<PAGE> 1
U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
[x] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
For the quarterly period ended June 30, 1998.
[ ] 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: 0-7693
INTERNATIONAL MERCANTILE CORPORATION
--------------------------------------------------------------------
(Exact name of small business issuer as specified in its charter)
MISSOURI 43-0970243
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(State or other jurisdiction (I.R.S. Employer
incorporation or organization) Identification No.)
7979 Old Georgetown Road, Bethesda MD
-------------------------------------------
(Address of principal executive offices)
301-654-1980
---------------------------
(Issuer's telephone number)
(Not Applicable)
--------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Check whether the issuer
(1) filed all reports required to be filed by Section 13 or 15(d) of the
Exchange Act during the past 12 months (or for such shorter period that the
registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.
Yes [ ] No [x]
State the number of shares outstanding of each of the issuer's classes of
common equity as of the latest practicable date:
3,976,282 Common Shares as of June 30, 1998
Transitional Small Business Disclosure Format Yes [ ] No [X]
<PAGE> 2
2
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
The condensed financial statements for the period ended June 30, 1998
included herein have been prepared by International Mercantile Corporation,
(the "Company") without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission (the "Commission"). In the opinion of
management, the statements include all adjustments necessary to present fairly
the financial position of the Company as of June 30, 1998, and the results of
operations and cash flows for the six month periods ended June 30, 1997 and
1998.
<PAGE> 3
3
INTERNATIONAL MERCANTILE CORPORATION
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
December 31, June 30,
1997 1998
Unaudited
--------- ------------
ASSETS
<S> <C> <C>
Current assets
Cash and cash equivalents $ 290,951 $ 146,747
Mortgages receivable 687,500 312,700
------- -------
Current assets 978,451 459,447
Capital assets-net 14,323 15,141
Other assets
Excess of purchase price over assets acquired 2,120,186 2,120,186
Notes receivable-affiliated parties 316,850 383,517
Securities-available for sale 367,000 367,000
Intangible assets 49,209 49,209
--------- ---------
Total other assets 2,853,245 2,919,912
--------- ---------
Total assets $3,846,019 $ 3,394,500
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued expenses $ 487,699 $ 544,649
Loan payable 606,494 527,494
Warehouse loan payable 654,805 297,065
Loan payable-related parties 180,263 180,263
Deferred income 32,695 15,635
Corporate income tax payable 12,495
------- ---------
Total current liabilities 1,974,451 1,565,106
Capital stock
Common stock-authorized 5,000,000
common shares, par value $1.00 each, at
December 31, 1997 the number of shares
outstanding was 3,177,583 and 3,976,282
respectively 3,177,583 3,976,282
Additional paid in capital 8,978,462 8,978,462
Retained earnings (9,470,294) (10,311,167)
---------- ----------
Total stockholders' equity 2,685,751 2,643,577
Less treasury stock (814,183) (814,183)
--------- ---------
Total stockholders equity 1,871,568 1,829,394
--------- ---------
Total liabilities and stockholders' equity $3,846,019 $ 3,394,500
========= ===========
</TABLE>
See accompanying notes to financial statements.
<PAGE> 4
4
INTERNATIONAL MERCANTILE CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
For the six For the six
months ended months ended
June 30, June 30,
1997 1998
Unaudited Unaudited
--------- ---------
<S> <C> <C>
Revenue $-0- $443,289
Mortgage related expenses -0- 253,706
--- -------
Gross profit -0- 189,583
Operations:
General and
administrative 400,000 1,026,526
Depreciation and
amortization -0- 1,682
---- ---------
Total expense 400,000 1,028,208
Income from operations (400,000) (838,625)
Corporate income taxes -0-
Other income
Interest income 2,385
Gain on sale of asset 250
Interest expense (4,883)
-------
Total other income and
expense -0- (2,248)
Net Profit (Loss) $(400,000) $ (840,873)
======== ==========
Net income (loss) per
share - basic $(3.96) $ (0.21)
======== =========
Number of shares
outstanding 101,083 3,976,282
======== ==========
Net income (loss) per
share - diluted $(3.96) $ (0.21)
=======
Number of shares
outstanding 101,083 3,976,282
======= =========
</TABLE>
See accompanying note to financial statements.
<PAGE> 5
5
INTERNATIONAL MERCANTILE CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
For the three For the three
months ended months ended
June 30, June 30,
1997 1998
Unaudited Unaudited
--------- ---------
<S> <C> <C>
Revenue $-0- $210,403
Mortgage related expenses -0- 117,053
--- -------
Gross profit -0- 93,350
Operations:
General and
administrative 200,000 760,229
Depreciation and
amortization -0- 841
----- -------
Total expense 200,000 761,070
Income from operations (200,000) (667,720)
Corporate income taxes -0-
Other income
Interest income 787
Gain on sale of asset 250
Interest expense (2,200)
-------
Total other income and
expense -0- (1,413)
Net Profit (Loss) $(200,000) $ (669,133)
======= ========
Net income (loss) per
share - basic $(1.98) $ (0.17)
======== =======
Number of shares
outstanding 101,083 3,976,282
======== ==========
Net income (loss) per
share - diluted $(1.98 $ (0.17)
======= ======
Number of shares
outstanding 101,083 3,976,282
======= =========
</TABLE>
See accompanying note to financial statements.
<PAGE> 6
6
INTERNATIONAL MERCANTILE CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
For the six For the six
months ended months ended
June 30, June 30,
1997 1998
Unaudited Unaudited
--------- ---------
<S> <C> <C>
Net income $(200,000) $(840,873)
Depreciation -0- 1,682
Gain on sale of asset
Non-cash transactions 378,699
Adjustments
Accounts payable and accrued expenses 200,000 56,950
Income taxes payable (12,495)
------- -------
TOTAL CASH FLOWS FROM OPERATIONS -0- (416,037)
CASH FLOWS FROM INVESTING ACTIVITIES
Mortgages receivable 374,800
Securities-available for sale
Capital assets (2,500)
Notes receivable (66,667)
------- ------
TOTAL CASH FLOWS FROM INVESTING ACTIVITIES -0- 305,633
CASH FLOWS FROM FINANCING ACTIVITIES
Sale of capital stock 420,000
Warehouse loan payable (357,740)
Loan payable ( 79,000)
Deferred income (17,060)
------- -------
TOTAL CASH FLOWS FROM FINANCING ACTIVITIES -0- ( 33,800)
NET INCREASE (DECREASE) IN CASH -0- (144,204)
CASH BALANCE BEGINNING OF PERIOD -0- 290,951
--- -------
CASH BALANCE END OF PERIOD $-0- $146,747
==== ========
</TABLE>
See accompanying notes to financial statements
<PAGE> 7
7
INTERNATIONAL MERCANTILE CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY
<TABLE>
<CAPTION>
Additional
Common Common paid in Treasury Retained
Date Stock Stock capital Stock Earnings Total
------ ----- ------ -------- -------- -------- -----
<S> <C> <C> <C> <C> <C> <C>
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
Unaudited
06-30-1998(4) 420,000 420,000 420,000
06-30-1998(5) 378,699 378,699 378,699
06-30-1998 Net loss (171,740) (171,740)
-------- ---------- ---------- --------- -------- ---------
06-30-1998 3,976,282 $3,976,282 $8,978,463 $(814,183) $(10,311,367) $1,829,183
========= ========== ========== ========== ========= =========
</TABLE>
(1) Reverse split of shares in a ration 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.
(5) Shares issued for consulting fees at a value of $1.00 per share.
See accompanying notes to financial statements.
<PAGE> 8
8
INTERNATIONAL MERCANTILE CORPORATION
NOTES TO FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 1998
1. BASIS OF PRESENTATION
The accompanying unaudited financial statements of International
Mercantile Corporation, (the "Company"), reflect all adjustments which are, in
the opinion of management, necessary to a fair statement of the results of the
interim periods presented. All such adjustments are of a normal recurring
nature. The financial statements should be read in conjunction with the notes
to financial statements contained in the Company's Annual Report on Form 10-K
for the year ended December 31, 1997.
2. NET INCOME 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 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:
<TABLE>
<CAPTION>
For the six months For the six months
months ended months ended
June 30, June 30,
1997 1998
------------- --------------
<S> <C> <C>
Total number common
shares outstanding 101,083(1) 3,976,282
======= =========
</TABLE>
(1) Pre split shares were 3,133,151
3. ACCOUNTING FOR INCOME TAXES
The Company follows Statement of Financial Accounting Standards ("SFAS")
No. 109, "Accounting for Income Taxes," which requires an asset and liability
approach of accounting for income taxes. Deferred tax assets and liabilities
are computed annually for differences between financial statement basis and tax
basis of assets, liabilities and available general business tax credit
carry-forwards. A valuation allowance is established when necessary to reduce
deferred tax assets to the amount expected to be realized.
<PAGE> 9
9
4. MARKETABLE SECURITIES
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 and June 30, 1998, 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, 1997:
<TABLE>
<CAPTION>
Estimated
Gross Gross Fair
Unrealized Unrealized Market
Cost Gains Losses Value
----- -------- --------- -----
<S> <C> <C> <C> <C>
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
======= ======= =======
</TABLE>
The following is a summary of cash, cash equivalents and available-for-sale
securities by balance sheet classification at June 30, 1998:
The following is a summary of cash, cash equivalents and available-for-sale
securities by balance sheet classification at June 30, 1998:
<TABLE>
<CAPTION>
Estimated
Gross Gross Fair
Unrealized Unrealized Market
Cost Gains Losses Value
<S> <C> <C> <C> <C>
Cash $ 146,747 $-0- $ -0- $ 146,747
------- ---- ------ -------
Total cash and cash
equivalents $ 146,747 $-0- $ -0- $ 146,747
Securities-available for
sale $ 580,000 $213,000 $ 367,000
-------- ------- -------
Total cash, cash
equivalents and
securities available
for sale $ 726,747 $213,000 $513,747
</TABLE>
<PAGE> 10
10
5. Commitments and Contingencies
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 six months ended June 30, 1998, the Company has accrued $60,000
in salary.
b. 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 six months ended June 30, 1998, the Company has accrued $60,000
in salary and paid an aggregate of $60,000 during the three months ended
June 30, 1998.
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". The term of this agreement is 10
years and is renewable. For the six months ended June 30, 1998, the Company has
accrued $60,000 and paid an aggregate of $130,000 during the three months ended
June 30, 1998.
<PAGE> 11
11
Item 2. Management's Discussion and Analysis or Plan of Operation
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
for the SIX months ended June 30, 1997 and 1998
------------------------------------------------
Except for the description of historical facts contained herein, this Form
10Q contains certain forward looking statements that involve risks and
uncertainties as detailed herein and from time to time in the Company's filings
with the Securities and Exchange Commission and elsewhere. Such statements are
based on management's current expectations and are subject to a number of
factors and uncertainties which could cause actual results to differ materially
from those described in the forward-looking statements. These factors include,
among others, the Company's fluctuations in sales and operating results, risks
associated with international operations and regulatory, competitive and
contractual risks and product development.
Results of operations for the three months ended June 30, 1998 as compared
to the three months ended June 30, 1997.
- --------------------------------------------------------------------------------
Revenues were $210,403 for the three months ended June 30, 1998 as compared
to $-0- for the three months ended June 30, 1997. Mortgages and related expenses
for the three months ended June 30, 1998, were $117,053 as compared to $0 for
the three months ended June 30, 1997 representing a cost of mortgages related
expenses of 0% for the three months ended June 30, 1997 as compared to 55.63%
for the three months ended June 30, 1998.
General and administrative costs for the three months ended June 30, 1998
were $761,070, an increase of 380.0% over expenses of $200,000 for the three
months ended June 30, 1997.
Results of operations for the three months ended June 30, 1997 as compared
to the three months ended June 30, 1996. -
- --------------------------------------------------------------------------------
Revenues were $-0- for the three months ended June 30, 1997 as compared to
$-0- for the three months ended June 30, 1996. Mortgages and related expenses
for the three months ended June 30, 1997, were $-0- as compared to $0 for the
three months ended June 30, 1996 representing a cost of mortgages related
expenses of 0% for the three months ended June 30, 1997 as compared to -0-% for
the three months ended June 30, 1996.
General and administrative costs for the three months ended June 30, 1997
were $200,000, an increase of 100.0% over expenses of $-0- for the three months
ended June 30, 1996.
Liquidity and capital resources as of the end of the six months ended June 30,
1998.
- --------------------------------------------------------------------------------
The Company's cash balance was $146,747 and working capital was a negative
$1,105,659 as at June 30, 1998.
The Company's primary short-term needs for capital, which are subject to
change, are for the search for acquisitions, operation of the Company's mortgage
business payment of the day to day operating expenses.
<PAGE> 12
Income tax: As of June 30, 1998, the Company has a tax loss carry-forward
of $10,311,167. 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.
The Company expects its capital requirements to increase over the next
several years as it continues to develop its mortgage business and seek new
mortgage company related acquisitions, increases sales and administration
infrastructure and embarks on developing in-house business 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 present
management can fund the continued capital requirements, the timing of regulatory
actions regarding the Company's potential acquisitions, the costs and timing of
expansion of sales, marketing activities, facilities expansion needs, and
competition in the mortgage business entered into.
The Company believes that its available cash and cash from management
contributions will be sufficient to satisfy its funding needs for the day to day
mortgage banking activities for at least the next 12 months. Thereafter, if cash
generated from any newly acquired or developed business 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.
<PAGE> 13
14
PART II
OTHER INFORMATION
Item 1. Legal Proceedings.
No legal proceedings were brought, are pending or are threatened during the
quarter.
Item 2. Changes in Securities
None.
Item 3. Defaults upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security-Holders
None.
<PAGE> 14
15
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934,
the registrant has caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
INTERNATIONAL MERCANTILE CORPORATION
(Registrant)
By: /s/ MAX APPLE
------------------
MAX APPLE
PRESIDENT
Dated: August 14, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from financial
statements for the six month period ended June 30, 1998 and is qualified in
its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1998
<CASH> 146,747
<SECURITIES> 367,000
<RECEIVABLES> 312,700
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 459,447
<PP&E> 142,084
<DEPRECIATION> 126,943
<TOTAL-ASSETS> 3,394,500
<CURRENT-LIABILITIES> 1,565,106
<BONDS> 0
0
0
<COMMON> 3,976,282
<OTHER-SE> (1,332,705)
<TOTAL-LIABILITY-AND-EQUITY> 3,300,934
<SALES> 443,289
<TOTAL-REVENUES> 443,289
<CGS> 253,706
<TOTAL-COSTS> 1,028,208
<OTHER-EXPENSES> (2,248)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,883
<INCOME-PRETAX> (840,873)
<INCOME-TAX> 0
<INCOME-CONTINUING> (840,873)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (840,873)
<EPS-PRIMARY> (0.21)
<EPS-DILUTED> (0.21)
</TABLE>
