to make any specific acquisition at
this time. In any event, the terms and conditions of any such acquisition would
be subject solely to management's discretion.
THE ARABIAN HORSE
-----------------
The Arabian horse has the distinction of being the oldest living breed
of horse. "Equus Arabicus", one of the four original species of horse, has been
identified in modern times as the Arabian horse. While other breeds disappeared
or mixed with different breeds, the Arabian remained essentially the same.
Although the first recorded history of the Arabian horse was 3,000 years ago,
some archaeologists believe the breed existed as long as 40,000 years ago.
Raised originally in Arabia and adjacent countries and noted for its
intelligence, grace and stamina, Arabians have the longest bloodline record of
any horse breed and have been bred by the Bedouins in the Near East for three
millennia, primarily for use in war because of their endurance. Tomb paintings
indicated that Egyptians raised Arabian horses as early as 1580 BC. The Muslim
conquests of the sixth and seventh centuries introduced Arabian horses to Europe
and many parts of Asia.
Many of the Arabian horse's characteristics (such as stamina, hardiness
and agility) were developed due to the careful breeding practices and harsh
lifestyle of the desert Bedouin tribes. The natural culling that occurred
because of the strenuous life in the desert was enhanced by careful breeding
6
<PAGE>
practices of owners. Because of these breeding practices the Arabian horse is
considered to be the most prepotent of all breeds of horses, for its ability in
passing on its characteristics to foals.
For thousands of years, owners bred Arabian horses to own more stock
and to pick up the famous Arabian qualities. In fact, the Arabian horse is the
genetic predecessor of every light horse breed in existence today. Arabians have
been bred with other horses to produce new breeds, including thoroughbreds,
standardbreds, quarter horses, lippizaners and national show horses.
STRAIGHT EGYPTIAN ARABIAN HORSES
--------------------------------
Straight Egyptian Arabians, which account for approximately 1.0% of all
purebred Arabian horses, trace their heritage exclusively to the Arabians which
were bred in, or whose bloodline was used as part of, the established breeding
programs in Egypt, referred to below. Many Arabian horses in North America and
Europe today are Egyptian-related in recognition of the superior qualities of
the Straight Egyptian Arabian.
Straight Egyptian Arabians are considered by breeders to be very
prepotent in passing their characteristics on to their foals because of their
intense line breeding. The Straight Egyptian Arabian is known for its elegant
features. Its dished head, large eyes, arched neck and high tail carriage
justify its reputation as the most beautiful of all breeds. Straight Egyptian
Arabian horses have a body which is shorter than other breeds, usually a rib and
one vertebrae less than a Thoroughbred and two vertebrae in the tail. Colourings
are primarily grey, bay and chestnut.
The Straight Egyptian Arabian horse's natural physical characteristics
have contributed to its outstanding performance in today's equine activities.
The short, dished head and wide flaring nostrils allow for maximum oxygen
intake. The arched neck keeps the windpipe defined and clear to carry air to the
lungs. Through careful breeding, strong resilient legs, free of most lameness
problems, are more common than in other breeds. Such qualities give the Straight
Egyptian Arabian horse superior athleticism and versatility.
INTERNATIONAL MARKETS
---------------------
As the demand for Straight Egyptian Arabian horses has increased,
markets have opened up in many parts of the world to meet this demand. Out of
the general Arabian horse population of 1 million, and a general world horse
population of an estimated 100 million, only approximately 6,000 horses are
registered Straight Egyptian Arabians. This exclusivity has helped to support
the market value of these horses. See "BUSINESS - The Industry."
Outside of North America, countries with well developed markets and
businesses leading in the breeding and growth of the Straight Egyptian Arabian
horse industry include: Sweden, Norway, Germany, Netherlands, Belgium, Spain,
Portugal, France, Switzerland, Austria, Hungary, Russia, Poland, Morocco, Egypt,
South Africa, Australia, Argentina, Chile, Uruguay, and Brazil.
NORTH AMERICAN MARKETS
----------------------
7
<PAGE>
Arabian horses made their debut in North America during the 1893
Chicago World's Fair, where Bedouins exhibited 29 horses. The breed gradually
grew, but it was not until the 1940's that the Arabian horses gained widespread
popularity through the advent of horse shows. Some of the best Arabian horses
bred throughout the world have been exported to North American breeders over the
last 40 years. North American breeders have achieved a reputation as leaders in
the preservation, through selective breeding, of purebred Arabian bloodlines.
After countless centuries, and only in the last 30 to 40 years, North
America has achieved the undisputed status as the world guardian and protector
of Straight Egyptian Arabian horses in terms of both quality and quantity. North
American interest in Straight Egyptian Arabian horses has soared after major
wins in the show ring, and consequently as a better understanding was achieved
of the pure, refined type and elegance for which these horses were prepotently
line-bred. The Pyramid Society was formed in the United States to ensure the
strictly controlled perpetuation of this rare genetic pool and to provide
valuable outcross bloodlines to other Arabian breeders.
Several countries maintain their own registration systems for Arabian
horses. Registration of Arabians in North America began in 1908, although
Arabian horses were imported occasionally to North America during the 18th and
19th centuries. Up to the end of December 1991, all Arabian horses owned in
Canada could be registered with either or both the Arabian Horse Registry of
America, Inc. (the "AHRA") or the Canadian Arabian Horse Registry (the "CAHR").
Effective January 1992, all Canadian Arabian horses must be registered only with
the CAHR as, at the request of the CAHR, the AHRA has ceased to offer its
registration services to Canadian owners for foals born in Canada. A breeder
usually registers a foal within six months of its birth. The CAHR rules limit
registration to one foal per year per mare. Effective January 1, 1991, all foals
must be blood-typed as they approach breeding age. The CAHR also maintains
records of the blood-type of every Arabian breeding stallion. The particular
markings of the horse, including hair whorl location, are recorded on the
Certificate of Registration.
Since neither the CAHR nor the AHRA registers specific bloodlines, the
Pyramid Society was formed to establish standards for and act as a record keeper
of Straight Egyptian genealogy. An extensive reference handbook of Straight
Egyptian Arabian horses is published every four years by the Pyramid Society.
The latest reference handbook was published in 1994. The Pyramid Society also
holds an annual World Egyptian Event in Lexington, Kentucky. The Egyptian Event
includes a stallion exhibition, lectures, halter, performance and futurity
competitions for Straight Egyptian Arabian horses and Egyptian-related horses.
Horses which are nominated en utero to compete at a future date, usually for a
period of three years after nomination, participate in various futurity
competitions.
Canadian breeders of Straight Egyptian Arabian horses consider it
desirable that their horses be registered with the CAHR and be confirmed by the
Pyramid Society to be Straight Egyptians to ensure recognition and adequate
protection of the bloodline. Breeders also seek membership with the
International Arabian horse Association located in Westminster, Colorado. This
association organizes and operates various Arabian horse shows throughout the
year and prescribes ethical standards to be followed by its members.
THE INDUSTRY
------------
The major criteria for determining the value of Straight Egyptian
Arabian horses are substantially similar to those utilized to determine the
value of race horses: pedigree, performance in competition, and
8
<PAGE>
the ability to produce marketable foals. The owner of a Straight Egyptian
Arabian horse need not bear the costs of training for, or risk the many health
hazards involved with, racing in order to derive value. The show arena is
equivalent to the race track for a racehorse since the Straight Egyptian Arabian
accumulates honors by winning show competitions as opposed to winning races.
However, professional Arabian and Straight Egyptian Arabian horse racing is
rapidly becoming quite popular.
Straight Egyptian Arabian horses have become increasingly popular in
the last three decades in North America and interest has increased following not
only major competitive wins by these horses in the show ring, but also a growing
public appreciation of the refinement and elegance of the Straight Egyptian. As
previously noted, Straight Egyptian Arabian horses represent approximately 1% of
the entire Arabian horse population, and yet Straight Egyptian Arabian horses
consistently win 20%-30% of the North American show events. These performance
results have generated increased interest in the breeding of Straight Egyptian
Arabian horses.
Arabians are considered to be the one of the fastest growing breeds of
all of the major light horse breeds on the North American continent. The
American Horse Council of Washington, D.C. has published registration figures
indicating that the number of Arabian foals registered in North America has
increased from 1,610 in 1960 to 24,578 in 1988, which is approximately four
times the rate of growth of the total number of registrations during these years
for the major North American light horse breeds. Purebred Arabian horse
registrations have declined, however, from their highest levels in the
mid-1980's to approximately 13,000 registrations in each of 1994 and 1995.
Arabians are generally sold either by private agreement or at public
auction, often by a sales agent. Due to their rarity and aesthetic qualities,
Straight Egyptian Arabian horse foals will normally fetch considerably higher
prices than Egyptian-related foals. Also, a filly is usually much more valuable
than a colt because of her potential value for breeding. In general, the
percentage of live foals born in a group of mares confirmed by a veterinarian as
"checked to be in foal" is normally approximately 90% and the usual ratio of
colts to fillies is one to one. Generally, breeders evaluate a breeding program
on the basis of the number of foals one may expect to be produced by a mare, the
reproductive capabilities of fillies so produced and the anticipated selling
price of each foal. The anticipated breeding life of an Arabian mare under good
management conditions is approximately 15 years. Because the gestation period
for horses is eleven months, a mare can carry only one foal a year, assuming
that a breeder is utilizing only a direct breeding program for his mares.
The rarity of Arabians is preserved by the CAHR rules providing for
only one foal per year per mare. Subsequent to the 1990 breeding season, the
CAHR rules permit the transportation of semen for artificial insemination and
the storage of semen. To reduce the risk associated with breeding, some breeders
have in recent years employed embryo transfers and artificial insemination.
Unlike the standards applicable to the thoroughbred horse industry, regulations
regarding Arabian horses permit immediate artificial insemination and embryo
transfers, thus reducing the risk of injury to the stallions and reducing the
risks for mares associated with breeding, carrying and delivery of foals.
COMPANY'S PRIMARY SOURCES OF REVENUES AND INCOME
------------------------------------------------
The Company's primary sources of revenue are:
9
<PAGE>
(a) Sales of Straight Egyptian Arabian horses to various limited
partnerships, offered by Edwards Securities Inc. ("ESI"),
acting as the General Partner. ESI is a corporation
incorporated under the laws of Ontario and licensed by the
Ontario Securities Commission to create, promote, and sell
securities. David G. Edwards is indirectly the sole
controlling shareholder, Director, and president of ESI. See
"CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS."
(b) Sales of Straight Egyptian Arabian horses to individual
owners.
(c) Sales of Straight Egyptian Arabian horses to other breeders.
(d) Services related to the breeding and care of Straight Egyptian
Arabian horses for the limited partnerships, and for other
individuals who choose to utilize the Company's services.
See "FINANCIAL INFORMATION - Management's Discussion and Analysis."
In order to maximize the net income that results from these
revenue-generating sources, the Company increases margins by optimizing the use
of in-house re-engineered processes, which are designed to achieve the maximum
breeding rates and foaling rates in the shortest time frames and to minimize the
costs related to the breeding and care services provided by the Company at its
Blue Moon farm facilities.
The Company's facilities at Blue Moon Farms have been customized to
accommodate the breeding, caring and delivery procedures used at every stage of
the Straight Egyptian Arabian horse's productive life. For example, pregnant
Straight Egyptian Arabian mares move through a staged sequence and live in
different facilities as their pregnancy progresses. At the final stages, the
pregnant Straight Egyptian Arabian mare has moved into facilities adjacent to
the birthing center and breeding laboratories, so that expert help is at hand.
Here, the Straight Egyptian Arabian mare is internally monitored by remote
electronics and by wireless alert systems, 24 hours a day, including up to the
precise moment that her "water breaks". Use of in-house expertise and state of
the art equipment makes the above possible while cutting industry standard costs
substantially.
COMPETITION
-----------
Competition is very limited, given the infancy of the modern Straight
Egyptian Arabian horse business. There are only a handful of operators who are
willing and able to structure and run the Straight Egyptian Arabian horse
breeding business like any other high-technology business, using state-
of-the-art management and production-line techniques. Although there are
numerous horse farms throughout North America that breed and raise Egyptian
Arabian horses, only a handful of farms are devoted exclusively to the breeding
and raising of Straight Egyptian Arabian horses. The competitive success of any
breeding operation will depend on its ability to produce on a consistent basis
Straight Egyptian Arabian horses that fare well in competitions and on its
ability to control costs associated with the breeding of and caring for the
horses.
The Company believes that, by applying to the Straight Egyptian Arabian
horse business all the techniques and tools applied to any other high technology
business, it has achieved a competitive
10
<PAGE>
advantage. The focus has been to achieve a world class quality product (top bred
Straight Egyptian Arabian mares), with the highest productivity rates
(successful births of Straight Egyptian Arabian fillies), and lowest defects
rate (failed inseminations and aborted pregnancies). This combined with Mr.
Edwards' successful track record, via ESI, in successfully packaging and
marketing the Straight Egyptian Arabian horse product into affordable investment
units which clients could buy, has given the Company a competitive advantage.
The North American and international markets are so large and in such
an embryonic growth stage, that there is room for any number of companies
engaged in the same business as the Company. The Company anticipates that, as
the demand for Straight Egyptian Arabian horses grows, existing horse farms as
well as potential new farms will enter the market and place greater emphasis on
the breeding and development of Straight Egyptian Arabian horses. As additional
farms enter this marketplace, competition will increase, and the Company will
need to continue to devote resources to the development and maintenance of
facilities and systems that are designed to reduce the costs of breeding and
maintaining horses without sacrificing the quality of the horses that are
produced through the Company's efforts.
RISK FACTORS
------------
The major risk factors that could directly impact the Company's
business are as follows:
o Future, potential infestation of the Company's Straight
Egyptian Arabian horses by a yet unknown but assumed deadly
equine illness. The Straight Egyptian Arabian horses that are
boarded at the Company's Blue Moon Farms facility are fully
insured by Lloyds of London, and their immediate value would
be recoverable. However, to rebuild the Straight Egyptian
Arabian horse herd would take time and, in the interim,
ongoing revenue streams from sales of horses would be
curtailed, as sales to the limited partnerships and individual
purchasers would be interrupted.
o Future, potential unplanned death or departure of key
personnel, specifically David G. Edwards, Patricia L. Edwards,
Kenneth A. Edwards, and Stephane Robillard, would adversely
impact the business in the near-term. There can be no
assurance that the Company would be able to replace any of
these individuals. Furthermore, the Company does not carry key
man insurance on any of these individuals. See "DIRECTORS AND
EXECUTIVE OFFICERS."
o Future, potential, unanticipated changes in governmental tax
laws and tax rulings on individual client's affairs
disallowing the farming tax status and associated investment
costs/losses deductions for clients of the limited
partnerships that purchase the horses from the Company and the
deductibility of Straight Egyptian Arabian horse investment
interest expense. These changes could make investing by
individual clients in the limited partnerships less
attractive, and could adversely impact the demand for the
Company's horses.
11
<PAGE>
o Termination of the Company's close association with its four
associated Canadian farms could temporarily hamper, in the
near-term, the Company's sales. Specifically, if Egyptian
Arabians Inc. was ever unable to access semen from senior
Straight Egyptian Arabian stallions owned by its current major
supplier, it would have to make arrangements to purchase semen
from other sources. Semen would then have to be purchased from
the owners of other world class senior stallions and any
unplanned changes in the supply of semen would be viewed as
disruptive but only temporary.
o A sudden, unforeseen, glut in production of quality Straight
Egyptian Arabian horses into the North American markets would
drive unit prices down and thus adversely affect gross
revenues and net margins.
o There has been no public market for the Company's Common
Stock. There can be no assurance that an active public market
will develop or be sustained or that the market price of the
Common Stock will not decline below that which is originally
quoted by any broker-dealer. Future announcements concerning
the Company or its competitors, quarterly variations in
operating results, announcements of litigation or changes in
earnings estimates by analysts could cause the market price of
the Company's Common Stock to fluctuate substantially. These
fluctuations, as well as general economic, political and
market conditions such as recessions, international
instabilities or military conflicts, may materially and
adversely affect the market price of the Company's Common
Stock.
12
<PAGE>
ITEM 2. FINANCIAL INFORMATION
SELECTED FINANCIAL DATA1
(all expressed in terms of Canadian
dollars)
<TABLE>
<CAPTION>
Year Ended January 31,
----------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
STATEMENTS OF OPERATIONS DATA
<S> <C> <C> <C> <C> <C>
REVENUES
Farm2 $2,485,218 $1,867,067 $1,647,780 $1,004,326 $247,272
Horses3 9,690,500 6,829,100 4,234,895 3,439,506 1,867,757
Interest and Other 308,406 357,257 444,913 497,446 116,017
----------- ---------- ---------- ---------- ----------
Total Revenues $12,484,124 $9,053,424 $6,327,588 $4,941,278 $2,231,046
----------- ---------- ---------- ---------- ----------
COSTS AND EXPENSES
Farm2 1,117,619 1,148,804 973,666 481,208 291,716
Horses3 9,459,150 7,000,000 4,194,050 3,218,795 1,737,110
Marketing and Sales 71,918 114,219 18,656 25,342 49,242
General and Administrative 456,232 407,778 368,131 173,540 183,979
Depreciation and Amortization 57,814 55,308 46,063 35,991 18,006
Interest Expense 54,260 65,842 73,771 47,038 10,222
Consulting Fees - Internet Business 987,687 --- --- --- ---
----------- ---------- ---------- ---------- ----------
Total Costs and Expenses $12,204,680 $8,791,951 $5,674,337 $3,981,914 $2,290,275
----------- ---------- ---------- ---------- ----------
Income (Loss) before Taxes $279,444 $261,473 $653,251 $959,364 $(59,229)
Provision for Income Taxes 510,000 88,883 243,000 377,960 8,602
----------- ---------- ---------- ---------- ----------
Income (Loss) from Continuing
Operations $(230,556) $172,590 $410,251 $581,404 $(67,831)
----------- ---------- ---------- ---------- ----------
Income from Discontinued
Operations (Net of Income Taxes) 145,502 142,947 157,531 118,148 88,610
----------- ---------- ---------- ---------- ----------
Net Income (Loss) (85,054) 315,537 567,782 699,552 20,779
=========== ========== ========== ========== ==========
Income (Loss) per Common Share
from Continuing Operations $ ( .01) $ .02 $ .05 $ .07 $ ( .01)
Weighted Average Number of
Common Shares Outstanding 16,560,519 8,654,719 8,450,000 8,450,000 8,450,000
----------- ---------- ---------- ---------- ----------
</TABLE>
- ------------------------
1The Selected Financial Data presented is the historical data of 622291
Ontario Ltd. for the years ended January 31, 1993 through 1997 which will be the
historical data of the Company upon consummation of the reorganization of 622291
with Mercristo Developments, Inc. Factors that affect the comparability of
financial data from year to year and for comparable interim periods include
timing of the foaling season, demand for investment limited partnerships,
unusual horse mortality and illness rates and non-recurring marketing expenses.
See "Management's Discussion and Analysis."
2Farm revenues and costs and expenses relate to the Company's breeding
operations and care of the horses.
3Horse revenues and costs and expenses relate to the Company's sale of horses.
13
<PAGE>
SELECTED FINANCIAL DATA (CONT.)
(all expressed in terms of Canadian dollars)
<TABLE>
<CAPTION>
January 31,
-----------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
BALANCE SHEET DATA
<S> <C> <C> <C> <C> <C>
Continuing Operations
Working Capital $646,806 $(828,154) $(554,926) $(1,606,083) $(1,117,521)
Total Assets 8,969,522 8,064,589 8,877,188 7,217,144 5,717,474
Long-Term Debt, less current 430,025 386,920 420,280 220,000 129,840
portion
Stockholders' Equity $1,239,721 $661,887 $356,260 $(195,622) $(895,174))
<CAPTION>
Three Months Ended April 30,
----------------------------
1997 1996
---- ----
(unaudited)
STATEMENTS OF OPERATIONS DATA
<S> <C> <C>
REVENUES
Farm $532,701 $581,553
Horses 285,000 1,972,000
Interest and Other 38,678 87,958
------ ------
Total Revenues $856,379 $2,641,511
-------- ----------
COSTS AND EXPENSES
Farm $282,968 $271,461
Horses 560,000 2,180,000
Marketing and Sales 47,561 37,565
General and Administrative 254,497 204,660
Depreciation and Amortization 16,720 14,454
Interest Expense 16,715 6,469
Consulting Fees - Internet --- ---
-------- --------
Total Costs and Expenses $1,178,461 $2,714,609
---------- ----------
Income (Loss) before Taxes $(322,082) $(73,098)
Provision for Income Taxes (128,833) (29,239)
--------- --------
Income (Loss) from Continuing
Operations $(193,249) $(43,859)
Income from Discontinued --- 30,600
Operations (Net of Income Taxes)
--------- --------
Net Income (Loss) $(193,249) $(13,259)
========== =========
Income (Loss) per Common Share
from Continuing Operations $ (.01) $ (.01)
======= =======
Weighted Average Number of
Common Shares Outstanding 16,560,519 8,654,519
<CAPTION>
April 30,
---------
1997
----
BALANCE SHEET DATA
<S> <C>
Continuing Operations
Working Capital $(227,556)
Total Assets 6,822,725
Long-Term Debt, less current
portion 829,114
Stockholders' Equity 1,046,472
</TABLE>
14
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
INTRODUCTION
Effective January 31, 1997, pursuant to the terms and conditions of an
Agreement and Plan of Reorganization by and among the Company, Egyptian Arabians
Inc. and Egyptian Arabians' sole stockholder, Egyptian Arabians Inc. became a
wholly-owned subsidiary of the Company. Simultaneous with that transaction,
622291 became a wholly-owned subsidiary of the Egyptian Arabians and, 622291 was
reorganized pursuant to which operations of 622291 other than the Blue Moon
Farms breeding and care operations of 622291's wholly-owned subsidiary, Edwards
Arabian Inc., were spun off from 622291. The transaction pursuant to which
Egyptian Arabians Inc. (including directly and indirectly its wholly-owned
subsidiaries, 622291 and Edwards Arabians) became a wholly-owned subsidiary of
the Company has been accounted for as a recapitalization, resulting in the
historical operations of 622291 being treated as the historical operations of
the Company. Accordingly, the following discussion and analysis of financial
condition and results of operations is a discussion of the historical financial
performance of 622291's operations relating to the Blue Moon Farms operations
and the operations of 622291's wholly-owned subsidiary, Edwards Arabians Inc.
Since the inception of the Company's Canadian operations in 1991, the
Company has generated revenue primarily by selling Straight Egyptian Arabian
horses to investment limited partnerships and individual investors and by
operating the breeding and care facilities at its Blue Moon Farms facilities.
Revenues generated by these two activities have remained fairly constant as a
percentage of the Company's overall revenues, with sales representing
approximately 78% and management fees for the breeding and care of the horses
representing approximately 20%. The Company has increased sales primarily as a
result of increased levels of investing activities promoted by Edwards
Securities Inc. which, in turn, results in a greater number of horses being
boarded at the Company's Blue Moon Farms facilities. Sales to limited
partnerships have traditionally accounted for approximately 50% of the Company's
sales while the balance consists of sales to other farms and individual owners.
Revenues from the Company's Blue Moon Farms operations, as those operations
relate to the care and maintenance of the horses boarded there, are generated
almost entirely (98%) from services rendered to the various limited partnerships
that purchase Straight Egyptian Arabians from the Company. The Company continues
to believe that the markets outside of Canada represent significant
opportunities for the Company. Management intends to allocate greater resources
to expanding sales channels and establishing marketing alliances in non-Canadian
and international markets.
The Company recognizes the need to continue to apply technology in a
manner that will increase its operating margins. In furtherance of those goals,
the Company expects to allocate a greater percentage of its overall revenues to
research and development and sales and marketing activities over the next
several years.
The following discussion and analysis of the Company's financial
condition and results of operations focuses on the Company's operations and does
not include any discussion or analysis with respect to the operations that were
spun-off from 622291.
15
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated the percentages
which the selected items in the Company's Consolidated Statements of Operations
bear to total revenues:
<TABLE>
<CAPTION>
Three Months Ended
Year Ended January 31, April 30
---------------------- --------
1997 1996 1995 1997 1996
---- ---- ---- ---- ----
REVENUES
<S> <C> <C> <C> <C> <C>
Farm1 19.9% 20.6% 26.0% 62.2% 22.0%
Horses2 77.6% 75.4% 67.0% 33.3% 74.7%
Interest and Other 2.5% 4.0% 7.0% 4.5% 3.3%
---- ---- ---- ---- ----
Total Revenues 100.0% 100.0% 100.0% 100.0% 100.0%
------ ------ ------ ------ ------
COSTS AND EXPENSES
Farm1 9.0% 12.7% 15.4% 33.0% 10.3%
Horses2 75.8% 77.3% 66.3% 65.4% 82.5%
Marketing and Sales 0.6% 1.3% 0.3% 5.6% 1.4%
General and Administrative 3.7% 4.5% 5.8% 29.7% 7.8%
Depreciation and Amortization 0.4% 0.6% 0.7% 2.0% 0.6%
Interest Expense 0.4% 0.7% 1.2% 2.0% 0.2%
Consulting Fees - Internet
Business 7.9% --- --- --- ---
---- ------ ------ ------ ------
Total Costs and Expenses 97.8% 97.1% 89.7% 137.7% 102.8%
----- ----- ------ ------
Income Before Taxes 2.2% 2.9% 10.3% (37.7%) (2.8%)
Provision for Income Taxes 4.1% 1.0% 3.8% (15.0%) (1.1%)
---- ---- ---- -------
Income (Loss) from
Continuing Operations (1.9%) 1.9% 6.5% (22.7%) (1.7%)
===== ==== ==== ======= ======
</TABLE>
- -----------------
1 - Farm revenues and costs and expenses relate to the Company's breeding
operations and care of the horses.
2 - Horse revenues and costs and expenses
relate to the Company's sale of horses.
The following table sets forth for the periods indicated the number of
horses in the Company's inventory and the changes in that inventory. Horses
enter life as weanling fillies or colts, and fillies are allowed to grow up to
mare status at age three. At this time, mares will begin to bred, and management
of the company expects that a mare will have an economic reproductive life of at
least 15 years, although actual experience has shown that some mares have been
bred and have foaled out beyond the 15 year reproductive life span. Horses have
been sold to investors within a broad range of age groupings, from weanling
fillies up to mature mares. The Company does not sell colts to investors. As the
inventory of
16
<PAGE>
horses maintained by the Company constantly changes, the ages of the horses in
that inventory varies depending on the ages of the horses sold and purchased by
the Company. The Company does not own any stallions and instead utilizes and
accesses semen from a major international organization which currently controls
the largest collection of senior, world class Straight Egyptian Arabian
stallions available. In addition, the Company has previously purchased semen
from other senior stallions which are owned by other independent North American
breeders of Straight Egyptian Arabian horses. The number of horses in the
Company's inventory is significantly less than the number of horses under the
Company's care and supervision.
<TABLE>
<CAPTION>
Three Months
------------
Year Ended January 31 Ended April 30
---------------------- --------------
NUMBER OF HORSES 1997 1996 1995 1997 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Beginning Inventory 16 10 5 12 10
Horses Acquired 115 97 59 3 38
Horses Sold or Exchanged 119 91 54 7 28
--- --- --- -- ---
Ending Inventory 12 16 10 8 20
=== === === == ====
</TABLE>
There was a decrease in the number of horses in ending inventory at
January 31, 1997 when compared to January 31, 1996 but an increase in total
carrying value for those horses due to a favorable mix in mares to colts. The
ratio of mares to colts can vary significantly at any point in time.
The range of sales and purchase prices and the average sale and purchase
price of horses for all periods were as follows:
<TABLE>
<CAPTION>
Range Average
--------------- -----------
<S> <C> <C>
Mares $70,000-$95,000 $92,000
Fillies $50,000-$60,000 $55,000
Colts:
Purchase $10,000
Sale $500 or less
</TABLE>
The limited partnerships to which the Company frequently sells fillies
and mares generally have a one to three year life until, for tax reasons, they
are rolled over into corporations. Prior to the occurrence of these roll-overs,
the Company will evaluate the holdings of a given partnership, focusing on the
number of horses and the mix of colts to fillies, in order to support and
maintain the investment value of those partnerships. The Company will often take
fillies or mares from its existing inventory and exchange them for colts owned
by the various investment partnerships. Fillies and mares are much more valuable
than colts, and the price differential between the fillies and mares surrendered
by the Company and the colts received in exchange is expensed as part of the
cost of horses sold. In determining the value of the fillies and mares
surrendered by the Company and colts received in exchange from the limited
partnerships, the Company recognizes the current market value of the horses
based on the Company's costs of purchasing fillies, mares and colts.
17
<PAGE>
In addition, the average management fees charged by the Company for all
periods presented were approximately $5,000 per investment limited partnership
per year, or approximately $417 per month.
THREE MONTHS ENDED APRIL 30, 1997 COMPARED WITH THREE MONTHS ENDED APRIL 30,
1996
REVENUES. Total revenues for the three months ended April 30, 1997 decreased by
$1,785,132 (67.6%) to $856,379 from $2,641,511 for the three months ended April
30, 1996. Revenues from breeding and care of horses accounted for $48,852, and
the sale of horses accounted for $1,687,000, and interest and other revenues
accounted for the remaining $49,280 decrease in revenues. The primary reason for
the decrease in revenues from breeding and care of horses was that in 1997, the
Company did not care for the horses of one of the farms in Cabreah, the contract
for which in the first quarter of 1996 generated approximately $100,000. There
were two primary reasons for the large decrease in the revenues generated by the
sale of horses. The Company offered an early sales incentive plan with its
salesmen to sell horses during the three months ended April 30, 1996. Also, the
foaling activity started approximately 30 days later than usual in the three
months ended April 30, 1997 due to a decision to use frozen semen which also
resulted in a substantially reduced fertilization rate. The Company, in response
to this delay, quickly reverted to using fresh semen which has resulted in a
much higher fertilization rate. Management expects that this higher
fertilization rate will substantially increase the foaling activity for the
remainder of the 1997 operating year when compared to the results of the three
months ended April 30, 1997.
COSTS AND EXPENSES. Total costs and expenses for the three months ended April
30, 1997 decreased by $1,536,148 (56.6%) to $1,178,461 from $2,714,609 for the
three months ended April 30, 1996. As the Company's horse sales and foaling
activity decreased significantly during the three months ended April 30, 1997 as
compared to the three months ended April 30, 1996, the Company was able to
control the incurring of expenses associated with those activities.
MARKETING AND SALES. Marketing and sales expenses for the three months ended
April 30, 1997 increased by $9,996 (26.6%) to $47,561 from $37,565 for the three
months ended April 30, 1996, which reflects the Company's increased emphasis on
marketing activities for the 1997 Operating Year.
GENERAL AND ADMINISTRATIVE. General and administrative expenses for the three
months ended April 30, 1997 increased by $49,837 (24.3%) to $254,497 from
$204,660 for the three months ended April 30, 1996. The primary reason for the
increase was professional and consulting fees incurred in connection with the
recapitalization of the Company.
INCOME TAXES. The provision for taxes for the three months ended April 30, 1997
and 1996 is based upon an effective Canadian tax rate of 40.0%.
YEAR ENDED JANUARY 31, 1997 ("1996 OPERATING YEAR") COMPARED WITH YEAR ENDED
JANUARY 31, 1996 ("1995 OPERATING YEAR")
REVENUES. Total revenues for the 1996 Operating Year increased by $3,430,700
(37.9%) to $12,484,124 from $9,053,424 for the 1995 Operating Year. Revenues
from breeding and care of horses accounted for $618,151, and the sale of horses
accounted for $2,861,400 of the increase
18
<PAGE>
in total revenues during the 1996 Operating Year. The increase in revenues was
primarily attributed to the increased level of investment in Straight Egyptian
Arabian horses and the corresponding increase in the Company's foaling and
breeding activities. These increases were offset, in part, by a decrease in
interest and other revenue. Interest income and other revenues decreased by
$48,851 during the 1996 Operating Year as a result of the continued decline in
the use of the Company's resources to support secondary financing of the
investment partnerships.
COSTS AND EXPENSES. Total costs and expenses for the 1996 Operating Year
increased by $3,412,729 (38.8%) to $12,204,680 from $8,791,951 for the 1995
Operating Year. As a percentage of total revenues, costs and expenses increased
to 97.8% in the 1996 Operating Year from 97.1% in the 1995 Operating Year. In
the 1996 Operating Year, the Company was beset by several unusual and
non-recurring events which contributed to the increase in overall costs and
expenses. The Company incurred consulting fees associated with the failed
acquisition of ComputerLink Online and Tucows in the amount of $987,687 during
the 1996 Operating Year. The consultants were compensated through the issuance
of common stock of the Company. The Company lost an average of one horse each
month during the year due to various causes of death and replacement costs for
those horses approximated $400,000. In addition, normal veterinary costs
quadrupled due to prolonged illnesses with the Company's colts and fillies.
Despite the occurrence of these events, which the Company believes are not
indicative of any adverse trends, the Company was able to tightly control its
other operating expenses. In response to and in partial resolution of the
prolonged illnesses resulting from Rhodococcus Equi, the Company engaged in
extensive consultations with veterinarians and professors at the University of
Guelph. As previously noted, the Company, through its subsidiary, Edwards
Arabians Inc., is currently participating in an extensive research and
development study with the University of Guelph to aid in the prevention of
Rhodococcus Equi in young foals. The program consists of administering Guelph
Plasma and Polymune R and monitoring the foals' fibrinogen levels every two
weeks as well as obtaining nasal swabs and trachial aspirations as needed. The
Company believes that this will allow the Company to monitor much more closely
the impact of this disease on young foals.
MARKETING AND SALES. Marketing and sales expenses for the 1996 Operating Year
decreased by $42,301 (37.0%) to $71,918 from $114,219 in the 1995 Operating
Year. Marketing and sales expenses as a percentage of total revenues were .6% in
the 1996 Operating Year as compared to 1.3% in the 1995 Operating Year. The
primary reasons for the decrease were the incurrence in the 1995 Operating Year
of costs for new advertising materials promoting sales to limited partnerships
and a special one-time sales commission.
GENERAL AND ADMINISTRATIVE. General and administrative expenses for the 1996
Operating Year increased by $48,454 (11.9%) to $456,232 from $407,778 in the
1995 Operating Year. As a percentage of total revenues, general and
administrative expenses were 3.7% in the 1996 Operating Year as compared to 4.5%
in the 1995 Operating Year. These expenses increased primarily as the result of
salary increases, greater than normal professional fees and office expenses
incurred in connection with expanding the business.
INCOME TAXES. The provision for income taxes for the 1996 Operating Year is
based upon an effective Canadian tax rate of 182.5% as compared with a rate of
33.5% in the 1995 Operating Year. The primary reason for the increase in the
effective tax rate was the nondeductible consulting fees incurred in connection
with the failed acquisition of ComputerLink Online and Tucows and the effect of
the Canadian tax brackets based on income levels.
19
<PAGE>
YEAR ENDED JANUARY 31, 1996 ("1995 OPERATING YEAR") COMPARED WITH YEAR ENDED
JANUARY 31, 1995 ("1994 OPERATING YEAR")
REVENUES. Total revenues for the 1995 Operating Year increased by $2,725,836
(43.1%) to $9,053,424 from $6,327,588 for the 1994 Operating Year. Revenues from
breeding and care of horses accounted for $219,287 and the sale of horses
accounted for $2,594,205 of the increase in total revenues during the 1995
Operating Year. The increase in revenues was primarily attributed to the
increases in the foaling and breeding activities generated by increased
investment demand for Straight Egyptian Arabian horses. These increases were
offset, in part, by a decrease in interest and other revenue. Interest income
and other revenues declined by $87,656 during the 1995 Operating Year as the
Company reduced the extent to which it would support secondary financing of the
investment partnerships.
COSTS AND EXPENSES. Total costs and expenses for the 1995 Operating Year
increased by $3,113,524 (54.9%) to $8,787,861 from $5,674,337 for the 1994
Operating Year. As a percentage of total revenues, costs and expenses increased
to 97.1% in the 1995 Operating Year from 89.7% in the 1994 Operating Year. The
increases in the costs and expenses as a percentage of sales were primarily
attributable to an unusually large horse purchase in December 1995 in connection
with investment partnership demand for horses to take advantage of favorable tax
situations, cost associated with the rollover of six investment partnerships and
the replacement of certain horses for some of those partnerships and the
incurrence of higher than normal insurance replacement costs.
MARKETING AND SALES. Marketing and sales expenses for the 1995 Operating Year
increased by $95,563 (512.2%) to $114,219 from $18,656 in the 1994 Operating
Year. Marketing and sales expenses as a percentage of total revenues were 1.3%
in the 1995 Operating Year as compared to .3% in the 1994 Operating Year. The
primary reasons for the increase were the incurrence in the 1995 Operating Year
of costs for new advertising materials promoting sales to limited partnerships
and a special one-time sales commission.
GENERAL AND ADMINISTRATIVE. General and administrative expenses for the 1995
Operating Year increased by $35,557 (9.7%) to $403,688 from $368,131 in the 1994
Operating Year. As a percentage of total revenues, general and administrative
expenses were 4.5% in the 1995 Operating Year as compared to 5.8% in the 1994
Operating Year. The Company continued to expand its business in the 1995
Operating Year and accordingly spent more on salaries, professional fees and
office expenses.
INCOME TAXES. The provision for income taxes for the 1995 Operating Year is
based upon an effective Canadian tax rate of 33.5% as compared with a rate of
37.2% in the 1994 Operating Year. The primary reason for the increase in the
effective tax rate was the effect of the Canadian tax brackets based on income
levels.
LIQUIDITY AND CAPITAL RESOURCES
At January 31, 1997, the Company's primary source of liquidity included cash and
cash equivalents of $53,162 and open trade credit with vendors of $4,011,687.
The Company has not borrowed any moneys from financial institutions for working
capital needs with the exception of its commercial mortgages on the construction
and improvements to its facilities. The Company
20
<PAGE>
improved its working capital during the 1996 Operating Year by $1,474,960 to
$646,806 at January 31, 1997 from a negative $828,154 working capital at January
31, 1996. Cash flows from operating activities during the 1996 Operating Year
were a negative $1,467,929 which resulted primarily from a significant increase
in accounts receivable and a decrease in deferred revenues. Cash flows from
investing activities during the 1996 Operating Year were $1,333,128 which
resulted primarily from cash collected from limited partnerships in satisfaction
of amounts owed the Company. Also during the 1996 Operating Year, the Company
acquired $165,212 in property and equipment. Cash flows from financing
activities during the 1996 Operating Year included borrowings on new commercial
property of $170,000, repayment of $110,155 on a commercial mortgage and
dividend distribution of $113,000.
The balance sheet at April 30, 1997 shows a decrease in current assets for the
three months from $4,764,832 to $2,014,507 and a corresponding decrease in
current liabilities from $4,118,026 to $2,242,063 and a decrease in deferred
revenues from $2,350,750 to $2,002,909, all compared with those figures at
January 31, 1997. The decrease in current assets and liabilities was primarily
attributable to the collection of accounts receivable and reduction in
inventories during the first quarter.
The Company acquired a building from Resi Corp., a related company, in April,
1997 which is used as corporate offices in Ottawa, Ontario, Canada for $550,000,
including the assumption of mortgages with an unpaid principal balance of
$441,320.
COMPANY'S FINANCING REQUIREMENTS
The Company has no current need for any externally generated financing to fund
its continued operations or to fund continued internal growth. As the Financial
Statements show, the Company's business has been profitable, is self-financing,
and does not depend on any institutional debt or commercial lines of credit
(except for commercial mortgages on the Company's properties).
21
<PAGE>
ITEM 3. PROPERTIES
The Company's principal properties consist of its owned corporate
offices in Ottawa, Ontario and its operating farm facilities in Addison,
Ontario.
The Company owns its corporate offices at 240 Argyle Avenue, Ottawa,
which offices are encumbered by mortgages with Sun Life Trust Company and a
private mortgagee having a total outstanding indebtedness of approximately
$440,000 as of January 31, 1997. These facilities house the operations of
Edwards Arabians, a wholly-owned subsidiary of 622291, which is a Canadian
subsidiary of the Company's subsidiary Egyptian Arabians Inc. The Company's
operations with respect to marketing and sales, finance and accounting, as well
as its executive offices, are located within this facility.
The Company's farm operating facilities are located at Addison, Ontario
and come under the Blue Moon Farms umbrella of 622291. These facilities cover
approximately 220 acres of land, of which 130 acres, including buildings, are
owned by the Company and encumbered by a mortgage with the Business Development
Bank of Canada having a total outstanding indebtedness of $480,000 as of January
31, 1997, and the remaining 90 acres are adjacent leased farm land.
The Blue Moon Farms facilities include over 50,000 square feet of
building space, covering buildings for vehicles and equipment, the reception
center, lodge, meeting facilities for sales staff, brokers, potential investors,
agricultural and equine specialists, farm administration offices, farm hospital,
quarantine center, breeding center, reproductive and R&D laboratories, R&D
barns, main and subsidiary barns with 62 stalls, "in-utero" stalls, foaling
stalls, nursery center, training ring, run-in buildings, food storage
facilities, exhibition facilities and exercise facilities. The entire complex is
protected by high voltage, low amperage electrical fencing. The Blue Moon Farms
operations are staffed 24 hours a day with three shifts of trained personnel,
and protected from fire hazard by advanced sensor and extinguishing systems.
22
<PAGE>
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
The following table sets forth certain information concerning the
beneficial ownership of the Company's Common Stock with respect to (i) each
person known by the Company to own beneficially more than 5% of the outstanding
shares of Common Stock, (ii) each of the Company's Directors and executive
officers, and (iii) all Directors and executive officers as a group. Unless
otherwise indicated, each of the stockholders has sole voting and investment
power with respect to the shares beneficially owned.
<TABLE>
<CAPTION>
Name and Address Shares Beneficially Owned
--------------------------
of Beneficial Owner Number Percentage (1)
- ------------------- ------------------- --------------
<S> <C> <C>
David G. Edwards, 8,650,000 shares(2) 52.23%
Director, Officer
240 Argyle Avenue,
Ottawa, Ontario K2P 1B9
Patricia L. Edwards, None -
Director, Officer
240 Argyle Avenue,
Ottawa, Ontario K2P 1B9
Kenneth A. Edwards None -
Director, Officer
240 Argyle Avenue,
Ottawa, Ontario K2P 1B9
All Directors and executive 8,650,000 52.23%
officers as a group
(3 persons)
</TABLE>
- --------------------------------------------------------------------------------
(1) Based on 16,560,519 shares of Common Stock issued and outstanding, which
assumes the consummation of the transactions described under "BUSINESS -
The Company - Mercristo Developments, Inc."
(2) Includes 8,450,000 shares of Common Stock owned of record by Resi Corp.,
a Canadian company of which Mr. Edwards is the sole shareholder and
Director, and over which Mr. Edwards has voting and investment power.
23
<PAGE>
ITEM 5. DIRECTORS AND EXECUTIVE OFFICERS
Information with respect to the Directors, executive officers and
certain other key employees of the Company is set forth below:
Name Age Position
- ---- --- --------
David G. Edwards 49 President; Chief Executive
Officer; Chief Financial
Officer, Vice-President
(Marketing & Sales);
Director.
Patricia L. Edwards 49 Secretary - Treasurer;
Vice-President
(Administration); Director.
Kenneth A. Edwards 50 Vice-President
(Operations); Director.
Stephane Robillard 25 Breeding Manager
Tina E. Onstein 26 Farm Manager
David G. Edwards, the Company's President, is a 1971 graduate of St.
Lawrence College, Cornwall, Ontario, Canada, and received his degree in Business
Administration, majoring in Marketing. He has 26 years of experience in the
Ottawa area as a financial planner, and, since 1988, as a securities broker
licensed by the Ontario Securities Commission. As Chairman, President and CEO
and director of the ESI Group of companies ("ESI Group" since 1984), Mr. Edwards
provides a full range of non-banking investment services.
The ESI Group includes ESI Financial Planners Inc., ESI Sheltered
Investments Corporation, Edwards Securities Inc., ESI Mortgage Brokers Inc.,
Argyle Insurance Brokers Inc., ESI Investment Funds Ltd., and until recently the
Company's Canadian equine Straight Egyptian Arabian horse subsidiaries: 622291
(including Blue Moon Farms operations), and Edwards Arabians.
Patricia L. Edwards, the Company's Secretary - Treasurer, is the wife
of David G. Edwards. She has had many years of experience in various departments
of the Canadian federal and provincial governments such as Transportation,
Communications, Finance, Treasury Board, and lastly the Deputy Prime Minister's
Office in Ottawa. She is a registered Insurance Broker and President of Argyle
Insurance Brokers, one of the companies in the ESI Group. Argyle Insurance
concentrates on managing the insurance policies (from Lloyds of London) for
several large Canadian equine breeding operations, including the Company's
operations, covering multi-million dollar herds of Straight Egyptian Arabian
horses. In addition, Argyle Insurance provides insurance for the boating and
marine industry throughout Eastern Ontario.
24
<PAGE>
As Vice President (Administration) for the Company, she is responsible
for supervising the strictly controlled Straight Egyptian Arabian horse
blood-typing, accurate registration, documentation, liasing with registries in
both the United States and Canada, coordinating the presentation of the
Company's Straight Egyptian Arabian horses at premier shows across North
America, and public and investor relations.
Kenneth A. Edwards, the brother of David G. Edwards, has had 32 years
of extensive experience in all aspects of the Canadian construction business,
starting as a licensed electrician, establishing an electrical contracting
business, and finally establishing several full service construction companies.
In 1989, he joined the ESI Group and managed ESI Developments, completing real
estate projects covering commercial office, retail, and industrial projects for
local governments.
As Vice President (Operations), he has been responsible for all
construction and property development and management at the Company's Blue Moon
Farms facility at Addison, Ontario since its purchase in September 1992. He has
been instrumental in constructing one of the world's premier equine breeding and
care facility at the Company's Addison location, and continues to oversee all
the re-engineering and leading edge improvements in the Company's breeding and
care operations.
Stephane Robillard, the Company's Breeding Manager, has had 8 years of
experience in the Straight Egyptian Arabian horse breeding area starting at one
of the Company's five Canadian associate farms, where he managed all day to day
operations for 50 Straight Egyptian Arabian horses. He was hired as Breeding
Manager when the Company's Blue Moon Farms facility opened in 1992. He has
successfully completed Straight Egyptian Arabian horse specialized training and
education programs at CABREAH International Farms in Texas, Equine Science
Program at Colorado State University, Select Breeders Southwest Inc. in Texas,
Kemptville College, and private training at the Haines Institute.
Mr. Robillard is primarily responsible for all aspects of the Company's
mission-critical Straight Egyptian Arabian horse breeding operations. He manages
a staff of 12, and through the use of leading edge artificial insemination
techniques, foaling management and monitoring processes has consistently
achieved a conception and delivery rate of over 85% versus the industry average
of 65% - 70%. Management believes that this performance leads most farms
worldwide and has helped make the Company what management believes is the
world's second largest private breeder in the short span of five years.
Tina E. Onstein, the Company's Farm Manger, has had, since early
childhood, significant experience in the equine care business in Europe and
Canada. She has won many awards in show competition and trained extensively at
facilities in Europe and North America. She is responsible for all
farm-management activities at the Company's Blue Moon Farms facility at Addison.
The Company's Restated Certificate of Incorporation and By-laws provide
for limitation of the liability of Directors to the Company and its
stockholders, and for indemnification of Directors, officers, employees and
agents of the Company, respectively, to the maximum extent permitted by the
Delaware General Corporation Law. See "INDEMNIFICATION OF DIRECTORS AND
OFFICERS."
25
<PAGE>
ITEM 6. EXECUTIVE COMPENSATION
Management expects that, commencing February 1, 1997 and through the
fiscal year ending January 31, 1998, none of the officers or directors of the
Company will receive cash and cash equivalent remuneration in excess of $80,000.
For the salaries paid by the Company during its three most recent fiscal years
ended January 31, 1997, see Summary Compensation Table as follows:
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Name Operating Annual Long-Term All Other
& Position Year Compensation Compensation Compensation
- ---------- --------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
David G. Edwards 1996 None None None
President, Chief Executive Officer 1995 None None None
Chief Financial Officer, 1994 None None None
Vice President (Marketing & Sales)
Director
Patricia L. Edwards 1996 $40,000 None None
Secretary - Treasurer, 1995 $40,000 None None
Vice President (Admin.) 1994 $40,000 None None
Director
Kenneth A. Edwards 1996 $60,000 None None
Vice President (Operations) 1995 $60,000 None None
Director 1994 $60,000 None None
</TABLE>
No employee of the Company has a written employment contract with the
Company.
All of the officers and Directors are reimbursed for out-of-pocket
expenses incurred in connection with the Company's business. So long as the
expenses that are incurred in connection with the Company's business are
reasonable in amount and accounted for to the satisfaction of the Board of
Directors, there is no set limitation on the amount of expenses which may be
incurred.
At the present time, the Company has no retirement, pension, profit
sharing, or similar programs for the benefit of its employees. The Company
expects to adopt a stock option plan pursuant to which options can be granted to
key employees, officers, directors and consultants of the Company. There are
currently no issued or outstanding options, warrants or rights granted to any
Director or officer or employee of the Company.
26
<PAGE>
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
As noted under Item 1 "BUSINESS", one of the Company's primary sources
of revenue is the sale of Straight Egyptian Arabian horses to various limited
partnerships offered by Edwards Securities Inc. ("ESI"), which also acts as
General Partner of those limited partnerships. ESI is an Ontario corporation of
which David G. Edwards is a Director and President and of which he is indirectly
the sole controlling shareholder. As General Partner of the limited
partnerships, ESI is entitled to participate in the profits and losses of each
partnership. Generally, ESI's participation percentage is 1.5% of assets under
administration. In addition, ESI receives from the limited partnerships a 10%
marketing commission as compensation in connection with its services as the
promoter of the various limited partnerships. Since January 31, 1996, ESI has
received an aggregate of approximately $450,000 from the limited partnerships to
which the Company has sold horses.
Since 1990, Mr. Edwards, a securities broker licensed by the Ontario
Securities Commission, has, through ESI, developed and delivered, to over 1,000
individual clients, a total of 52 equine-based limited partnerships. Since
January 31, 1996, the Company has received an aggregate of approximately
$7,300,000 from sales of horses to the limited partnership promoted by ESI. All
of the eligible horses owned by each of the 52 equine-based limited partnerships
have been subsequently managed, cared for and bred at the Company's Blue Moon
Farms facilities. Since January 31, 1996, the Company has earned an aggregate of
approximately $4,800,000 from these limited partnerships for the management,
care and breeding of horses owned by those partnerships.
The Company's revenues from the sale of Straight Egyptian Arabian
horses to the limited partnerships developed by ESI are supplemented by the
subsequent breeding and care of the Straight Egyptian Arabian horses at the
Company's Blue Moon Farms facilities. The Company enters into management
agreements with each of the limited partnerships pursuant to which the Company,
through its Blue Moon Farms operations, oversees the continual management, care
and breeding of the horses owned by the limited partnerships. In connection with
these management agreements, the Company accepts from each of the limited
partnerships in consideration for the management, care and breeding of the
horses owned by the limited partnerships, a promissory note. Those notes provide
for monthly payments of interest and further provide that the full amount of
unpaid principal on the promissory note is due and payable when the horses owned
by the limited partnership are sold or when those horses are transferred from
the limited partnership to a corporation in connection with a role-up of the
limited partnership. Approximately 98% of the Company's revenues from the care
and maintenance of the horses boarded at the Company's Blue Moon Farms
facilities is generated from services rendered to these limited partnerships.
Resi Corp. ("Resi"), all of the issued and outstanding shares of Common
Stock of which are owned by David G. Edwards, owes approximately $600,000 to
622291 as of January 31, 1997. The amount of this debt represents advances that
622291 made to Resi to underwrite operating cash flow shortfalls of Resi. Resi
and 622291 have agreed that the aggregate amount of such advances, including any
that may be made in the future, will not exceed $1,000,000 and will bear
interest at Canadian prime. There is no set repayment schedule, but all unpaid
principal and
27
<PAGE>
interest will be due and payable on January 31, 2002. Resi has the ability to
prepay at any time without penalty.
The Company purchases its insurance through Argyle Insurance Brokers
("Argyle"), one of the companies in the ESI Group. Argyle brokers these
insurance purchases for the Company and receives its compensation primarily from
the insurance companies with which Argyle places the insurance, none of which is
affiliated with the Company or Argyle. Each year Argyle receives an aggregate of
approximately $60,000 from the insurance companies that have issued insurance
for the Company, and the five farms operating under the CABREAH umbrella,
including 622291, have paid an aggregate of approximately $20,000 to Argyle over
the same period. Management believes that the terms and conditions of these
insurance purchases are no less favorable to the Company than would have been
obtained from unaffiliated third parties.
Other than as reported in this Item 7, there are no transactions or
series of transactions since the beginning of the Company's last fiscal year or
any currently proposed transaction or series of similar transactions to which
the Company or any of its subsidiaries was or is to be a party in which the
amount involved exceeded $80,000 and in which any of the following persons had
or will have a direct or indirect material interest: Directors, officers,
employees, owners of 5% or more of the Company's outstanding securities,
promoters, family members.
There is no indebtedness owed by any of the Company's officers,
Directors, or employees to the Company.
ITEM 8. LEGAL PROCEEDINGS
Neither the Company, nor any of its direct and indirect subsidiaries,
is a party to any material pending legal proceedings, nor is any of them a party
to any routine litigation incidental to the business.
28
<PAGE>
ITEM 9. MARKET PRICE OF AND DIVIDENDS ON THE
REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
MARKET INFORMATION
------------------
As of date hereof, there is no established public trading market for
the Company's Common Stock, the only class of equity securities that the Company
has authorized and issued and outstanding. The Company anticipates that its
securities will be traded on the NASDAQ Bulletin Board.
HOLDERS
-------
There are approximately 343 stockholders of record of the Common Stock
of the Company as of April 15, 1997 per the records of the Company's transfer
agent, Olde Monmouth Stock Transfer Company of Atlantic Highlands, New Jersey.
DIVIDENDS
---------
The Company has not declared or paid dividends on its Common Stock
during the existence of the Company and its direct and indirect subsidiaries or
predecessor companies.
The Company intends to declare and pay dividends in the future, subject
to the Company achieving certain net income levels as established by the
Company's Board of Directors. The actual dividend policy applied at the
discretion of the Board of Directors will depend on a number of factors
including future earnings, working capital requirements, and the cashflow of the
Company.
OUTSTANDING STOCK
-----------------
Giving effect to the Agreement and Plan of Reorganization, the Company
currently has outstanding 16,560,519 shares of Common Stock of which:
(1) 8,450,000 shares were issued in connection with the Agreement
and Plan of Reorganization pursuant to which Egyptian Arabians
Inc. became a wholly-owned subsidiary of the Company. The
holders of these shares will be entitled to resell them only
pursuant to a registration statement under the Securities Act
of 1933, as amended (the "Securities Act") or an applicable
exemption from registration thereunder such as an exemption
provided by Rule 144. In general, under Rule 144 as currently
in effect, a person (or persons whose shares are aggregated)
who has beneficially owned "restricted securities" for at
least one year may, under
29
<PAGE>
certain circumstances, resell in any three-month period such
number of shares as does not exceed the greater of one percent
of the then-outstanding shares or the average weekly trading
volume during the four calendar weeks prior to such resale.
Rule 144 also permits, under certain circumstances, the resale
of shares without any quantity limitation by a person who has
satisfied a three-year holding period and who is not, and has
not been for the preceding three months, an affiliate of the
Company. In addition, holding periods of successive non-
affiliated owners are aggregated for purposes of determining
compliance with these one- and three-year holding period
requirements. In addition, the Securities and Exchange
Commission has proposed changes to Rule 144 with respect to
the volume limitations of Rule 144.
(2) 204,719 shares of Common Stock are freely transferable and may
be resold without further registration under the Securities
Act, as such shares were issued in compliance with Rule 504
promulgated under Securities Act and are not "restricted"
securities.
(3) 4,240,000 shares of Common Stock were previously issued to
non-U.S. residents in a transaction exempt from the
registration requirements of the Securities Act in reliance on
Regulation S. The holders of these shares will be entitled to
resell them only pursuant to a registration statement under
the Securities Act or an applicable exemption from
registration thereunder such as that provided by Rule 144. As
these shares were issued in January of 1996, holders of these
shares will be entitled to sell them in compliance with Rule
144 once the Company has been subject to the reporting
requirements of the Exchange Act for a period of 90 days.
(4) 3,665,800 shares of Common Stock previously issued are subject
to the provisions of Rule 701. Under Rule 701 of the
Securities Act, certain persons who are issued shares of
Common Stock pursuant to employee benefit plans or consulting
or advisory contracts relating to compensation prior to the
Company's registration of its Common Stock are entitled to
sell such shares 90 days after the effective date of that
registration in reliance on Rule 144, without compliance with
the public information, volume limitation or notice provisions
of Rule 144.
The availability of shares for sale or actual sales under Rule 144 may
have an adverse effect on the market price of the Company's Common Stock. Sales
under Rule 144 also could impair the Company's ability to market additional
equity securities.
Although the Company is unable to predict when or to what extent any
such securities will be sold or otherwise, the public sale of large blocks of
the Company's Common Stock could have a significant effect upon the market price
of the Common Stock and upon the Company's ability to sell additional securities
publicly.
30
<PAGE>
ITEM 10. RECENT SALES OF UNREGISTERED SECURITIES
Since January 4, 1996, the date of its incorporation, the Company has
sold the following securities which were not registered under the Securities
Act:
On or about January 4, 1996, as part of the initial capitalization of
the Company, 204,719 shares of Common Stock were issued in
consideration of the organization expenses of forming the Company,
which organization expenses had a value of $4,090. This number of
shares reflects the reverse split effective January 26,1996.
On or about January 26, 1996, 4,240,000 shares of the Company's Common
Stock were sold for cash at their par value $0.001 per share, an
aggregate of $4,240, to non-U.S. residents in a transaction exempt from
the registration requirements of the Securities Act in accordance with
Rule 904 of Regulation S promulgated under the Securities Act.
On or about June 21, 1996, the Company issued an aggregate of 3,665,800
shares of Common Stock to six consultants and an accountant for
services valued at an aggregate of $987,687.
Effective January 31, 1997, the Company issued 8,450,000 shares to Resi
Corp. as the consideration for the transaction pursuant to which
Egyptian Arabians Inc. will become a wholly-owned subsidiary of the
Company.
The issuances of the securities described above were made in reliance
on exemptions from the registration requirements of the Securities Act provided
by Section 4(2) of the Securities Act, or by Rules 504, 904 and 701 or by
Regulation D promulgated by the Securities and Exchange Commission pursuant to
the Securities Act.
31
<PAGE>
ITEM 11. DESCRIPTION OF REGISTRANT'S SECURITIES TO BE
REGISTERED
GENERAL.
The Company's authorized capitalization is 100,000,000 shares of Common
Stock, $.001 par value per share, of which 16,560,519 shares are currently
issued and outstanding. Holders of shares of Common Stock are entitled to one
vote per share on matters to be voted upon by the stockholders, to receive
dividends when and if declared by the Board of Directors of the Company, and to
share ratably in the assets of the Company legally available for distribution to
stockholders in the event of liquidation or dissolution of the Company.
The Common Stock has no preemptive rights and no subscription,
redemption or conversion privileges, nor does it have cumulative voting rights,
which mean that the holders of more than one-half of the shares voting for the
election of Directors can elect all of the Directors. All of the outstanding
shares are fully paid and not liable for further call or assessment. There are
no outstanding warrants or options for the purchase of any shares of the
Company's Common Stock.
Olde Monmouth Stock Transfer Company, Inc. at 77 Memorial Parkway,
Suite 101, Atlantic Highlands, New Jersey 07716 is the Registrar and Transfer
Agent for the Company's Common Stock.
Certain provisions of the Delaware General Corporation Law ("Delaware
Law") and of the Company's Certificate of Incorporation and By-laws, summarized
in the following paragraphs, may be considered to have an anti-takeover effect
and may delay, deter or prevent a tender offer, proxy contest or other takeover
attempt that a stockholder might consider to be such stockholder's best
interest, including such an attempt as might result in payment of a premium over
the market price of shares held by stockholders.
DELAWARE ANTI-TAKEOVER LAW. The Company, as a Delaware corporation, is
subject to the provisions of Delaware Law, including Section 203. In general,
Section 203 prohibits a public Delaware corporation from engaging in a "business
combination" with an "interested stockholder" for a period of three years after
the date of transaction in which such person became an interested stockholder
unless: (i) prior to such date, the Board of Directors approved either the
business combination or the transaction which resulted in the stockholder
becoming an interested stockholder; or (ii) upon becoming an interested
stockholder, the stockholder then owned at least 85% of the voting stock, as
defined in Section 203; or (iii) subsequent to such date, the business
combination is approved by both the Board of Directors and holders of at least
66 2/3% of the corporation's outstanding voting stock, excluding shares owned by
the interested stockholder. For these purposes, the term "business combination"
includes mergers, asset sales and other similar transactions with an "interested
stockholder." An "interested stockholder" is a person who, together with
affiliates and associates, owns (or within the prior three years did own) 15% or
more of the corporation's voting stock. Although Section 203 permits a
corporation to elect not to be governed by its provisions, the Company to date
has not made this election.
32
<PAGE>
SPECIAL MEETINGS OF STOCKHOLDERS. The Company's By-laws provide that
special meetings of stockholders may be called only by the President, by request
of a majority of the Board of Directors, or by the Secretary upon the written
request of the holders of not less than 25% of the shares of stock outstanding
and entitled to vote at the meeting. These provisions may make it more difficult
for stockholders to take action opposed by the Board of Directors.
ITEM 12. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Company's Restated Certificate of Incorporation (the "Certificate
of Incorporation") and By-laws as amended (the "By-laws") provide for limitation
of the liability of the Directors to the Company and its stockholders and for
indemnification of Directors, officers, employees and agents of the Company,
respectively, to the maximum extent permitted by the Delaware General
Corporation Law ("Delaware Law").
The Certificate of Incorporation provides that the Directors are not
liable to the Company or its stockholders for monetary damages for breaches of
fiduciary duty as a Director, except for liability (i) for any breach of the
Director's duty of loyalty to the Company or its stockholders; (ii) for acts or
omissions not in good faith or which involved intentional misconduct or a
knowing violation of law; (iii) for dividend payments or stock repurchases in
violation of Delaware Law; (iv) for any transaction from which the Director
derived any improper personal benefit.
The By-laws include provisions by which the Company will indemnify its
officers and Directors and other persons against expenses, judgments, fines and
amounts paid in settlement with respect to threatened, pending or completed
suits or proceedings against such persons by reason of serving or having served
the Company as officers, Directors or in other capacities, except in relation to
matters with respect to which such persons shall be determined not to have acted
in good faith, lawfully or in the best interests of the Company. With respect to
matters to which the Company's officers, Directors, employees, agents or other
representatives are determined to be liable for misconduct or negligence in the
performance of their duties, the Bylaws provide for indemnification only to the
extent that the Company determines that such person acted in good faith and in a
manner he reasonably believed to be in or not opposed to the best interests of
the Company.
33
<PAGE>
ITEM 13. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
34
<PAGE>
================================================================================
MERCRISTO DEVELOPMENTS, INC.
(A DELAWARE CORPORATION)
OTTAWA, ONTARIO - CANADA
--------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C>
Independent Auditors' Report............................................................................. F-1
Consolidated Balance Sheets at January 31, 1997,
1996 and April 30, 1997................................................................................. F-2
Consolidated Statements of Changes in Stockholders' Equity for the Years Ended
January 31, 1997, 1996 and 1995 and for the Three Months Ended
April 30, 1997.......................................................................................... F-3
Consolidated Statements of Operations for the Years Ended
January 31, 1997, 1996 and 1995 and for the
Three Months Ended April 30, 1997 and 1996............................................................. F-4
Consolidated Statements of Cash Flows for the Years
Ended January 31, 1997, 1996 and 1995 and for the
Three Months Ended April 30, 1997 and 1996............................................................ F-6
Notes to the Consolidated Financial Statements.......................................................... F-8
</TABLE>
================================================================================
35
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
and Stockholders
Mercristo Developments, Inc.
(A Delaware Corporation)
Ottawa, Ontario - Canada
We have audited the accompanying consolidated balance sheets of
Mercristo Developments, Inc. and its subsidiaries as of January 31, 1997 and
1996, and the related consolidated statements of changes in stockholders'
equity, operations and cash flows for each of the three years in the period
ended January 31, 1997. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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
Mercristo Developments, Inc. and its subsidiaries as of January 31, 1997 and
1996, and the results of their operations and their cash flows for each of the
three years in the period ended January 31, 1997, in conformity with generally
accepted accounting principles.
Rotenberg & Company, LLP
Rochester, New York
April 11, 1997
F-1
<PAGE>
MERCRISTO DEVELOPMENTS, INC.
(A Delaware Corporation)
Ottawa, Ontario - Canada
CONSOLIDATED BALANCE SHEETS AS OF
JANUARY 31, 1997 AND 1996 AND APRIL 30, 1997
(all expressed in terms of Canadian dollars)
<TABLE>
<CAPTION>
ASSETS
Consolidated
April 30, 1997
1997 1996 (unaudited)
----------------------- ----------------------- ----------------------
<S> <C> <C> <C>
Current Assets
Cash and Cash Equivalents $ 53,162 $ 241,117 $ 101,458
Accounts Receivable 3,768,851 1,583,839 1,004,364
Inventories 925,246 638,000 530,246
Prepaid Expenses 17,573 6,000 378,439
Net Current Assets of Discontinued
Operations --- 1,082,920 ---
----------------------- ----------------------- ----------------------
Total Current Assets $ 4,764,832 $ 3,551,876 $ 2,014,507
Due from Partnership 2,000,910 3,724,522 2,049,828
Due from Related Companies 848,444 --- 806,169
Property and Equipment - Net of
Accumulated Depreciation 1,355,336 1,247,938 1,952,221
Net Property and Equipment of
Discontinued Operations --- 1,384,747 ---
----------------------- ----------------------- ----------------------
Total Assets $ 8,969,522 $ 9,909,083 $ 6,822,725
------------ ======================= ======================= ======================
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
- -------------------
<S> <C> <C> <C>
Accounts Payable and Accrued
Expenses $ 4,067,926 $ 3,247,867 $ 2,164,439
Income Taxes Payable --- 15,883 ---
Current Portion of Long Term Debt 50,100 33,360 77,624
Net Current Liabilities of
Discontinued Operations --- 225,149 ---
----------------------- ----------------------- ------------------
Total Current Liabilities $ 4,118,026 $ 3,522,259 $ 2,242,063
Deferred Revenue 2,350,750 3,468,209 2,002,909
Long Term Debt 430,025 386,920 829,114
Deferred Income Taxes 831,000 321,000 702,167
Net Long Term Liabilities of
Discontinued Operations --- 1,548,808 ---
----------------------- ----------------------- ------------------
Total Liabilities $ 7,729,801 $ 9,247,196 $ 5,776,253
----------------- ----------------------- ----------------------- ------------------
Stockholders' Equity
- --------------------
Common Stock:
$.001 Par; 20,000,000 Shares
Authorized, 16,560,519 Shares
Issued and Outstanding $ 16,560 $ 8,654 $ 16,560
Additional Paid Capital 987,907 3,886 987,907
Retained Earnings 235,254 649,347 42,005
----------------------- ----------------------- ------------------
Total Stockholders' Equity $ 1,239,721 $ 661,887 $ 1,046,472
-------------------------- ----------------------- ----------------------- ------------------
Total Liabilities and
Stockholders' Equity $ 8,969,522 $ 9,909,083 $ 6,822,725
----------------------- ======================= ======================= ==================
</TABLE>
The accompanying notes are an integral part of this financial statement and
should be read in conjunction therewith.
F-2
<PAGE>
MERCRISTO DEVELOPMENTS, INC.
(A Delaware Corporation)
Ottawa, Ontario --- Canada
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED JANUARY 31, 1997, 1996 AND 1995
AND FOR THE THREE MONTHS ENDED
APRIL 30, 1997 (all expressed in
terms of Canadian dollars)
<TABLE>
<CAPTION>
Common
Stock Additional Total
Capital $.001 Par Paid--in Retained Stockholders'
Shares Stock Value Capital Earnings Equity
----------- ---------- ----------- ----------- ------------ ----------------------
<S> <C> <C> <C> <C> <C> <C>
Balance -
February 1, 1994 --- $2,941 $--- $--- $(198,563) $(195,622)
Recapitalization 8,450,000 (2,941) 8,450 --- (5,509) ---
---------- ----------- ------- --------- ------------ -------------
Adjusted Balance ---
February 1, 1994 8,450,000 $--- $8,450 $--- $(204,072) $(195,622)
Net Income --- --- --- --- 567,782 567,782
Dividends --- --- --- --- (15,900) (15,900)
---------- ----------- ------- --------- ------------ -------------
Balance -
January 31, 1995 8,450,000 $--- $8,450 $--- $347,810 $356,260
Issuance of Shares:
Initial Capitalization 4,090,448 --- 4,090 --- --- 4,090
20 for 1 Reverse Split (3,885,925) --- (3,886) 3,886 --- ---
Adjustment for
Fractional
Shares 196 --- --- --- --- ---
Net Income --- --- --- --- 315,537 315,537
Dividends --- --- --- --- (14,000) (14,000)
---------- ----------- ------- --------- ------------ -------------
Balance -
January 31, 1996 8,654,719 $--- $8,654 $3,886 $649,347 $661,887
Issuance of Shares:
Acquisition of
ComputerLink Online
Inc.
and Tucows Ltd. 7,000,000 --- 7,000 --- --- 7,000
Recision of Computer-
Link
Online Inc. and
Tucows Ltd. (7,000,000) --- (7,000) --- --- (7,000)
Private Placement
--- Reg S 4,240,000 --- 4,240 --- --- 4,240
Compensation - Rule
701 3,665,800 --- 3,666 984,021 --- 987,687
Net Loss --- --- --- --- (85,054) (85,054)
Dividends --- --- --- --- (113,000) (113,000)
Spin Off --- --- --- --- (216,039) (216,039)
------------ ----------- ------- --------- ------------ -------------
BALANCE -
JANUARY 31, 1997 $16,560,519 --- $16,560 $987,907 $235,254 $1,239,721
------------ ----------- ------- --------- ------------ -------------
Net Loss --- --- $--- --- (193,249) (193,249)
----------- ----------- ------- --------- ------------ -------------
BALANCE -
APRIL 30, 1997 $16,560,519 $--- $16,560 $987,907 $42,005 $1,046,472
============ =========== ======== ========= ============ =============
</TABLE>
F-3
<PAGE>
MERCRISTO DEVELOPMENTS, INC.
(A Delaware Corporation)
Ottawa, Ontario - Canada
CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE
YEARS ENDED JANUARY 31, 1997, 1996 AND 1995 AND FOR THE
THREE MONTHS ENDED APRIL 30,
1997 AND 1996 (all expressed in
terms of Canadian dollars)
<TABLE>
<CAPTION>
Three Months Ended
April 30, April 30,
1997 1996 1995 1997 1996
------------ ------------ ------------ ----------- -----------
(unaudited)
Revenues
- --------
<S> <C> <C> <C> <C> <C>
Farm
Limited Partnerships $ 2,435,538 $1,824,125 $1,606,585 $ 520,982 475,528
Other 49,680 42,942 41,195 11,719 106,025
Horses
Limited Partnerships 4,351,035 2,820,419 1,821,005 128,250 867,681
Other 5,339,465 4,008,681 2,413,890 156,750 1,104,319
Interest 302,524 354,696 437,110 37,803 77,516
Other 5,882 2,561 7,803 875 10,442
------------ ------------ ------------ ----------- -----------
Total Revenues $12,484,124 $9,053,424 $6,327,588 $ 856,379 $2,641,511
------------ ------------ ------------ ----------- -----------
Costs and Expenses
- ------------------
Farm $ 1,117,619 $1,148,804 973,666 $ 282,968 271,461
Horses 9,459,150 7,000,000 4,194,050 560,000 2,180,000
Marketing and Sales 71,918 114,219 18,656 47,561 37,565
General and
Administrative 456,232 407,778 368,131 254,497 204,660
Depreciation and
Amortization 57,814 55,308 46,063 16,720 14,454
Interest Expense 54,260 65,842 73,771 16,715 6,469
Consulting Fees -
Internet 987,687 --- --- --- ---
------------ ------------ ------------ ----------- -----------
Costs and Expenses 12,204,680 $8,791,951 $5,674,337 $1,178,461 $2,714,609
------------ ------------ ------------ ----------- -----------
Income (Loss) Before
Provision for
Taxes $ 279,444 $ 261,473 $ 653,251 $ (322,082) $ (73,098)
Provision for Taxes 510,000 88,883 243,000 (128,833) (29,239)
------------ ------------ ------------ ----------- -----------
Income (Loss) from
Continuing Operations (230,556) $ 172,590 $ 410,251 $ (193,249) $ (43,859)
Income from Discontinued
Operations (Net of Income
Taxes) 145,502 142,947 157,531 --- 30,600
------------ ------------ ------------ ----------- -----------
Net Income (Loss) $ (85,054) $ 315,537 $ 567,782 $ (193,249) $ (13,259)
------------ ------------ ------------ ----------- -----------
</TABLE>
F-4
<PAGE>
MERCRISTO DEVELOPMENTS, INC.
(A Delaware Corporation)
Ottawa, Ontario - Canada
CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE
YEARS ENDED JANUARY 31, 1997, 1996 AND 1995 AND FOR THE
THREE MONTHS ENDED APRIL 30,
1997 AND 1996 (all expressed in
terms of Canadian dollars)
<TABLE>
<CAPTION>
Three Months Ended
April, 30 April 30,
1997 1996 1995 1997 1996
----------- ---------- ----------- ---------- ---------
Income (Loss) per
<S> <C> <C> <C> <C> <C>
Common Share:
Continuing Operations $(.01) $.02 $.05 $(.01) $(.01)
Discontinued Operations --- .02 .02 --- ---
----------- ---------- ----------- ---------- ---------
Total $(.01) $.04 $.07 $(.01) $(.01)
========== ========== ========== ========== =========
Weighted Average Number
of Common Shares
Outstanding 16,560,519 8,654,719 8,450,000 16,560,519 8,654,719
</TABLE>
The accompanying notes are an integral part of this financial statement
and should be read in conjunction therewith.
F-5
<PAGE>
MERCRISTO DEVELOPMENTS, INC.
(A Delaware Corporation)
Ottawa, Ontario - Canada
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE
YEARS ENDED JANUARY 31, 1997, 1996 AND 1995
AND FOR THE THREE MONTHS ENDED
APRIL 30, 1997 AND 1996
(all expressed in terms of Canadian dollars)
<TABLE>
<CAPTION>
Three Months Ended
April 30, April 30,
1997 1996 1995 1997 1996
----------- ------------ ------------- ------------ -------------
(unaudited)
Operating Activities
- ---------------------
<S> <C> <C> <C> <C> <C>
Net Income (Loss) $ (85,054) $ 315,537 $ 567,782 $ (193,249) $ (13,259)
Non-Cash Adjustments:
Depreciation/Amortization 57,814 55,308 46,063 16,720 14,454
Deferred Revenue (1,117,459) (649,444) (98,334) (347,841) (461,982)
Deferred Income Taxes 510,000 73,000 243,000 (128,833) 23,648
Stock Issued for Compensation
for Services 987,687 --- ---
Other 4,240 4,090 ---
Changes:
Accounts Receivable (1,796,019) 722,932 (1,505,999) 2,764,487 1,065,141
Inventory (287,246) 12,000 (383,300) 395,000 (1,045,000)
Prepaid Expenses (3,000) (3,000) (3,000) (360,866) (220,500)
Accounts Payable 431,066 (348,931) 919,751 (1,903,487) (695,952)
Income Taxes Payable (24,456) (16,544) (12,253) --- (8,152)
Discontinued Operations - Non-
Cash Adjustments and Working
Capital Changes (349,809) (17,350) (32,745) 400,482
----------- --------- --------- ---------- ----------
Net Cash Flows from
Operating Activities $(1,672,236) $ 147,598 $ (259,035) $ 241,931 $(941,120)
----------- --------- --------- ---------- ----------
Investing Activities
- --------------------
Acquisition of Fixed Assets $ (165,212) $ (415,458) (210,827) $ (613,605) $ (33,234)
Due from Partnership 1,723,612 584,914 379,210 (48,918) 1,039,962
Due to/from Related Companies --- --- --- 42,275 ---
Investing Activities of
Discontinued Operations (2,155) 235 (673)
----------- --------- --------- ---------- ----------
Net Cash Flows from
Investing Activities $1,556,245 $ 169,691 $ 167,710 $ (620,248) $1,006,728
----------- --------- --------- ---------- ----------
Financing Activities
- --------------------
Dividends $ (113,000) $ (14,000) $ (15,900) $ --- $ (24,000)
Increase in Long-Term Debt 170,000 (33,360) 233,640 426,613 ---
Decrease in Long-Term Debt (110,155) --- --- --- (8,340)
Financing Activities of
Discontinued Operations (18,809) (176,700) (26,700)
----------- --------- --------- ---------- ----------
Net Cash Flows from
Financing Activities $ (71,964) $ (224,060) $ 191,040 $ 426,613 $ (32,340)
----------- --------- --------- ---------- ----------
Increase (Decrease) in Cash and
Cash Equivalents $ (187,955) $ 93,229 $ 99,715 $ 48,296 $ 33,268
Cash and Cash Equivalents -
Beginning of Year 241,117 147,888 48,173 53,162 241,117
----------- --------- --------- ---------- ----------
Cash and Cash Equivalents - End of
Year $ 53,162 $ 241,117 $ 147,888 $ 101,458 $ 274,385
============ =========== =========== =========== ==========
- continued -
</TABLE>
F-6
<PAGE>
MERCRISTO DEVELOPMENTS, INC.
(A Delaware Corporation)
Ottawa, Ontario - Canada
CONSOLIDATED STATEMENTS OF CASH FLOW - CONTINUED
Schedule of Non-Cash Investing and Financing Activities
<TABLE>
<CAPTION>
Year Ended
January 31, 1997
----------------------
<S> <C>
Spin Off to Shareholder:
- -----------------------
Cash and Cash Equivalents $ 134,215
Accounts Receivable 54,854
Loans Receivable 1,142,962
Other Current Assets 21,518
Property and Equipment 1,321,333
Accounts Payable (63,960)
Other Current Liabilities (16,440)
Long Term Debt (1,529,999)
----------------------
Total $ 1,064,483
Due from Related Companies (848,444)
----------------------
Net Distribution $ 216,039
======================
</TABLE>
The accompanying notes are an integral part of this financial statement
and should be read in conjunction therewith.
F-7
<PAGE>
MERCRISTO DEVELOPMENTS, INC.
(A Delaware Corporation)
Ottawa, Ontario - Canada
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(all expressed in terms of Canadian dollars)
Note A - Summary of Transaction
- -------------------------------
The consolidated financial statements for all periods presented
reflect the Plan of Reorganization, which was effected as of January
31, 1997, pursuant to which Egyptian Arabians Inc. (including
directly and indirectly its wholly-owned subsidiaries 622291 Ontario
Ltd. and Edwards Arabians Inc.) became a wholly-owned subsidiary of
the Company. The business combination is accounted for as a
recapitalization.
Factors that affect the comparability of financial data from year
to year and for comparable interim periods include timing of the
foaling season, demand for investment limited partnerships, unusual
horse mortality and illness rates and non-recurring marketing
expenses.
All references to the "Company" herein include Mercristo
Developments, Inc., Egyptian Arabians Inc., and its direct and
indirect, wholly-owned subsidiaries 622291 Ontario Ltd. and Edwards
Arabians Inc., individually or collectively.
Note B - Nature of Operations and Summary of Significant Accounting Policies
- ----------------------------------------------------------------------------
Mercristo Developments, Inc.
----------------------------
The Company was formed on January 4, 1996 as MAC Systems Inc. under
the laws of the State of Delaware and began investigating the
potential acquisition of another company doing business in the
Internet service business. In February 1996, the Company acquired in
exchange for 6,000,000 shares of its common stock, ComputerLink
Online Inc., a private Canadian corporation providing Internet
access, software, and World Wide Web services. In March 1996, the
Company changed its name to Internet @ iDirect.com Inc.. In June
1996, the Company acquired in exchange for 1,000,000 shares of its
common stock Tucows Ltd., a provider of World Wide Web services. The
acquisitions were rescinded on January 15, 1997. As a result of the
rescission of these transactions, the Company had no operations and
no operating assets as of January 31, 1997. The Company changed its
name to Mercristo Developments, Inc. on February 10, 1997. In April
1997, the Company increased its authorized shares of Common Stock
from 20,000,000 shares to 100,000,000 shares.
622291 Ontario Ltd.
-------------------
622291 Ontario Ltd. is a private Canadian corporation with
diversified financial investment and operational interests located in
Ottawa, Ontario, Canada. Effective January 31, 1997, a reorganization
was effected pursuant to which all operations of 622291 other than
the Blue Moon Farms breeding and care operations and its wholly-owned
subsidiary, Edwards Arabians Inc., were spun off from 622291 and
622291 became a wholly-owned subsidiary for a newly formed Canadian
corporation named Egyptians Arabians Inc. Egyptian Arabians Inc. is a
holding company with no assets or operations. Simultaneous with that
transaction, Egyptian Arabians Inc. (including directly and
indirectly its wholly-owned subsidiaries, 622291 and Edwards
Arabians) became a wholly-owned subsidiary of the Company. That
transaction has been accounted for as a recapitalization, resulting
in the historical operations of 622291 being
F-8
<PAGE>
treated as the historical operations of the Company. The reorganized
company is primarily involved in the breeding and care of Straight
Egyptian Arabian horses. Accordingly, the accompanying historical
financial statements of 622291 Ontario Ltd. have been restated to
reflect the financial position, results of operations and cash flows
for all years presented as if the reorganization had occurred at the
beginning of the earliest period presented. The spun off operations
have been reflected as discontinued operations in the consolidated
financial statements. All significant intercompany transactions have
been eliminated.
Segment Data, Geographic Information and Significant Customers
--------------------------------------------------------------
The Company operates in one industry segment and generates revenues
primarily in Canada. For all years presented, approximately 50% of
the sales of horses are to investment partnerships and 50% to other
breeders and individuals. Approximately 98% of the revenues from care
and breeding of horses are from investment partnerships and 2% from
individuals. The Company has been purchasing and selling the majority
of its horses from and to a non-related horse farm. However, the
economic dependence on the use of this horse farm has been lessening
since the Company has begun purchasing and selling horses to other
non-related horse farms.
Use of Estimates
----------------
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets
and liabilities and the 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.
Concentrations of Credit Risk
-----------------------------
Financial instruments which potentially expose the Company to
significant concentrations of credit risk consist principally of bank
deposits and accounts receivable. Cash is placed primarily in high
quality short-term interest bearing financial instruments. The
company performs ongoing credit evaluations of its customers'
financial condition and the accounts receivable are secured by the
horses.
Cash and Cash Equivalents
-------------------------
Cash and cash equivalents include all highly liquid investments
purchased with an original maturity of three months or less.
Receivables
-----------
Receivables from horse sales and breeding and care services are
based on contracted prices. The Company performs ongoing credit
evaluation of its customers' financial condition and evaluates the
collectibility of all receivables maintained. Amounts considered
uncollectible are written off when such determination is made and an
allowance for accounts doubtful of collection is maintained based
upon the expected collectibility. The Company measures its estimates
of impaired loans in accordance with the provisions of Statement of
Financial Accounting Standards No. 118 - Accounting by Creditors for
Impairment of a Loan - Income, Recognition and Disclosures. Interest
income on impaired loans is recognized only when payment is received.
The Company had no impaired loans.
Inventories
-----------
Horse inventories are stated at the lower of cost (specific
identification) or market. Costs of raised horses include
proportionate costs of breeding plus the costs of maintenance to
maturity. Purchased horses are carried at purchase cost plus costs of
maintenance to maturity.
F-9
<PAGE>
Property, Equipment and Depreciation
------------------------------------
Property and equipment are stated at cost, less accumulated
depreciation computed on the declining balance method over the
estimated useful lives as follows:
Buildings 25 Years
Machinery and Equipment 5 Years
Automobiles and Trucks 3 - 5 Years
Furniture and Fixtures 5 Years
Renewals and improvements are charged to property accounts. Costs
of maintenance and repairs that do not improve or extend asset lives
are charged to expense. The cost of property and equipment retired or
otherwise disposed of and the related accumulated depreciation are
removed from the accounts.
Long-Lived Assets
-----------------
Long-lived assets to be held and used are reviewed for impairment
whenever events or changes in circumstances indicate that the related
carrying amount may not be recoverable. In performing the review for
recoverability, the Company estimates the future cash flows expected
to result from the use of the asset and its eventual disposition in
determining its fair value. When required, impairment losses on
assets to be held and used are recognized based on the difference
between the fair value and the carrying amount of the asset and
long-lived assets to be disposed of are reported at the lower of
carrying amount or fair value less cost to sell.
Revenue Recognition
-------------------
The Company recognizes revenues from the sale of horses to
investment partnerships, other breeders, and individuals at the time
of delivery. The vast majority of the sales of horses are made for
cash under normal credit terms. Revenues from board and care,
breeding, and management of horses are recognized as the services are
rendered. Board and care and management fees are generally paid in
advance. Many of the investment partnerships pay for these services
through the use of installment obligations with the Company. Interest
rates ranging from 8.5% to 10.5% are charged to the partnerships. The
Company evaluates the holdings of a given investment partnership,
focusing on the number of horses and the mix of colts to fillies, in
order to support and maintain the investment value of those
partnerships. The Company will often take fillies or mares from its
existing inventory and exchange them for colts owned by the various
investment partnerships. Fillies and mares are much more valuable
than colts, and the cost differential (cost approximates market
value) between the fillies and mares surrendered by the Company and
the colts received in exchange is expensed as part of the cost of
horses sold.
Deferred Revenues
-----------------
Deferred revenues represent amounts received in advance from
investment partnerships for horse care services such as boarding,
feeding and breeding to be rendered over several years (generally one
to three years depending on the partnership). The deferred revenues
are recognized as earned and included in income as the services are
rendered.
Income Taxes
------------
The Company accounts for income taxes using the asset and liability
approach which requires recognition of deferred tax liabilities and
assets for the expected future tax consequences of temporary
differences between the carrying amounts and the tax basis of such
assets and liabilities. This method utilizes enacted statutory tax
rates in effect for the year in which the temporary differences are
expected to reverse and gives immediate effect to changes in income
tax rates upon enactment. Deferred tax assets are recognized, net of
any valuation allowance,
F-10
<PAGE>
for temporary differences and net operating loss and tax credit
carry-forwards. Deferred income tax expense represents the change in
net deferred asset and liability balances.
Interim Results (Unaudited)
---------------------------
The accompanying consolidated balance sheet as of April 30, 1997
and the related consolidated statements of changes in stockholders'
equity, operations and cash flows for the three months ended April
30, 1997 and 1996 are unaudited. In the opinion of management, these
financial statements have been prepared on the same basis as the
annual audited financial statements and include all adjustments,
consisting of only normal recurring adjustments, necessary for the
fair presentation of the results of the interim periods.
Note C - Discontinued Operations
- --------------------------------
Effective January 31, 1991, pursuant to the terms and conditions of
an Agreement and Plan of Reorganization, the operations of 622291
Ontario Ltd. other than the Blue Moons Farm horse breeding and core
operations were spun off from the Company. The spun off operations
included Edwards Securities Inc., Argyle Insurance Brokers Inc., and
938918 Ontario Ltd. and are reflected as discontinued operations in
the Company's consolidated financial statements.
A summary of discontinued operations for the years ended January
31, 1997, 1996 and 1995 is as follows:
<TABLE>
<CAPTION>
Year Ended January 31,
1997 1996 1995
-------------------- -------------------- ------------------
<S> <C> <C> <C>
Total Revenues $ 1,223,678 $ 905,623 $ 940,933
Operating Expenses 1,075,381 720,580 743,850
-------------------- -------------------- ------------------
Income Before Income Taxes $ 148,297 $ 185,043 $ 197,083
Provision for Income Taxes 2,795 42,096 39,552
-------------------- -------------------- ------------------
Net Income from Discontinued
Operations $ 145,502 $ 142,947 $ 157,531
==================== ==================== ==================
</TABLE>
Note D - Accounts Receivable
Accounts receivable consisted of the following at January 31, 1997
and 1996:
<TABLE>
<CAPTION>
1997 1996
---------------------- ----------------------
<S> <C> <C>
Due from Investors $1,180,014 $1,137,815
Partnerships 2,360,354 4,170,546
Horses 1,840,400 ---
Breeding 388,993 ---
---------------------- ----------------------
Total Accounts Receivable $5,769,761 $5,308,361
Less: Amounts - Due Within One Year 3,768,851 1,583,839
----
---------------------- ----------------------
Amounts - Due After One Year $2,000,910 $3,724,522
====================== ======================
</TABLE>
The amounts due from the investment partnerships represent
secondary financing supplied by Edwards Arabians Inc. to allow the
partnerships to prepay board and care for those horses in exchange
for an installment obligation. Deferred revenues are amortized
monthly as the services
F-11
<PAGE>
are rendered over a period of one to three years depending on the
partnership but are repaid with proceeds from the sale of offspring.
The loans are collateralized by the horses purchased by the
partnerships. Interest rates ranging from 8.5% to 10.5% are charged
to the partnerships. There are no fixed terms of repayment. The
amounts owed by the partnerships will be repaid as the investment
partnerships sell horses and will be fully collected by the date all
of their horses have been sold and the assets of the partnerships are
rolled over into corporations. The anticipated wind-up dates vary
between partnerships but are generally one to three years.
Note E - Due From Related Companies and Related Party Transactions
- ------------------------------------------------------------------
The amounts due from related companies are non-interest bearing
advances due from Resi, Corp. and represent advances that 622291 made
to Resi to underwrite operating cash flow shortfalls of Resi. These
amounts bear interest at Canadian prime and, although there is no set
repayment schedule, all unpaid principal and interest will be due and
payable on January 31, 2002.
The Company's primary source of revenue is the sale of Straight
Egyptian Arabian horses to various limited partnerships offered by
Edwards Securities Inc. which acts as general partner of those
limited partnerships. Edwards Securities Inc. is owned by Resi Corp.,
which is 100% owned by David G. Edwards, the Company's President and
Chief Executive Officer. Resi Corp., together with David G. Edwards,
owns 52% of the Company's issued and outstanding shares of Common
Stock.
The Company purchases its insurance through Argyle Insurance
Brokers ("Argyle"), one of the companies owned by Resi Corp.
Insurance premiums paid by the Company to the insurance companies
represented by Argyle were $110,000, $65,000 and $72,000 for the
years ended January 31, 1997, 1996 and 1995, respectively. Argyle
received commissions on the sale of commercial insurance from the
unrelated insurance companies.
Note F - Property and Equipment
Property and equipment consisted of the following at January 31,
1997 and 1996:
<TABLE>
<CAPTION> 1997 1996
---------------------- ----------------------
<S> <C> <C>
Farmland and Buildings $1,470,944 $1,314,508
Machinery and Equipment 83,696 71,044
Automobiles and Trucks 3,874 7,750
Furniture and Fixtures 7,785 7,785
---------------------- ----------------------
Total Property and Equipment $1,566,299 $1,401,087
Less: Amounts - Accumulated Depreciation 210,963 153,149
----
---------------------- ----------------------
Net Property and Equipment $1,355,336 $1,247,938
====================== ======================
</TABLE>
Depreciation expense for the years ended January 31, 1997, 1996 and
1995 was $57,814, $55,308 and $46,063 respectively.
F-12
<PAGE>
Note G - Accounts Payable and Accrued Expenses
- ----------------------------------------------
Accounts payable and accrued expenses consisted of the following at
January 31, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
------------------- ------------------
<S> <C> <C>
Horses $4,011,686 $3,085,993
Other 56,240 161,874
------------------- ------------------
Total Accounts Payable and Accrued Expenses $4,067,926 $3,247,867
=================== ==================
</TABLE>
Note H - Long Term Debt
Long term debt consisted of the following at January 31, 1997 and
1996:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Mortgage payable on farmland and buildings bearing interest at
0.70% above the Canadian FBDB's floating base rate (7.45% at
January 31, 1997), with monthly principal payments of $4,175
plus interest, expiring in 2006. $480,125 $350,280
Second mortgage payable on farmland and buildings
bearing interest at 17.15% with monthly interest
payments only. --- 70,000
--------- --------
Total 480,125 420,280
Less: Current Portion 50,100 33,360
---- ------- -------
Long Term Portion $430,025 $386,920
======== ========
<CAPTION>
As of January 31, 1997, the aggregate maturities of long term debt
are as follows:
<S> <C>
1998 $ 50,100
1999 50,100
2000 50,100
2001 50,100
2002 50,100
Thereafter 229,625
-------------
Total $ 480,125
============
</TABLE>
Note I - Income Taxes
The provision for income taxes from continuing operations for the
years ended January 31, 1997, 1996 and 1995 were as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------------------- ------------------ ----------------
<S> <C> <C> <C>
Current income taxes payable $ --- $ --- $ ---
Federal --- --- ---
State --- --- ---
Canadian --- 15,883 ---
------------------- ------------------ -----------------
Total Current Provision $ --- $15,883 $ ---
Deferred provision
Canadian 510,000 73,000 243,000
------------------- ------------------ -----------------
</TABLE>
F-13
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Total Provision $510,000 $88,883 $243,000
=================== ================== =================
</TABLE>
The provision for deferred income taxes from continuing operations
for the years ended January 31, 1997, 1996 and 1995 were as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------------------- ------------------ -----------------
<S> <C> <C> <C>
Revenue Recognition Methods $257,853 $151,091 $(252,160)
Inventory Items 109,154 (2,399) 145,654
Payable and Accrued Items 163,804 (69,786) 349,506
Other (20,811) (5,906) ---
------------------- ------------------ ------------------
Total Deferred Provision $510,000 $73,000 $243,000
=================== ================== ==================
</TABLE>
The provisions for income taxes from continuing operations differ
from those computed using statutory tax rates as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------------------- ------------------ -----------------
<S> <C> <C> <C>
Statutory Tax Rate 44.6% 44.6% 44.6%
Nondeductible Consulting Fees 142.4% --- ---
Effect of Tax Brackets (4.7%) (11.2%) (7.7%)
Nondeductible and Other .2% .1% .3%
------------------- ------------------ -----------------
Total Provision for Taxes 182.5% 33.5% 37.2%
=================== ================== =================
</TABLE>
The effective tax rates for discontinued operations were (1.9%),
(22.7%), and (20.1%) for the years ended January 31, 1997, 1996 and
1995, respectively. Differences between income taxes calculated at
the statutory rate and the resulting tax rate were due primarily to
the utilization of operating loss carryforwards.
The Company's net deferred income tax liability as of January 31,
1997 and 1996 consists of the following:
<TABLE>
<CAPTION>
1997 1996
---------------------------- --------------------------
<S> <C> <C>
Deferred Tax Liabilities
Revenue Recognition Methods $2,006,712 $1,247,102
Inventory Items 370,100 255,200
Deferred Tax Assets
Payable and Accrued Items and Other (1,545,812) (1,234,190)
---------------------------- --------------------------
Net Deferred Tax Liability $ 831,000 $ 268,112
============================ ==========================
</TABLE>
Note J - Stock Compensation
- ---------------------------
The Company incurred consulting fees in connection with the failed
acquisition of ComputerLink Online and Tucows during the year ended
January 31, 1997. The Company compensated consultants through the
issuance of common shares of the Company. The fair value of the
services rendered was $987,687 and was charged against operations.
The Company issued 3,665,800 shares valued at an agreed upon price of
approximately $.27 per share and reflected the full value of the
services received as paid in capital.
F-14
<PAGE>
Note L - Other Matters
- ----------------------
The Canadian income tax authorities are presently reviewing the
farming tax status and associated investment losses for some of the
individuals in limited investment partnerships which previously
purchased horses from the company. Denial of some of these losses by
the tax authorities might make investing in the limited partnership
less attractive and could adversely impact the demand for the
company's horses. Should an adverse condition result from this,
management would work vigorously to restructure the limited
partnerships in accordance with any revisions to the tax code and/or
would seek other sources for the sale of its horses.
The Canadian sales tax authorities are currently reviewing certain
input tax credits claimed by some of the investment limited
partnerships and the corporations that acquired partnership assets in
roll-up transactions which allowed the Company to offset the sales
tax it collected against the sales tax paid by those entities.
Management is of the opinion that the outcome of this review is
presently not determinable. However, if an adverse decision is
rendered, there would be no economic impact on the Company's
financial position, since any liability is that of the investment
limited partnerships and corporations.
F-15
<PAGE>
ITEM 14. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
36
<PAGE>
ITEM 15. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements and Supplementary Data
See Item 13.
(b) Exhibits
EXHIBIT NO. DESCRIPTION
- ----------- -----------
2.1 Agreement and Plan of Reorganization by and among
Mercristo Developments, Inc., Egyptian Arabians Inc. and
Resi Corp.
2.2 Agreements relating to the Reorganization of 622291
Ontario Limited
3.1 Restated Certificate of Incorporation
3.2 Amended and Restated By-laws
10.1 Mortgage from E.S.I. Holdings Limited to Michael Nurse
10.2 Mortgage from E.S.I. Holdings Limited to Sun Life Trust
Company
10.3 Loan Agreement from 622291 Ontario Limited to Business
Development Bank of Canada
10.4 Lease between Peter Vanderkloet and Edwards Arabians
Inc.
10.4.1 Addendum to Lease between Peter Vanderkloet and Edwards
Arabians Inc.
11 Statement re Computation of Per Share Earnings
21 Subsidiaries of Mercristo Developments, Inc.
27 Financial Data Schedule
37
<PAGE>
SIGNATURE PAGE
Pursuant to the requirements of Section 12 of the Securities and
Exchange Act of 1934, the Company has duly caused this registration statement to
be signed on its behalf by the undersigned, thereunto duly authorized
MERCRISTO DEVELOPMENTS, INC.
----------------------------
(Company)
Date: August 18, 1997 By: /s/David G. Edwards
------------------------
DAVID G. EDWARDS, President
<PAGE>
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
*2.1 Agreement and Plan of Reorganization by and among
Mercristo Developments, Inc., Egyptian Arabians Inc.
and Resi Corp.
*2.2 Agreements relating to the Reorganization of 622291
Ontario Limited
*3.1 Restated Certificate of Incorporation
*3.2 Amended and Restated By-laws
10.1 Mortgage from E.S.I. Holdings Limited to Michael
Nurse
10.2 Mortgage from E.S.I. Holdings Limited to Sun Life
Trust Company
10.3 Loan Agreement from 622291 Ontario Limited to
Business Development Bank of Canada
10.4 Lease between Peter Vanderkloet and Edwards
Arabians Inc.
10.4.1 Addendum to Lease between Peter Vanderkloet and
Edwards Arabians Inc.
*11 Statement re Computation of Per Share Earnings
21 Subsidiaries of Mercristo Developments, Inc.
27 Financial Data Schedule
- -----------------
* Previously filed.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMAY FINANCIAL INFORMATION EXTRACTED FROM THE
MERCRISTO DEVELOPMENT, INC. FINANCIAL STATEMENTS CONTAINED IN THE REGISTRATION
STATEMENT ON FORM 10 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<CURRENCY> CANADIAN
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-31-1998
<PERIOD-START> FEB-01-1997
<PERIOD-END> APR-30-1997
<EXCHANGE-RATE> .7155
<CASH> 101,458
<SECURITIES> 0
<RECEIVABLES> 1,004,364
<ALLOWANCES> 0
<INVENTORY> 530,246
<CURRENT-ASSETS> 2,014,507
<PP&E> 2,179,904
<DEPRECIATION> 227,683
<TOTAL-ASSETS> 6,822,725
<CURRENT-LIABILITIES> 2,242,063
<BONDS> 829,114
0
0
<COMMON> 16,560
<OTHER-SE> 1,029,912
<TOTAL-LIABILITY-AND-EQUITY> 6,822,725
<SALES> 285,000
<TOTAL-REVENUES> 856,379
<CGS> 560,000
<TOTAL-COSTS> 842,968
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 16,715
<INCOME-PRETAX> (322,082)
<INCOME-TAX> (128,833)
<INCOME-CONTINUING> (193,249)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (193,249)
<EPS-PRIMARY> (.01)
<EPS-DILUTED> (.01)
</TABLE>
