<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended July 31, 1997
-------------
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from to
---------------- ---------------------
Commission File Number 0-22541
-------
MERCRISTO DEVELOPMENTS, INC.
----------------------------
(Exact name of Registrant as Specified in Its Charter)
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)
Registrant's Telephone Number, Including Area Code 613-230-9803, 800-565-6671
--------------------------
----------------------------------------------------------
Former Name, Former Address and Former Fiscal year, if
Changed Since Last Report
Indicate by check whether the registrant: (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [_] No [X]
Indicate the number of shares outstanding for each of the issuer's
classes of common stock, as of the latest practicable date.
Common Stock, $.001 par value: 16,560,519 issued and outstanding as of September
15, 1997
<PAGE>
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
Mercristo Developments, Inc.
(A Delaware Corporation)
Ottawa, Ontario - Canada
TABLE OF CONTENTS
-----------------
<TABLE>
<S> <C>
Consolidated Balance Sheets at July 31, 1997 (Unaudited) and January 31, 1997 2
Consolidated Statements of Operations for the Three Months Ended
July 31, 1997 and 1996 and for the Six Months Ended July 31, 1997
and 1996 (Unaudited) 3-4
Consolidated Statements of Cash Flows for the Six Months
Ended July 31, 1997 and 1996 (Unaudited) 5
Notes to the Consolidated Financial Statements (Unaudited) 6-8
</TABLE>
<PAGE>
Mercristo Developments, Inc.
(A Delaware Corporation)
Ottawa, Ontario - Canada
Consolidated Balance Sheets at
------------------------------
July 31, 1997 (Unaudited) and January 31, 1997
----------------------------------------------
(All Expressed in Terms of Canadian Dollars)
--------------------------------------------
ASSETS
------
<TABLE>
<CAPTION>
July 31 January 31
1997 1997
----------- ------------
<S> <C> <C>
Current Assets
- --------------
Cash and Cash Equivalents $ 6,259 $ 53,162
Accounts Receivable 851,173 3,768,851
Inventories 380,246 925,246
Prepaid Expenses 156,401 17,573
----------- -----------
Total Current Assets $ 1,394,079 $ 4,764,832
Due from Partnership 2,037,585 2,000,910
Due from Related Companies 753,853 848,444
Property and Equipment - Net of
Accumulated Depreciation 1,967,509 1,355,336
----------- -----------
Total Assets $ 6,153,026 $ 8,969,522
------------ =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current Liabilities
- -------------------
Accounts Payable and Accrued Expenses $ 2,066,604 $ 4,067,926
Income Taxes Payable 49,752 ---
Current Portion of Long Term Debt 75,958 50,100
----------- -----------
Total Current Liabilities $ 2,192,314 $ 4,118,026
Deferred Revenue 1,458,168 2,350,750
Long Term Debt 811,322 430,025
Deferred Income Taxes 632,983 831,000
----------- -----------
Total Liabilities $ 5,094,787 $ 7,729,801
-----------------
Stockholders' Equity
- --------------------
Common Stock: $.001 Par; 20,000,000 Shares Authorized,
16,560,519 Shares Issued and Outstanding 16,560 16,560
Additional Paid Capital 987,907 987,907
Retained Earnings 53,772 235,254
----------- -----------
Total Stockholders' Equity $ 1,058,239 $ 1,239,721
-------------------------- ----------- -----------
Total Liabilities and Stockholders' Equity $ 6,153,026 $ 8,969,522
------------------------------------------ =========== ===========
</TABLE>
The accompanying notes are an integral part of this financial statement and
should be read in conjunction therewith.
2
<PAGE>
Mercristo Developments, Inc.
(A Delaware Corporation)
Ottawa, Ontario - Canada
Consolidated Statements of Operations
-------------------------------------
for the Three Months Ended July 31, 1997 and 1996
-------------------------------------------------
and for the Six Months Ended July 31, 1997 and 1996
---------------------------------------------------
(All Expressed in Terms of Canadian Dollars)
--------------------------------------------
(Unaudited)
<TABLE>
<CAPTION>
Three Months Six Months
Ended July 31 Ended July 31
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues
- --------
Farm
Limited Partnership $ 965,638 $ 384,385 $ 1,486,620 $ 859,913
Other 22,500 82,736 34,219 188,761
Horses
Limited Partnership 47,700 536,569 175,950 1,404,250
Other 86,150 416,931 242,900 1,521,250
Interest 20,047 36,860 57,850 114,376
Other 946 780 1,821 11,222
----------- ----------- ----------- -----------
Total Revenues $ 1,142,981 $ 1,458,261 $ 1,999,360 $ 4,099,772
----------- ----------- ----------- -----------
Costs and Expenses
- ------------------
Farm $ 513,232 $ 301,443 $ 796,200 $ 572,904
Horses 345,000 1,019,500 905,000 3,199,500
Marketing and Sales 17,069 12,640 64,630 50,205
General and Administrative 209,860 92,899 464,357 297,559
Depreciation and Amortization 18,307 13,827 35,027 28,281
Interest Expense 19,902 13,820 36,617 20,289
----------- ----------- ----------- -----------
Total Costs and Expenses $ 1,123,370 $ 1,454,129 $ 2,301,831 $ 4,168,738
----------- ----------- ----------- -----------
Income (Loss) Before
Provision for Taxes $ 19,611 $ 4,132 $ (302,471) $ (68,966)
Provision for Taxes 7,844 1,653 (120,989) (27,586)
----------- ----------- ----------- -----------
Income (Loss) from
Continuing Operations $ 11,767 $ 2,479 $ (181,482) $ (41,380)
Income from Discontinued
- ------------------------
Operations (Net of Income Taxes) -- 32,100 -- 62,700
-------------------------------- ----------- ----------- ----------- -----------
Net Income (Loss) $ 11,767 $ 34,579 $ (181,482) $ 21,320
=========== =========== =========== ===========
- continued -
</TABLE>
The accompanying notes are an integral part of this financial statement and
should be read in conjunction therewith.
3
<PAGE>
- - continued - Mercristo Developments, Inc.
(A Delaware Corporation)
Ottawa, Ontario - Canada
Consolidated Statements of Operations for the
---------------------------------------------
Three Months Ended July 31, 1997 and 1996
-----------------------------------------
and the Six Months Ended July 31, 1997 and 1996
-----------------------------------------------
(All Expressed in Terms of Canadian Dollars)
-------------------------------------------
(Unaudited)
<TABLE>
<CAPTION>
Three Months Six Months
Ended July 31 Ended July 31
1997 1996 1997 1996
------------ --------------- --------------- -------------
<S> <C> <C> <C> <C>
Income (Loss) per
Common Share:
Continuing Operation $ -- $ -- $ (.01) $ (.01)
Discontinued Operations -- .01 -- .01
------------- --------------- --------------- -------------
Net Income (Loss) $ -- $ .01 $ (.01) $ --
============= =============== =============== =============
Weighted Average Number
of Common Shares Outstanding 16,560,519 8,654,719 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.
4
<PAGE>
Mercristo Developments, Inc.
(A Delaware Corporation)
Ottawa, Ontario - Canada
Consolidated Statements of Cash Flows for the
---------------------------------------------
Six Months Ended July 31, 1997 and 1996
---------------------------------------
(All Expressed in Terms of Canadian Dollars)
--------------------------------------------
(Unaudited)
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Operating Activities
- --------------------
Net Income (Loss) for the Period $ (181,482) $ 21,320
Non-Cash Adjustments:
Depreciation/Amortization 35,027 28,281
Deferred Revenue (892,582) (721,785)
Deferred Income Taxes (198,017) (117,439)
Changes:
Accounts Receivable 2,917,678 778,274
Inventory 545,000 (925,500)
Prepaid Expenses (138,828) (147,000)
Accounts Payable (2,001,322) (767,297)
Income Taxes Payable 49,752 (12,613)
Discontinued Operations -
Non - Cash Adjustments and Working
Capital Changes -- 378,453
----------- -----------
Net Cash Flows from Operating Activities $ 135,226 $(1,485,306)
----------- -----------
Investing Activities
- --------------------
Acquisition of Fixed Assets $ (647,200) $ (83,472)
Due from Partnership (36,675) 1,465,907
Due to/from Related Companies 94,591 --
Investing Activities of Discontinued Operations -- --
----------- -----------
Net Cash Flows from Investing Activities $ (589,284) $ 1,382,435
----------- -----------
Financing Activities
- --------------------
Dividends $ -- $ (24,000)
Increase in Long-Term Debt 426,613 71,575
Decrease in Long-Term Debt (19,458) (16,680)
Financing Activities of Discontinued Operations -- (70,680)
----------- -----------
Net Cash Flows from Financing Activities $ 407,155 $ (39,785)
----------- -----------
Decrease in Cash and Cash Equivalents $ (46,903) $ (142,656)
Cash and Cash Equivalents - Beginning of Period 53,162 241,117
----------- -----------
Cash and Cash Equivalents - End of Period $ 6,259 $ 98,461
=========== ===========
</TABLE>
The accompanying notes are an integral part of this financial statement and
should be read in conjunction therewith.
5
<PAGE>
Mercristo Developments, Inc.
(A Delaware Corporation)
Ottawa, Ontario - Canada
Notes to Consolidated Financial Statements
------------------------------------------
(All Expressed in Terms of Canadian Dollars)
(Unaudited)
Note A - Basis of Presentation
- ------------------------------
The condensed consolidated financial statements of Mercristo Developments,
Inc. (the "Company") included herein have been prepared by the Company, without
audit, pursuant to the rules and regulations of the Securities and Exchange
Commission (the "SEC"). Certain information and footnote disclosures normally
included in financial statements prepared in conjunction with generally accepted
accounting principles have been condensed or omitted pursuant to such rules and
regulations, although the Company believes that the disclosures are adequate to
make the information presented not misleading. These condensed financial
statements should be read in conjunction with the annual audited financial
statements and the notes thereto included in the Company's registration
statement on Form 10.
The accompanying unaudited interim financial statements reflect all
adjustments of a normal and recurring nature which are, in the opinion of
management, necessary to present fairly the financial position, results of
operations and cash flows of the Company for the interim periods presented. The
results of operations for these periods are not necessarily comparable to, or
indicative of, results of any other interim period or for the fiscal year as a
whole. 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. Certain financial information that is not
required for interim financial reporting purposes has been omitted.
The condensed 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 was accounted
for as a recapitalization.
Note B - Receivables
- --------------------
Accounts receivable consisted of the following at July 31, 1997 and January
31, 1997:
July 31,1997 January 31, 1997
------------ ----------------
DUE FROM INVESTORS $ 221,894 $1,180,014
PARTNERSHIPS 2,086,567 2,360,354
HORSES 224,700 1,840,400
BREEDING 355,597 388,993
---------- ----------
Total Accounts Receivable $2,888,758 $5,769,761
Less: Amounts Due Within One Year 851,173 3,768,851
- ---- ---------- ----------
Amounts Due After One Year $2,037,585 $2,000,910
========== ==========
6
<PAGE>
Receivables due from horse sales and breeding fees are based on
contracted prices, are non-interest bearing, and are due under normal
credit terms within 30 days. The amounts due from the investment
partnerships and individual investors represent secondary financing
supplied by Edwards Arabians Inc. to allow them to prepay board and care
for horses in exchange for an installment obligation. Deferred revenues
are amortized monthly as the services are rendered over a period of one to
three years. The loans are collateralized by the horses purchased and have
interest rates ranging from 8.5% to 10.5%. The loans require interest only
payments during their term, with principal repayments due as the horses
are sold. Partnership loans will be collected by the time the assets of
the partnerships are rolled over into corporations. The anticipated
wind-up dates vary among partnerships but are generally one to three
years.
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.
Note C - 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
and individual investors pay for these services through the use of
installment obligations with the Company, which have interest rates
ranging from 8.5% to 10.5%. The installment obligations require interest
only payments during their term, with principal repayments due as the
horses are sold to third parties.
Note D - Net Income Per Common Share
------------------------------------
Net income per common share is computed using the weighted average
number of shares of common stock outstanding during each period after
giving retroactive effect to the recapitalization of the Company which was
effected as of January 31, 1997.
Note E - Recently Issued Accounting Standards
---------------------------------------------
SFAS No. 130
------------
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard No. 130, "Reporting
Comprehensive Income", which is applicable to the Company effective
February 1, 1998. This Statement establishes standards for the reporting
and display of comprehensive income and its components (revenues,
expenses, gains and losses) in a full set of general purpose financial
statements. Comprehensive income is defined as the change in the equity of
a business enterprise during a period from transactions and other events
and circumstances from non-owner sources. It includes all changes in
equity during a period (from net income and other sources) except those
resulting from investments by owners and distributions to owners.
Management believes that the adoption of this Statement will not have a
material effect on the Company's consolidated results of operations or
financial position.
7
<PAGE>
SFAS No. 131
------------
In June 1997, the FASB issued Statement of Financial Accounting
Standard No. 131, "Disclosures about Segments of an Enterprise and Related
Information", which is applicable to the Company effective February 1,
1998. This Statement requires that a public business enterprise report
financial and descriptive information about its reportable operating
segments. Operating segments are components of an enterprise about which
separate financial information is available that is evaluated regularly by
the chief financial decision maker in deciding how to allocate resources
and in assessing performance. The Statement requires disclosure of a
measure of segment profit or loss, certain specific revenue and expense
items, and segment assets. It requires reconciliations of total segment
revenues, total segment profit or loss, total segment assets, and other
amounts disclosed for segments to corresponding amounts in the
enterprise's general purpose financial statements. It requires that all
public business enterprises report information about the revenues derived
from the enterprise's products or services, about the countries in which
the enterprise earns revenues and holds assets, and about major customers
regardless of whether that information is used in making operating
decisions. Management believes that the adoption of this Statement will
not have a material effect on the Company's consolidated results of
operations or financial position.
Note F - Contingencies
----------------------
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.
8
<PAGE>
ITEM 2. 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 Ontario Ltd. ("622291") became a wholly-owned
subsidiary of 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
discontinued operations that were spun-off from 622291.
9
<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 Six Months
Ended July 31 Ended July 31
1997 1996 1997 1996
-------- -------- -------- ---------
<S> <C> <C> <C> <C>
Revenues
Farms 1 86.5% 32.0% 76.0% 25.6%
Horses 2 11.7% 65.4% 21.0% 71.3%
Interest and Other 1.8% 2.6% 3.0% 3.1%
-------- -------- -------- --------
Total Revenues 100.0% 100.0% 100.0% 100.0%
-------- -------- -------- --------
Costs and Expenses
Farm 1 44.9% 20.7% 39.8% 14.0%
Horses 2 30.2% 69.9% 45.3% 78.0%
Marketing and Sales 1.5% .9% 3.2% 1.2%
General and Administrative 18.4% 6.4% 23.2% 7.3%
Depreciation and Amortization 1.6% .9% 1.8% .7%
Interest Expense 1.7% .9% 1.8% .5%
-------- -------- -------- --------
Total Costs and Expenses 98.3% 99.7% 115.1% 101.7%
-------- -------- -------- --------
Income (Loss) Before Taxes 1.7% .3% (15.1%) (1.7%)
Provision for Income Taxes .7% .1% (6.0%) (.7%)
-------- -------- -------- ---------
Income (Loss) from
Continuing Operations 1.0% .2% (9.1%) (1.0%)
======= ======== ======== ========
</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.
- continued -
10
<PAGE>
Results of Operations - continued
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
breed. 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 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 Six Months
Ended July 31 Ended July 31
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Number of Horses
Beginning Inventory 8 20 12 10
Horses Acquired 20 39 23 77
Horses Sold or Exchanged 12 12 19 40
-- -- -- --
Ending Inventory 16 47 16 47
== == == ==
</TABLE>
There was an increase in the number of horses in ending inventory at
July 31, 1997 when compared to January 31, 1997 but a decrease in total
carrying value for those horses due to an unfavorable 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:
Range Average
------------------ --------
Mares $ 70,000 -$ 95,000 $ 92,000
Fillies $ 50,000 -$ 60,000 $ 55,000
Colts:
Purchase $ 10,000
Sale $500 or less
- continued -
11
<PAGE>
Results of Operations - continued
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. Total replacement
costs reflected in cost of sales were $235,000, and $177,500 for the three
months ended July 31, 1997 and 1996, respectively, and $550,000 and
$412,500 for the six months ended July 31,1997 and 1996, respectively.
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 July 31, 1997 Compared With Three Months Ended
July 31, 1996
Revenues. Total revenues for the three months ended July 31, 1997
decreased by $315,280 (21.6%) to $1,142,981 from $1,458,261 for the three
months ended July 31, 1996. Revenues from breeding and care of horses
increased by $521,017, and the sale of horses accounted for a decrease in
revenues of $819,650, and interest and other revenues accounted for the
remaining $16,647 decrease in revenues. The primary reason for the
continued decrease in the revenues generated by the sale of horses was
attributable to the limited activity in horse purchases and sales pending
the outcome of the Revenue Canada proposed assessments with the investors.
Farm revenues continued to increase as the number of horses under the
Company's care has grown. Breeding fees in the second quarter 1997
accounted for $306,000 of the increase in farm revenues.
Costs and Expenses. Total costs and expenses for the three months ended
July 31, 1997 decreased by $330,759 (22.7%) to $1,123,370 from $1,454,129
for the three months ended July 31, 1996. As the Company's horse sales
continued to decrease significantly during the three months ended July 31,
1997 as compared to the three months ended July 31, 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 July 31, 1997 increased by $4,429 (35.0%) to $17,069 from $12,640
for the three months ended July 31, 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 July 31, 1997 increased by $116,961 (125.9%) to
$209,860 from $92,899 for the three months ended July 31, 1996. The
primary reason for the increase was professional and consulting fees
incurred in connection with the recapitalization and Registration of the
Company.
Income Taxes. The provision for taxes for the three months ended July 31,
1997 and 1996 is based upon an effective Canadian tax rate of 40.0%.
12
<PAGE>
Six Months Ended July 31, 1997 Compared With Six Months Ended July 31,
1996
Revenues. Total revenues for the six months ended July 31, 1997 decreased
by $2,100,412 (51.2%) to $1,999,360 from $4,099,772 for the six months
ended July 31, 1996. Revenues from breeding and care of horses increased
by $472,165, and the sale of horses accounted for a decrease in revenues
of $2,506,650, and interest and other revenues accounted for the remaining
$65,927 decrease in revenues. There were three primary reasons for the
large decrease in the revenues generated by the sale of horses. The
continued decrease in the revenues generated by the sale of horses was
attributable to the limited activity in horse purchases and sales pending
the outcome of the Revenue Canada proposed assessments with the investors.
The Company had also offered an early sales incentive plan with its
salesmen to sell horses during the first quarter of 1996. Also, the
foaling activity started approximately 30 days later than usual in the
first quarter of 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 six months ended July 31, 1997.
Costs and Expenses. Total costs and expenses for the six months ended July
31, 1997 decreased by $1,866,907 (44.8%) to $2,301,831 from $4,168,738 for
the six months ended July 31, 1996. As the Company's horse sales and
foaling activity decreased significantly during the six months ended July
31, 1997 as compared to the six months ended July 31, 1996, the Company
was able to control the incurring of expenses associated with those
activities.
Marketing and Sales. Marketing and sales expenses for the six months ended
July 31, 1997 increased by $14,425 (28.7%) to $64,630 from $50,205 for the
six months ended July 31, 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
six months ended July 31, 1997 increased by $166,798 (56.1%) to $464,357
from $297,559 for the six months ended July 31, 1996. The primary reason
for the increase was professional and consulting fees incurred in
connection with the recapitalization and Registration of the Company.
Income Taxes. The provision for taxes for the six months ended July 31,
1997 and 1996 is based upon an effective Canadian tax rate of 40.0%.
Liquidity and Capital Resources
At July 31, 1997, the Company's primary source of liquidity included cash
and cash equivalents of $6,259 and open trade credit with vendors of
$2,066,604. 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's working capital decreased by $1,445,041 during
the six months ended July 31, 1997 from $646,806 at January 31, 1997 to a
negative working capital of $798,235 at July 31, 1997.
Net cash flows from operating activities during the six months ended July
31, 1997 were $135,226 as compared to a negative $1,485,306 for the six
months ended July 31, 1996. The increase of $1,620,532 resulted primarily
from the significant collection in accounts receivable and a decrease in
inventories during the six months ended July 31, 1997.
Net cash flows used in investing activities (primarily for capital
expenditures) during the six months ended July 31, 1997 were $589,284 as
compared to net cash flows from investing activities (primarily from
collections of amounts due from the limited partnerships) of $1,382,435
for the six months ended July 31, 1996. - continued -
13
<PAGE>
Liquidity and Capital Resources - continued
Net cash flows from financing activities during the six months ended July
31, 1997 were $407,155 as compared with net cash flows used in financing
activities of $39,785 for the six months ended July 31, 1996. The increase
reflects the borrowings on new commercial property of $426,613.
The balance sheet at July 31, 1997 shows a decrease in current assets for
the six months from $4,764,832 to $1,394,079 and a corresponding decrease
in current liabilities from $4,118,026 to $2,192,314 and a decrease in
deferred revenues from $2,350,750 to $1,458,168, 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 six months.
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 self-financing,
and does not depend on any institutional debt or commercial lines of
credit (except for commercial mortgages on the Company's properties).
14
<PAGE>
ITEM 3. Quantitative and Qualitative Disclosures About Market Price
There currently is no market for the Company's securities.
15
<PAGE>
PART II
OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K.
(a) See Index to Exhibits
(b) Reports on Form 8-K
No reports on Form 8-K have been filed during the quarter for
which this report is filed.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MERCRISTO DEVELOPMENTS, INC.
Date September 22, 1997 /s/ David G. Edwards
------------------------- -------------------------------
David G. Edwards, President
and Chief Financial Officer
16
<PAGE>
INDEX TO EXHIBITS
(2) Plan of acquisition, reorganization, arrangement, liquidation or
succession
Not applicable.
(3) (a) Articles of Incorporation
Restated Certificate of Incorporation is incorporated herein
by reference to Exhibit 3.1 to the Registrant's Registration
Statement on Form 10 (Registration No. 0-22541) as filed on
May 8, 1997.
(b) By-laws
Amended and Restated By-laws are incorporated herein by
reference to Exhibit 3.2 to the Registrant's Registration
Statement on Form 10 (Registration No. 0-22541) as filed on
May 8, 1997.
(4) Instruments defining the rights of security holders, including indentures
(a) The documents listed under Item (3) of this Index are incorporated
herein by reference.
(10) Material Contracts
Not applicable.
(11) Statement re computation of per share earnings
Computation can be clearly determined from the Financial Statements and
Notes thereto included herein.
<PAGE>
(15) Letter re unaudited interim financial information
Not applicable.
(18) Letter re change in accounting principles
Not applicable.
(19) Report furnished to security holders
Not applicable.
(22) Published report regarding matters submitted to vote of security
holders
Not applicable.
(23) Consents of experts and counsel
Not applicable.
(24) Power of attorney
Not applicable.
*(27) Financial Data Schedule
The Financial Data Schedule is included herein as Exhibit 27.
(99) Additional Exhibits
Not applicable.
- ---------------------
* Exhibit filed with this Report
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<CURRENCY> CANADIAN
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<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-31-1998
<PERIOD-START> JAN-31-1997
<PERIOD-END> JUL-31-1997
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