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SCHEDULE 14C
(RULE 14c-101)
INFORMATION REQUIRED IN INFORMATION STATEMENT
SCHEDULE 14C INFORMATION
INFORMATION STATEMENT PURSUANT TO SECTION 14(c) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO. )
Check the appropriate box:
/X/ Preliminary Information Statement / / Confidential,
for Use of the Commission Only
/ / Definitive Information Statement (as permitted by Rule 14c-5(d)(2))
INTERNATIONAL MERCANTILE CORPORATION
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(Name of Registrant as Specified in Its Charter)
Payment of Filing Fee (Check the appropriate box):
/X/ No fee required.
/ / Fee computed on table below per Exchange Act Rules 14c-5(g) and 0-11.
(1) Title of each class of securities to which transaction applies:
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(2) Aggregate number of securities to which transactions applies:
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(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the filing fee
is calculated and state how it was determined):
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(4) Proposed maximum aggregate value of transaction:
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(5) Total fee paid:
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/ / Fee paid previously with preliminary materials.
/ / Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number, or
the form or schedule and the date of its filing.
(1) Amount previously paid:
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(2) Form, schedule or registration statement no.:
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(3) Filing party:
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(4) Date filed:
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INTERNATIONAL MERCANTILE CORPORATION
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD ON FRIDAY, SEPTEMBER 11, 1998
TO ALL SHAREHOLDERS:
The Annual Meeting of Shareholders of International Mercantile Corporation, (the
"Company"), will be held the at 3400 Las Vegas Boulevard South, Las Vegas,
Nevada, at 10:00 a.m. on Friday, September 11, 1998 for the following purposes:
(1) To elect a Board of Directors, each to serve for a term of one (1) year or
until the nest Annual Meeting of Shareholders, or until his successor is duly
elected and qualified.
(2) To ratify the engagement of Thomas P. Monaghan, C.P.A., as the Company's
Independent Auditor.
(3) To transact such other business as may properly come before the meeting.
The Board of Directors has fixed the close of business on August 17, 1998, as
the record date for determination of the stockholders entitled to notice of and
to vote at the meeting. A copy of the list of Shareholders as of August 10,
1998, will be present during the meeting.
You are urged to attend the meeting.
BY ORDER OF THE BOARD OF DIRECTORS
OF INTERNATIONAL MERCANTILE
CORPORATION
By: /s/ MAX APPLE
------------------------------
Chairman of the Board
Kansas City, Missouri
August 28, 1998
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INTERNATIONAL MERCANTILE CORPORATION
1801 GOLD MINE ROAD,
BROOKEVILLE, MARYLAND 20814
ANNUAL MEETING OF SHAREHOLDERS
SEPTEMBER 11, 1998
REVISED PRELIMINARY
INFORMATION STATEMENT
GENERAL INFORMATION
This Information Statement is furnished to the Shareholders of
International Mercantile Corporation (the "Company", or "IMTL") in connection
with the Annual Meeting of Shareholders to be held on Friday, September 11,
1998, at 10:00 a.m. at 3400 Las Vegas Boulevard South, Las Vegas, Nevada, or at
any adjournment or adjournments of such meeting for the purposes set forth in
the accompanying Notice of Annual Meeting of Shareholders. This Information
Statement is being mailed to Shareholder on or about August 28, 1998.
RECORD DATE AND VOTING RIGHTS
Only Shareholders of record at the close of business on August 17,
1998, are entitled to notice of, and to vote at, the Annual Meeting of
Shareholders. On the record data, there were 2,485 shares of common stock of
the Company ("Shares") issued and outstanding and entitled to vote at the
Annual Meeting.
At the Annual Meeting, each shareholder is entitled to one (1) vote
for each Share held of record on all matters to come before the meeting, except
in the case of the election of directors, in which case the Bylaws of the
Company provide for cumulative voting. Cumulative voting entitles each
shareholder to cast as many votes in the aggregate as shall equal the number of
Shares held by him or her, multiplied by the number of directors to be elected,
and each shareholder may cast the whole number of votes, whether in person or
by proxy, for one candidate or distribute them between two or more candidates.
REVOCABILITY OF PROXY AND VOTING OF PROXY
Shareholders may cast votes by executing a Proxy in form approved in
advance by the Company and delivering same to the Company at the following
address no later than September 8, 1998: International Mercantile Corporation
c/o Fillmore & Griffin, Attn: Arthur E. Fillmore, 4600 Madison, Suite 210,
Kansas City, Missouri 64112. Any Proxy may be revoked by the person giving it at
any time before it is exercised. A Proxy may be revoked by the giving of another
Proxy bearing a later date or by notifying the Secretary of the Company in
writing of such revocation at any time before the proxy is exercised. Any Proxy
delivered to the Company will, unless it is revoked or unless it is received in
such form as to render it invalid, be voted in accordance with the instructions
indicated thereon.
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The Proxy may confer discretionary authority with respect to the
voting of the Shares represented thereby on any other business that may properly
come before the meeting or any adjournment thereof. The Board of Directors is
not aware that any such other business is to be presented for action at the
meeting and does not itself intend to present any such other business; however,
if any such other business does come before the meeting, Shares represented by
any such Proxy conferring discretionary authority pursuant to this paragraph
will be voted by the person(s) named in the Proxy in accordance with their best
judgement.
PRINCIPAL SHAREHOLDERS
The following table sets forth, as of December 31, 1997, the only
persons known to the Company to be the beneficial owners of more than five
percent (5%) of the outstanding number of Shares of the Company:
Amount & Equity Voting
Title Nature of Percent Percent
of Name and Address of Beneficial of of
Class Beneficial Owner Ownership (1) Class Class
- ----- ---------------- ------------- ----- -----
Common Continent Finance 1,500,000 47.21 47.21
Corporation
Common AB Securities, Inc. 310,000 9.76 9.76
Common Scott Hess 310,000 9.76 9.76
(1) To the best knowledge of the Company, as of December 31, 1997, such holders
had the sole voting and investment power with respect to the voting securities
of IMC beneficially owned by them, unless otherwise indicated by footnote. In
July, 1997 the Company reverse split the number of shares of common stock
outstanding in a ratio of 31 to 1, restating the number of shares of common
stock outstanding to 101,0834.
RATIFICATION OF ENGAGEMENT OF AUDITORS
At the Annual Meeting the Shareholders will consider the
ratification of the engagement of the firm of Thomas P. Monahan, C.P.A., as the
Company's Independent Auditor. The firm of Weinberg & Company, P.A. resigned as
the Company's Independent Auditors and said new firm was engaged as reported in
forms 8-K filed with the Securities and Exchange Commission on July 9, July 16,
and July 22, 1998.
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NOMINEES FOR DIRECTORS
If a nominee refuses or is unable to serve as a Director another
nominee will be substituted or designated by a majority of the present Board of
Directors.
The following table and the notes thereto provide certain information
regarding the nominees for Directors of the Company including their beneficial
ownership of voting securities of IMC and the Company as of December 31, 1997.
Principal
Occupation Director/
or Employment Officer IMC
for Past Five Years of Shares
and Director- Company Beneficially
Age Ship Since Owned
--- ---- ----- -----
Max Apple 58 Chairman of the Board 1995 180,000
Secretary and Director,
IMTL. 1991 to present,
attorney, private law practice,
Jasper, Indiana
Roger B. Arnold 40 President, Director IMTL; 1997
History as Mortgage N/A
Banker, Financial Services
Walt DeRonde 49 Chief Operating Officer, 1997
Chief Financial Officer, 120,000
Treasurer, Vice President,
Director IMTL; History in
Financial Services and Modular
Housing Market; November, 1996
to August, 1998 Mutual of New
York, Financial Planner;
November, 1995 to November, 1996
Home American, Inc, General
Manager; July, 1993 to November,
1995, Division Manager, Reymar
Industries, Inc.
Ed Huyta 55 Director, Vice President 1997 60,000
IMTL; History in Healthcare
and Senior Age Market
Scott Hess 34 History in Insurance and Mortgage N/A 310,000
Operations; November 1997 to
Present, Chairman and Chief
Executive Officer, AB
Securities, Inc.; January 1991
to December 1995, President and
Chief Executive Officer,
Atlantic International Resources
Corp.
Frederic Richardson 38 Investment Banker; History N/A 45,000
In Financial Services Industry
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BOARD COMMITTEES AND MEETING OF THE BOARD OF DIRECTORS
The Company has an Executive Committee which met twelve (12) times
during 1997. Pursuant to the Company's Bylaws, this Committee may exercise any
and all of the powers of the Board of Directors in the management of the
business and affairs of the Company to the extent authorized by the Board of
Directors. The Executive Committee has three (3) members, Walter Deronde, Roger
B. Arnold, and Ed Huyta.
The Company does not have a nominating committee. Nominees for
Director are recommended by the Executive Committee to the Board of Directors
for approval and submission at the Annual Shareholders Meetings.
The Board of Directors held twelve (12) regular meetings and fifteen
(15) special meetings during 1997. No Director attended fewer that 75% of the
total number of meetings of the Board of Directors and meeting of committees on
which he served.
EXECUTIVE COMPENSATION
The following sets forth the cash compensation, including bonuses and deferred
compensation, paid during 1997 to those executive officers which compensation
exceeded $60,000 and to all executive officers as a group for services rendered
in all capacities to the Company
a. Employment Agreement with Mr. Walter Deronde
On January 1, 1997, the Company entered into an employment agreement
with Mr. Walter Deronde as Treasure and Vice President for an annual salary of
$120,000. In addition, Mr. Deronde is responsible for evaluating merger and
acquisition candidates in the mortgage banking industry.
For the year ending December 31, 1997, the Company had accrued
$120,000 in salary.
b. Employment Agreement with Mr. Max Apple
On May 1, 1995, the Company entered into an employment agreement
with Mr. Max Apple as Chairman for an annual salary of $120,000 per annum and
reimbursement of all "out-of-pocket" expenses.
For the year ending December 31, 1997, the Company had accrued
$120,000 in salary.
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c. Financial Consulting Agreement
On May 1, 1995, the Company entered into a financial consulting
agreement with Frederic Richardson for a monthly fee of $10,000 per month and
reimbursement of all out-of-pocket expenses. In October of 1997 Mr Richardson
assigned his contract to FSR Group . The term of this agreement is 10 years and
is renewable. From time to time, FSR has engaged in business transactions with
affiliates of the placement agent, including a loan to a corporate stockholder
of the placement agent.
For the year ending December 31, 1997, the Company had accrued
$120,000.
d. General
Except as set forth above no cash compensation, including bonuses
and deferred compensation, was paid during 1997 by IMC to any of its executive
officers. No fees were paid to Board members for attending Board meetings during
1997. Shares of the Company's common stock may be issued to its officers
representing the fair market value of services actually rendered by them with
out pay and as reimbursement for expenses actually incurred by them in the
performance of their duties as officers of the Company.
RELATED PARTY TRANSACTIONS
a. Issuance of Shares of Capital Stock
The company issued 1,500,000 shares of common stock to Continent Finance
Corporation (" CFC") to acquire University Mortgage, Inc. ("UMI") and Home
America Mortgage Company ("HAMC"). HAMC was a former indirect subsidiary of the
Company through Frontier Insurance Company ("FIC"). On November 17, 1995, the
Company sold FIC and retained its interest in HAMC. In 1996, the Company sold
HAMC to CFC in consideration for the forgiveness of certain debt and cash. On
December 25, 1996, HAMC was sold by CFC to University Mortgage, Inc. ("UMI")
and in January, 1997, the transaction with UMI was rescinded with HAMC being
returned back to CFC. On August 1, 1997, the Company acquired UMI and
reacquired HAMC from CFC.
CFC is the majority shareholder of the Company.
The Company issued 60,000 shares of common stock to Ed Huyta, a
Director, in consideration for the forgiveness of debt arising from expenses
paid on behalf of the Company aggregating $60,000,
The Company has issued an aggregate of 200,000 shares of common
stock to Ventana Consulting, Inc., a Michigan corporation.
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b. Due to Related Parties
Certain officers and consultants of the Company paid expenses in the
amount of $180,263 on behalf of the Company during 1995. This amount is due on
demand and bears no interest. All expenses incurred during 1996 were paid by the
officers of the Company who waived reimbursement.
c. Employment Agreement with Mr. Walter Deronde
On January 1, 1997, the Company entered into an employment
agreement with Mr. Walter Deronde as COO, Treasurer and Vice President for an
annual salary of $120,000. In addition, Mr. Deronde is responsible for
evaluating merger and acquisition candidates in the mortgage banking industry.
For the year ending December 31, 1997, the Company had accrued
$120,000 in salary.
d. Employment Agreement with Mr. Max Apple
On May 1, 1995, the Company entered into an employment agreement
with Mr. Max Apple as Chairman for an annual salary of $120,000 per annum and
reimbursement of all "out-of-pocket expenses".
For the year ending December 31, 1997, the Company had accrued
$120,000 in salary.
e. Financial Consulting Agreement
On May 1, 1995, the Company entered into a financial consulting
agreement with Frederic Richardson for a monthly fee of $10,000 per month and
reimbursement of all "out-of-pocket expenses". The contract was assigned to FSR
Group in October 1997. The term of this agreement is 10 years and is renewable.
For the year ending December 31, 1997, the Company had accrued
$120,000.
f. Capital contribution
On August 15, 1997, AB Securities, Inc., ("ABS"), contributed to UMI
1,000,000 shares of common stock of Global Link Technology, which is traded on
the NASDAQ Bulletin Board with the trading symbol GLTK. The Market price at the
date of contribution and at December 31, 1997 was $0.08 per share.
g. Loans Payable- Affiliated Companies
UMI has Loans receivable - affiliated parties from W-C Consultants,
Inc. aggregating $292,091 at December 31, 1997.
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h. Managerial Relationship
On January 1, 1997, the UMI entered into an agreement with James E.
Clare, Donald E. Wolpe and W-C Consultants, Inc., (collectively referred to as
"W-C"), whereby W-C will participate in the management of the UMI's licensed
branch at 5480 Wisconsin Avenue, Chevy Chase, Maryland. W-C's sole shareholder
is Jeffrey A. Wolpe who is also Vice President/Counsel to UMI. W-C's Chairman,
Donald E. Wolpe, (Jeffrey A. Wolpe's father) and W-C's President, James E.
Clare, represent UMI as branch managers. For the year ending December 31, 1997,
W-C received $377,970, which was charged to operations.
i. Sublease Agreement
On July 1, 1996, UMI entered into a lease agreement with W-C for
the lease of approximately 1,322 square feet of office and storage space from
Highland House Limited Partnership at Highland House, 5480 Wisconsin Avenue,
Suite LL-4, Chevy Chase, Maryland 20815 at a monthly rental of $1,665 for a term
ending September 30, 1997. On October 1, 1997, the lease agreement was extended
to September 30, 2000 with a monthly rental of $1,766.
For the year ended December 31, 1997, rent expense was $21,483.
j. Change in Managerial Control
As of December 31, 1997, the Company acquired all of the issued and
outstanding capital stock of the UMI. This acquisition enables the Company to
have majority managerial and financial control in the decision making process of
the UMI.
k. Change in Equity Ownership
1. On December 25, 1996, UMI acquired all of the issued and
outstanding capital stock of HAMC from CFC in consideration for the issuance of
10,000 shares of nonvoting convertible Class A Preferred stock by the UMI.
2. On January I, 1997, pursuant to an agreement by and between ABS
and University Consulting, Inc. ("University Consulting"), both Maryland
corporations owned and controlled by M. Scott Hess, University Consulting
exchanged 1,000 shares of the Company's common stock in settlement for a note
payable to AB Securities.
3. In January, 1997, an agreement was executed by and between the UMI
and CFC, whereby CFC caused to be issued 100,000 shares of common stock of the
Company valued at $5.00 per share in consideration for all of the issued and
outstanding capital stock of HAMC with a book value of $471,637. The recording
of the transaction realized a gain of $28,363.
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4. On May 14, 1997, the UMI, CFC and ABS entered into an "Agreement
and Plan of Reorganization" whereby CFC exchanged all of the issued and
outstanding Class A preferred shares of the UMI to AB Securities for 10,500
shares of preferred stock of ABS.
5. On December 31, 1997, the UMI was party to an agreement by and
between the Company and ABS controlled by M. Scott Hess, President of UMI and
President of ABS. ABS exchanged all of the UMI's issued and outstanding stock to
the Company for 175,00 shares of the Company's common stock valued at $385,000
or $2.20 per share.
SUBSEQUENT EVENT
Subsequent to the date of the financial statements, the Company had
appointed Mr. Roger Arnold as President of the Company.
SHAREHOLDER PROPOSALS
Written recommendations to the Board of Directors from Shareholders of the
Company will be considered by the Executive Committee if received in writing by
the Secretary of the Company on or before September 8, 1998.
RELATIONSHIP WITH INDEPENDENT PUBLIC ACCOUNTANTS
The independent certified public accounting firm of Thomas P. Monaghan, C.P.A.,
examined the financial statements of the Company. It is not anticipated that a
representative from the said firm will be present at the Shareholders' Meeting.
OTHER MATTERS
The management of the Company knows of no other matters that may come before the
meeting. However, if any matters other than those referred to herein should
properly come before the meeting, it is intention of management to vote on such
matters in accordance with their best business judgment.
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FINANCIAL STATEMENTS
The Annual Report to Shareholders covering the fiscal year ended December 31,
1997, is enclosed herewith.
BY THE ORDER OF THE BOARD OF
DIRECTORS OF INTERNATIONAL
MERCANTILE CORPORATION
/s/ Max Apple
-------------------------------------
Board Chairman
Kansas City, Missouri
August 28, 1998
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INTERNATIONAL MERCANTILE CORPORATION
ANNUAL REPORT TO SHAREHOLDERS
I. BUSINESS REVIEW
HISTORICAL
International Mercantile Corporation, a Missouri corporation ("IMC",
the "Company" "Registrant" OR "IMTL") was incorporated on March 10, 1971, for
the purpose of acquiring Frontier Insurance Company ("FIC" or "Frontier") and
Universal Life Holding Corporation ("ULHC" or "Universal"). IMC effected these
acquisitions on August 31, 1973. IMC subsequently acquired a controlling
interest in Sterling Financial Corporation ("SFC"). Prior to 1997, the Company,
through various transactions which have previously been reported in detail,
divested itself of its entire ownership in FIC, ULHC and SFC.
CURRENT
The Company currently has two wholly owned subsidiaries, University
Mortgage, Inc. ("UMI") and Home America Mortgage Company, ("HAMC"). The
Company's principal business is the organization and sale of purchase,
refinance, home equity, home improvement and debt consolidation loans from
residential customers in Maryland, Virginia, Washington, D.C., Pennsylvania and
Delaware. The Company does not retain any servicing rights on loans it
originates.
ACQUISITIONS OCCURRING IN 1997
As of December 31, 1997, the Company completed a series of
transactions between the Company, UMI, (Continent Finance Corporation "CFC"),
and AB Securities, Inc. ( "ABS") for the acquisitions of HAMC and UMI. The
Company issued and aggregate of 1,910,000 shares of common stock with a value in
the aggregate of $2,250,000.
The shares issuances were as follows:
In January, 1997, an agreement was entered into by and between the
UMI and CFC, whereby CFC caused to be issued 100,000 shares of common stock of
the Company valued at $5.00 per share in consideration for all of the issued and
outstanding capital stock of HAMC with a book value of $471,637. The recording
of the transaction on UMI's books realized a gain of $28,363 for UMI.
On August 1, 1997, the Company issued to CFC, 1,000,000 shares of
common stock valued at $1.00 per share or $1,000,000 for all the issued and
outstanding stock of HAMC and as a finders fee for the acquisition of UMI. HAMC
is an inactive mortgage banking company which had a license to originate
mortgages in the state of Louisiana.
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In November the Company issued to CFC 500,000 shares, with rights to
2,000,000 shares, for the acquisition of MBHC preferred stock. The transaction
was subject to independent audit review.
Finally in December the Company completed it's deal with UMI and
restructured it's agreements with CFC resulting in the 1,500,000 shares issued
to date to CFC being done so in consideration for the UMI, IMTL transaction.
In August, 1997, the Company issued 100,000 shares of common stock to
UMI as part consideration for the anticipated acquisition. These shares of
common stock were valued at the market price of $5.00 per share.
On December 31, 1997, the Company issued to UMI 175,000 shares of
common stock valued at $385,000 or $2.20 per share representing one half of the
market price of the Company on December 31, 1997 as consideration.
In addition, on December 31, 1997, the Company issued 135,000 shares
of common stock to AB Securities, Inc. as collateral in consideration of the
purchase of 6,000 shares of Class A preferred stock of ABS and a Note Payable in
the principal amount of $300,000 due on or before March 31, 1998 with interest
at 10%. These shares of common stock were part of the consideration of the
purchase of UMI. The shares were valued at $135,000 or $1.00 per share.
The number of shares of common stock issued to UMI is subject to
adjustment if as of December 31, 1998 the market price of the shares of common
stock is less then the purchase price.
a. ACQUISITION OF HOME AMERICAN MORTGAGE COMPANY
HAMC was incorporated in the state of Louisiana on July 21, 1986 and
is licensed by the state to operate as a mortgage originator and broker of
conventional mortgages. As of December 31, 1997, HAMC had no assets, liabilities
or valid licenses.
HAMC was a former subsidiary of the Company's through having been a
subsidiary of Frontier Insurance Company, ("FIC"). On November 17, 1995, the
Company sold FIC and retained its interest in HAMC. In 1996, the Company sold
HAMC to CFC in consideration for the forgiveness of certain debt and cash. On
December 25, 1996, HAMC was sold by CFC to UMI and in January, 1997, the
transaction with UMI was rescinded with HAMC being returned back to CFC. On
August 1, 1997, the Company reacquired HAMC from CFC.
b. ACQUISITION OF UNIVERSITY MORTGAGE, INC.
UMI is a mortgage banking company based in Chevy Chase, Maryland.
UMI's improvement and debt consolidation loans from residential customers in
Maryland, Virginia, Washington, D.C., Pennsylvania and Delaware. The Company
does not retain any servicing rights on loans it originates.
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PRIVATE PLACEMENT
In 1997, the Company offered for sale to persons who qualified as
"accredited investors" as defined under Regulation D promulgated by the
Securities and Exchange Commission a minimum of 25 Units and a maximum of 75
Units of its securities. 25 Units were offered on an all-or-none basis and the
remaining 50 Units are being offered on a "best efforts basis". Each Unit
consists of 10,000 shares of the Company's common stock.
As of December 31, 1997, the Company had sold 22 Units for an
aggregate consideration of $220,000. The offering was amended to reduce to
minimum offering to 20 Units enabling the Company to receive the proceeds of
$200,000 as of December 31, 1997.
LOOKING FORWARD
The Company is considered to be a development stage company with
little operating history since January 1, 1996. The Company is dependent upon
the financial resources of the Company's management for its continued existence.
The Company will also be dependent upon its ability to raise additional capital
to complete its plans for further acquisitions and its marketing program,
acquire management talent, and working capital to engage in profitable business
activity. Since its reorganization, the Company's activities have been limited
to the acquisition of UMI and the preparation and sale of its private placement.
II. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS FOR THE YEARS OF DECEMBER 31, 1995, 1996 AND 1997
For the last six years, the Company has remained dormant while
management was seeking new profitable business opportunities. During this
dormant period, management has been responsible for providing for the required
expenses to remain in existence.
As of December 31, 1996, the Company had examined various investment
and business opportunities which upon the completion of a detailed due diligence
process by management resulted in the decision not consummate.
On July 1, 1997, the Company entered into a series of transactions
which resulted in the Company acquiring University Mortgage, Inc., ("UMI") and
Home America Mortgage Company ("HAMC"). UMI's principal business is the
origination and sale of purchase, refinance, home equity, home improvement and
debt consolidation loans from residential customers in Maryland, Virginia,
Washington, D.C., Pennsylvania and Delaware. HAMC presently holds an inactive
license to do business in the state of Louisiana. The Company does not retain
any servicing rights on loans it originates. The Company is actively seeking to
grow through the acquisition of other active mortgage banking and mortgage
brokering business. The Company has positioned itself to entertain new
acquisitions by having available and developed various sources for mortgage
funding and having acquired a warehouse line of credit through UMI and a
unsecured line of credit. The Company anticipates that with the completion of a
private placement begun in the 4th quarter 1997, the Company will be adequately
funded to complete its plans for opening new offices off mortgage
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banking products and provide the working capital to continue as a going concern.
The Company anticipates that its results of operations may fluctuate
for the foreseeable future due to several factors, including whether and when
new mortgage products are successfully developed and introduced by the Company,
market acceptance of current or new mortgage products, regulatory delays,
competitive pressures on average interest rate pricing, changes in the mix of
and mortgage products sold. Operating results would also be adversely affected
by a downturn in the market for the Company's current and future mortgage
products, change in interest rates, changes in the availability of end purchases
of mortgage. Because the Company is continuing to increase its operating
expenses for personnel, the Company's operating results would be adversely
affected if its mortgage production did not correspondingly increase. The
Company's limited operating history makes accurate prediction of future
operating results difficult or impossible. Although UMI has experienced growth
in recent years, there can be no assurance that, in the future, the Company and
UMI will sustain revenue growth or remain profitable on a quarterly or annual
basis or that its growth will be consistent with predictions made by securities
analysts. The Company's computer and other systems will not be adversely
affected by the year 2000.
RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1997 AS COMPARED TO THE
YEAR ENDED DECEMBER 31, 1996.
Revenues from any source were $-0- for the years ending December 31,
1996 and 1997. Costs processing mortgages were $-0- for the years ending
December 31, 1996 and 1997.
General and administrative costs for the year ended December 31, 1997
were $1,511,538, an increase of $1,511,538 over expenses of $-0- for the year
ended December 31, 1996. These increased costs were the result of the Company
issuing an aggregate of 946,500 shares of common stock in consideration for
$956,500 in consulting fees, reimbursement for expenses paid by the officer's
and Directors on behalf of the Company, and in settlement of litigation. The
Company also accrued $360,000 in back salaries pursuant to various employment
agreements and has paid additional expenses of $205,038.
LITIGATION
On June 25, 1993, a Petition on Note was filed against the Company in
the Circuit of Cole County, Missouri, seeking damages ion the amount of $54,294
plus interest and attorney's fees, for default on numerous promissory notes. The
Petition alleged that there were promissory notes issued by the Company in favor
of Plaintiffs, Janet L. Mertz, Edwin H. Mertz, Glenn E. Mertz, Edna L. Mertz,
Danny W. Mertz and Valerie J. Mertz which were due in February, 1993, and which
the Company has refused to pay. In June, 1994, the Plaintiffs Motion for Summary
Judgment was granted and Judgment was entered against the Company in the
aggregate amount of $70,820. As of December 31, 1997, the Judgment was not
satisfied and is still pending.
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RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1996 AS COMPARED TO THE
YEAR ENDED DECEMBER 31, 1995.
Revenues from any source were $-0- for the years ending December 31,
1996 and 1997. Cost processing mortgages were $-0- for the years ending December
31, 1996 and 1997.
General and administrative costs for the year ended December 31, 1996
were $-0-, a decrease of $235,619 over expenses of $235,619 for the year ended
December 31, 1996. These decreased costs were the result of the Company
remaining in a dormant mode.
LIQUIDITY AND CAPITAL RESOURCES AS OF THE END OF FISCAL YEAR ENDED DECEMBER 31,
1996.
The Company cash balance is $-0- and incurred negative working
capital of $313,395 as of the end of fiscal 1996.
Income tax: As of December 31, 1996, the Company had a tax loss
carry-forward of $7,958,757. The Company's ability to utilize its tax credit
carry-forwards in future years will be subject to an annual limitation pursuant
to the "Change in Ownership Rules" under Section 382 of the Internal Revenue
Code of 1986, as amended. However, any annual limitation is not expected to have
a material adverse effect on the Company's ability to utilize its tax credit
carry-forwards.
LIQUIDITY AND CAPITAL RESOURCES AS OF THE END OF FISCAL YEAR, DECEMBER 31, 1997.
The Company increased its cash balance to $290,951 and incurred
negative working capital of $996,000 as of the end of fiscal 1997 as the result
of the sale in the aggregate of $220,000 in shares of common stock through the
Company's private placement and the consolidation of UMI's cash position.
Income tax: As of December 31, 1997, the Company had a tax loss
carry-forward of $9,470,294. The Company's ability to utilize its tax credit
carry-forwards in future years will be subject to an annual limitation pursuant
to the "Change in Ownership Rules" under Section 382 of the Internal Revenue
Code of 1986, as amended. However, any annual limitation is not expected to have
a material adverse effect on the Company's ability to utilize its tax credit
carry-forwards.
Management believes that the present cash balance and lines of credit
will pay the ongoing cost of the mortgage banking business.
The Company currently plans to expend approximately $1.0 million for
the expansion and development of its mortgage banking business, marketing and
general administrative capabilities in connection with the fulfillment of the
Company's marketing program and the anticipated launch of the Company's mortgage
products currently under development. Additionally, the Company utilizes cash
generated from operating activities to meet its capital requirements.
17
The Company expects its capital requirements to increase over the
next several years as it commences to seek out new mortgage banking
opportunities and development efforts, undertakes new mortgage product
development, increases sales and administration infrastructure and embarks on
developing in-house warehousing capabilities and facilities. The Company's
future liquidity and capital funding requirements will depend on numerous
factors, including the extent to which the Company's continued market
penetration are successfully developed and gain market acceptance, the timing of
regulatory actions regarding the Company's potential mortgage products, the
costs and timing of expansion of sales, marketing and mortgage production
activities, facilities expansion needs, procurement of additional mortgage
banking licenses in additional states.
The Company believes that its available cash and cash from operations
will be sufficient to satisfy its funding needs for at least the next 12 months.
Thereafter, if cash generated from operations is insufficient to satisfy the
Company's working capital and capital expenditure requirements, the Company may
be required to sell additional equity or debt securities or obtain additional
credit facilities. There can be no assurance that such financing, if required,
will be available on satisfactory terms, if at all.
III. STOCK INFORMATION
There exists a market for IMC stock, which trades over the counter.
Its trading symbol is IMTL. The bid and ask prices for IMC stock on December 31,
1997 were 5.00 and 5.5, respectively. A cash dividend has never been paid on the
common stock.
Transfer Agent and Registrar:
Curt Hughes
Interwest Transfer Agent
1981 East 4800 South, Suite 100
Salt Lake City, Utah 84117
(801) 272-9294
The Company's Annual Report filed with the Securities and Exchange
Commission on Form 10-K is available without charge to Shareholders of the
Company's Common Stock and may be obtained by writing to International
Mercantile Corporation c/o Fillmore & Griffin, 4600 Madison, Suite 210, Kansas
City, Missouri 64112, attn: Arthur E. Fillmore.
18
IV. EXECUTIVE OFFICERS AND DIRECTORS
Max Apple
Chairman of the Board
Secretary and Director
Roger B. Arnold
President, Director
Walt DeRonde
COO, CFO, Treasurer, Vice
President, Director
Ed Huyta
Director, Vice President
19
THOMAS P. MONAHAN
CERTIFIED PUBLIC ACCOUNTANT
208 LEXINGTON AVENUE
PATERSON, NEW JERSEY 07502
(973) 790-8775
To The Board of Directors and Shareholders of International Mercantile
Corporation ( a development stage company)
I have audited the accompanying consolidated balance sheet of
International Mercantile Corporation ( a development stage company) as of
December 31, 1997 and the related consolidated statements of operations, cash
flows and shareholders' equity for the year ended December 31, 1997. I did not
audit the financial statements as of December 31, 1996 and the related
consolidated statements of operations, cash flows and shareholders' equity for
the year ended December 31, 1995 and 1996. Those statements were audited by
other auditors whose report has been furnished to me, and our opinion, insofar
as it relates to the amounts included for financial statements as of December
31, 1995 and 1996 are based solely on the report of the other auditors.
I conducted my audit in accordance with generally accepted auditing
standards. Those standards require that I plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
I believe that my audit provides a reasonable basis for my opinion.
In my opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
International Mercantile Corporation ( a development stage company) as of
December 31, 1997 and the related consolidated statements of operations, cash
flows and shareholders' equity for the year ended December 31, 1997 in
conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared
assuming that International Mercantile Corporation ( a development stage
company) will continue as a going concern. As more fully described in Note 2,
the Company has incurred operating losses since inception and requires
additional capital to continue operations. These conditions raise substantial
doubt about the Company's ability to continue as a going concern. Management's
plans as to these matters are described in Note 2. The financial statements do
not include any adjustments to reflect the possible effects on the
recoverability and classification of assets or the amounts and classifications
of liabilities that may result from the possible inability of International
Mercantile Corporation ( a development stage company) to continue as a going
concern.
s/Thomas Monahan
---------------------------------------
Thomas P. Monahan, CPA
July 15, 1998
Paterson, New Jersey
20
V.
INTERNATIONAL MERCANTILE CORPORATION
CONSOLIDATED BALANCE SHEET
December 31, December 31,
1996 1997
---- ----
ASSETS
Current assets
Cash and cash equivalents $-0- $290,951
Mortgages receivable 687,500
----------
Current assets -0- 978,451
Capital assets-net 14,323
Other assets
Excess of purchase price over assets acquired 2,120,186
Notes receivable-affiliated parties 316,850
Securities-available for sale 367,000
Intangible assets 49,209
----------
Total other assets 2,853,245
----------
Total assets $-0- $3,846,019
==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued expenses $75,638 $487,699
Loan payable 57,494 606,494
Warehouse loan payable 654,805
Loan payable-related parties 180,263 180,263
Deferred income 32,695
Corporate income tax payable 12,495
----------- ----------
Total current liabilities 313,395 1,974,451
Capital stock
Common stock-authorized 5,000,000 common shares, par value $1.00 each, at
December 31, 1996 and 1997 the number of shares outstanding was
3,133,151 and 3,177,583 respectively. 3,133,151 3,177,583
Additional paid in capital 5,326,394 8,978,462
Retained earnings (7,958,757) (9,470,294)
----------- ----------
Total stockholders' equity 500,788 2,685,751
Less treasury stock (814,183) (814,183)
----------- ----------
Total stockholders equity 313,395 1,871,568
----------- ----------
Total liabilities and stockholders' equity $-0- $3,846,019
=========== ==========
21
INTERNATIONAL MERCANTILE CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
For the year ended For the year ended For the year ended
December 31, 1995 December 31, 1996 December 31, 1997
------------------- ------------------- -------------------
Net income (loss) $(1,039,100) $-0- $(1,474,234)
Depreciation 44,075
Loss on disposition of subsidiaries 901,600
Gain on sale of asset 28,363
Non cash transactions 1,316,492
Adjustments to reconcile net income (loss) to net cash
Other receivables (185,776)
Other liabilities 140,045
Interest receivable 2,882
Employee advances 2,500
Due to affiliate 4,300
Accounts payable and accrued expenses 52,061
Income taxes payable (28,802)
---------- ----------
TOTAL CASH FLOWS FROM OPERATIONS (183,231) -0- (52,363)
CASH FLOWS FROM INVESTING ACTIVITIES
Mortgages receivable (687,500)
Securities-available for sale (580,000)
Capital assets (5,400)
Notes receivable (148,810)
Deposits 2,376
----------
TOTAL CASH FLOWS FROM INVESTING ACTIVITIES -0- (1,419,334)
CASH FLOWS FROM FINANCING ACTIVITIES
Advances from related parties 180,263
Sale of capital stock 220,000
Additional paid in capital 80,000
Warehouse loan payable 654,805
Loan payable 49,000
Line of Credit 200,000
Deferred income 32,695
---------- ----------
TOTAL CASH FLOWS FROM FINANCING ACTIVITIES 180,263 -0- 1,236,500
NET INCREASE (DECREASE) IN CASH (2,968) -0- (235,188)
CASH BALANCE BEGINNING OF PERIOD 2,968 -0- 526,139
---------- ----------
CASH BALANCE END OF PERIOD $-0- $-0- $290,951
========== ========== ==========
22
INTERNATIONAL MERCANTILE CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
DECEMBER 31, 1997
For the year For the year For the year
ended ended ended
December 31, December 31, December 31,
1995 1996 1997
---- ---- ----
Revenue $98,119 $-0- $-0-
Mortgage related expenses -0- -0- -0-
Gross profit -0- -0- -0-
Operations:
General and administrative 235,619 -0- 1,511,538
Depreciation and amortization -0-
----------- ----------- -----------
Total expense 235,619 -0- 1,511,538
Income (loss) before loss on disposition of
subsidiaries (137,500) -0- (1,511,538)
Loss on disposition of subsidiaries (901,600)
Net income (loss) $(1,039,100) $-0- $ (1,511,538)
=========== =========== ============
Net income (loss) per common share
Net income (loss) before loss on disposition of
subsidiary $(0.04)
===========
Loss on disposition of subsidiary $(0.29)
===========
Net income (loss) per share -basic $(0.33) $0.00 $(0.47)
=========== ===========
Number of shares outstanding-basic 3133151 3,177,583 3,177,583
=========== =========== ===========
23
INTERNATIONAL MERCANTILE CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY
Additional
paid in Treasury Retained
Date Common Stock Common Stock capital Stock Earnings Total
- ---- ------------ ------------ ---------- -------- --------- -----
12-31-1995 3,133,151 $3,133,151 $5,326,395 $(814,183) $(7,958,757) $(313,395)
12-31-1996 Net loss -0- -0-
---------- ---------- ---------- ---------- ---------- --------
12-31-1996 3,133,151 3,133,151 5,326,395 $(814,183) $(7,958,757) $(313,395)
06-01-1997(1) 101,083 101,083 8,358,463 (814,183) (7,958,757) (313,395)
12-31-1997(2) 946,500 946,500 10,000 956,500
12-31-1997(3) 1,500,000 1,500,000 1,500,000
12-31-1997(3) 100,000 100,000 400,000 500,000
12-31-1997(3) 135,000 135,000 135,000
12-31-1997(3) 175,000 175,000 210,000 385,000
12-31-1997(4) 220,000 220,000 220,000
12-31-1997 Net loss (1,511,538) (1,511,546)
---------- ---------- ---------- ---------- ----------
3,177,583 3,177,583 8,978,463 (814,183) (9,470,295) 1,871,568
(1) Reverse split of shares in a ratio of 31-1
(2) Shares issued for consulting fees at an average value of $1.01 per share.
(3) Shares issued for the acquisition of HAMC and UMI from CFC and AB Securities
valued at an aggregate of $2,520,000 or $1.32 per share.
(4) Shares issued pursuant to the private placement at $1.00 per share.
24
INTERNATIONAL MERCANTILE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
NOTE 1. ORGANIZATION OF COMPANY AND ISSUANCE OF COMMON STOCK
a. Creation of the Company
International Mercantile Corporation (the "Company") was first formed
under the laws of Missouri on March 10, 1971 with an authorized capitalization
of 2,000,000 common shares, $1.00 par value each. On July 30, 1987 the
certificate of incorporation was amended as to the number of common shares
authorized to issue to 5,000,000, $1.00 par value. On May 21, 1988, the Company
amended its certificate of incorporation to increase the number of directors to
constitute the Board of Directors to 9.
b. Description of the Company
The Company has two wholly owned subsidiaries, University Mortgage,
Inc., ("UMI") and Home America Mortgage Company, ("HAMC"). The Company's
principal business is the origination and sale of purchase, refinance, home
equity, home improvement and debt consolidation loans from residential customers
in Maryland, Virginia, Washington, D.C. , Pennsylvania and Delaware. The Company
is licensed to do business in the state of Louisiana through HAMC. The Company
does not retain any servicing rights on loans it originates.
c. Issuance of Capital Stock
In July, 1997 , the Company reverse split the number of shares of
common stock outstanding in a ratio of 31 to restating the number of shares of
common stock outstanding to 101,083.
As of December 31, 1997, the Company has issued an aggregate of
946,500 shares of common stock in consideration for $956,500 in consulting fees,
reimbursement for expenses paid by the officer's and Directors on behalf of the
Company, and in settlement of litigation.
As of December 31, 1997, the Company has issued an aggregate of
1,910,000 shares of common stock and recorded a Note Payable in the principle
amount of $300,000 in consideration for the acquisition of HAMC and UMI from CFC
and AB Securities, Inc.
As of December 31, 1997, the Company is required to issue 220,000
shares of common stock pursuant to a private placement under Rule 506 of the
Securities Act of 1933, as amended for an aggregate consideration of $220,000 or
$1.00 per share. The Company has reflected these shares as outstanding as of
December 31, 1997.
25
INTERNATIONAL MERCANTILE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
NOTE 2-SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. Basis of Financial Statement Presentation
The accompanying financial statements have been prepared on a going
concern basis, which contemplates the realization of assets and the satisfaction
of liabilities in the normal course of business. The Company incurred net losses
of $9,470,294 for the period from inception March 10, 1971 to December 31, 1997.
These factors indicate that the Company's continuation as a going concern is
dependent upon its ability to obtain adequate financing. The Company is
anticipating that with the completion of its private placement and with the
increase in working capital provided by the profitable operations of the
Company's new ly acquired subsidiary University Mortgage, Inc. , the Company
will complete its plans for expansion into the mortgage business and experience
an increase in income. The Company will require substantial additional funds to
finance its business activities on an ongoing basis and will have a continuing
long-term need to obtain additional financing. The Company's future capital
requirements will depend on numerous factors including, but not limited to,
continued progress developing its source of mortgage funding sources, initiating
marketing penetration and opening regional offices. The Company plans to engage
in such ongoing financing efforts on a continuing basis.
The financial statements presented consist of the consolidated
balance sheet of the Company as at December 31, 1996 and 1997 and the related
consolidated statements of operations, stockholders equity and cash flows for
the years ended December 31, 1995, 1996 and 1997.
b. Cash and cash equivalents
The Company treats temporary investments with a maturity of less than
three months as cash.
c. Property and Equipment
Property and equipment are stated at cost less accumulated
depreciation. Depreciation is computed over the estimated useful lives using the
straight line methods over a period of five years. Maintenance and repairs are
charged against income and betterment's are capitalized.
d. Earnings per share
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, EARNINGS PER SHARE
("Statement No. 128"). Statement No. 128 applies to entities with publicly held
common stock or potential common stock and is effective for financial statements
issued for periods ending after December 15, 1997. Statement No. 128 replaces
APB Opinion 15, Earnings per Share ("EPS"). Statement No. 128 requires dual
presentation of basic and diluted earnings per share by entities with complex
capital structures. Basic EPS includes no dilution and is computed by dividing
net income by the total number of common
26
INTERNATIONAL MERCANTILE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
shares outstanding for the period. Diluted EPS reflects the potential dilution
of securities that could dilute the shares in computing the earnings of the
Company such as common stock which may be issuable upon exercise of outstanding
common stock options or the conversion of debt into common stock.
Pursuant to the requirements of the Securities and Exchange
Commission, the calculation of the shares used in computing basic and diluted
EPS include the shares of common stock issued for the acquisition of HAMC and
UMI.
Shares used in calculating basic and diluted net income per share
were as follows:
Year ended Year ended
December 31, December 31,
1996 1997
--------------------------------
Total number common
shares outstanding 101,083(1) 3,177,583
(1) Pre split shares were 3,133,151
e. Revenue recognition
Revenue is recognized when products are shipped or services are
rendered.
f. Selling and Marketing Costs
Selling and Marketing - Certain selling and marketing costs are
expensed in the period in which the cost pertains. Other selling and marketing
costs are expensed as incurred
g. Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that effect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
27
INTERNATIONAL MERCANTILE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
h. Significant Concentration of Credit Risk
At December 31, 1997, the Company has concentrated its credit risk by
maintaining deposits in several banks. The maximum loss that could have resulted
from this risk totaled $134,823 which represents the excess of the deposit
liabilities reported by the banks over the amounts that would have been covered
by the federal insurance.
j. Mortgage Inventory
The UMI presents its mortgage inventory as discussed in "Fair Value
of Financial Instruments". As of the date of this report, substantially all of
the December 31, 1997 mortgage inventory has been sold. Mortgage inventory
secures the related warehouse lines of credit.
k. Asset Impairment
The Company adopted the provisions of SFAS No. 121, Accounting for
the impairment of long lived assets and for long-lived assets to be disposed of
effective January 1, 1996. SFAS No. 121 requires impairment losses to be
recorded on long-lived assets used in operations when indicators of impairment
are present and the estimated undiscounted cash flows to be generated by those
assets are less than the assets' carrying amount. SFAS No. 121 also addresses
the accounting for long-lived assets that are expected to be disposed of. There
was no effect of such adoption on the Company's financial position or results of
operations.
l. Excess of purchase price over cost of assets acquired
Excess of purchase price over cost of assets acquired represents the
cost in excess of the fair value of net assets acquired and is amortized on a
straight line basis over 20 to 40 years.
NOTE 3 - ACQUISITIONS
As of December 31, 1997, the Company completed a series of
transactions between the Company, UMI, CFC and ABS for the acquisitions of HAMC
and UMI. The Company issued and aggregate of 1,910,000 shares of common stock
with a value in the aggregate of $2,520,000.
As part of the assets acquired in this series of transactions, the
company acquired 200,000 shares of preferred stock, par value $100.00, of
Mortgage Bankers Holding Corp. for 500,000 shares of the company's common stock,
with rights to 2,000,000 additional shares subject to terms and conditions of
the agreement Pursuant to the agreement, the transaction was subject to
confirmation of value as part of the Company's due diligence process on the
value of the assets. The Company concluded its due diligence process and
concluded that the value of the assets could not be confirmed. As of December
31, 1997, this aspect of the transaction was rescinded.
28
INTERNATIONAL MERCANTILE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
The share issuances are as follows:
In January, 1997, an agreement by and between the UMI and CFC,
whereby CFC caused to be issued 100,000 shares of common stock of the Company
valued at $5.00 per share in consideration for all of the issued and outstanding
capital stock of HAMC with a book value of $471,637. The recording of the
transaction on UMI's books realized a gain of $28,363 for UMI.
On August 1, 1997, the Company issued to CFC 1,500,000 shares of
common stock valued at $1.00 per share or $1,500,000 for all the issued and
outstanding stock of HAMC and as a finders fee for the acquisition of UMI. HAMC
is an inactive mortgage banking company with a license to originate mortgages in
the state of Louisiana.
In August, 1997, the Company issued 100,000 shares of common stock to
UMI as part consideration for the anticipated acquisition. These shares of
common stock were valued at the then market price of $5.00.
On December 31, 1997, the Company issued to UMI 175,000 shares of
common stock valued at $385,000 or $2.20 per shares representing on half of the
market price of the Company on December 31, 1997 in consideration of the risk of
the holding period.
In addition on December 31, 1997, the Company issued 135,000 shares
of common stock to AB Securities, Inc., ("ABS") as collateral in consideration
of the purchase of 6,000 shares of Class A preferred stock of ABS and a Note
Payable in the principle amount of $300,000 due on or before March 31, 1998 with
interest at 10%. These shares of common stock were part of the consideration for
the purchase of UMI. The shares were valued at $135,000 or $1.00 per share.
The number of shares of common stock issued to UMI is subject to
adjustment if as of December 31, 1998 or 14 days after the date of the release
of any restrictions on the further transfer of the shares of common stock the
then current market price of the shares of common stock is less then the market
price of the shares of common stock then the number of shares will be increased
to equal the market price on that date.
The transaction for the acquisitions of HAMC and UMI, culminating on
December 31, 1997, have been accounted for as a reverse acquisition and using
the purchase method of accounting with historic costs being the basis of
valuation, and accordingly, the accompanying financial statements include the
results of operations of the consolidated operations from the date of
acquisition beginning December 31, 1997.
29
INTERNATIONAL MERCANTILE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
a. Acquisition of Home America Mortgage Company
HAMC was incorporated in the state of Louisiana on July 21, 1986 and
is licensed by that state to operate as a mortgage originator and broker of
conventional mortgages. As of December 31, 1997, HAMC had no assets or
liabilities. as of December 31, 1997, the mortgage banking license in Louisiana
is inactive.
HAMC was a former subsidiary of the Company's through having been a
subsidiary of Frontier Life Insurance Company, ("FLI"). On November 17, 1995,
the Company sold FLI and retained its interest in HAMC. In 1996, the Company
sold HAMC to CFC in consideration for the forgiveness of certain debts and cash.
On December 25, 1996, HAMC was sold by CFC to UMI and in January, 1997, the
transaction with UMI was rescinded with HAMC being returned back to CFC. On
August 1, 1997, the Company reacquired HAMC from CFC.
b. Acquisition of University Mortgage, Inc.
UMI is a mortgage banking company in Chevy Chase Maryland. UMI's
principal business is the origination and sale of purchase, refinance, home
equity, home improvement and debt consolidation loans from residential customers
in Maryland, Virginia, Washington, D.C. , Pennsylvania and Delaware. The Company
does not retain any servicing rights on loans it originates.
NOTE 4 - SALE OF SUBSIDIARIES
On May 4, 1995, the Company exchanged all of the common stock owned
by the Company in ULHC for forgiveness of the notes and other payables owed by
the Company to ULHC. The Company had a gain on the sale in the amount of
$751,089.
On November 17, 1995, the Company sold its insurance subsidiary
(Washington) by transferring all of its stock in Washington for full
satisfaction of a note owed to two former officers, cancellation of consulting
agreements, and cancellation of all intercompany receivables and payables. In
addition, the Company transferred its accrued rights to commissions due from the
former third party administrator and all of the obligations of Ventana
Corporation f/k/a C.J. Brown ("Ventana") held by the Company. The Company also
received a mortgage executed by one of the Company's consultants in the amount
of approximately $200,000. The $200,000 mortgage was offset by a commission due
the consultant regarding the purchase of the Company. The Company assigned all
rights to Washington regarding litigation against Ventana and its officers. As a
result of this sale, the Company incurred a loss of $1,652,689. The Company
entered into an agreement dated November 17, 1995, amended on May 3, 1996, for
the purchase of the common stock of a mortgage company from Washington in
exchange for a parcel of real estate owned by the mortgage company.
30
INTERNATIONAL MERCANTILE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
For financial reporting purposes, the assets, liabilities, results of
operations, and cash flows of ULHC and Washington are included as a discontinued
operation.
NOTE 5 - MARKETABLE SECURITIES, AVAILABLE FOR SALE
The Company adopted Financial Accounting Standards Board ("FASB")
Statement No. 115, "Accounting for Certain Investments in Debt and Equity
Securities", which requires that investments in equity securities that have
readily determinable fair values and investments in debt securities be
classified in three categories: held-to-maturity, trading and
available-for-sale. Based on the nature of the assets held by the Company and
Management's investment strategy, the Company's investments have been classified
as available-for-sale. Management determines the appropriate classification of
debt securities at the time of purchase and reevaluates such designation as of
each balance sheet date.
Securities classified as available-for-sale are carried at estimated
fair value, as determined by quoted market prices, with unrealized gains and
losses, net of tax, reported in a separate component of stockholders' equity. At
December 31, 1997, the Company had no investments that were classified as
trading or held-to-maturity as defined by the Statement.
The following is a summary of cash, cash equivalents and
available-for-sale securities by balance sheet classification at December 31,
1996:
Estimated
Gross Gross Fair
Unrealized Unrealized Market
Cost Gains Losses Value
---- ----- ------ -----
Cash $ -0- $-0- $ -0- $ -0-
--- ---- ------- -----
Total cash and cash
equivalents $ -0- $-0- $ -0- $ -0-
31
INTERNATIONAL MERCANTILE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
The following is a summary of cash, cash equivalents and
available-for-sale securities by balance sheet classification at December 31,
1997:
Estimated
Gross Gross Fair
Unrealized Unrealized Market
Cost Gains Losses Value
---- ----- ------ -----
Cash $ 290,951 $-0- $ -0- $ 290,951
------- ------- ------- -------
Total cash and cash
equivalents $ 290,951 $-0- $ -0- $ 290,951
Securities-available for
sale $ 580,000 $213,000 $ 367,000
-------- -------- -------
Total cash, cash
equivalents and securities
available for sale $ 870,951 $213,000 $ 657,951
======== ======== =======
NOTE 6 - CAPITAL ASSETS
Capital Assets for the Company consisted of the following at
December 31, 1997:
Accumulated
Asset depreciation Balance
----- ------------ -------
Office equipment $ 99,793 $90,947 $ 8,846
Leasehold improvements 4,272 $ 4,272 $ -0-
Computer software 35,519 30,042 $ 5,477
--------- --------- ---------
Total $139,584 $125,261 $ 14,323
========= ========= =========
NOTE 7 - RELATED PARTY TRANSACTIONS
a. Issuance of Shares of Capital Stock
The Company issued 1,500,000 shares of common stock to CFC to acquire
HAMC. HAMC was a former subsidiary of the Company's through having been a
subsidiary of FLI. On November 17, 1995, the Company sold FLI and retained its
interest in HAMC. In 1996, the Company sold HAMC to CFC in consideration for the
forgiveness of certain debts and cash. On December 25, 1996, HAMC was sold by
CFC to UMI and in January, 1997, the transaction with UMI was rescinded with
HAMC being returned back to CFC. On August 1, 1997, the Company reacquired HAMC
from CFC.
32
INTERNATIONAL MERCANTILE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
CFC is the majority shareholder of the Company.
The Company issued 63,000 shares of common stock to Ed Huyta, a
Director in consideration for the forgiveness of debt arising from expenses paid
on behalf of the Company aggregating $63,000.
The Company has issued an aggregate of 200,000 shares of common stock
to Ventana Consulting, Inc., a Michigan corporation.
b. Due to Related Parties
Certain officers and consultants of the Company paid expenses in the
amount of $180,263 on behalf of the Company during 1995. This amount is due on
demand and bears no interest. All expenses incurred during 1996 were paid by the
officers of the Company and waived reimbursement.
c. Employment Agreement with Mr. Walter Deronde
On January 1, 1997, the Company entered into an employment agreement
with Mr. Walter Deronde as Treasure and Vice President for an annual salary of
$120,000. In addition Mr. Deronde is responsible for evaluating merger and
acquisition candidates in the mortgage banking industry.
For the year ending December 31, 1997, the Company has accrued
$120,000 in salary.
d. Employment Agreement with Mr. Max Apple
On May 1, 1995, the Company entered into an employment agreement for
an annual salary of $120,000 per annum and reimbursement of all "out-of-pocket
expenses.
For the year ending December 31, 1997, the Company has accrued
$120,000 in salary.
e. Financial Consulting Agreement
On May 1, 1995, the Company entered into a financial consulting
agreement with Frederic Richardson for a monthly fee of $10,000 per month and
reimbursement of all "out-of-pocket expenses". The term of this agreement is 10
years and is renewable.
For the year ending December 31, 1997, the Company has accrued
$120,000.
33
INTERNATIONAL MERCANTILE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
f. Capital contribution
On August 15, 1997, AB Securities, Inc., ("ABS"), contributed to UMI
1,000,000 shares of common stock of Global Link Technology, which is traded on
the NASDAQ Bulletin Board with the trading symbol GLTK. The Market price at the
date of contribution and at December 31, 1997 was $0.08 per share.
g. Loans Payable- Affiliated Companies
UMI has Loans receivable - affiliated parties from W-C Consultants,
Inc. aggregating $292,091 at December 31, 1997.
h. Managerial Relationship
On January 1, 1997, the UMI entered into an agreement with James E.
Clare, Donald E. Wolpe and W-C Consultants, Inc., (collectively referred to as
"W-C"), whereby W-C will participate in the management of the UMI's licensed
branch at 5480 Wisconsin Avenue, Chevy Chase, Maryland. W-C `s sole shareholder
is Jeffrey A. Wolpe who is also Vice President/Counsel to UMI. W-C's Chairman,
Donald E. Wolpe, (Jeffrey A. Wolpe's father) and W-C's President, James E.
Clare, represent UMI as branch managers. For the year ending December 31, 1997,
W-C received $377,970, which was charged to operations.
i. Sublease Agreement
On July 1, 1996, the UMI entered into a lease agreement with W-C for
the lease of approximately 1,322 square feet of office and storage space from
Highland House Limited Partnership at Highland House, 5480 Wisconsin Avenue,
Suite LL-4, Chevy Chase, Maryland 20815 at a monthly rental of $1,665 for a term
ending September 30, 1997. On October 1, 1997, the lease agreement was extended
to September 30, 2000 with a monthly rental of $1,766.
For the year ended December 31, 1997, rent expense was $21,483.
j. Change in Managerial Control
As of December 31, 1997, the Company acquired all of the issued and
outstanding capital stock of the UMI. This acquisition enables the Company to
have majority managerial and financial control in the decision making process of
the UMI.
k. Change in Equity Ownership
1. On December 25, 1996, the UMI acquired all of the issued and
outstanding capital stock of HAMC from CFC in consideration for the issuance of
10,000 shares of nonvoting convertible Class A Preferred stock by the UMI.
34
INTERNATIONAL MERCANTILE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
2. On January 1, 1997, an agreement by and between ABS and University
Consulting, Inc. ("University Consulting"), both Maryland corporations owned and
controlled by M. Scott Hess. University Consulting exchanged 1,000 shares of the
Company's common stock in settlement for a note payable to AB Securities.
3. In January, 1997, an agreement by and between the UMI and CFC,
whereby CFC caused to be issued 100,000 shares of common stock of the Company
valued at $5.00 per share in consideration for all of the issued and outstanding
capital stock of HAMC with a book value of $471,637. The recording of the
transaction realized a gain of $28,363.
4. On May 14, 1997, the UMI, CFC and ABS entered into an "Agreement
and Plan of Reorganization" whereby CFC exchanged all of the issued and
outstanding Class A preferred shares of the UMI to AB Securities for 10,500
shares of preferred stock of ABS.
5. On December 31, 1997, the UMI was party to an agreement by and
between the Company and ABS controlled by M. Scott Hess, President of UMI and
President of ABS. ABS exchanged all of the UMI's issued and outstanding stock to
the Company for 175,000 shares of the Company's common stock valued at $385,000
or $2.20 per share.
l. Lease of Office Space
The Company rents office space from a consultant of the Company under
an operating lease expiring June 1996. The lease agreement calls for annual rent
of $18,000. Future minimum lease payments due subsequent to December 31, 1995
and 1996 are $9,000 and $9,000 respectively.
m. Other Agreements
On August 14, 1996, the Company executed an agreement to purchase
100% of the outstanding capital stock of a corporation that has the rights to
develop and operate an ambulatory surgery center in Waldorf, Maryland, for
250,000 shares of the Company's common stock. The seller would retain 70% of the
voting rights under a voting trust agreement. The Company agreed to furnish
within 15 days a commitment letter to raise equity capital in the amount of
$3,000,000. The equity funding was to be provided within 90 days of the
execution of the agreement. The Company was unable to raise the equity within
the 90 day period, therefore the agreement was canceled.
On September 18, 1996, the Company entered into an agreement to
purchase 100% of the capital stock of University Consulting, Inc. ("UC") for
387,500 shares of the company's common stock valued at $387,500. UC owns and
operates a mortgage company, title company and income tax and accounting service
business. This agreement was canceled in December 1996.
On December 23, 1996, the Company entered into a stock purchase
agreement with University Mortgage, Inc. to purchase 40,000 shares of its
non-voting Redeemable Class A Preferred Stock for $400,000 which was
subsequently canceled.
35
INTERNATIONAL MERCANTILE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
NOTE 8 - INCOME TAXES
The Company provides for the tax effects of transactions reported in
the financial statements. The provision if any, consists of taxes currently due
plus deferred taxes related primarily to differences between the basis of assets
and liabilities for financial and income tax reporting. The deferred tax assets
and liabilities, if any represent the future tax return consequences of those
differences, which will either be taxable or deductible when the assets and
liabilities are recovered or settled. As of December 31, 1997, the Company had
no material current tax liability, deferred tax assets, or liabilities to impact
on the Company's financial position because the deferred tax asset related to
the Company's net operating loss carryforward and was fully offset by a
valuation allowance.
At December 31, 1997, the Company has net operating loss carry
forwards for income tax purposes of $9,470,294. This carryforward is available
to offset future taxable income, if any, and expires in the year 2010. The
Company's utilization of this carryforward against future taxable income may
become subject to an annual limitation due to a cumulative change in ownership
of the Company of more than 50 percent.
The components of the net deferred tax asset as of December 31, 1997
are as follows:
Deferred tax asset:
Net operating loss carry forward $ 3,443,603
Valuation allowance $( 3,443,603)
------------
Net deferred tax asset $ -0-
============
The Company recognized no income tax benefit for the loss generated
as of December 31, 1997.
SFAS No. 109 requires that a valuation allowance be provided if it is
more likely than not that some portion or all of a deferred tax asset will not
be realized. The Company's ability to realize benefit of its deferred tax asset
will depend on the generation of future taxable income. Because the Company has
yet to recognize significant revenue from the sale of its products, the Company
believes that a full valuation allowance should be provided.
NOTE 9 - COMMITMENTS AND CONTINGENCIES
a. Lease Agreement for Office Space
On May 1, 1996, the Company entered into a 20 month lease agreement
beginning May 1, 1996 and ending January 1, 1998 for office space at 7979 Old
Georgetown Road, Bethesda, Maryland 20814 for a rental of $2,000 per month.
As of December 31, 1998 the Company had paid an aggregate of $40,000
towards the rent with the issuance of 30,000 shares of common stock valued at
$40,000.
36
INTERNATIONAL MERCANTILE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
b. Litigation
As part of the sale of Washington, the Company transferred all of its
rights to litigation against Ventana to Washington.
On June 25, 1993, a Petition on Note was filed against the Company in
the Circuit of Cole County, Missouri, seeking damages ion the amount of $54,294
plus interest and attorney's fees, for default on numerous promissory notes. The
Petition alleged that there were promissory notes issued by the Company in favor
of Plaintiffs, Janet L. Mertz, Edwin H. Mertz, Glenn E. Mertz, Edna L. Mertz,
Danny W. Mertz and Valerie J. Mertz, which were due in February, 1993, and which
the Company had refused to pay. In June, 1994, the Plaintiffs Motion for Summary
Judgment was granted and Judgment was entered against the Company in the
aggregate amount of $70,820. As of December 31, 1997, the Judgment was not
satisfied and is still pending.
c. Net Branch Agreement
On February 24, 1997, UMI entered into a Net Branch agreement with
Diversity Financial Services, Inc. ("DFS") to establish a mortgage branch at
DFS's office in Mount Rainier, Maryland. UMI subleased the Mount Rainier office
from DFS. As of December 10, 1997, the Mount Rainier office was sold and the
agreement was terminated. As of December 31, 1997, UMI had an obligation to the
management of the Mount Rainier office of $49,000.
d. Group Compensation Plan
On August 6, 1997, the Company filed a registration statement on Form
S-8 registering 800,000 shares of common stock to provide a means of non-cash
remuneration to consultants, and service providers who contribute to the
operating progress and earning power of the Company. The eligible participants
to this plan includes any consultant or service provider that is not an
employee.
As of December 31, 1997, the Company has issued 330,000 shares
pursuant to this plan. The Company has reserved 470,000 shares of common stock
pending the issuance of shares pursuant to this plan.
NOTE 10 - WAREHOUSE LOAN PAYABLE
On August 28, 1997, the UMI entered into Whole Loan Purchase and Sale
Agreement and a Warehouse Credit and Security Agreement with Lau Funding Plus,
Inc. ("LFP") whereby LFP has agreed to make loans to the UMI from time to time
to finance loans on single-family mortgage loans to a limit of $2,000,000. The
amounts advanced to finance loans are limited to typically 95% of the principal
amount of the loan. Interest is charged at LIBOR plus 4.75%.
The Warehouse Loan is collateralized by the underlying loans and is
personally guaranteed by M. Scott Hess, James Clare, Donald Wolpe and Jeffrey
Wolpe.
37
INTERNATIONAL MERCANTILE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
At December 31, 1997, the warehouse loan balance outstanding was
$654,805 with mortgages receivable of $687,500.
NOTE 11 - LOAN PAYABLE TO THE FIRST NATIONAL BANK OF MARYLAND
On January 22, 1997, the UMI entered into an agreement for an
unsecured line of credit with the First National Bank of Maryland aggregating
$200,000. The loan is payable in full or on demand with interest at 4.5% payable
monthly. The note is secured by moneys on deposit with the bank.
At December 31, 1997, the amount due is $200,000.
NOTE 12 - PRIVATE PLACEMENT
a. Sale of Units
The Company offered for sale to persons who qualified as "accredited
investors" as defined under Regulation D promulgated by the Securities and
Exchange Commission a minimum of 25 Units and a maximum of 75 Units of its
securities. 25 Units were offered on an all-or-none basis and the remaining 50
Units are being offered on a "best efforts basis". Each Unit consists of 10,000
shares of the Company's common stock. The Company is obligated to file a
registration statement within 90 days of the first closing of this offering.
As of December 31, 1997, the Company had sold 22 Units for an
aggregate consideration of $220,000. The offering was amended to reduce to
minimum offering to 20 Units enabling the Company to receive the proceeds of
$220,000 as of December 31, 1997.
NOTE 13 - SUPPLEMENTAL SCHEDULE OF NON CASH INVESTING AND FINANCING
ACTIVITIES
On May 4, 1995, the Company exchanged all of the common stock owned
by the Company in Universal Life Holding Company ("ULHC") for forgiveness of the
notes and other payables owed by the Company to ULHC. The Company had a gain on
the sale in the amount of $751,089.
On November 17, 1995, the Company sold its insurance subsidiary
Washington Security Life Insurance Company f/k/a Frontier Insurance Company
("Washington") by transferring all of its stock in Washington for full
satisfaction of a note owed to two former officers, cancellation of consulting
agreements, and cancellation of all intercompany receivables and payables. In
addition, the Company transferred its accrued rights to commissions due from the
former third party administrator and all of the obligations of Ventana
Corporation f/k/a C.J. Brown ("Ventana") held by the Company. The Company also
received a mortgage executed by one of the Company's consultants in the amount
of approximately $200,000. This amount was offset by a commission due the
consultant as part of the purchase of the Company. The Company assigned all
rights to Washington regarding litigation against Ventana and its officers. As a
result of this sale, the Company incurred a loss of $1,652,689.
38
INTERNATIONAL MERCANTILE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
As of December 31, 1997, the Company has issued an aggregate of
946,500 shares of common stock in consideration for $956,500 in consulting fees,
reimbursement for expenses paid by the officer's and Directors on behalf of the
Company, and in settlement of litigation.
As of December 31, 1997, the Company has issued an aggregate of
1,910,000 shares of common stock and recorded a Note Payable in the principle
amount of $300,000 in consideration for the acquisition of HAMC and UMI from CFC
and AB Securities, Inc.
NOTE 14 - SUBSEQUENT EVENTS
Subsequent to the date of the financial statements the Company had
appointed Mr. Roger Arnold as President of the Company.