<PAGE> 1
UNITED STATES 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, 1998
--------------
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 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: 17,840,519 ISSUED AND OUTSTANDING AS OF
SEPTEMBER 10, 1998
<PAGE> 2
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
================================================================================
Mercristo Developments, Inc.
(A Delaware Corporation)
Ottawa, Ontario - Canada
TABLE OF CONTENTS
Consolidated Balance Sheets at July 31, 1998 (Unaudited)
and January 31, 1998
Consolidated Statements of Operations for the Three Months Ended
July 31, 1998 and 1997 and for the Six Months Ended July 31, 1998
and 1997 (Unaudited)
Consolidated Statements of Cash Flows for the Six Months Ended
July 31, 1998 and 1997 (Unaudited)
Notes to the Consolidated Financial Statements (Unaudited)
================================================================================
<PAGE> 3
Mercristo Developments, Inc.
(A Delaware Corporation)
Ottawa, Ontario - Canada
Consolidated Balance Sheets at
------------------------------
July 31, 1998 (Unaudited) and January 31, 1998
----------------------------------------------
(All Expressed in Terms of Canadian Dollars)
--------------------------------------------
<TABLE>
<CAPTION>
ASSETS
------
July 31 January 31
1998 1998
----------- -----------
<S> <C> <C>
Current Assets
- - --------------
Cash and Cash Equivalents $ -- $ 14,612
Accounts Receivable 5,353,192 4,805,590
Inventories 40,000 60,500
----------- -----------
Total Current Assets $ 5,393,192 $ 4,880,702
Due from Partnership 2,738,386 2,717,107
Due from Related Companies --- 210,743
Property and Equipment - Net of
Accumulated Depreciation 1,924,819 1,954,041
----------- -----------
Total Assets $10,056,397 $ 9,762,593
------------ =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current Liabilities
- - -------------------
Accounts Payable and Accrued Expenses $ 4,108,962 $ 4,018,267
Income Taxes Payable 276,532 73,427
Current Portion of Long Term Debt 77,847 77,847
----------- -----------
Total Current Liabilities $ 4,463,341 $ 4,169,541
Deferred Revenue 295,326 1,646,472
Long Term Debt 731,751 770,409
Due to Related Companies 85,410 ---
Deferred Income Taxes 1,322,625 1,015,600
----------- -----------
Total Liabilities $ 6,898,453 $ 7,602,022
----------------- ----------- -----------
Stockholders' Equity
- - --------------------
Common Stock: $.001 Par; 100,000,000 Shares Authorized,
17,840,519 Shares Issued and Outstanding 17,840 17,840
Additional Paid Capital 1,324,627 1,324,627
Retained Earnings 1,815,477 818,104
----------- -----------
Total Stockholders' Equity $ 3,157,944 $ 2,160,571
-------------------------- ----------- -----------
Total Liabilities and Stockholders' Equity $10,056,397 $ 9,762,593
------------------------------------------ =========== ===========
</TABLE>
The accompanying notes are an integral part of this financial statement and
should be read in conjunction therewith.
<PAGE> 4
Mercristo Developments, Inc.
(A Delaware Corporation)
Ottawa, Ontario - Canada
Consolidated Statements of Operations
-------------------------------------
for the Three Months Ended July 31, 1998 and 1997
-------------------------------------------------
and for the Six Months Ended July 31, 1998 and 1997
---------------------------------------------------
(All Expressed in Terms of Canadian Dollars)
--------------------------------------------
(Unaudited)
<TABLE>
<CAPTION>
Three Months Six Months
Ended July 31 Ended July 31
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues
- - --------
Farm
Limited Partnership $ 571,433 $ 965,638 $ 1,065,001 $ 1,486,620
Other 23,500 22,500 44,000 34,219
Horses
Limited Partnership -- 47,700 -- 175,950
Other 500,000 86,150 1,005,950 242,900
Interest 56,346 20,047 113,094 57,850
Other 4,158 946 9,577 1,821
------------ ------------ ------------ ------------
Total Revenues $ 1,155,437 $ 1,142,981 $ 2,237,622 $ 1,999,360
------------ ------------ ------------ ------------
Costs and Expenses
- - ------------------
Farm $ 163,998 $ 513,232 $ 339,971 $ 796,200
Horses 10,000 345,000 41,250 905,000
Marketing and Sales 79 17,069 1,673 64,630
General and Administrative 89,734 209,860 236,267 464,357
Depreciation and Amortization 17,687 18,307 35,596 35,027
Interest Expense 27,719 19,902 56,585 36,617
------------ ------------ ------------ ------------
Total Costs and Expenses $ 309,217 $ 1,123,370 $ 711,342 $ 2,301,831
------------ ------------ ------------ ------------
Income (Loss) Before
Provision for Taxes $ 846,220 $ 19,611 $ 1,526,280 $ (302,471)
Provision for Taxes 302,513 7,844 528,907 (120,989)
------------ ------------ ------------ ------------
Net Income (Loss) $ 543,707 $ 11,767 $ 997,373 $ (181,482)
============ ============ ============ ============
Net Income (Loss) per
Common Share $ .030 $ .001 $ .056 $ (.011)
============ ============ ============ ============
Weighted Average Number
of Common Shares Outstanding 17,840,519 16,560,519 17,840,519 16,560,519
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of this financial statement and
should be read in conjunction therewith.
<PAGE> 5
Mercristo Developments, Inc.
(A Delaware Corporation)
Ottawa, Ontario - Canada
Consolidated Statements of Cash Flows for the
---------------------------------------------
Six Months Ended July 31, 1998 and 1997
---------------------------------------
(All Expressed in Terms of Canadian Dollars)
--------------------------------------------
(Unaudited)
-----------
<TABLE>
<CAPTION>
Six Months
Ended July 31
1998 1997
----------- -----------
<S> <C> <C>
Operating Activities
- - --------------------
Net Income (Loss) for the Period $ 997,373 $ (181,482)
Non-Cash Adjustments:
Depreciation/Amortization 35,596 35,027
Deferred Revenue (1,351,146) (892,582)
Deferred Income Taxes 307,025 (198,017)
Changes:
Accounts Receivable (547,602) 2,917,678
Inventory 20,500 545,000
Prepaid Expenses -- (138,828)
Accounts Payable 90,695 (2,001,322)
Income Taxes Payable 203,105 49,752
----------- -----------
Net Cash Flows from Operating Activities $ (244,454) $ 135,226
----------- -----------
Investing Activities
- - --------------------
Acquisition of Fixed Assets $ (6,374) $ (647,200)
Due from Partnerships (21,279) (36,675)
Due from Related Companies 210,743 94,591
----------- -----------
Net Cash Flows from Investing Activities $ 183,090 $ (589,284)
----------- -----------
Financing Activities
- - --------------------
Increase in Long-Term Debt $ -- $ 426,613
Decrease in Long-Term Debt (38,658) (19,458)
Due to Related Companies 85,410 --
----------- -----------
Net Cash Flows from Financing Activities $ 46,752 $ 407,155
----------- -----------
Decrease in Cash and Cash Equivalents $ (14,612) $ (46,903)
Cash and Cash Equivalents - Beginning of Period 14,612 53,162
----------- -----------
Cash and Cash Equivalents - End of Period $ -- $ 6,259
=========== ===========
</TABLE>
The accompanying notes are an integral part of this financial statement and
should be read in conjunction therewith.
<PAGE> 6
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 Annual Report on Form 10-K for the
Fiscal Year Ended January 31, 1998.
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.
NOTE B - RECEIVABLES
--------------------
Accounts receivable consisted of the following at July 31, 1998 and
January 31, 1998:
<TABLE>
<CAPTION>
July 31, January 31,
1998 1998
------------ -----------
<S> <C> <C>
Due from Investors $ 100,030 $ 208,153
Partnerships 4,175,958 3,499,402
Horses 3,815,590 3,815,142
------------ -----------
Total Accounts Receivable $ 8,091,578 $ 7,522,697
Less: Amounts Due Within One Year 5,353,192 4,805,590
---- ------------ ------------
Amounts Due After One Year $ 2,738,386 $ 2,717,107
============ ===========
</TABLE>
<PAGE> 7
NOTE B - RECEIVABLES - CONTINUED
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.
NOTE E - 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.
<PAGE> 8
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.
During 1997, as a result of Revenue Canada's proposed assessments with
the investors in the investment limited partnerships, the sales of horses
was limited primarily to other breeders and individual investors. As a
result, as a percentage of the Company's overall revenues for the 1997
Operating Year, sales of horses declined to approximately 43% and
management fees for the breeding and care of the horses increased to
approximately 52%. The volume of sales of horses in the 1998 Operating
Year will continue to be negatively impacted pending the outcome of the
Revenue Canada assessments with the individual investors. The Company
expects farm revenues to continue to increase during the 1998 Operating
Year since the foaling activity and the limited sales of horses will
result in a greater number of horses under the Company's care.
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 (97%) from services rendered to the various
limited partnerships that purchased Straight Egyptian Arabian
<PAGE> 9
horses from the Company.
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.
In recognition of the fact that sales of horses to investment limited
partnerships have diminished as a result of Revenue Canada pronouncements,
the Company has decided to diversify its base of operations by expanding
into unrelated and totally distinct consumer sector businesses. The
Company's management has identified several possible acquisition
candidates and is evaluating the merits of pursuing those candidates.
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
1998 1997 1998 1997
---------- --------- --------- ---------
REVENUES
<S> <C> <C> <C> <C>
Farms(1) 51.5% 86.5% 49.6% 76.0%
Horses(2) 43.3% 11.7% 45.0% 21.0%
Interest and Other 5.2% 1.8% 5.4% 3.0%
------ ------ ------ ------
Total Revenues 100.0% 100.0% 100.0% 100.0%
------ ------ ------ ------
COSTS AND EXPENSES
Farm(1) 14.2% 44.9% 15.2% 39.8%
Horses(2) .9% 30.2% 1.8% 45.3%
Marketing and Sales ---% 1.5% .1% 3.2%
General and Administrative 7.8% 18.4% 10.6% 23.2%
Depreciation and Amortization 1.5% 1.6% 1.6% 1.8%
Interest Expense 2.4% 1.7% 2.5% 1.8%
------ ------ ------ ------
Total Costs and Expenses 26.8% 98.3% 31.8% 115.1%
------ ------ ------ ------
Income (Loss) Before Taxes 73.2% 1.7% 68.2% (15.1)%
Provision for Income Taxes 26.2% .7% 23.6% (6.0)%
------ ------ ------ ------
Net Income (Loss) 47.0% 1.0% 44.6% (9.1)%
====== ====== ====== ======
<FN>
(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.
</TABLE>
- continued -
<PAGE> 10
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. Beginning in 1998, the Company
began to utilize semen from its own stallions for breeding mares under
its care. The Company had 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
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Number of Horses
Beginning Inventory 4 8 4 12
Horses Acquired --- 20 2 23
Horses Sold or Exchanged --- (12) (4) (19)
--- ---- -- ---
Ending Inventory 4 16 2 16
=== === === ====
</TABLE>
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>
- continued -
<PAGE> 11
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 $0 and $235,000 for the three months
ended July 31, 1998 and 1997, respectively, and $0, and $550,000 for the
six months ended July 31, 1998 and 1997, 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, 1998 COMPARED WITH THREE MONTHS ENDED
JULY 31, 1997
REVENUES. Total revenues for the three months ended July 31, 1998
increased by $12,456 (1.1)% to $1,155,437 from $1,142,981 for the three
months ended July 31, 1997. Revenues from breeding and care of horses
decreased by $393,205, the sale of horses accounted for an increase in
revenues of $366,150, and interest and other revenues accounted for the
remaining $39,511 increase in revenues. The sales of horses in the three
months ended July 31, 1998 represents $500,000 on the sale of the rights
to purchase all of the colts delivered at the Blue Moons Farms facilities
during the 1997-98 breeding season which was deferred from the year ended
January 31, 1998. There were no other revenues generated by the sale of
horses during the quarter pending the outcome of the Revenue Canada
proposed assessments with the investors. Farm revenues for board and care
continued to increase as the number of horses under the Company's care has
grown. Breeding fees and fees charged for insurance coverage in the second
quarter of 1998 as compared to the second quarter of 1997 accounted for
the overall decrease in farm revenues.
COSTS AND EXPENSES. Total costs and expenses for the three months ended
July 31, 1998 decreased by $ 814,153 (72.5%) to $309,217 from $1,123,370
for the three months ended July 31, 1997. As there were no horse purchases
and sales activity during the three months ended July 31, 1998 as compared
to the three months ended July 31, 1997, the Company was able to control
the incurring of expenses associated with those activities.
Farm expenses as a percentage of farm revenues decreased to 27.6% for
the three months ended July 31, 1998 from 51.9% for the three months ended
July 31, 1997. The decrease was primarily due to reduced salaries and
staffing, cancellation of insurance on the horses and fewer horse
registrations, all of which are a result of the continued Revenue Canada
assessment against the investors in the limited partnerships.
The cost of horses sold as a percentage of horse sales decreased to
2.0% for the three months ended July 31, 1998 from 257.8% for the three
months ended July 31, 1997. The decrease was primarily due to the high
margin on the sale of the rights to purchase all of the colts delivered
during the three months ended July 31, 1998 and the unusually high
mortality rate and replacement costs of horses during the three months
ended July 31, 1997.
MARKETING AND SALES. The Company incurred only $79 of marketing and sales
expenses for the three months ended July 31, 1998 which was attributable
to the lack of horse sales. Marketing and sales expenses for the three
months ended July 31, 1997 were $17,069.
<PAGE> 12
GENERAL AND ADMINISTRATIVE. General and administrative expenses for the
three months ended July 31, 1998 decreased by $120,126 to $89,734 from
$209,860 for the three months ended July 31, 1997. The primary reason for
the decrease was a significant reduction in the amount of professional
and consulting fees, extraordinary amounts of which were incurred in
connection with the recapitalization and Registration of the Company
during the three months ended July 31, 1997.
INCOME TAXES. The provision for taxes for the three months ended July 31,
1998 and 1997 is based upon an effective Canadian tax rate of 40.0%.
SIX MONTHS ENDED JULY 31, 1998 COMPARED WITH SIX MONTHS ENDED JULY 31,
1997
REVENUES. Total revenues for the six months ended July 31, 1998 increased
by $238,262 (11.9)% to $2,237,622 from $1,999,360 for the six months ended
July 31, 1997. Revenues from breeding and care of horses decreased by
$411,838, and the sale of horses accounted for an increase in revenues of
$587,100, and interest and other revenues accounted for the remaining
$63,000 increase in revenues. The sales of horses in the six months ended
July 31, 1998 included $1,000,000 on the sale of the rights to purchase
all of the colts delivered at the Blue Moons Farms facilities during the
1997-98 breeding season which was deferred from the year ended January 31,
1998. Other revenues generated by the sale of horses were very limited
pending the outcome of the Revenue Canada proposed assessments with the
investors. Farm revenues for board and care continued to increase as the
number of horses under the Company's care has grown. Breeding fees and
fees charged for insurance coverage in the first six months 1998 as
compared to the first six months of 1997 accounted for the overall
decrease in farm revenues.
COSTS AND EXPENSES. Total costs and expenses for the six months ended July
31, 1998 decreased by $1,590,489 (69.1%) to $711,342 from $2,301,831 for
the six months ended July 31, 1997. As the Company's horse purchases and
sales activity was very limited during the six months ended July 31, 1998
as compared to the six months ended July 31, 1997, the Company was able to
control the incurring of expenses associated with those activities.
Farm expenses as a percentage of farm revenues decreased to 30.7% for
the six months ended July 31, 1998 from 52.4% for the six months ended July
31, 1997. The decrease was primarily due to reduced salaries and staffing,
reductions in outside breeding fees, cancellation of insurance on the
horses and fewer horse registrations, all of which are a result of the
continued Revenue Canada assessment against the investors in the limited
partnerships.
The cost of horses sold as a percentage of horse sales decreased to
4.1% for the six months ended July 31, 1998 from 216.1% for the six months
ended July 31, 1997. The decrease was primarily due to the high margin on
the sale of the rights to purchase all of the colts delivered during the
six months ended July 31, 1998 and the unusually high mortality rate and
replacement costs of horses during the six months ended July 31, 1997.
MARKETING AND SALES. The company incurred only $1,673 of marketing and
sales expenses for the six months ended July 31, 1998 which was
attributable to the lack of horse sales. Marketing and sales expenses for
the six months ended July 31, 1997 were $64,630.
GENERAL AND ADMINISTRATIVE. General and administrative expenses for the
six months ended July 31, 1998 decreased by $228,090 to $236,267 from
$464,357 for the six months ended July 31, 1997. The primary reason for
the decrease was a significant reduction in the amount of professional
and consulting fees, extraordinary amounts of which were incurred in
connection with the recapitalization and Registration of the Company
during the six months ended July 31, 1997.
INCOME TAXES. The provision for taxes for the six months ended July 31,
1998 and 1997 is based upon an effective Canadian tax rate of 40.0%.
<PAGE> 13
LIQUIDITY AND CAPITAL RESOURCES
At July 31, 1998, the Company's primary source of liquidity was open
trade credit with vendors of $4,108,962. The Company's cash equivalents
were $0. 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 increased by $218,690 during
the six months ended July 31, 1998 from $711,161 at January 31, 1998 to
$929,851 at July 31, 1998.
Net cash flows from operating activities during the six months ended July
31, 1998 were a negative $244,454 as compared to a positive $135,226 for
the six months ended July 31, 1997. The decrease of $379,680 resulted
primarily from the reduction in deferred revenues and an increase in
accounts receivable during the six months ended July 31, 1998. Accounts
receivable from the limited partnerships has increased during the six
months ended July 31, 1998 primarily do the limited activities and sales
of horses from the limited partnerships pending the outcome of the Revenue
Canada assessments with the investors.
Net cash flows from investing activities (primarily from the collection of
amounts due from related companies) during the six months ended July 31,
1998 were $183,090 as compared to net cash flows used in investing
activities (primarily used in the acquisition of property and equipment)
of $589,284 for the six months ended July 31, 1997.
Net cash flows from financing activities during the six months ended July
31, 1998 were $46,752 as compared with net cash flows from financing
activities of $407,155 for the six months ended July 31, 1997. The
decrease reflects the borrowings on new commercial property during the six
months ended July 31, 1997. The Company received advances of $85,410 from
related companies to assist in financing operating costs during the second
quarter of 1998.
The balance sheet at July 31, 1998 shows an increase in current assets
for the six months from $4,880,702 to $5,393,192, an increase in current
liabilities from $4,169,541 to $4,463,341 and a decrease in deferred
revenues from $1,646,472 to $295,326, all compared with those figures at
January 31, 1998. The increase in current assets and liabilities was
primarily attributable to an increase in accounts receivable and accounts
payable during the six months ended July 31, 1998.
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).
The Company has available through Resi Corp., a related party, a line of
credit of $1,500,000 that can be used to fund operating cash shortfalls
and future acquisitions of new businesses.
<PAGE> 14
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 14, 1998 /s/ David G. Edwards
----------------------------- --------------------------------------
David G. Edwards, President
and Chief Financial Officer
<PAGE> 15
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.
<PAGE> 16
*(27) FINANCIAL DATA SCHEDULE
The Financial Data Schedule is included herein as Exhibit 27.
(99) ADDITIONAL EXHIBITS
Not applicable.
- - ------------------------
*Exhibit filed with this Report
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
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<CURRENCY> CANADIAN DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JAN-31-1999
<PERIOD-START> FEB-01-1998
<PERIOD-END> JUL-31-1998
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