-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, SEvdYv3DLRrNlnAXChYvRz0KZInKZmrKJUCiL3iDWWD51whKosInI649O7pIM7eE 7WCs53Q144EW9EafZ/rERQ== 0000949459-97-000571.txt : 19971216 0000949459-97-000571.hdr.sgml : 19971216 ACCESSION NUMBER: 0000949459-97-000571 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19971031 FILED AS OF DATE: 19971215 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: MERCRISTO DEVELOPMENTS INC CENTRAL INDEX KEY: 0001038492 STANDARD INDUSTRIAL CLASSIFICATION: AGRICULTURE SERVICES [0700] IRS NUMBER: 980166912 STATE OF INCORPORATION: DE FISCAL YEAR END: 0430 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-22541 FILM NUMBER: 97738567 BUSINESS ADDRESS: STREET 1: 240 ARGYLLE AVENUE CITY: OTTAWA ONTARIO STATE: A6 ZIP: 00000 MAIL ADDRESS: STREET 1: MERCRISTO DEVELOPMENTS INC STREET 2: 240 ARGYLE AVENUE CITY: OTTAWA ONTARIO STATE: A6 10-Q 1 MERCRISTO DEVELOPMENTS, INC.. 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 ------- 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 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 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)
ASSETS October 31 January 31 1997 1997 ---------- ---------- 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.
- 2 - 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)
Three Months Nine Months Ended October 31 Ended October 31 1997 1996 1997 1996 ----------- ----------- ----------- ----------- 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 =========== =========== =========== ===========
- 3 - 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)
Three Months Nine Months Ended October 31 Ended October 31 1997 1996 1997 1996 ----------- ----------- ----------- ----------- 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.
- 4 - 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)
Nine Months Ended October 31 1997 1996 ----------- ----------- 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.
- 5 - 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 - 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 - 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 - 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 - 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:
Three Months Nine Months Ended October 31 Ended October 31 1997 1996 1997 1996 --------------------------------------------- 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% ======= ======== ======== ========
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 - 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 - 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 - 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 - 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 - ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET PRICE There currently is no market for the Company's securities. - 15 - 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 - 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 - *(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 - EX-27 2 FINANCIAL DATA SCHEDULE
5 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. 1 9-MOS JAN-31-1998 FEB-01-1997 OCT-31-1997 28,927 0 1,244,326 0 320,396 1,639,180 2,213,499 245,990 6,035,182 2,368,797 0 0 0 16,560 1,222,316 6,035,182 2,768,388 2,875,224 2,823,457 2,823,457 0 0 53,176 (1,409) (504) (845) 0 0 0 (845) .00 .00
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