Harvey J. Davis and Patricia A. Davis - Page 9

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               3.   Initial Stock                                                     
               In 1990, petitioners acquired two Arabian geldings, Pryncz             
          for $200 and Prince Hilal for $500.  Petitioners took Pryncz and            
          Prince Hilal to McDannald to be broken and trained.  Petitioner             
          believed that the geldings would become more valuable if                    
          McDannald broke and trained them.  Neither of the geldings was              
          ever shown.  Pryncz has a physical defect in his throat that                
          prevents him from being a successful show horse.  This defect was           
          discovered during training.                                                 
               Also in 1990, petitioners acquired from McDannald two                  
          Arabian mares, Brigitta La Brisa and Vendalita, each for $2,000.            
          Petitioners agreed to give McDannald the right to a foal from               
          Vendalita as part of her purchase price.  Petitioner believed the           
          value of the right to Vendalita’s first born foal was $3,000-               
               Petitioners intended to use Brigitta La Brisa as a broodmare           
          and to breed her to Rumadii in 1992.  Rumadii had already                   
          successfully sired Brigitta La Brisa’s filly, Vendalita.                    
               Brigitta La Brisa had produced a filly, Vendalita, in 1985,            
          and a colt, Mundo, in 1987.  Petitioners did not ask McDannald              
          whether Brigitta La Brisa had potential breeding problems before            
          they bought her, nor did McDannald mention any breeding problems            
          with the mare.  However, Brigitta La Brisa had substantial                  
          breeding problems after petitioners acquired her.  In 1993, 1995,           

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