INTERNATIONAL MERCANTILE CORP, 10-K, 1999-09-28

INTERNATIONAL MERCANTILE CORP
10-K, 1999-09-28
MORTGAGE BANKERS & LOAN CORRESPONDENTS

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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------

FORM 10-KSB
Annual Report Pursuant to Section 13 or 15 (d)
of the Securities Exchange Act of 1934

For the fiscal year ended December 31, 1998 Commission file number 0-7693
--------------------------------

INTERNATIONAL MERCANTILE CORPORATION
(Exact Name of Registrant as Specified in its Charter)

MISSOURI 1662 43-0970243
(State or other (Primary Standard Industrial (I.R.S. Employer
jurisdiction of Classification Code Number) Identification No.)
incorporation or
organization)

1625 KNECHT AVENUE
BALTIMORE, MARYLAND 21227
(Address of principal executive offices and zip code)

(410) 242-5000
(Name, address, including zip code, and telephone number,
including area code, of agent for service)

Securities Registered Pursuant to Section 12(g) of the Act:
Class A Common Stock, par value $0.01 per share

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter periods 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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405,
of Regulation S-B is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendments to
this Form 10-KSB. [ ]

Transitional Small Business Disclosure Format Yes No X

Registrant's total revenues for its most recent fiscal year......$1,339,856.

As of December 31, 1998, there were outstanding 3,323,615 shares of Class A
Common Stock, $0.01 par value, and 1,000,000 shares of Class B Common Stock,
$0.01 par value.

The Company's Class A Common Stock is traded on the Over the Counter (OTC)
Electronic Bulletin Board. The aggregate market value of the Company's Class A
Common Stock held by non-affiliates

<PAGE>

of Registrant was $2,605,615 on December 31, 1998 based upon the average bid and
asked price of the Registrant's Common Stock on that date.

INTERNATIONAL MERCANTILE CORPORATION

PART I

Item 1. Business.

International Mercantile Corporation, a Missouri corporation ("IMTL" or
the "Company"), was founded on March 10, 1971, for the purpose of acquiring
Frontier Insurance Company and Universal Life Holding Corporation. The Company
effected these acquisitions on August 31, 1973. The Company subsequently
acquired a controlling interest in Sterling Financial Corporation. Prior to
1997, the Company through various transactions which have previously been
reported, divested itself of its entire ownership in these entities.

In 1997, the Company acquired University Mortgage, Inc. , a diversified
financial services company, which offers a full spectrum of financial and asset
management services and products. The Company operates primarily on the East
Coast and provides residential mortgages and equity investment. The Company also
acquired Home American Mortgage Company, which as of December 1998 had no assets
or operations. The Company does not retain any servicing rights on loans it
originates.

University Mortgage, Inc.

University Mortgage, Inc.("UMI"), a Maryland corporation, was
incorporated in 1994 and operates as a licensed mortgage lender in Maryland,
Virginia, Washington, D.C., Delaware and Pennsylvania. UMI specializes in the
origination of high loan-to-value "Equity+Plus" consumer loans for homeowners.
These loans are primarily used for home improvements and/or debt consolidation
and are frequently eligible for HUD insurance under the FHA Title I program, or
are issued under an uninsured conventional Title I look-alike program. UMI is
also an approved correspondent of several investors to whom its sells its loans
on a non-recourse, servicing-released basis. UMI has originated more than 500 of
these loans and currently closes about 30 loans per month. The average loan
amount is approximately $42,000 and UMI's average fee for closing a loan is
approximately $3,230.

In an effort to become a leading consumer finance company in the
Mid-Atlantic states, UMI has chosen a low-risk expansion plan to develop
business from a loan origination network consisting of mortgage brokers,
financial planners and home-improvement dealers. UMI has also implemented
direct-mail and telemarketing campaigns targeting homeowners who it feels are
likely candidates for home

<PAGE>

improvement and debt consolidation financing. Finally, UMI is building a
wholesale network by fax broadcasting rate sheets and product information to
over 300 licensed mortgage brokers in the Mid-Atlantic region.

Securitization of Loans

In the normal course of its business, the Company will sell loans which
it has made to unrelated third party investors through the (i) sale of
individual loans; (ii) bulk sale of several loans; and (iii) securitization of
an entire portfolio of loans. Such sales may occur shortly after the
consummation of a loan out of its portfolio or after a portfolio of loans has
been built. In all instances, loans are sold to unrelated entities for a
premium, thereby generating income for the Company. The Company has not yet
completed a securitization transaction.

To advance solid growth, the Company's strategy includes continued
expansion through acquisitions of mortgage companies primarily through the use
of Class A Common Stock. The Company created by such acquisitions will promote
continual development of competitive, multi-faceted, cross-selling financial
services.

The Company has been 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.

Competition

The Company's competitors include regional mortgage brokers and
regional and national banks.

Marketing

The Company markets its products and services through various forms of
advertising and a direct sales force. The Company takes applications from
potential borrowers in person and telephonically. The loan request is then
processed and closed. The Company attempts to provide its home equity borrowers
with a loan approval and to close its home equity loans in a timely, competitive
manner.

Lending Policies and Practices

The Company endeavors at all times to keep its interest and other
charges competitive with the lending rates of other finance companies.

<PAGE>

Regulation

The consumer home equity lending business is highly regulated by both
federal and state laws. All consumer loans must meet the requirements of the
Federal Truth-In-Lending Act, the Real Estate Settlement Procedures Act and
Federal Reserve Regulations X, Z and B. In addition to the Federal laws, UMI is
licensed and regulated by the Department of Banking in the Commonwealth of
Pennsylvania, Maryland, Virginia and Washington, DC and maintains compliance
with the various federal and state laws through its in-house and outside counsel
which continually review documentation and procedures and monitor and apprise
the Company on various changes in the laws.

Union Express Mortgage

Union Express Mortgage Corporation ("UEMC") is a Florida based private
mortgage company. In October 1998, the Company entered into a Stock Purchase
Agreement (the "Agreement") with UEMC, Shahid Quraeshi and Richard J. Jump. Mr.
Quraeshi and Mr. Jump each have a 50% interest (or 500 shares) in UEMC and Mr.
Jump is the President. Pursuant to the terms of the Agreement, the Company
bought 100% of the outstanding common stock of UEMC (1000 shares) in exchange
for 400,000 shares of Class A Common Stock at a deemed price of 1.00 per share,
or a purchase price of $400,000. As of December 31, 1998, this transaction was
rescinded by the parties.

Promissory Note from Oxford International, Inc.

On December 2, 1998, the Company approved the issuance of 3,000,000
shares of Series 2 Preferred Stock, $0.10 par value, to Oxford International,
Inc. ("Oxford") in exchange for a note in the principal amount of $3,000,000,
bearing interest at 8% per annum (the "Note"). The Note was secured by certain
assets of Oxford. Oxford is owned by Greg Dutcher, a former Director of the
Company. As of December 31, 1998, this transaction was rescinded by the parties.

Employees

As of December 31, 1998, the Company had three employees, all of whom
were full time, and UMI had 15 full time employees.

Item 2. Properties.

UMI has entered into a sublease agreement with W-C Consultants for the
lease of approximately 1,322 feet of office and storage space for the premises
located at 5480 Wisconsin Avenue, Suite LL- 4, Chevy Chase, Maryland. On October
1, 1997, the lease agreement was extended until September 30, 2000 at a monthly
rental of $1,766. During 1998, the Company's principal executive offices were
located at this address.

Item 3. Legal Proceedings.

On June 25, 1993, a Petition on Note was filed against the

<PAGE>

Company in the Circuit of Cole County, Missouri, seeking damages in 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
Motin for Summary Judgment was granted and Judgment was entered against the
Company in the aggregate amount of $70,820. As of December 31, 1998, the
judgment was not satisfied and is still pending.

During 1998, two actions were filed against the Company in connection
with the alleged breach by the Company of certain acquisition agreements. During
1998, each of these actions was settled and were not outstanding as of December
31, 1998. In full settlement thereof, the Company transferred to the plaintiffs
an aggregate of 123,000 shares of Class A Common Stock. These shares were
restricted securities as defined in Rule 144 promulgated under the Act.

Item 4. Submission of Matters to a Vote of Security Holders.

(a) The Annual Meeting of Shareholders was held on
September 11, 1998.
(b) Election of Directors

Each of the following individuals was elected as a director at
the Annual Meeting:

For Withhold
--- --------
Frederic S. Richardson 2,323,000 0
M. Scott Hess 2,323,000 0
Max W. Apple 2,323,000 0
Walter DeRonde 2,323,000 0
Ed Hutya 2,323,000 0

(c) In addition to the election of directors, the following
matters were also voted on and approved at the Annual Meeting:

(i) A proposal to ratify a 31 to 1
reverse stock split effectuated in
1997.

Affirmative Votes - 2,323,000

Negative Votes - 0

Abstaining Votes - 0

(ii) A proposal to ratify Thomas P. Monahan,
CPA, as the Company's

<PAGE>

independent auditor.

Affirmative Votes - 2,323,000

Negative Votes - 0

Abstaining Votes - 0

(iii) A proposal to amend the Company's
Articles of Incorporation to allow
the number of the Company's
Directors to be set by the Bylaws.

Affirmative Votes - 2,323,000

Negative Votes - 0

Abstaining Votes - 0

(iv) A proposal to amend the Company's
Articles of Incorporation to reduce
the par value of its common stock
from $1.00 per share to $.01 per
share.

Affirmative Votes - 2,323,000

Negative Votes - 0

Abstaining Votes - 0

(v) A proposal to authorize an amendment
to the Company's Articles of
Incorporation to increase the number
of authorized shares of any class of
stock from 10,000,000 to 50,000,000
shares.

Affirmative Votes - 2,323,000

Negative Votes - 0

Abstaining Votes - 0

(vi) A proposal to amend the Company's
Articles of Incorporation to provide
for up to three classes of preferred
stock, with rights regarding voting,
par value, liquidation, conversion
and dividends to be set by the Board
of Directors and one new class "B"

<PAGE>

stock, having voting rights of 51
votes for each share, be created,
with the current class of common
stock being designated class "A".

Affirmative Votes - 2,323,000

Negative Votes - 0

Abstaining Votes - 0

PART II

Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters.

The Class A Common Stock is currently traded on the OTC Electronic
Bulletin Board under the symbol "IMTL." There is no established trading market
for the Class A Common Stock. The high and low bid prices on the OTC Electronic
Bulletin Board for the Class A Common Stock were as follows:

Fiscal Quarter High Low
- -------------- ---- ---

1997
First Quarter (through March 31, 1997) 27 1/8 3 7/8
Second Quarter (through June 30, 1997) 3 7/8 3 7/8
Third Quarter (through September 30, 1997) 21 21/64 13 17/32
Fourth Quarter (through December 31, 1997) 6 1/2 4

1998
First Quarter (through March 31, 1998) 4 1/8 1/2
Second Quarter (through June 30, 1998) 2 3/4 1
Third Quarter (through September 30, 1998) 2 1/16 13/16
Fourth Quarter (through December 31, 1998) 1 3/8 7/16

Such quotations reflect inter-dealer prices, without retail mark-up,
mark-down or commission and may not represent actual transactions.

On December 31, 1998, there were 2,481 record holders of the Class A
Common Stock.

The holders of the Common Stock are entitled to receive such dividends
as the Board of Directors of the Company may from time to time declare out of
funds legally available for payment of dividends. Through the date hereof, no
cash dividends have been declared on the Company's securities.

During the fourth quarter of 1997 and the first quarter of 1998, the
Company engaged in a private placement offering pursuant

<PAGE>

to Rule 506 of Regulation D of the Securities Act of 1933, as amended, to
accredited investors. The Company offered 75 Units, with 25 Units offered on an
"all-or-none" basis and the remaining 50 Units offered on a "best efforts"
basis. Each Unit consisted of 10,000 shares of the Company's Class A Common
Stock at $1.00 per share. The Offering was amended to reduce the minimum
offering to 20 Units. As of December 31, 1997, the Company sold 22 Units for
$220,000 and as of December 31, 1998, the Company sold 42 additional Units for
$420,000. The Company agreed to use its best efforts to register the Common
Stock for resale under the Act. As of the date hereof, the Company has not
registered the shares of Common Stock. In connection with the sale of the Units,
the Company paid a broker-dealer compensation of 10% of all Units sold, or an
aggregate of $66,000.

In October 1998, the Company commenced a private placement offering
pursuant to Rule 506 of Regulation D of the Securities Act of 1933, as amended.
The Company offered for sale on a "best efforts" basis a minimum of 4 Units and
a maximum of 80 Units at a unit price of $25,000. Each Unit consisted of 20,833
shares of Common Stock and 20,833 shares of Convertible Preferred Stock, which
are convertible into 20,833 shares of Common Stock. As of December 31, 1998, no
Units were sold.

Item 6. Management's Discussion and Analysis of
Financial Conditions and Results of
Operations.

Cautionary Statement Regarding Forward-Looking Statements

This Form 10-KSB contains certain forward-looking statements regarding,
among other things, the anticipated financial and operating results of the
Company. For this purpose, forward looking statements are any statements
contained herein that are not statements of historical fact and include, but are
not limited to, those preceded by or that include the words, "believes,"
"expects," "anticipates," or similar expressions. In connection with the "safe
harbor" provisions in the Private Securities Litigation Reform Act of 1995, the
Company is including this Cautionary Statement identifying important factors
that could cause the Company's actual results to differ materially from those
projected in forward looking statements made by, or on behalf of, the Company.
These factors, many of which are beyond the control of the Company, include the
Company's ability to (i) identify and capitalize on possible acquisition
opportunities, (ii) obtain suitable financing to support its operations, (iii)
manage its growth, (iv) achieve operating efficiencies associated with the
acquisitions of separate businesses, (v) integrate the operation of separate
businesses hereinafter acquired, and (vi) anticipate and adjust to fluctuations
in economic variables affecting the mortgage market. Although the Company
believes that the forward looking statements contained herein are reasonable, it
can give no

<PAGE>

assurance that the Company's expectations will be met. All forward looking
statements are expressly qualified in their entirety by this Cautionary
Statement.

Introduction

During 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 and has no assets or
liabilities. The Company carries HAMC in its financial statements for no value.

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 various
sources for mortgage funding and having acquired a warehouse line of credit
through UMI and an unsecured line of credit.

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 mortgages. 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 the Company has experienced
growth in recent years, there can be no assurance that, in the future, the
Company will sustain revenue growth or remain profitable on a quarterly or
annual basis

<PAGE>

or that its growth will be consistent. The Company's computer and other systems
will not be adversely affected by the year 2000.

The Company's independent auditor had included an explanatory paragraph
in his report on the Company's December 31, 1998, consolidated financial
statements discussing issues which raise substantial doubt about the Company's
ability to continue as a going concern. The Company believes that the funds
available at December 31, 1998 combined with the revenues to be generated during
fiscal year 1999, together with cash contributed by management, and the
potential capital to be raised from private placement activities and the ability
to reduce anticipated expenditures, if required, will provide for the Company to
continue as a going concern.

Results of Operations

For the Year Ended December 31, 1998 as Compared to the Year Ended December 31,
1997.

Revenues from any source were $-0- for the year ending December 31,
1997 and increased to $1,339,856 for the year ended December 31, 1998 as result
of the consolidated operations of University Mortgage, Inc. Costs processing
mortgages were $-0- for the year ending December 31, 1997 and increased to
$779,640 for the year ended December 31, 1998. Gross profit was $-0- for the
year ended December 31, 1997 and increased to $560,216 for the year ended
December 31, 1998.

General and administrative costs for the year ended December 31, 1998
were $2,351,893, an increase of $840,360 over expenses of $1,511,538 for the
year ended December 31, 1997. The increased costs were the result of the Company
incurring $482,706 in consulting fees, $779,640 in mortgage related expenses,
$524,187 in corporate administrative expenses, $584,308 in operating expenses
for mortgage support services, $15,000 in corporate office rent, $295,625 in
legal fees, and $410,000 in the recognition of a loss on the "keep well"
agreement with UMI.

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. The 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 for by the officers
and Directors on behalf of the Company and in settlement of litigation.

<PAGE>

The Company also accrued $360,000 in back salaries pursuant to various
employment agreements and has paid additional expenses of $205,038.

Liquidity and Capital Resources

As of the end of fiscal year, December 31, 1998.

At December 31, 1998, the Company has cash and cash equivalents of
approximately $205,022 and negative working capital of $131,831. Mortgages
receivables decreased $578,700 or 84.2% primarily as result of closing more
loans on a table funding basis instead of closing loans using the Company's
warehousing line as was the procedure for the year ended December 31, 1997.

The Company financed its operations through the sale of shares of Class
A Common Stock aggregating $420,000, a reduction in mortgages receivable
aggregating $578,700, and a reduction in notes receivable-related parties
aggregating $84,259.

The Company expended cash to purchase capital assets aggregating $745,
reducing the loans payable on the warehouse line payable, and a reduction in
loans payable-related parties aggregating $529,263.

As of December 31, 1999, UMI had become delinquent in payment of
payroll taxes (including penalties and interest) in the amount of $74,263.

Income tax: As of December 31, 1998, the Company had a tax loss
carry-forward of $11,265,312. 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, or other business 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

<PAGE>

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.

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 year 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.

Year 2000 Compliance

During 1998, the Company implemented a Year 2000 plan to minimize the
possibility of a serious interruption of its business operations. In 1998,
specifications were developed for new business systems to include compliance
with Year 2000 issues. Based upon the specifications, in 1998, the Company
significantly upgraded its business systems, including all computer hardware and
software used in business operations, including management, administration, and
financial systems. As of December 31, 1998, the Company believes that its
products are Year 2000 compliant.

The Company's Year 2000 program is designed to minimize the possibility
of serious Year 2000 interruption. Possible Year 2000 worst case scenarios
include the interruptions of significant parts of the Company's business as a
result of internal business system failure, or the failure of the business
systems of its suppliers, distributors or customers. Any such interruption may
have a material adverse impact on the future results of the Company.

Item 7. Consolidated Financial Statements.

Page
----

Report of Independent Auditors F-1

Consolidated Balance Sheets F-2

Consolidated Statements of Operations F-4

Consolidated Statement of Shareholders' Equity F-6

Consolidated Statements of Cash Flows F-8

Notes to Consolidated Financial Statements F-9

<PAGE>

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

I have audited the accompanying consolidated balance sheet of
International Mercantile Corporation as of December 31, 1997 and 1998 and the
related consolidated statements of operations, cash flows and shareholders'
equity for the year ended December 31, 1997 and 1998. 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, 1996. Those statements were audited by other auditors whose report
has been furnished to me, and my opinion, insofar as it relates to the amounts
included for financial statements as of December 31, 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 as of December 31, 1997 and 1998 and the related
consolidated statements of operations, cash flows and shareholders' equity for
the year ended December 31, 1997 and 1998 in conformity with generally accepted
accounting principles.

The accompanying consolidated financial statements have been prepared
assuming that International Mercantile Corporation 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 to continue as a going concern.

/s/ Thomas Monahan
- -------------------
Thomas P. Monahan, CPA
August 5, 1999
Paterson, New Jersey

F-1

<PAGE>

INTERNATIONAL MERCANTILE CORPORATION
CONSOLIDATED BALANCE SHEET

<TABLE>
<CAPTION>
December 31, December 31,
1997 1998
---- ----
<S> <C> <C>
Assets
Current assets

Cash and cash equivalents $ 290,951 $ 205,022

Mortgages receivable 687,500 108,800
---------- ---------
Current assets 978,451 313,822

Capital assets-net 14,323 6,328

Other assets

Excess of purchase price over assets acquired 1,120,186 1,120,186

Notes receivable-affiliated parties 316,850 232,591

Securities-available for sale 367,000 481,872

Security deposit 5,488

Intangible assets 49,209 32,241
---------- ----------
Total other assets 1,853,245 1,872,378
---------- ----------
Total assets $2,846,019 $2,192,528
=========== ==========

Liabilities and Stockholders' Equity

Current liabilities

Accounts payable and accrued expenses $ 487,699 $ 4,397

Payroll taxes 74,263

Notes payable 57,494 57,494

Loan payable-related parties 529,263

Warehouse loan payable 654,805 103,360

Bank line of credit 200,000 200,700

Deferred income 32,695 5,440

Corporate income tax payable 12,495
---------- ---------
Total current liabilities 1,974,451 445,653

Capital stock

Preferred stock- Series 1- authorized 10,000,000 shares, $0.10 par value each,
at December 31, 1998, the number of shares outstanding is -0-.
Preferred stock- Series 2 - authorized 2,000,000 shares, $0.10 par value each,
at December 31, 1998 the number of shares outstanding is -0-.
Preferred stock - Series 3, authorized 5,000,000, $0.10 par value each. At
December 3, 1998, the number of shares outstanding is -0- .
Common stock-Class A-authorized 31,000,000 common shares, par value $0.01
each, at December 31, 1998, the number of shares outstanding was
2,177,583 and 3,323,615 respectively. 21,776 33,236
</TABLE>

See accompanying notes to financial statements.

F-2

<PAGE>

<TABLE>
<S> <C> <C>
Common stock - Class B - authorized 2,000,000, $0.01 par value each, the
number of shares outstanding at December 31, 1998 is 1,000,000. 10,000

Additional paid in capital 11,134,270 13,783,133

Retained earnings (9,470,294) (11,265,312)
---------- ------------

Total stockholders' equity 2,685,751 2,561,058

Less treasury stock (814,183) (814,183)
----------- ------------

Total stockholders equity 871,568 1,746,875
----------- ------------

Total liabilities and stockholders' equity $2,846,019 $2,192,528
=========== ============
</TABLE>

See accompanying notes to financial statements.

F-3

<PAGE>

INTERNATIONAL MERCANTILE CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS

<TABLE>
<CAPTION>
For the year For the year For the year
ended ended ended
December 31, December 31, December 31,
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Revenue $ -0- $ -0- $ 1,339,856

Mortgage related expenses -0- -0- 779,640
------------ ---------- ---------
Gross profit -0- -0- 560,216

Operations:

General and administrative -0- 1,511,538 2,351,893

Depreciation and amortization -0- 8,739
------------ ---------- ---------
Total expense -0- 1,511,538 2,360,632

Income from operations (1,511,538) (1,800,416)

Corporate income taxes -0-

Other income

Interest income 45,062

Gain on sale of asset 250

Interest expense (39,913)

Total other income and expense -0- 5,399

Net Profit (Loss) $ -0- $ (1,511,538) $ (1,795,017)
=========== ============ ============

Net income (loss) per share - basic $ -0- $ (0.53) $(0.43)
=========== ============ ============

Number of shares outstanding 101,083 2,877,583 4,191,282
=========== ============ ============
</TABLE>

See accompanying notes to financial statements

F-4

<PAGE>

INTERNATIONAL MERCANTILE CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS

<TABLE>
<CAPTION>
For the three For the three For the three
months ended months ended months ended
December 31, September 30, September 30,
1996 1997 1998
Unaudited Unaudited Unaudited
--------- --------- ---------
<S> <C> <C> <C>
Revenue $ -0- $ -0- $ 590,519

Mortgage related expenses -0- -0- 298,527
--------- --------- ----------
Gross profit -0- -0- 291,992

Operations:

General and administrative -0- 427,038 976,955

Depreciation and amortization -0- -0- 6,256
--------- --------- ----------

Total expense -0- 427,038 983,211

Income from operations (427,038) (691,219)

Corporate income taxes

Other income

Interest income 41,861

Interest expense -0- (31,556)

Total other income and expense 10,305

Net Profit (Loss) $ -0- (427,038) $(680,914)
========= ========= ==========
Net income (loss) per share - basic $ -0- $ (0.15) $ (0.16)
========= ========= ==========
Number of shares outstanding 101,083 2,877,583 4,191,282
========= ========= ==========
</TABLE>

See accompanying notes to financial statements.

F-5
<PAGE>

INTERNATIONAL MERCANTILE CORPORATION
CONSOLIDATED STATEMENT OF SHAREHOLDERS EQUITY

<TABLE>
<CAPTION>
Preferred Preferred Preferred Class A Class A Class B Class B
Stock Stock Stock Common Common Common Common
Date Series 1 Series 2 Series 3 Stock Stock Stock Stock
- ---- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
12-31-1995 3,133,151 $3,133,151

Net loss
--------- ----------
12-31-1996 3,133,151 3,133,151

Reflects 31 to 1 reverse 101,083 1,011
split

Shares issued for 946,500 9,465
consulting fees

Shares issued for 1,910,000 19,100
acquisitions

Sale of shares through 220,000 2,200
private placement at $1.00
per share

Prior period correction- (1,000,000) (10,000)
Cancellation of shares

Net loss
--------- ----------
December 31, 1997 2,177,583 21,776

Sale of shares 420,000 4,200

Issuance of shares as non 1,093,699 10,937
cash compensation

Issuance of shares for 125,000 1,250
legal expenses

Issuance of shares Pursant 507,333 5,073
to S-8 options valued at
$1.74

Exchange of shares (1,000,000) (10,000) 1,000,000 10,000

Net loss
--------- ---------- ---------- ---------
December 31, 1998 -0- -0- -0- 3,323,615 $ 33,236 1,000,000 $ 10,000
====== ====== ====== ========== ======== ========== =========
</TABLE>

See accompanying notes to financial statements.

F-6
<PAGE>

<TABLE>
<CAPTION>
Additional
paid in Treasury Retained
Date capital Stock Earnings Total
- ---- ------- ----- -------- -----
<S> <C> <C> <C> <C>
12-31-1995 $5,326,395 $(814,183) $(7,958,757) $(313,395)

Net loss -0- -0-
---------- --------- ----------- ---------
12-31-1996 5,326,395 $(814,183) $(7,958,757) $(313,395)

Reflects 31 to 1 reverse 8,458,535 (814,183) (7,958,757) (313,395)
split

Shares issued for 947,035 956,500
consulting fees

Shares issued for 2,500,900 2,520,000
acquisitions

Sale of shares through 217,800 220,000
private placement at $1.00
per share

Prior period correction- (990,000) (1,000,000)
Cancellation of shares

Net loss (1,511,538) (1,511,546)
----------- -----------
December 31, 1997 11,134,270 (814,183) (9,470,295) 871,568

Sale of shares 415,800 420,000

Issuance of shares as non 1,100,762 1,111,699
cash compensation

Issuance of shares for 254,375 255,625
legal expenses

Issuance of shares Pursant 877,927 883,000
to S-8 options valued at
$1.74

Exchange of shares -0-

Net loss (1,795,017) (1,795,017)
------------ ---------- ------------- -----------
December 31, 1998 $13,783,134 $(814,183) $(11,265,312) $1,746,875
============ ========== ============= ===========
</TABLE>

See accompanying notes to financial statements

F-7
<PAGE>

INTERNATIONAL MERCANTILE CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS

<TABLE>
<CAPTION>
For the year For the year For the year
ended ended ended
December 31, December 31, December 31,
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES

Net income $ -0- $ (1,511,537) $ (1,795,017)

Depreciation 8,739

Non cash compensation 956,500 2,250,324

Non cash items 399,814

Adjustments

Accounts payable and accrued expenses 412,061 (483,302)

Payroll taxes 74,263

Corporate income taxes payable 12,495 (12,495)
----------- ----------
TOTAL CASH FLOWS FROM OPERATIONS -0- 269,333 42,512

CASH FLOWS FROM INVESTING ACTIVITIES

Mortgages receivable (687,500) 578,700

Capital assets (14,323) (745)

Notes receivable-related parties (316,850) 84,259

Securities available for sale (367,000) (114,872)

Security deposit (5,488)

Intangible asset (49,209) 16,968
----------
TOTAL CASH FLOWS FROM INVESTING ACTIVITIES -0- (1,434,882) 558,822

CASH FLOWS FROM FINANCING ACTIVITIES

Sale of capital stock 220,000 420,000

Warehouse loan payable 654,805 (551,445)

Additional paid in capital

Loan payable- related parties 549,000 (529,263)

Line of credit

Deferred income 32,695 (27,255)
----------- ----------
TOTAL CASH FLOWS FROM FINANCING ACTIVITIES 1,456,500 (687,263)

NET INCREASE (DECREASE) IN CASH -0- 290,951 (85,929)

CASH BALANCE BEGINNING OF PERIOD -0- -0- 290,951
------ ----------- ----------
CASH BALANCE END OF PERIOD $ -0- $ 290,951 $ 205,022
====== =========== ==========
</TABLE>

See accompanying notes to financial statements

F-8

<PAGE>

INTERNATIONAL MERCANTILE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 and 1998

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.

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 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 at a value of $1.00 per share.

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.

F-9

<PAGE>

INTERNATIONAL MERCANTILE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 and 1998

The Company sold, pursuant to a private placement under "Rule 506" of the
Securities Act of 1933, as amended, an aggregate of 420,000 shares of common
stock at $1.00 per share for an aggregate consideration of $420,000.

The Company issued an aggregate of 1,113,699 shares of common stock in
consideration for $1,113,699 in consulting fees valued at $1.00 per share.

The Company issued to Filmore and Griffth, attorneys at law, an aggregate
of 125,000 shares in consideration for legal services valued at $255,625 or
$2.05 per share.

The Company issued an aggregate of 507,333 shares in consideration for
consulting services valued at $883,000 or $1.74 per share.

The Company received 1,000,000 shares of common stock from CFC for
cancellation reducing the number of shares of common stock issued to CFC for the
acquisitions in 1997. The Company had issued and aggregate of 1,910,000 shares
of common stock with a value in the aggregate of $2,520,000. The financial
statements as of December 31, 1997 and for the year ended December 31, 1997 have
been restated correcting the number of shares of common stock issued for the
various acquisitions to be an aggregate of 910,000 and reducing the value of the
stock issued to an aggregate of $1,520,000 or $1.65 per share.

The Company has approved the issuance of 1,000,000 shares of Class B
Common stock to Mr. Frederic Richardson in consideration for the cancellation of
1,000,000 shares of his Class A Common Stock.

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 $11,934,304 for the period from inception March 10, 1971 to December 31,
1998. 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 subsidiary, University Mortgage, Inc. , the Company will complete its
plans for

F-10

<PAGE>

INTERNATIONAL MERCANTILE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 and 1998

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, 1997 and 1998 and the related
consolidated statements of operations, stockholders equity and cash flows for
the years ended December 31, 1996, 1997 and 1998.

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 shares outstanding for the period.
Diluted EPS reflects the potential dilution of securities that could dilute the
shares in computing the earnings of the

F-11

<PAGE>

INTERNATIONAL MERCANTILE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 and 1998

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>
Year ended Year ended Year ended
December 31, December 31, December 31,
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Total number common
shares outstanding 101,083(1) 2,177,583(2) 3,323,615

Shares due ABS on "keep well"
provision of acquisition agreement 700,000

Shares reserved pursuant to Stock
option plan 800,000 167,667
------- --------- ---------
Total 101,083 2,877,583 4,191,282
======= ========= =========
</TABLE>

(1) Pre split shares were 3,133,151
(2) Restated reflecting 1,000,000 shares returned for cancellation in 1998.

e. Revenue recognition

Revenue is recognized when mortgages are closed.

f. 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

F-12

<PAGE>

INTERNATIONAL MERCANTILE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 and 1998

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.

g. Significant Concentration of Credit Risk

At December 31, 1997 and 1998, the Company has concentrated its credit
risk by maintaining deposits in several banks. The maximum loss that could have
resulted from this risk totaled $-0- and -0- which represents the excess of the
deposit liabilities reported by the banks over the amounts that would have been
covered by the federal insurance.

h. 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 and 1998 mortgage inventory has been sold.
Mortgage inventory secures the related warehouse lines of credit

i. 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.

j. Income Taxes

The Company utilizes the liability method of accounting for income taxes.
Under this method, deferred taxes arise from temporary differences between the
financial statement and tax bases of

F-13

<PAGE>

INTERNATIONAL MERCANTILE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 and 1998

assets and liabilities using enacted tax rates in effect in the years in which
the differences are expected to reverse. A valuation allowance is provided for
net deferred tax assets if, based on the weighted available evidence, it is more
likely than not that some or all of the deferred tax assets will not be
realized. Tax credits are recognized when realized using the flow through method
of accounting.

k. Recent Accounting Standards

Accounting for Derivative Instruments and Hedging Activities Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" (SFAS 133) was issued in June 1998. It is effective for
all fiscal years beginning after June 15, 1999. The new standard requires
companies to record derivatives on the balance sheet as assets or liabilities,
measured at fair value. Gains or losses resulting from changes in the values of
those derivatives would be accounted for depending on the use of the derivatives
and whether they qualify for hedge accounting. The key criterion for hedge
accounting is that the hedging relationship must be highly effective in
achieving offsetting changes in fair value or cash flows. The Company does not
currently engage in derivative trading or hedging activity.

The Company will adopt SFAS 133 in the fiscal year ending December 31,
2000, although no impact on operating results or financial position is expected.

Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use

In March of 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use". SOP 98-1 requires computer
software costs associated with internal use software to be charged to operations
as incurred until certain capitalization criteria are met. SOP 98-1 is effective
beginning January 1, 1999. The Company is currently assessing the impact that
adoption of this statement will have on consolidated financial position and
results of operations.

NOTE 3 - ACQUISITIONS

F-14

<PAGE>

INTERNATIONAL MERCANTILE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 and 1998

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 initially issued and aggregate of 1,910,000 shares of common stock with
a value in the aggregate of $2,520,000. In 1998, the Company received 1,000,000
shares of common stock from CFC for cancellation reducing the number of shares
of common stock issued to CFC for the acquisitions in 1997. The financial
statements as of December 31, 1997 and for the year ended December 31, 1997 have
been restated correcting the number of shares of common stock issued for the
various acquisitions to be an aggregate of 910,000 and reducing the value of the
stock issued to an aggregate of $1,520,000.

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
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.

The share issuance's 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.

F-15

<PAGE>

INTERNATIONAL MERCANTILE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 and 1998

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 AB Securities, Inc. ("ABS"),
175,000 shares of common stock valued at $385,000 or $2.20 per share to
representing one half of the market price of the Company on December 31, 1997 in
consideration of the risk of the holding period.

In December 31, 1997, the Company issued 135,000 shares of common stock
to 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.

As of December 31, 1998, FSR and ABS agreed to permit the offset of
approximately $280,000 plus accrued interest in moneys borrowed from the Company
by FSR with approximately $270,000 plus accrued interest aggregating $300,413 in
moneys due ABS at December 31, 1998 pursuant to this agreement. As of December
31, 1998, the note payable due ABS was canceled.

The number of shares of common stock issued to UMI was 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 if 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.

As of December 31, 1998, the Company has reserved approximately 700,000
shares of common stock pending resolution as the number of shares of common
stock payable under this provision.

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.

F-16

<PAGE>

INTERNATIONAL MERCANTILE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 and 1998

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 and 1998, HAMC had no assets or
liabilities. as of December 31, 1998, 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 - MARKETABLE SECURITIES, AVAILABLE FOR SALE

F-17

<PAGE>

INTERNATIONAL MERCANTILE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 and 1998

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,
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>

F-18

<PAGE>

INTERNATIONAL MERCANTILE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 and 1998

The following is a summary of cash, cash equivalents and available-for-sale
securities by balance sheet classification at December 31, 1998:

<TABLE>
<CAPTION>
Estimated
Gross Gross Fair
Unrealized Unrealized Market
Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>

Cash $ 205,022 $-0- $ -0- $ 205,022
------- ---- ------- ---------
Total cash and cash
equivalents $ 205,022 $-0- $ -0- $ 205,022

Securities-available for
sale $ 580,000 $98,128 $ 481,872
------- ------- ---------
Total cash, cash
equivalents and
securities available
for sale $ 785,022 $98,128 $ 686,894
======= ======= =========
</TABLE>

F-19

<PAGE>

INTERNATIONAL MERCANTILE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 and 1998

NOTE 6 - CAPITAL ASSETS

Capital Assets for the Company consisted of the following at December 31,
1997:

<TABLE>
<CAPTION>
Accumulated
Asset depreciation Balance
----- ------------ -------
<S> <C> <C> <C>
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
========== ========= =========
</TABLE>

Capital Assets for the Company consisted of the following at December 31,
1998:

<TABLE>
<CAPTION>
Accumulated
Asset depreciation Balance
----- ------------ -------
<S> <C> <C> <C>
Office equipment $ 99,793 $ 93,465 $ 6,328
Leasehold improvements 4,272 $ 4,272 $ -0-
Computer software 35,519 35,519 $ -0-
--------- ------------ -------
Total $ 139,584 $ 133,256 $ 6,328
========= ============ =======
</TABLE>

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.

CFC is the majority shareholder of the Company.

F-20

<PAGE>

INTERNATIONAL MERCANTILE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 and 1998

For the years ended December 31, 1997 and 1998, the Company issued 63,000
and 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 $63,000 and $60,000 respectively.

The Company has issued an aggregate of 200,000 shares of common stock,
valued at $2.50 per share to Ventana Consulting, Inc., a Michigan corporation in
consideration for an aggregate of $500,000 in financial consulting services.

During 1998, the Company issued 15,000 shares of common stock, valued at
$15,000 or $1.00 per nshare to Greg Dutcher, a former Director, in consideration
for rent expense incurred by the Company renting office space at his facility.

b. 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 and 1998, the Company has accrued
$120,000 and $-0- respectively in salary.

As of December 31, 1998, the balance due Mr. Deronde pursuant to this
agreement is $-0-.

c. 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.

F-21

<PAGE>

INTERNATIONAL MERCANTILE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 and 1998

For the year ended December 31, 1998, the Company has accrued $6,000 in
salary and paid an aggregate of $6,000 during the three months ended June 30,
1998.

As of December 31, 1998, the balance due Mr. Apple pusuant to this
agreement is $-0-.

d. 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 income from the financial
consulting agreement was assigned to FSR Group, Inc. ("FSR"). The term of this
agreement is 10 years and is renewable.

For the year ending December 31, 1997, the Company has accrued $120,000
to FSR.

For the year ended December 31, 1998, the Company has accrued $60,000 and
paid an aggregate of $130,000 for the year ended December 31, 1998 to FSR.

As of December 31, 1998, the balance due Mr. Richardson and FSR pursuant
to this agreement is $-0-.

e. 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 and 1998 was $0.08 per share.

f. Loans Payable- Affiliated Companies

F-22

<PAGE>

INTERNATIONAL MERCANTILE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 and 1998

UMI has Loans receivable - affiliated parties from W-C Consultants, Inc.
aggregating $231,992 at December 31, 1998.

g. Managerial Relationship

On January 1, 1997, 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 the Company. W-C's Chairman,
Donald E. Wolpe, (Jeffrey A. Wolpe's father) and W-C's President, James E.
Clare, represent the Company as branch managers. For the year ending December
31, 1998, W-C, Donald E. Wolpe and James Clare received an aggregate of
$140,894, which was charged to operations.

h. Officer's Compensation

For the year ended December 31, 1998, no officer received in excess of
$100,000.

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 and 1998, UMI's rent expense was
$21,483 and $21,290 respectively.

j. Change in Managerial Control

F-23

<PAGE>

INTERNATIONAL MERCANTILE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 and 1998

As of December 31, 1997, IMTL has acquired all of the issued and
outstanding capital stock of the Company. This acquisition enables IMTL to have
majority managerial and financial control in the decision making process of the
Company.

k. Net Branch Agreement

On December 1, 1998, UMI entered into a net branch agreement with Sean
Kieran Hagerty and Kerry Ann Hagerty collectively as branch managers of a
licensed branch of UMI in Severna Park, Maryland to originate, process and close
mortgage loans in jurisdictions that UMI is licensed to do business pursuant to
certain terms and conditions. The agreement may be terminated by either party
upon 90 days notice. The Branch manager will pay a monthly fee equal to 10% of
the "Gross revenue of all closed loans for the month" with a minimum fee of
$5,000 per month. During the initial months of operation December 1998 through
February, 1999, if revenue is insufficient to pay this fee, then it will accrue
until March, 1999, after which any unpaid portion will be paid along with the
monthly retainer in an amount equal to $250 per closed loan until paid. The
Company will maintain a lien against all net branch personal property and
financial assets as security for all moneys due the UMI.

As of December 31, 1998, the Severna park office had not begun
operations.

In addition, the UMI advanced Sean and Kerry Hagerty $10,000 as evidenced
by a note dated December 24, 1998 payable on demand with interest at 18%.

On January 1, 1999, UMI acting as a Subtenant entered into an "Office
Sublease Agreement" with Sean Hagerty as Sub landlord for office space located
at the Ritchie Court Office Building, 877 Baltimore Annapolis Boulevard, Severna
Park, Maryland 21146 for a monthly rent of $5,488.50 per month beginning March
1, 1999. The Office sublease is on a month to month basis and is subject to the
same terms and conditions as the Net Branch Agreement.

l. Change in Equity Ownership

F-24

<PAGE>

INTERNATIONAL MERCANTILE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 and 1998

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.

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.

m. 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.

NOTE 8 - CAPITAL STOCK

F-25

<PAGE>

INTERNATIONAL MERCANTILE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 and 1998

The Company has amended its certificate of incorporation to issue an
aggregate of 50,000,000 shares of stock as follows:

31,000,000 shares of Class A Common Stock, par value $0.01 per share.

2,000,000 shares of Class B Common Stock, $0.01 per share.

10,000,000 shares of Preferred Stock, Series 1, $0.10 per share.

2,000,000 shares of Preferred Stock, Series 2, $0.10 per share.

5,000,000 shares of Preferred Stock, Series 2, $0.10 per share.

Class A Common Stock.

The holders of shares of Class A Common Stock are entitled to 1 vote per
share and do not have cumulative voting rights on the election of directors.
Upon any liquidation, dissolution or winding up of the Company, holders of
shares of Class A Common Stock are entitled to receive pro rata all of the
assets of the Company available for distribution to holders of shares of the
Company's Class A Common Stock. Shareholders of the Company do not have any
preemptive rights to subscribe for or purchase any stock, obligations, warrants
or other securities of the Company.

Class B Common Stock

The holders of shares of Class B Common Stock are entitled to 51 votes
per share and do not have cumulative voting rights on the election of directors.
Upon any liquidation, dissolution or winding up of the Company, holders of
shares of Class B Common Stock are entitled to receive pro rata all of the
assets of the Company available for distribution to holders of shares of the
Company's

F-26

<PAGE>

INTERNATIONAL MERCANTILE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 and 1998

Class B Common Stock. Shareholders of the Company do not have any preemptive
rights to subscribe for or purchase any stock, obligations, warrants or other
securities of the Company.

Series 1 Convertible Preferred Stock

Each share of Series 1 Preferred Stock is convertible into one (1) share
of Class A Common Stock at any time for 3 years following issuance, at a price
of two dollars ($2.00) per share. The Series 1 Preferred Stock does not carry
any voting rights. In the event the Company declares a dividend, the Series 1
Preferred Stock has a dividend preference to that of the Class A Common Stock.

The Series 1 Preferred Stock is redeemable by the Company for $.10 per
share at any time after the first annual anniversary of issuance, if the average
closing bid price of the Class A Common Stock for 10 business days immediately
preceding the date of such redemption notice is at least 125% of the exercise
price of the Series 1 Preferred Stock. Following any such redemption notice, the
holder of the Series 1 Preferred Stock shall have the opportunity to convert the
Series 1 Preferred Stock for a period of 20 days following such notice.

The Company has approved the issuance of 1,000,000 shares of Class B
Common stock to Mr. Frederic Richardson in consideration for the cancellation of
1,000,000 shares of his Class A Common Stock.

The Company issued to Continent Finance Corporation one million shares of
Class "B" Common Stock in exchange for one million shares Class "A" Common Stock
which it previously held. Continent Finance Corporation is controlled by a trust
established for the family of Frederic Richardson, the Chairman of the Company.
The purpose of this exchange was to maintain voting control with management as
management enters into negotiations with other companies for mergers and
acquisitions utilizing

NOTE 8 - NOTE RECEIVABLE

As reported on Form 8-K filed with the Securities and Exchange Commission
on September 30, 1998, the Company has entered into agreements to purchase the
stock and assets of two companies:

F-27

<PAGE>

INTERNATIONAL MERCANTILE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 and 1998

In the first transaction, the Company issued 3,000,000 shares of Series
"2" Preferred Stock to Oxford International in exchange for $3,000,000 in
publicly traded securities. The Series "2" Preferred Stock bears a dividend of
6%, which dividend is payable in the Company's Class "A" Common Stock.
Subsequently, on December 2, 1998, The Company desires to loan the publicly
traded but restricted securities back to Oxford International and received a
Promissory Note in the principal amount of $3,000,000, bearing interest at the
rate of 8% per annum, due in full December 15, 1999.

As of December 31, 1998, the Company has in Company escrow the 3,000,000
shares of Series "2" Preferred Stock pending the completion of a due diligence
by the Company's management as to the value and marketability of the securities
underlying the transaction. Subsequent to the date of the balance sheet, the
Company completed its due diligence and has decided to rescind the transaction
and return the shares of Series "2" Preferred stock to the treasury.

In the second transaction, the Company has entered into a letter of intent
with Union Express Mortgage Corporation ("Union Express") whereby the Company
would acquire 100% of the outstanding stock of Union Express in exchange for
400,000 shares of Class "A" Common Stock. As of December 31, 1998, this
transaction as originally contemplated has been terminated.

NOTE 9 - 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, 1998, 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, 1998, the Company has net operating loss carry forwards
for income tax purposes of $11,934,304. This carryforward is available to offset
future taxable income, if any, and

F-28

<PAGE>

INTERNATIONAL MERCANTILE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 and 1998

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, 1998 are
as follows:

Deferred tax asset:

<TABLE>
<S> <C>
Net operating loss carry forward $ 4,057,663
Valuation allowance $ (4,057.663)
------------
Net deferred tax asset $ -0-
============
</TABLE>

The Company recognized no income tax benefit for the loss generated as of
December 31, 1998.

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 10 - 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.

F-29

<PAGE>

INTERNATIONAL MERCANTILE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 and 1998

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.

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 on 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 and December 31, 1998, 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 noncash
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.

F-30

<PAGE>

INTERNATIONAL MERCANTILE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 and 1998

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.

e. Payroll taxes

For the year ending December 31, 1998, UMI is behind it is payment of
payroll taxes. The aggregate balance due at December 31, 1998 is $74,263
including penalties and interest.

f. Financial Consulting Agreement with Ventana Consultants, Ltd.

On October 31, 1998, the Company entered into a financial consulting
agreement with Ventana Consultants, Ltd.("Ventana") to render services in the
areas of investment banking, finance and general business analysis. In
consideration for these services, the Company will pay 60,000 shares of common
stock issued pursuant to S-8 and pay an aggregate of 60,000 shares of common
stock at the rate of 20,000 shares per month. Ventana also agrees to aid the
Company in the preparation and filing of an application for listing on the
NASDAQ.

As of December 31, 1998, the Company has issued to Venetian and aggregate
of 260,000 shares of common stock, pursuant to S-8, with an aggregate
consideration of $260,000 .

g. Financial Consulting Agreement with E&E Company

On January 1, 1998, the Company entered into a financial consulting
agreement with E&E Company for financial consulting services. In consideration
for these services, the Company agrees to pay a quarterly fee equal to a number
of free trading shares of common stock aggregating $60,000 in value each quater.

For the year ending December 31, 1998, the Company has paid an aggregate
of 30,000 shares of common stock aggregating $$31,250 in financial consulting
services.

F-31

<PAGE>

INTERNATIONAL MERCANTILE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 and 1998

h. Stock Option Plan

On August 6, 1996, the Company adopted a Compensation Plan ( the "Plan")
which is intended to promote the best interest of the Company, and its
stockholders by providing a means of non-cash remuneration to consultants, and
services providers who contribute to the operating progress and earning power of
the Company. The Company has reserved 800,000 shares of common stock pursuant to
this plan.

For the year ended December 31, 1998, the Company has issued 632,333
shares of common stock. The Company has reserved 167,667 shares for issuance
pursuant to the Plan.

NOTE 11 - WAREHOUSE LOAN PAYABLE

On August 28, 1997, 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 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.

At December 31, 1998, the warehouse loan balance outstanding was $103,360
with mortgages receivable of $128,168.

At December 31, 1998, the loans comprising the warehousing balance are
past the agreed upon term under which they may be held on the warehousing line
of credit. The loans are current as to their payment terms and conditions.

NOTE 12 - LOAN PAYABLE TO THE FIRST NATIONAL BANK OF MARYLAND

F-32

<PAGE>

INTERNATIONAL MERCANTILE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 and 1998

On January 22, 1997, 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, 1998, the amount due is $200,700.

NOTE 13 - 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, and December 31, 1998 , the Company had sold 22
Units and 42 Units or 220,000 and 420,000 shares of common stock respectively
for an aggregate consideration of $220,000 and $420,000 respectively. 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.

As of December 31, 1998, the Company has not registered the shares of
common stock underlying the Units.

b. Private Placement

The Company is offering for sale a minimum of 4 Units and a maximum of 80
Units of its securities. Each Unit (the "Unit") is being sold at $25,000 per
Unit and consists of 20,833 shares of

F-33

<PAGE>

INTERNATIONAL MERCANTILE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 and 1998

common stock and 20,833 shares of convertible preferred stock, which are
convertible into 20,833 shares of common stock. The units are being offered on a
"best- efforts" basis. The minimum amount of securities offered will be four (4)
units. The units must be purchased for investment purposes only and the free
transferability of the securities is restricted. The shares of preferred stock
is convertible at any time for three years following issuance at a price of
$2.00 per share. The shares of preferred stock is redeemable by the Company for
$0.10 per share at any time after the first annual anniversary of issuance if
the average closing bid price of the shares of common stock for the 10 business
days immediately preceding the date of such redemption notice is at least 125%
of the exercise price of the shares of preferred stock (i.e. $2.50 per share).
following any such redemption notice, the holders of the shares of preferred
stock will have the opportunity to convert the shares of preferred stock for a
period of 20 days following such notice.

As of December 31, 1998, no shares have been sold.

NOTE 14 - SUPPLEMENTAL SCHEDULE OF NON CASH INVESTING AND FINANCING
ACTIVITIES

NOTE 15 - SUBSEQUENT EVENTS

Change in Management

F-34

<PAGE>

INTERNATIONAL MERCANTILE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 and 1998

Subsequent to the date of the financial statements the Company had
appointed Scott Hess as President of the Company and President of UMI.

F-35

<PAGE>

Item 8. Changes In and Disagreements with Accountants
on Accounting and Financial Disclosure.

On July 14, 1998, the Company's independent auditors, Weinberg and
Company, resigned and Thomas Monahan, CPA, was engaged as the Company's new
independent auditor for the fiscal year ended December 31, 1998. The hiring of
Thomas Monahan was approved by the board of directors. Except as indicated in
the next paragraph, the principal accountant's report on the financial
statements for the past two years did not contain any adverse opinion or
disclaimer of opinion and was not modified as to uncertainty, audit scope, or
accounting principles.

The consolidated financial statements for the fiscal years ended
December 31, 1997 and December 31, 1998 were prepared assuming that the Company
will continue as a going concern. As more fully described in Note 2 to such
financial statements, 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 Item 6 of this Form
10-KSB. 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 the Company to continue as a going concern.

There were no disagreements on any matter of accounting principles or
practices, financial statement disclosure, or auditing scope or procedure or
other reportable events involving the Company and its former auditors.

PART III

Item 9. Directors and Executive Officers of the Registrant;
Compliance with Section 16(a) of the Exchange Act.

MANAGEMENT

Directors and Executive Officers

The Directors and executive officers of the Company as of December 31,
1998, together with their ages and business backgrounds are as follows.

Name Age Position(s) Held
- ---- --- ----------------

Frederic S. Richardson 39 Chairman of the
Board of Directors,
Chief Financial
Officer

<PAGE>

M. Scott Hess 36 Chief Executive
Officer, President,
Director

Max W. Apple 60 Secretary, Director

Walter DeRonde 50 Chief Operating
Officer, Treasurer,
Vice President,
Director

Edward A. Hutya 57 Vice President,
Director

Each director and executive officer of the Company holds office during
the term for which they are elected and qualify. There are no family
relationships among or between such directors and executive officers.

Frederic S. Richardson has been the Chairman of the Board of Directors
and Chief Financial Officer of the Company since September 1998. Mr Richardson
has extensive experience in insurance, mortgage and financial services. He is
familiar with every facet of investment banking and specializes in structuring
transactions for private and public entities, raising large amounts of capital,
and identifying acquisition targets. Since 1994, Mr. Richardson has been the
President of Maccabean Industries, Inc., a consulting firm specializing in
raising capital for companies in the financial services industry and real estate
market. Prior to that he was the President of First Security Merchant, a
subsidiary of Corporate Life Insurance Company ("CLIC"), of which Mr. Richardson
was a principal. Mr. Richardson raised $10 million to purchase CLIC and became
one of the youngest persons in the country to purchase a life insurance company.
As an associate for Protectogon, Inc., Mr. Richardson acted as an intermediary
in the merger and acquisition of life and property casualty insurance companies.
He was also the Managing Director of Pierce Investment Banking. Mr. Richardson
received a degree in Economics from the University of Maryland and a Masters in
Business Administration from American University.

Mr. Richardson was a director and officer of Corporate Life Insurance
Company ("CLIC"), a stock life insurance company, from 1991 until its
liquidation in February 1994. He was the controlling stockholder of the
corporate parent and controlling stockholder of CLIC. In June 1995, Linda L.
Kaiser, the Insurance Commissioner of Pennsylvania and CLIC's Statutory
Liquidator, filed a complaint against Mr. Richardson (and others) alleging,
among other things, that he engaged in fraudulent and negligent conduct in his
operation of CLIC causing the company to lose millions of

<PAGE>

dollars and finally collapse. CLIC was liquidated and dissolved by the Insurance
Commissioner. In October 1997, Mr. Richardson entered into a Settlement
Agreement with the Insurance Commissioner pursuant to which he was released from
the lawsuit and from any further liability. Pursuant to the terms of the
Settlement Agreement, the policy limits of Mr. Richardson's insurance policy
were paid to the Statutory Liquidator. In addition, he agreed not to accept any
position of executive authority with any Pennsylvania domiciled insurance
company without the consent of the Commissioner and agreed not to accept any
position of executive authority with any other insurance company for a period of
ten years.

M. Scott Hess has been the President, Chief Executive Officer and
Director of the Company since September 1998. Mr. Hess is also the sole director
and president of UMI, a subsidiary of the Company. Since 1983, Mr. Hess has
operated as a merchant banking principal, acquiring, starting, capitalizing and
managing small to mid-size companies. His accomplishments include planning,
managing and financing high profile domestic and international projects with
aggregate values of over $750 million. Since 1995, Mr. Hess has been the
Chairman and CEO of AB Securities, Inc., a financial services holding company.
Mr. Hess also founded and capitalized Atlantic International Resources Corp., a
financial services holding company. Mr. Hess served as the President and CEO
from 1991-1995. He also founded and capitalized W.P. Consolidated, Inc., a
financial consulting and investment holding company and served as its CEO and
Chairman. Mr. Hess attended Auburn University before graduating magna cum laude
from and completing a Graduate Fellowship at the University of Maryland.

Max W. Apple has been the Secretary of the Company since 1995 and a
Director since 1991. Mr Apple is a former judge and currently a member of the
Indiana Bar. Mr. Apple attended the Indiana University Schools of Law as well as
the National College of the State Judiciary and Indiana Judicial College. He has
been involved in various business ventures which include owning Nunur
Corporation, a company which owned commercial and residential properties, being
a partner in French Lick Springs Golf and Tennis Resort, L.P., and being the
sole shareholder of The Paoli Corporation, a company specializing in the
manufacturing of wood products and operating lumber dry kilns.

Walt DeRonde has been the Chief Operating Officer, Chief Financial
Officer, Vice President, Treasurer and Director of the Company since 1997. Mr.
DeRonde, is involved with the housing manufacturing industry, has experience in
the financial services industry and operates out of Dallas, Texas.

Edward A. Hutya has been a Vice President and Director of the Company
since 1997. He is currently the president of the Center of Independent Living
and A consultant to Riverside Healthcare foundation, two not-for-profit
organizations. Mr. Hutya has many years of experience in the operations and
acquisitions of health

<PAGE>

care properties. During his tenure as president of several not-for-profit
corporations, Mr. Hutya directed corporate development for the acquisition of
housing and nursing facilities for the elderly and special populations. Mr.
Hutya also selected and hired management companies which operated nursing homes.
Prior to his involvement with not-for-profit organizations, Mr. Hutya
specialized in financing, including equipment, vehicles, real estate and
governmental leasing and financing. Mr. Hutya has a degree in economics from the
University of Connecticut and participated in graduate work in Urban Economics
at American University.

Officer and Director Resignations

In 1997, Gregory C. Dutcher resigned as a Director of the Company. In
September 1999, Walter DeRonde and Edward A. Hutya resigned as Directors and
officers of the Company. In September 1999, Mr. Hess resigned as President and
Chief Executive Officer of the Company.

Section 16(a) Beneficial Ownership Reporting Compliance

During the 1998 year, based solely upon the reports furnished to the
Company, none of the officers, directors, or beneficial owners of more than ten
percent of the equity securities of the Company filed any reports required under
Section 16(a) of the Securities Exchange Act of 1934.

Item 10. Executive Compensation.

Except as set forth below, no compensation, including bonuses and
deferred compensation, was paid during 1997 and 1998 by the Company to any of
its executive officers in excess of $100,000 (other than the Chief Executive
Officer). Members of the Board of Directors do not currently receive any cash
compensation for serving on the Board of Directors.

Summary Compensation Table

Name and Principal Position Fiscal year Annual Compensation
- --------------------------- ----------- -------------------
Salary Bonus
------ -----
M. Scott Hess, Chief 9/97-
Executive Officer, 12/97 $9,000 $0
President(1)
1/98-
12/98 $36,000 $0

Frederic S. Richardson,
Chief Financial Officer 1997(2) $48,000 $0
1998(2) $130,000 $0

<PAGE>

Max W. Apple,
Secretary 1997(3) $0 $0
1998(3) $180,000 $0

Walter DeRonde,
Chief Operating Officer 1997(4) $0 $0
1998(4) $120,000 $0

(1) M. Scott Hess receives $3,000 per month from University Mortgage,
Inc.

(2) Mr. Richardson has a consulting agreement with the Company pursuant
to which he is entitled to $10,000 per month. In 1997, he received 48,000 shares
of Class A Common Stock for reimbursement of expenses, and in 1998 he received a
cash payment of $130,000 on account of accrued compensation. The shares were
valued at $1.00 per share which was the fair market value thereof at the time of
issuance.

(3) During 1998, Mr. Apple received 180,000 shares of Class A Common
Stock in payment of all accrued salary and expenses due to him for 1997 and
1998. The shares were valued at $1.00 per share which was the fair market value
thereof at the time of issuance.

(4) During 1998, Mr. DeRonde received 120,000 shares of Class A Common
Stock in payment of all accrued salary and expenses due to him under his
employment agreement for 1997 and 1998. The shares were valued at $1.00 per
share which was the fair market value thereof at the time of issuance.

Executive Employment Agreements

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. The Agreement was assigned to FSR Group, Inc. ("FSR") a
company owned by Mr. Richardson in October 1997. Commencing January 1, 1999, the
agreement was reassigned by FSR to Mr. Richardson. For the year ending December
31, 1997, the Company has accrued $120,000 to FSR and issued 48,000 shares of
Class A Common Stock to him in payment of accrued expenses. For the year ended
December 31, 1998, the Company has accrued $60,000 and paid an aggregate of
$130,000 for the year ended December 31, 1998 to FSR. As of December 31, 1998,
the balance due Mr. Richardson and FSR pursuant to this agreement is $0.00.
During 1998, FSR borrowed from the Company the principal amount of $280,000. As
of December 31, 1998, the loan was satisfied by FSR assuming debt owed by the
Company to AB Securities, Inc.

On May 1, 1995, the Company entered into an employment agreement with
Max Apple for an annual salary of $120,000 per annum

<PAGE>

and reimbursement of all "out-of-pocket" expenses. For the year ending December
31, 1997, the Company accrued $120,000 in salary. For the year ended December
31, 1998, the Company has accrued $6,000 in salary and paid an aggregate of
$6,000 during the three months ended June 30, 1998. During 1998 the Company
issued to him 180,000 shares of Class A Common Stock in payment of all accrued
salary and expenses due under the agreement. As of December 31, 1998, no salary
is due to Mr. Apple pursuant to the agreement and the agreement has been
canceled.

On January 1, 1997, the Company entered into an employment agreement
with Walter DeRonde as 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 years ended
December 31, 1997, and December 31, 1998, the Company has accrued $120,000 and
$0.00 respectively in salary. During 1988, the Company issued to him 120,000
shares of Class A Common Stock in full payment of all amounts accrued under his
agreement. As of December 31, 1998, no salary is due to Mr. DeRonde pursuant to
the agreement and the agreement has been canceled.

Item 11. Security Ownership of Certain Beneficial
Owners and Management.

The following tables set forth information as to the number of shares
of stock of the Company beneficially owned as of December 31, 1998 by (i) each
person who is deemed to be a beneficial owner of more than 5% of the outstanding
shares; (ii) each director; (iii) each executive officer; and (iv) all directors
and executive officers as a group. A person is deemed to be a beneficial owner
of any securities of which that person has the right to acquire beneficial
ownership of such securities within sixty days.

Class A Common Stock

Number of shares of
Name and Address of Class A Common Stock Percent
Beneficial Owner (1) Beneficially Owned Of Class
- -------------------- ------------------ --------

Max W. Apple 180,000 5.4%
215 East Thornton Street
Paoli, Indiana 47454

Walter DeRonde 120,000 3.6%
475 Medina Drive
Highland Village, Texas 75067

M. Scott Hess (2) 310,000 9.3%
3B Compremise Street
Annapolis, Maryland 21401

<PAGE>

Edward Hutya 60,000 1.8%
3014 U.S. Highway
301 North No. 500
Tampa, Florida 53619

Frederic S. Richardson 48,000 1.4%
1801 Gold Mine Road
Brookerville, Maryland 21401

Continent Finance Corporation 200,000(3) 6.0%
1801 Gold Mine Road
Brookerville, Maryland 21401

Urban Agriculture Network 300,000 9.0%
1711 Lamont Street, N.W.
Washington, D.C. 20010

Vinny Pazienza 220,000 6.62%
Anchor Bay Club, Suite 720
300 Three Islands Blvd.
Hallandale, Florida 33009

All Officers and Directors
as a group (6 persons) 718,000 21.6%
- --------------------------------------------------------------------------------
(1) To the best knowledge of the Company, as of December 31, 1998, such holders
had the sole voting and investment power with respect to the voting securities
of the Company beneficially owned by them, unless otherwise indicated by
footnote.

(2) All of these shares are owned of record by AB Securities, Inc., a Maryland
corporation owned by Mr. Hess and of which he is President and Director. As of
December 31, 1998, the Company has reserved approximately 700,000 shares of
Class A Common Stock which may be issuable to ABS pursuant to the UMI
acquisition. Pending resolution of this issue, these shares have been excluded
from the above table and are not considered as issued and outstanding.

(3) Excludes 1,000,000 shares of Class B Common Stock which is identical to the
Class A Common Stock but carries 51 votes per share, and such shares have not
been considered issued and outstanding for purposes of this table. At the
September 1998 shareholder's meeting, Mr. Frederic Richardson received the
discretionary proxy to vote all of such shares of Class B Common Stock. Mr.
Richardson disclaims beneficial ownership of these shares.

<PAGE>

Class B Common Stock

Number of shares of
Name and Address of Class B Common Stock Percent
Beneficial Owner Beneficially Owned Of Class
- ---------------- ------------------ --------

Sarah Saul Simon Trust 1,000,000 100%
P.O. Box 340
Olney, Maryland 20832 (1)

- --------------------------------------------------------------------------------
(1) The beneficiaries of the Sarah Saul Simon Trust are Frederic Richardson's
children. The current trustees are Mr. Richardson's mother and sister-in-law. In
September 1998, the trust received 1,000,000 shares of Class B Common Stock in
consideration for the cancellation by Continent Finance Corporation of 1,000,000
shares of Class A Common Stock.

Item 12. Certain Relationships and Related Transactions.

Effective September 1998, the Sarah Saul Simon Trust became the
majority shareholder of the Company. The beneficiaries of the Sarah Saul Simon
Trust are Mr. Richardson's children. The current trustees are Mr. Richardson's
mother and sister-in-law. As of December 31, 1998, the trust owned 1,000,000
shares of Class B Common Stock. In September 1998, Continent Finance
Corporation, a corporation owned by the trust, and of which Mr. Richardson is a
Director and President, canceled 1,000,000 shares of Class A Common Stock and
the trust received 1,000,000 shares of Class B Common Stock. The Class B Common
Stock is identical to the Class A Common Stock except that the Class B Common
Stock has 51 votes per share.

On January 1, 1997, 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, 1998, W-C
received $140,894, which was charged to operations.

On July 1, 1996, UMI entered into a sublease 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 years 1997 and
1998, rent expense was $21,483 and $21,290.

During 1997, a series of transactions occurred pursuant to which UMI
and HAMC became wholly-owned subsidiaries of the Company.

<PAGE>

As a result of such transactions, the following shares of Class A Common Stock
were issued by the Company: 1,500,000 shares to CFC; 100,000 shares to UMI; and
310,000 shares to AB Securities, Inc. As part of the transaction, the Company
issued a note to AB Securities, Inc. in the principal amount of $300,000 bearing
interest at 10% per annum and due March 31, 1998. During 1998, CFC canceled
1,000,000 shares of the stock that had been issued to it, and the Company
reserved approximately 700,000 additional shares of Class A Common Stock which
appear to be due to AB Securities, Inc. under the agreement. As of December 31,
1998, these reserved shares are not considered issued and outstanding and have
not been reflected in the share amounts set forth in this Form 10-KSB.

The 910,000 shares which have been issued pursuant to the above
transactions as of December 31, 1999 were valued at $1.67 per share which was
the fair market value on the date of issuance. All of such shares constituted
restricted securities as defined in Rule 144 promulgated under the Act and were
issued pursuant to the exemption from registration set forth in Section 4(2) of
the Act.

During 1998, FSR, a company owned by Mr. Richardson, borrowed from the
Company the amount of $280,000. As of December 31, 1998, FSR assumed the
outstanding obligation due from the Company to ABS in full payment of the
obligation due from FSR to the Company. ABS consented to this arrangement.

During 1997, the Company issued to Mr. Richardson 48,000 shares of
Class A Common Stock in payment of out of pocket expenses incurred by him on
behalf of the Company. Such shares were valued at $1.00 which was the fair
market value on the date of issuance. All of such shares constituted restricted
securities as defined in Rule 144 promulgated under the Act and were issued to
him pursuant to the exemption from registration set forth in Section 4(2) of the
Act.

In September 1998, the Board of Directors approved the issuance to the
Sarah Saul Simon Trust of 1,000,000 shares of Class B Common Stock.

During 1997 and 1998, the Company issued 63,000 and 60,000 shares of
Class A Common Stock, respectively, to Ed Huyta, for reimbursement of expenses
paid by him on behalf of the Company. Such shares were valued at $1.00 per share
which was the fair market value on the date of issuance. All of such shares
constituted restricted securities as defined in Rule 144 promulgated under the
Act and were issued to him pursuant to the exemption from registration set forth
in Section 4(2) of the Act.

During 1997 and 1998, the Company issued an aggregate of 30,000 shares
of Common Stock to Gregory Dutcher, a former Director of the Company, in payment
of rental for the Company's former executive offices located at 7979 Old
Georgetown Road, Bethesda,

<PAGE>

Maryland. The lease expired on January 1, 1998, and was at a rental of $2,000
per month. Such shares were valued at an average of $1.33 per share which was
the fair market value on the date of issuance. All of such shares constituted
restricted securities as defined in Rule 144 promulgated under the Act and were
issued to him pursuant to the exemption from registration set forth in Section
4(2) of the Act.

During 1998, the Company issued the following shares of Class A Common
Stock to its officers in payment of all accrued salary or expenses due under
their respective employment agreements: Max Apple-180,000 shares; and Walter
DeRonde-120,000. These agreements were terminated effective December 31, 1998,
and no further payments are due under such agreements. Such shares were valued
at $1.00 per share which was the fair market value on the date of issuance. All
of such shares constituted restricted securities as defined in Rule 144
promulgated under the Act and were issued to him pursuant to the exemption from
registration set forth in Section 4(2) of the Act.

During 1998, the Company issued 60,000 shares of Class A Common Stock
to Edward Hutya, a Director, in exchange for a prior investment in the Company
made by him in 1995. Such shares were valued at $1.00 per share which was the
fair market value on the date of issuance. All of such shares constituted
restricted securities as defined in Rule 144 promulgated under the Act and were
issued to him pursuant to the exemption from registration set forth in Section
4(2) of the Act.

Item 13. Exhibits, Consolidated Financial Statement
Schedules and Reports on Form 8-K.

(a) Consolidated Financial Statements filed herewith at Item
7 hereof include balance sheets at December 31, 1998 and
1997 and statements of operations, stockholders equity,
and cash flows, for the years ended December 31, 1998 and
1997. All other schedules for which provision is made in
regulation S-B of the Commission are not required under
the related instruction or are not applicable and
therefore have been omitted.

(b) No reports on 8-K were filed by the Company during the final
quarter of 1998.

Exhibit No. Description
----------- -----------

3.1 Articles of Incorporation (incorporated by
reference to the Company's Report on Form
10-K for the year ended December 31, 1981)

<PAGE>

3.2 Articles of Amendment (incorporated by
reference to the Company's Report on Form
10-K for the year ended December 31, 1981)

** 3.3 Amendment of Article Three of the Articles
of Incorporation dated September 11, 1998

** 3.3.1 Amendment of Article Six of the Articles
of Incorporation dated September 11, 1998

3.4 By-laws (incorporated by reference to the
Company's Report on Form 10-K for the year
ended December 31, 1987)

10.1 International Mercantile Corporation Group
Compensation Plan dated November 4, 1997
(incorporated by reference from Exhibit
3.2 to Form S-8 filed November 9, 1998,
No. 333-66965)

** 27.1 Financial Data Schedule (Electronic Filing
Only)

**-Filed herewith

<PAGE>

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.

INTERNATIONAL MERCANTILE CORPORATION

By: /s/ Timothy Jewell
---------------------------------
Timothy Jewell, Chief Executive
Officer, President

Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.

Signatures Title Date
---------- ----- ----

<S> <C> <C>
/s/ Frederic S. Richardson
- ---------------------------- Chairman of the Board, September 24, 1999
Frederic S. Richardson Chief Financial Officer,
(Principal Accounting Officer)

/s/ M. Scott Hess
- ---------------------------- Director September 24, 1999
M. Scott Hess

/s/ Max W. Apple
- ---------------------------- Secretary, Director September 24, 1999
Max W. Apple

/s/ Timothy Jewell
- ---------------------------- President, Chief Executive
Timothy Jewell Officer, Director (Principal
Executive Officer) September 24, 1999
</TABLE>

<PAGE>

[STATE OF MISSOURI LOGO] STATE OF MISSOURI
REBECCA MCDOWELL COOK, SECRETARY OF STATE
P.O. BOX 778, JEFFERSON CITY, MO. 65102

CORPORATION DIVISION

AMENDMENT OF ARTICLES OF INCORPORATION
(To be submitted in duplicate)

Pursuant to the provisions of The General and Business Corporation Law of
Missouri, the undersigned Corporation certifies the following:

1. The present name of the Corporation is International Mercantile Corporation
--------------------------------------

- --------------------------------------------------------------------------------

2. An amendment to the Corporation's Articles of Incorporation was adopted by
the shareholders on September 11, 1998.
----------------------------------------

3. Article Number Three is amended to read as follows:

THREE

The aggregate number, class and par value of shares which the corporation shall
have authority to issue is as follows:

1. 31,000,000 shares Class "A" common, previously known as "common" stock, with
a par value of $.01 per share, previously $1.00 per share, with each share
entitled to one vote.

2. 2,000,000 shares Class "B" common, with a par value of $.01 per share, with
each share entitled to 51 votes.

3. 10,000,000 shares non-voting Series"1" preferred, $.10 par value, the terms
described on the enclosed Director's Certificate of Designation.

4. 2,000,000 shares non-voting Series "2" preferred, $.10 par value, the terms
described on the enclosed Directors Certificate of Designation.

5. 5,000,000 shares, non-voting Series "3" preferred, $.10 par value, with all
other terms to be set by the Board of Directors.

(If more than one article is to be amended or
more space is needed attach fly sheet.)

<PAGE>

4. Of the 3,976,282 shares outstanding, 2,323,000 such shares were entitled to
vote on such amendment.

The number of outstanding shares of any class entitled to vote thereon as a
class were as follows:

CLASS NUMBER OF OUTSTANDING SHARES

Common 3,976,282

5. The number of shares voted for and against the amendment was as follows:

CLASS NO. VOTED FOR NO. VOTED AGAINST

Common 2,323,000 -0-

6. If the amendment changed the number or par value of authorized shares having
a par value, the amount in dollars of authorized shares having a par value as
changed is:

Common stock par value reduced from $1.00 per share to $.01 per share, and
preferred par value set at $.10 per share. Number of aggregate shares
increased from 5,000,000 to 50,000,000

If the amendment changed the number of authorized shares without par value,
the authorized number of shares without par value as changed and the
consideration proposed to be received for such increased authorized shares
without par value as are to be presently issued are:

7. If the amendment provides for an exchange, reclassification, or cancellation
of issued shares, or a reduction of the number of authorized shares of any
class below the number of issued shares of that class, the following is a
statement of the manner in which such reduction shall be effected:

Former common reclassified as Class "A" common, and number of authorized
Class "A" common shares increased from 5,000,000 to 31,000,000 shares.

<PAGE>

IN WITNESS WHEREOF, the undersigned Frederic Richardson
--------------------------------------------
PRESIDENT OR
has executed this instrument and its
- ------------------------------------------
VICE PRESIDENT

Arthur E. Fillmore, II
- ---------------------------------------has affixed its corporate seal hereto and
SECRETARY OR ASSISTANT SECRETARY
attested said seal on the 11th day of September , 1998.
-------------------- ------------------ --

PLACE
CORPORATE SEAL
HERE
(If no seal, state "None")
International Merchantile Corporation
-------------------------------------
NAME OF CORPORATION

[ATTEST]

/s/ Arthur E. Fillmore, II By /s/ Frederic Richardson
- ------------------------------------ ---------------------------------------
SECRETARY OR ASSISTANT SECRETARY PRESIDENT OR VICE PRESIDENT

State of Missouri )
------------------------- )
)ss.
County of Jackson )
------------------------ )

Donna M.S. Gouge , a Notary Public, do hereby certify
- -------------------------------------------
that
this 11th day of September , 1998, personally appeared
------------------- ----------------------- --

before me Frederic Richardson and Arthur E. Fillmore, II who, being by me first
----------------------------------------------

duly sworn, appeared that they are the President and Assistant Secretary
------------------------------------------------------

- --------------------------------------------------------------------------------
they signed the foregoing documents as President & Assistant Secretary of the
----------------------------------

corporation, and that the statements therein contained are true.

(Notarial Seal) /s/ Donna M.S. Gouge
------------------------------------
DONNA M.S. GOUGE NOTARY PUBLIC
NOTARY PUBLIC-NOTARY SEAL
STATE OF MISSOURI My commission expires December 23, 1999
JACKSON COUNTY --------------
MY COMMISSION EXPIRES: December 23, 1999

<PAGE>
INTERNATIONAL MERCANTILE CORPORATION

DESIGNATION OF RIGHTS-SERIES 1 CONVERTIBLE PREFERRED STOCK

The Series 1 Convertible Preferred Stock shall have the following
preferences, qualifications, limitations, restrictions and the special or
relative rights in respect to the shares of all other classes of Preferred Stock
and Common Stock of International Mercantile Corporation (the "Corporation").

(1) Number of shares, class and par value. This designation of rights
creates Series 1 Convertible Preferred Stock ("Series 1 Preferred Stock"),
consisting of 10,000,000 shares having a par value of ten cents ($.10) per
shares and an aggregate par value of $1,000,000.

(2) Conversion rights. Each share of Series 1 Preferred Stock is
convertible at any time for three (3) years following issuance into one share of
Class A Common Stock, at a price of two dollars ($2.00) per share.

(3) Dividend preference. Each share of Series 1 Preferred Stock has
dividend rights identical to the Class A Common Stock in the event the
Corporation declares any dividends. There is no automatic accrual of dividends
on the Series 1 Preferred Stock.

(4) Redemption. Each share of Series 1 Preferred Stock is redeemable by
the Corporation for $.10 per share at any time after the first annual
anniversary of issuance if the average closing bid price of the Class A Common
Stock for ten (10) business days immediately preceding the date of such
redemption notice is at least 125% of the exercise price of the Series 1
Preferred Stock

<PAGE>

(i.e. $2.50 per share) upon written notice to the shareholders as described
herein (the "redemption notice"). Following any such redemption notice the
holders of the Series 1 Preferred Stock shall have the opportunity to convert
the Series 1 Preferred Stock for a period of twenty (20) days.

Any shares of the Series 1 Preferred Stock redeemed pursuant to this
section or otherwise acquired by the Corporation in any manner whatsoever shall
be permanently retired immediately on the acquisition thereof and shall not
under any circumstances be reissued. The Corporation shall from time to time
take such appropriate action as may be necessary to reduce the authorized number
of shares of Series 1 Preferred Stock accordingly.

If fewer than all of the issued and outstanding shares of Series 1
Preferred Stock are redeemed at any time, all shares of Series 1 Preferred
Stock to be redeemed shall be selected pro rata, and there shall be so redeemed
from each registered holder in whole shares, as nearly as practicable to the
nearest share, that proportion of all of the shares to be redeemed which the
number of shares held of record by such holder bears to the total number of
shares of Series 1 Preferred Stock at the time outstanding.

Notice of Redemption of Series 1 Preferred Stock, specifying the date
(the "Redemption Date") and place of redemption and the number of shares and the
certificate numbers thereof which are to be redeemed shall be mailed to each
holder of record of shares to be redeemed at its address as shown by records of
the Corporation not more than sixty (60) nor less than ten (10) days

<PAGE>

prior to the date on which such redemption is to be made.

Notice of Redemption having been so mailed and provision for payment of
the redemption price for such shares on the specified redemption date having
been made by the Corporation, then, unless default be made in the payment of the
redemption price for such shares when and as due, (i) on such Redemption Date
all rights of the respective holders of such shares, as shareholders of the
Corporation on a date designated by the Corporation's Board of Directors (the
"record date") by reason of the ownership of such shares, shall cease, except
the right to receive the redemption price of such shares upon presentation and
surrender of the respective certificates representing such shares; and (ii) such
shares shall not after such Redemption Date be deemed to be outstanding. In case
less than all the shares represented by any such certificate are redeemed, a new
certificate shall be issued representing the unredeemed shares without cost to
the holder thereof.

(5) Liquidation. The Series 1 Preferred Stock shall not be entitled to
any liquidation preference in the event of the voluntary or involuntary
liquidation, dissolution or winding up of the Corporation and the holders of the
Series 1 Preferred Stock shall not be entitled to any amount upon liquidation,
dissolution or winding up of the Corporation.

(6) Voting. The holders of the Series 1 Preferred Stock shall not be
entitled to any voting rights whatsoever on matters submitted to a vote of
shareholders of the corporation, so long as

<PAGE>

any shares of the Series 1 Preferred Stock shall be outstanding, except those
rights provided by the general corporation law of the State of Missouri.

The Corporation shall not, without the written consent of the holders
of one half of the aggregate number of shares of the Series 1 Preferred Stock at
the time outstanding; alter or change the powers, preferences or rights given to
the Series 1 Preferred Stock so as to affect the Series 1 Preferred Stock
adversely.

/s/ Arthur E. Fillmore, II
-------------------------------------
Arthur E. Fillmore, II
Assistant Secretary

<PAGE>

[STATE OF MISSOURI LOGO] STATE OF MISSOURI
REBECCA McDOWELL COOK, SECRETARY OF STATE
P.O. BOX 778, JEFFERSON CITY, MO 65102

CORPORATION DIVISION

AMENDMENT OF ARTICLES OF INCORPORATION

Pursuant to the provisions of The General and Business Corporation Law of
Missouri, the undersigned Corporation certifies the following:

1. The present name of the Corporation is International Mercantile Corporation
-------------------------------------

- --------------------------------------------------------------------------------

The name under which it was originally organized was

International Mercantile Corporation
- --------------------------------------------------------------------------------

- --------------------------------------------------------------------------------

2. An amendment to the Corporation's Articles of Incorporation was adopted by
the shareholders on September 11, 1998
-------------------------------------------------------- --

- --------------------------------------------------------------------------- --

3. Article Number Six is amended to read as follows:
---

Article Six

The number of directors to constitute the Board of Directors is five
(5), unless otherwise set by the Board of Directors, who shall be allowed to do
so without a further amendment to these Articles of Incorporation.

<PAGE>

4. Such shares were entitled to vote on such amendment. The number of
outstanding shares of any class entitled to vote thereon as a class were as
follows:

CLASS NUMBER OF OUTSTANDING SHARES
Common 3,976,282

5. The number of shares voted for and against the amendment was as follows:

CLASS NO. VOTED FOR NO. VOTED AGAINST
Common 2,323,000 -0-

6. If the amendment changed the number or par value of authorized shares having
a par value, the amount in dollars of authorized shares having a par value as
changed is:

7. If the amendment provides for an exchange, reclassification, or cancellation
of issued shares, or a reduction the number of authorized shares of any class
below the number of issued shares of that class, the following is a statement
of the manner in which such reduction shall be effected:

<PAGE>

IN WITNESS WHEREOF, the undersigned, Frederic Richardson
-------------------------------------------
President

has executed this instrument and its
- ----------------------------------------
Vice President

Arthur E. Fillmore, II has affixed its corporate seal hereto and
- --------------------------------
Secretary or Assistant Secretary

tested said seal on the 11th day of September, 1998.
-------------------------- ----------------- --

PLACE
CORPORATE SEAL
HERE
(If no seal, state "None.")

International Merchantile Corporation
---------------------------------------
Name of Corporation

TEST:

/s/ Arthur E. Fillmore, II By /s/ Frederic Richardson
- ------------------------------------- -------------------------------------
Secretary or Assistant Secretary President or Vice President

State of Missouri )
----------------------------- )
)ss.
County of Jackson )
---------------------------- )

Donna M. S. Gouge , a Notary Public, do hereby certify that
- ---------------------------------------

this 11th day of September, 1998, personally appeared before me
---------- ------------------ --

Frederic Richardson and Arthur E. Fillmore, II who, being by me first duly sworn
- ----------------------------------------------

and declared that they are the President and Assistant Secretary
--------------------------------------------------------------

- --------------------------------------------------------------------------------

they signed the foregoing documents as President and Assistant Secretary of the
---------------------------------

corporation, and that the statements therein contained are true.

(NOTARIAL SEAL) /s/ Donna M. S. Gouge
DONNA M.S. GOUGE --------------------------------------
NOTARY PUBLIC - NOTARY SEAL NOTARY PUBLIC
STATE OF MISSOURI
JACKSON COUNTY My commission expires December 23,1999
MY COMMISSION EXPIRES: DECEMBER 23, 1999 ----------------
-----------------

<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from
financial statements for the year ended December 31, 1998 and is qualified in
its entirety by reference to such financial statements.
</LEGEND>
<CIK> 0000051387
<NAME> International Mercantile Corporation
<MULTIPLIER> 1,000
<CURRENCY> US DOLLARS

<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<EXCHANGE-RATE> 1,000
<CASH> 205,022
<SECURITIES> 0
<RECEIVABLES> 108,800
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 313,822
<PP&E> 139,584
<DEPRECIATION> (133,256)
<TOTAL-ASSETS> 2,192,528
<CURRENT-LIABILITIES> 445,653
<BONDS> 0
0
1
<COMMON> 33,236
<OTHER-SE> (2,527,821)
<TOTAL-LIABILITY-AND-EQUITY> 1,746,875
<SALES> 1,339,856
<TOTAL-REVENUES> 1,339,856
<CGS> 779,640
<TOTAL-COSTS> 2,360,632
<OTHER-EXPENSES> 5,399
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 39,913
<INCOME-PRETAX> (1,800,416)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,800,416)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,795,017)
<EPS-BASIC> (.43)
<EPS-DILUTED> (.43)

</TABLE>