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 October 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
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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 |X| No | |
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
December 15, 1997
<PAGE>
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
================================================================================
Mercristo Developments, Inc.
(A Delaware Corporation)
Ottawa, Ontario - Canada
TABLE OF CONTENTS
-----------------
Consolidated Balance Sheets at October 31, 1997 (Unaudited)
and January 31, 1997 2
Consolidated Statements of Operations for the Three Months Ended
October 31, 1997 and 1996 and for the Nine Months Ended October 31,
1997 and 1996 (Unaudited) 3-4
Consolidated Statements of Cash Flows for the Nine Months
Ended October 31, 1997 and 1996 (Unaudited) 5
Notes to the Consolidated Financial Statements (Unaudited) 6-8
================================================================================
1
<PAGE>
Mercristo Developments, Inc.
(A Delaware Corporation)
Ottawa, Ontario - Canada
Consolidated Balance Sheets at
October 31, 1997 (Unaudited) and January 31, 1997
(All Expressed in Terms of Canadian Dollars)
<TABLE>
<CAPTION>
ASSETS
October 31 January 31
1997 1997
---------- ----------
<S> <C> <C>
Current Assets
- --------------
Cash and Cash Equivalents $ 28,927 $ 53,162
Accounts Receivable 1,244,326 3,768,851
Inventories 320,396 925,246
Prepaid Expenses 45,531 17,573
---------- ----------
Total Current Assets $1,639,180 $4,764,832
Due from Partnership 1,997,867 2,000,910
Due from Related Companies 436,066 848,444
Property and Equipment - Net of
Accumulated Depreciation 1,962,069 1,355,336
---------- ----------
Total Assets $6,035,182 $8,969,522
------------ ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current Liabilities
- -------------------
Accounts Payable and Accrued Expenses $2,102,516 $4,067,926
Income Taxes Payable 190,323 --
Current Portion of Long Term Debt 75,958 50,100
---------- ----------
Total Current Liabilities $2,368,797 $4,118,026
Deferred Revenue 1,002,768 2,350,750
Long Term Debt 791,758 430,025
Deferred Income Taxes 632,983 831,000
---------- ----------
Total Liabilities $4,796,306 $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 234,409 235,254
---------- ----------
Total Stockholders' Equity $1,238,876 $1,239,721
-------------------------- ---------- ----------
Total Liabilities and Stockholders' Equity $6,035,182 $8,969,522
------------------------------------------ ========== ==========
The accompanying notes are an integral part of this financial statement and should be read in
conjunction therewith.
</TABLE>
- 2 -
<PAGE>
Mercristo Developments, Inc.
(A Delaware Corporation)
Ottawa, Ontario - Canada
Consolidated Statements of Operations
for the Three Months Ended October 31, 1997 and 1996
and for the Nine Months Ended October 31, 1997 and 1996
(All Expressed in Terms of Canadian Dollars)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Nine Months
Ended October 31 Ended October 31
1997 1996 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues
- --------
Farm
Limited Partnership $ 781,349 $ 765,838 $ 2,267,969 $ 1,625,751
Other 24,200 156,860 58,419 345,621
Horses
Limited Partnership -- 1,045,000 175,950 2,449,250
Other 23,150 1,088,500 266,050 2,609,750
Interest 46,312 57,346 104,162 171,722
Other 853 -- 2,674 11,222
----------- ----------- ----------- -----------
Total Revenues $ 875,864 $ 3,113,544 $ 2,875,224 $ 7,213,316
----------- ----------- ----------- -----------
Costs and Expenses
- ------------------
Farm $ 387,636 $ 251,442 $ 1,183,836 $ 824,346
Horses 67,550 2,283,000 972,550 5,482,500
Marketing and Sales -- 33,967 64,630 84,172
General and Administrative 84,791 101,368 549,148 398,927
Depreciation and Amortization 18,266 13,827 53,293 42,108
Interest Expense 16,559 11,176 53,176 31,465
----------- ----------- ----------- -----------
Total Costs and Expenses $ 574,802 $ 2,694,780 $ 2,876,633 $ 6,863,518
----------- ----------- ----------- -----------
Income (Loss) Before
Provision for Taxes $ 301,062 $ 418,764 $ (1,409) $ 349,798
Provision for Taxes 120,425 167,506 (564) 139,920
----------- ----------- ----------- -----------
Income (Loss) from
Continuing Operations $ 180,637 $ 251,258 $ (845) $ 209,878
Income from Discontinued
- ------------------------
Operations (Net of Income Taxes) -- 38,650 -- 101,350
-------------------------------- ----------- ----------- ----------- -----------
Net Income (Loss) $ 180,637 $ 289,908 $ (845) $ 311,228
=========== =========== =========== ===========
</TABLE>
- 3 -
<PAGE>
Mercristo Developments, Inc.
(A Delaware Corporation)
Ottawa, Ontario - Canada
Consolidated Statements of Operations for the
Three Months Ended October 31, 1997 and 1996
and the Nine Months Ended October 31, 1997 and 1996
(All Expressed in Terms of Canadian Dollars)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Nine Months
Ended October 31 Ended October 31
1997 1996 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Income (Loss) per
Common Share:
Continuing Operation $ .01 $ .02 $ -- $ .01
Discontinued Operations -- -- -- .01
----------- ----------- ----------- -----------
Net Income (Loss) $ .01 $ .02 $ -- $ .02
=========== =========== =========== ===========
Weighted Average Number
of Common Shares Outstanding 16,560,519 14,654,303 16,560,519 14,654,303
========== ========== ========== ==========
The accompanying notes are an integral part of this financial statement and should be
read in conjunction therewith.
</TABLE>
- 4 -
<PAGE>
Mercristo Developments, Inc.
(A Delaware Corporation)
Ottawa, Ontario - Canada
Consolidated Statements of Cash Flows for the
Nine Months Ended October 31, 1997 and 1996
(All Expressed in Terms of Canadian Dollars)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months
Ended October 31
1997 1996
----------- -----------
<S> <C> <C>
Operating Activities
Net Income (Loss) for the Period $ (845) $ 311,228
Non-Cash Adjustments:
Depreciation/Amortization 53,293 42,108
Deferred Revenue (1,347,982) (1,186,394)
Deferred Income Taxes (198,017) --
Changes:
Accounts Receivable 2,524,525 (1,818)
Inventory 604,850 (422,500)
Prepaid Expenses (27,958) (73,500)
Accounts Payable (1,965,410) (602,427)
Income Taxes Payable 190,323 147,126
Discontinued Operations -
Non - Cash Adjustments and Working
Capital Changes -- 271,793
----------- -----------
Net Cash Flows from Operating Activities $ (167,221) $(1,514,384)
----------- -----------
Investing Activities
Acquisition of Fixed Assets $ (660,026) $ (166,186)
Due from Partnership 3,043 1,469,992
Due to/from Related Companies 412,378 --
Investing Activities of Discontinued Operations -- --
----------- -----------
Net Cash Flows from Investing Activities $ (244,605) $ 1,303,806
----------- -----------
Financing Activities
Dividends $ -- $ (24,000)
Increase in Long-Term Debt 426,613 97,390
Decrease in Long-Term Debt (39,022) (25,020)
Financing Activities of Discontinued Operations -- (20,680)
----------- -----------
Net Cash Flows from Financing Activities $ 387,591 $ 27,690
----------- -----------
Decrease in Cash and Cash Equivalents $ (24,235) $ (182,888)
Cash and Cash Equivalents - Beginning of Period 53,162 241,117
----------- -----------
Cash and Cash Equivalents - End of Period $ 28,927 $ 58,229
=========== ===========
The accompanying notes are an integral part of this financial statement and
should be read in conjunction therewith.
</TABLE>
- 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 October 31, 1997 and
January 31, 1997:
October 31, January 31,
1997 1997
----------- -----------
Due from Investors $ 144,403 $ 1,180,014
Partnerships 2,873,090 2,360,354
Horses 224,700 1,840,400
Breeding --- 388,993
----------- -----------
Total Accounts Receivable $ 3,242,193 $ 5,769,761
Less: Amounts Due Within One Year 1,244,326 3,768,851
---- ----------- -----------
Amounts Due After One Year $ 1,997,867 $ 2,000,910
=========== ===========
- 6 -
<PAGE>
Note B - Receivables - continued
- --------------------------------
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.
- continued -
- 7 -
<PAGE>
Note E - Recently Issued Accounting Standards- continued
- --------------------------------------------------------
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 and 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.
Until recently, 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%. Over the past nine months, revenues
from the sale of horses have represented an increasingly smaller percentage of
overall revenues and revenues from the breeding and care operations have assumed
an increasingly larger percentage of overall revenues. This significant
reduction in horse sales has resulted primarily from uncertainty surrounding the
outcome of a review by Canadian taxing authorities of investment losses claimed
by horse owners. The Company has historically 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 Nine Months
Ended October 31 Ended October 31
1997 1996 1997 1996
---------------------------------------------
<S> <C> <C> <C> <C>
REVENUES
Farms 1 92.0% 29.6% 80.9% 27.3%
Horses 2 2.6% 68.5% 15.4% 70.1%
Interest and Other 5.4% 1.9% 3.7% 2.6%
-------- -------- -------- --------
Total Revenues 100.0% 100.0% 100.0% 100.0%
------ ------ ------ ------
COSTS AND EXPENSES
Farm 1 44.2% 8.1% 41.2% 11.4%
Horses 2 7.7% 73.3% 33.8% 76.0%
Marketing and Sales 0.0% 1.1% 2.2% 1.2%
General and Administrative 9.7% 3.3% 19.1% 5.6%
Depreciation and Amortization 2.1% .4% 1.9% .6%
Interest Expense 1.9% .4% 1.8% .4%
-------- --------- -------- --------
Total Costs and Expenses 65.6% 86.6% 100.0% 95.2%
------- ------- ------ -------
Income (Loss) Before Taxes 34.4% 13.4% 0.0% 4.8%
Provision for Income Taxes 13.7% 5.4% 0.0% 1.9%
------- -------- -------- --------
Income (Loss) from
Continuing Operations 20.7% 8.0% 0.0% 2.9%
======= ======== ======== ========
</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.
Three Months Nine Months
Ended October 31 Ended October 31
1997 1996 1997 1996
--------- ---------- ---------- ---------
Number of Horses
Beginning Inventory 16 47 12 10
Horses Acquired 25 20 48 97
Horses Sold or Exchanged (31) (32) (50) (72)
--- --- --- ---
Ending Inventory 10 35 10 35
=== === === ===
There was a 16% decrease in the number of horses in ending inventory at
October 31, 1997 when compared to January 31, 1997 but a 65% decrease in total
carrying value for those horses due to a substantial decrease in the number of
mares as compared to colts in the ending inventory. 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 $59,950 and $216,000 for the
three months ended October 31, 1997 and 1996, respectively, and $609,950 and
$628,500 for the nine months ended October 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 OCTOBER 31, 1997 COMPARED WITH THREE MONTHS ENDED OCTOBER 31,
1996
REVENUES. Total revenues for the three months ended October 31, 1997 decreased
by $2,237,680 (71.9%) to $875,864 from $3,113,544 for the three months ended
October 31, 1996. Revenues from breeding and care of horses decreased by
$117,149, revenues from the sale of horses decreased $2,110,350, and interest
and other revenues decreased by $10,181. The continued decrease in the revenues
generated by the sale of horses was primarily attributable to the limited
activity in horse purchases and sales pending the outcome of the Revenue Canada
proposed assessments with the investors. The uncertainty of this outcome will
continue to adversely affect the Company's horse sales. Farm revenues for board
and care continued to increase as the number of horses under the Company's care
has grown, but a reduction in breeding fees in the third quarter 1997 as
compared to the third quarter of 1996 accounted for the overall decrease in farm
revenues.
COSTS AND EXPENSES. Total costs and expenses for the three months ended October
31, 1997 decreased by $2,119,978 (78.7%) to $574,802 from $2,694,780 for the
three months ended October 31, 1996. As the Company's horse sales continued to
decrease significantly during the three months ended October 31, 1997 as
compared to the three months ended October 31, 1996, the Company was able to
control the incurring of expenses associated with those activities.
MARKETING AND SALES. The Company did not incur any marketing and sales expenses
for the three months ended October 31, 1997 which was attributable to the lack
of horse sales. Marketing and sales expenses for the three months ended October
31, 1996 were $33,967.
GENERAL AND ADMINISTRATIVE. General and administrative expenses for the three
months ended October 31, 1997 decreased by $16,577 (16.4%) to $84,791 from
$101,368 for the three months ended October 31, 1996. The primary reason for the
decrease was a reduction in professional and consulting fees incurred in
connection with the recapitalization and Registration of the Company which began
in the third quarter of 1996.
INCOME TAXES. The provision for taxes for the three months ended October 31,
1997 and 1996 is based upon an effective Canadian tax rate of 40.0%.
- 12 -
<PAGE>
NINE MONTHS ENDED OCTOBER 31, 1997 COMPARED WITH NINE MONTHS ENDED OCTOBER 31,
1996
REVENUES. Total revenues for the nine months ended October 31, 1997 decreased by
$4,338,092 (60.1%) to $2,875,224 from $7,213,316 for the nine months ended
October 31, 1996. Revenues from breeding and care of horses increased by
$355,016, revenues from the sale of horses decreased $4,617,000, and interest
and other revenues decreased $76,108. There were three primary reasons for the
large decrease in the revenues generated by the sale of horses. First and
foremost was the limited activity in horse purchases and sales pending the
outcome of the Revenue Canada proposed assessments with the investors. Second,
the Company had also offered an early sales incentive plan with its salesmen to
sell horses during the first quarter of 1996. Third, 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 nine months ended October 31, 1997.
COSTS AND EXPENSES. Total costs and expenses for the nine months ended October
31, 1997 decreased by $3,986,885 (58.1%) to $2,876,633 from $6,863,518 for the
nine months ended October 31, 1996. As the Company's horse sales and foaling
activity decreased significantly during the nine months ended October 31, 1997
as compared to the nine months ended October 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 nine months ended
October 31, 1997 decreased by $19,542 (23.2%) to $64,630 from $84,172 for the
nine months ended October 31, 1996. The primary reason for the decrease was the
lack of marketing relating to sales of horses during the third quarter of 1997.
GENERAL AND ADMINISTRATIVE. General and administrative expenses for the nine
months ended October 31, 1997 increased by $150,221 (37.6%) to $549,148 from
$398,927 for the nine months ended October 31, 1996. The primary reason for the
increase was professional and consulting fees incurred in connection with the
recapitalization of the Company and the registration of the Company's Common
Stock with the United States Securities and Exchange Commission, during the
first half of 1997.
INCOME TAXES. The provision for taxes for the nine months ended October 31, 1997
and 1996 is based upon an effective Canadian tax rate of 40.0%.
LIQUIDITY AND CAPITAL RESOURCES
At October 31, 1997, the Company's primary source of liquidity included cash and
cash equivalents of $28,927 and open trade credit with vendors of $2,102,516.
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
$1,376,423 during the six months ended October 31, 1997 from $646,806 at January
31, 1997 to a negative working capital of $729,617 at October 31, 1997.
Net cash flows from operating activities during the nine months ended October
31, 1997 were a negative $167,221 as compared to a negative $1,514,384 for the
nine months ended October 31, 1996. The increase of $1,347,163 resulted
primarily from the significant collection in accounts receivable and a decrease
in inventories during the nine months ended October 31, 1997.
- continued -
- 13 -
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES - continued
Net cash flows used in investing activities (primarily for capital expenditures
net of the collection of amounts due from related companies) during the nine
months ended October 31, 1997 were $244,605 as compared to net cash flows from
investing activities (primarily from collections of amounts due from the limited
partnerships) of $1,303,806 for the nine months ended October 31, 1996.
Net cash flows from financing activities during the nine months ended October
31, 1997 were $387,591 as compared with net cash flows from financing activities
of $27,690 for the nine months ended October 31, 1996. The increase reflects the
borrowings on new commercial property of $426,613.
The balance sheet at October 31, 1997 shows a decrease in current assets for the
nine months from $4,764,832 to $1,639,180 and a corresponding decrease in
current liabilities from $4,118,026 to $2,446,078 and a decrease in deferred
revenues from $2,368,797 to $1,002,768, 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 nine months.
COMPANY'S FINANCING REQUIREMENTS
The Company has no current need for any externally generated financing to fund
its continuing operations. 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 December 15, 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.
(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.
- 17 -
<PAGE>
*(27) FINANCIAL DATA SCHEDULE
The Financial Data Schedule is included herein as Exhibit 27.
(99) ADDITIONAL EXHIBITS
Not applicable.
_______________________
*Exhibit filed with this Report
- 18 -
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF MERCRISTO DEVELOPMENTS, INC. FOR THE NINE MONTH PERIOD
ENDED OCTOBER 31, 1997, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JAN-31-1998
<PERIOD-START> FEB-01-1997
<PERIOD-END> OCT-31-1997
<CASH> 28,927
<SECURITIES> 0
<RECEIVABLES> 1,244,326
<ALLOWANCES> 0
<INVENTORY> 320,396
<CURRENT-ASSETS> 1,639,180
<PP&E> 2,213,499
<DEPRECIATION> 245,990
<TOTAL-ASSETS> 6,035,182
<CURRENT-LIABILITIES> 2,368,797
<BONDS> 0
0
0
<COMMON> 16,560
<OTHER-SE> 1,222,316
<TOTAL-LIABILITY-AND-EQUITY> 6,035,182
<SALES> 2,768,388
<TOTAL-REVENUES> 2,875,224
<CGS> 2,823,457
<TOTAL-COSTS> 2,823,457
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 53,176
<INCOME-PRETAX> (1,409)
<INCOME-TAX> (504)
<INCOME-CONTINUING> (845)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (845)
<EPS-PRIMARY> .00
<EPS-DILUTED> .00
</TABLE>
