<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
SCHEDULE 14C INFORMATION
Information Statement Pursuant to Section 14(c) of the Securities Exchange Act
of 1934
CHECK THE APPROPRIATE BOX:
[X] Preliminary Information Statement
[ ] Confidential, for Use of the Commission Only (as permitted by
Rule 14c-5(d)(2))
[ ] Definitive Information Statement
INTERNATIONAL REALTY GROUP, INC.
(Name of Registrant As Specified In Charter)
PAYMENT OF FILING FEE (CHECK THE APPROPRIATE BOX):
[ ] $125 per Exchange Act Rules 0-11(c)(1)(ii), or 14c-5(g).
[ ] Fee computed on table below per Exchange Act Rules 14c-5(g) and
0-11
1) Title of each class of securities to which transaction applies:
2) Aggregate number of securities to which transaction applies:
3) Per unit price or other underlying value of transaction
computed pursuant to Exchange Act Rule 0-11 (Set forth in the
amount on which the filing fee is calculated and state how it
was determined):
4) Proposed maximum aggregate value of transaction:
5) Total fee paid:
[X] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by
Exchange Act Rule 0-11(a)(2) and identify the filing for which
the offsetting fee was paid previously. Identify the previous
filing by registration statement number, or the Form or Schedule
and the date of its filing.
1) Amount Previously Paid:
2) Form, Schedule or Registration Statement No.:
3) Filing Party:
4) Date Filed:
<PAGE> 2
INTERNATIONAL REALTY GROUP, INC.
111 NORTHWEST 183RD STREET
SUITE 350
MIAMI, FLORIDA 33169
--------------------------------------
NOTICE OF STOCKHOLDER ACTION
IN LIEU OF SPECIAL MEETING
--------------------------------------
TO THE STOCKHOLDERS
OF INTERNATIONAL REALTY GROUP, INC.:
This Information Statement is furnished to the stockholders of
International Realty Group, Inc. (the "Company") in connection with the
following corporate action to be approved by the written consent of two
stockholders of the Company who own sufficient voting securities of the Company
to approve such action:
An amendment to Article IV of the Certificate of
Incorporation, as amended, of the Company to increase
the number of authorized shares of common stock, par
value, $.001 per share ("Common Stock"), of the Company
from 10,000,000 shares to 450,000,000 shares.
We are not asking you for a proxy and you are requested not to send us a
proxy. Your vote or consent is not requested or required to approve the above
amendment. This Information Statement is provided solely for your information.
This Information Statement also serves as the notice required by Section 228
of the Delaware General Corporation Law for the approval of a corporate action
by less than unanimous written consent of the stockholders of the Company.
By Order of the Board of Directors
October ___, 1996 Richard M. Bradbury
President
<PAGE> 3
INTERNATIONAL REALTY GROUP, INC.
111 NORTHWEST 183RD STREET
SUITE 350
MIAMI, FLORIDA 33169
---------------------------------
INFORMATION STATEMENT
---------------------------------
GENERAL INFORMATION
This Information Statement is furnished by International Realty Group,
Inc. (the "Company") in connection with the following corporate action to be
approved by stockholders of the Company who own sufficient voting securities of
the Company to approve such actions:
An amendment to Article IV of the Certificate of
Incorporation, as amended, of the Company to increase
the number of authorized shares of common stock, par
value, $.001 per share ("Common Stock"), of the Company
from 10,000,000 shares to 450,000,000 shares.
As more fully described in this Information Statement, the foregoing
corporate action is being taken in order to, among other things, allow the
Company to complete the transaction (the "Transaction") in which the Company
acquired certain assets and business from DSC, S.A. de C.V. ("DSC") and
Hemisphere Developments Limited ("Hemisphere") in return for which the Company
will issue up to approximately 80,020,585 shares of Common Stock. See "The
Transaction" contained herein. In reviewing the Transaction, stockholders
should give attention to the matters set forth under the caption "Certain
Considerations" commencing on page 10 of this Information Statement.
WE ARE NOT ASKING YOU FOR A PROXY AND YOU ARE
REQUESTED NOT TO SEND US A PROXY.
The approximate date upon which this Information Statement will first be
sent to stockholders is October __ 1996.
THE ACTIONS DESCRIBED HEREIN WILL BE APPROVED BY TWO
STOCKHOLDERS OF THE COMPANY WHO OWN SUFFICIENT VOTING
SECURITIES TO APPROVE SUCH ACTIONS. YOUR VOTE OR
CONSENT IS NOT REQUESTED OR REQUIRED TO APPROVE SUCH
ACTIONS. THIS INFORMATION STATEMENT IS PROVIDED SOLELY
FOR YOUR INFORMATION.
<PAGE> 4
TABLE OF CONTENTS
<TABLE>
<CAPTION>
INFORMATION STATEMENT Page
----
<S> <C>
General Information .................................................................................... 1
AMENDMENT TO THE CERTIFICATE OF INCORPORATION
Proposed Amendment ..................................................................................... 3
Reason For Adoption .................................................................................... 3
THE TRANSACTION
General ................................................................................................ 3
DSC Assets ............................................................................................. 4
Hemisphere Transaction ................................................................................. 6
Hemisphere/Nueva Tierra Assets ......................................................................... 7
Change in Control of Company ........................................................................... 8
Reasons For the Transaction ............................................................................ 8
Certain Considerations ................................................................................. 10
Accounting Treatment ................................................................................... 12
Third Party Appraisals ................................................................................. 12
Federal Income Tax Consequences ........................................................................ 13
No Appraisal Rights .................................................................................... 13
Regulatory Requirements ................................................................................ 13
Pro Forma Financial Information ........................................................................ 14
CERTAIN INFORMATION CONCERNING THE COMPANY
General ................................................................................................ 24
Business Operations .................................................................................... 24
Other Activities ....................................................................................... 26
Employees .............................................................................................. 27
Description of Property ................................................................................ 27
Minority Interests ..................................................................................... 30
Environmental Regulations .............................................................................. 30
Real Estate Investment Policies ........................................................................ 31
Legal Proceedings ...................................................................................... 31
Change in Accountant ................................................................................... 31
Description of Common Stock ............................................................................ 31
Principal Stockholders ................................................................................. 33
Management's Discussion and Analysis ................................................................... 34
FINANCIAL STATEMENTS
Index to Financial Statements .......................................................................... F-1
</TABLE>
APPENDICES
Appendix A--Amendment to Agreement, dated July 31, 1996, between the Company
and Hemisphere.
Appendix B--Second Amendment to Agreement, dated July 31, 1996, between the
Company and DSC.
Appendix C--Amendment to Agreement, dated February 7, 1996, between the Company
and DSC.
Appendix D--Agreement, dated February 9, 1996, between the Company and
Hemisphere.
Appendix E--Agreement, dated October 6, 1995, between the Company and DSC.
<PAGE> 5
AMENDMENT TO THE CERTIFICATE OF INCORPORATION
PROPOSED AMENDMENT
The Board of Directors of the Company has unanimously approved the
following amendment to the Company's Certificate of Incorporation, as amended,
and directed that such amendment be submitted to the Company's stockholders for
their consent:
An amendment to Article IV of the Articles of Incorporation, as amended,
to increased the authorized shares of Common Stock from 10,000,000
shares to 450,000,000 shares.
Jack Birnholz and Richard Bradbury, who jointly control more than a
majority of the Common Stock of the Company, have informed the Company that
they intend to execute a written stockholder consent on or about the date of
this Information Statement approving the proposed amendment to Article IV of
the Company's Certificate of Incorporation, as amended.
ACCORDINGLY, THE VOTE OR CONSENT OF THE OTHER STOCKHOLDERS OF THE COMPANY
IS NOT REQUESTED OR REQUIRED TO APPROVE SUCH AMENDMENT.
REASON FOR ADOPTION
As of the date of this Information Statement, there are 9,954,250 shares
of Common Stock issued and outstanding. The Company's Certificate of
Incorporation, as amended, currently authorizes a maximum of 10,000,000 shares
of Common Stock. The purposes of this amendment to increase the authorized
shares of Common Stock from 10,000,000 shares to 450,000,000 shares are to:
(i) permit the Company to issue shares of Common Stock in connection with the
Transaction, as described immediately below; and (ii) provide sufficient
available shares of Common Stock for distribution in a private or public
offering or other acquisitions by the Company as they may be authorized
pursuant to the actions of the Board of Directors. See "THE TRANSACTION."
THE TRANSACTION
GENERAL
On August 19, 1996, the Company consummated a share exchange transaction
with: (i) DSC, S.A. de C.V. ("DSC"), a company organized under the laws of
Mexico; and (ii) Hemisphere Developments Limited ("Hemisphere"), a company
organized under the laws of Isle of Man. As more fully described below, the
share exchange transactions with DSC and Hemisphere will result in a change in
the control of the Company that is expected to occur during the fourth quarter
of 1996.
3
<PAGE> 6
DSC TRANSACTION
Pursuant to the share exchange transaction with DSC (the "DSC
Transaction"), the Company acquired the following assets from DSC as of August
19, 1996 (the "Closing Date"): (i) DSC's 100 percent interest in Centro de
Promociones Guerraro S.A. de C.V.; (ii) DSC's 75 percent interest in Clusters
Inmobiliaria de Ixtapa, S.A. de C.V. ("Clusters Ixtapa"); (iii) a promissory
note ("Clusters Note") in the principal amount of $5,625,000 of Clusters
Ixtapa; and (iv) DSC's 30 percent interest in Nueva Tierra, S.A. de C.V. ("Nueva
Tierra"). Such assets acquired by the Company are collectively referred to
herein as the "DSC Assets."
In exchange for the DSC Assets, the Company issued to DSC on the Closing
Date 485,930 shares of the Company's common stock, par value $.001 per share
(the "Common Stock") and a Convertible Promissory Note (the "DSC Note") in the
principal amount of $29,673,658. The DSC Note is convertible into 37,945,854
shares of Common Stock.
The Company has the right to force the conversion of the DSC Note after
the Company's Certificate of Incorporation has been amended to increase the
number of authorized shares of Common Stock from 10,000,000 to 450,000,000.
The Company intends to amend its Certificate of Incorporation with the State of
Delaware as soon as possible after the expiration of the twenty day period
following the mailing of this Information Statement to stockholders. The
Company anticipates that the authorized Common Stock will be increased and the
DSC Note converted to Common Stock during the fourth quarter of 1996. In the
event that the DSC Note is not converted prior to December 31, 1996, the DSC
Note becomes immediately payable together with interest at a rate of five
percent per year. The DSC Note is secured by the DSC Assets.
The DSC Transaction was consummated pursuant to the Second Amendment to
Agreement between the Company and DSC, dated July 31, 1996. The Second
Amendment to Agreement modified and supplemented the First Amendment to
Agreement, dated February 7, 1996, as described in the Company's Current Report
on Form 8-K, dated February 28, 1996. The Second Amendment to Agreement
modified and supplemented the original Agreement between the parties, dated
October 6, 1995, as described in the Company's Current Report on Form 8-K,
dated October 18, 1995. The Second Amendment, the First Amendment and the
original Agreement (collectively referred to herein as the "DSC Agreement") are
attached to this Information Statement as Appendix A, B and C, respectively.
The original Agreement and the First Amendment contemplated the
acquisition by the Company of Tropical Club Ixtapa S.A. de C.V., Impulsora
Turistica de Occidente, S.A. de C.V., Tropical Club Isla Mujeres S.A. de C.V.,
Promocaribe, S.A. de C.V., DSC Casa Blanca, S.A. de C.V. and Pez Maya, S.A. de
C.V. The Company decided not to acquire such companies because such companies
and their assets are presently the subject of debt-related legal proceedings in
Mexico. To the extent that in the future the Company is able to negotiate a
restructuring of such debt with the banks and other debt holders, the Company
may in the future consider acquiring such companies through a share exchange
transaction or otherwise. Neither the Company, nor DSC, however, is presently
involved in any such negotiations or has any understanding, agreement or
arrangement with any such banks or debt holders for the debt restructuring or
settlement of such debt.
4
<PAGE> 7
At the Closing of the DSC Transaction, the Company also elected not to
acquire DSC's 12.3 percent interest in Malecon S.A. de C.V. and DSC's 30 percent
interest in Corporacion Inmobiliaria del Norte, S.A. de C.V., since such
interests were subject to a right of first refusal by the majority stockholders
of the respective companies and certain pledges to banks or other financial
institutions. In the event that such rights of first refusal are waived and
such pledges are removed or accepted by the Company, the DSC Agreement provides
that the Company may acquire such interests by issuing to DSC a convertible note
(on terms similar to the DSC Note) in the principal aggregate amount of
$2,600,855.
Pursuant to the DSC Agreement, DSC has loaned approximately $170,000 to
the Company. Approximately $105,000 of the proceeds of such loans have been
used by the Company for costs incurred in connection with the DSC Transaction
and the balance has been used for working capital purposes. Such loans were
repaid by the Company on the Closing Date through the reduction of account
receivables due from DSC to the companies acquired. After the Closing Date,
DSC has made advances in the approximate amount of $25,000 and may in the
future make additional advances to the Company that will likewise be repaid
through the reduction of such accounts receivables.
The shares of Common Stock issued to DSC on the Closing Date and upon
conversion of the DSC Note have and will be issued by the Company in reliance
on the exemption from registration under the Securities Act of 1933 provided by
Regulation S. The DSC Agreement provides that the shares of Common Stock
issued to DSC will be afforded certain demand and piggyback registration
rights.
Pursuant to the DSC Agreement, John Day, Geoffrey Bell and Jack Birnholz
resigned from the Company's Board of Directors on the Closing Date and the
remaining members of the Board--Richard Bradbury and Alton Hollis--appointed
Bernardo Dominguez C. (the President of DSC) to fill a vacancy on the Company's
Board of Directors.
As required by the DSC Agreement, Messrs. Bradbury and Birnholz executed a
proxy agreement on the Closing Date, pursuant to which DSC may vote the Common
Stock held by such persons in order to effectuate the transactions contemplated
by the DSC Agreement. Accordingly, the shares owned by Messrs. Bradbury and
Birnholz may be voted by DSC to approve the amendment to the Company's
Certificate of Incorporation to increase the authorized shares of Common Stock.
DSC has advised the Company that, in the event that DSC exercises its proxy
with respect to the amendment to the Company's Certificate of Incorporation,
DSC intends to execute the stockholder consent to approve such amendment. The
proxy agreement terminates upon the earlier of the Company's authorization to
increase the Common Stock or December 31, 1996.
For purposes of the DSC and Hemisphere Transactions, the Common Stock has
been valued at $.782 per share. See "The Transaction--Reasons for the
Transaction-valuation of the Company."
5
<PAGE> 8
DSC ASSETS
The DSC Assets consist of: (i) 100 percent equity interest in Centro de
Promociones Guerraro S.A. de C.V.; (ii) 75 percent equity interest in Clusters
Ixtapa; (iii) a note receivable in the principal amount of $5,625,00; and (iv)
DSC's 30 percent interest in Nueva Tierra. For information regarding Nueva
Tierra, see below under the caption "Hemisphere /Nueva Tierra Assets."
Centro de Promociones Guerraro S.A. de C.V., a company formed under the
laws of Mexico on March 13, 1989, owns land located in Acapulco, Mexico, known
as Campo de Tiro. The eight-acre, partially developed property is being held
for investment and is subject to a mortgage (including accrued interest) in the
approximate amount of $659,508. See "CERTAIN INFORMATION CONCERNING
COMPANY--Description of Property."
Clusters Ixtapa, a company formed under the laws of Mexico on July 24,
1991, owns land in Ixtapa on the pacific coast of Mexico in the state of
Guerrero. The 26-acre property is being held for investment. See "CERTAIN
INFORMATION CONCERNING THE COMPANY--Description of Property." Clusters Ixtapa
has received loans in the principal amount of $23,007,000 (the "NAFIN Debt")
from its lender, National Financiera, S.N.C. Bank ("NAFIN"). On December 29,
1995, Clusters Ixtapa, DSC and NAFIN entered into a restructuring plan with
respect to the NAFIN Debt. Pursuant to this plan, DSC has assumed the NAFIN
Debt in exchange for Clusters Ixtapa's payment of approximately $15,341,000
and DSC's payment of the difference. Such payment by DSC, as well as the
repayment of certain other debt of DSC to NAFIN, will be made by the transfer
from DSC to NAFIN of approximately 15,991,000 shares of the Company's Common
Stock upon the conversion of the DSC Note. Pursuant to the DSC Transaction,
the Company acquired from DSC a $5,625,000 debt obligation of Clusters Ixtapa
on the Closing Date.
The DSC Assets have been valued at $30,053,655 for purposes of the DSC
Transaction. Based upon the $.782 per share value of the Common Stock, the
Company will issue an aggregate 37,945,854 shares of Common Stock as
consideration for the DSC Assets.
HEMISPHERE TRANSACTION
Simultaneously with the DSC Transaction, the Company consummated a share
exchange transaction ("Hemisphere Transaction") with Hemisphere, a real estate
investment business. Pursuant to the Hemisphere Transaction, the Company
acquired from Hemisphere on the Closing Date all of the common stock of Newland
Corporation ("Newland"), a Marshall Isles company formed on December 12, 1995,
which owns 70 percent of the common stock of Nueva Tierra. As a result of the
Hemisphere Transaction and the DSC Transaction, the Company owns 100 percent of
the stock of Nueva Tierra, a Mexican company formed on October 6, 1995. As
more fully described below, Nueva Tierra owns a majority interest and is the
general partner of the following four real estate Asociacion en Participacion
("Participating Associations"), a form of limited partnership in Mexico: (i)
Villas Del Carbon; (ii) Barra del Tordo; (iii) Hacienda del Franco; and (iv)
Bahia de Cortes.
6
<PAGE> 9
In exchange for the 70 percent interest in Nueva Tierra, the Company
issued 514,070 shares of Common Stock to Hemisphere on the Closing Date and a
convertible note (the "Hemisphere Note") in the principal amount of
$32,120,440. The Hemisphere Note is identical in form to the DSC Note and is
convertible into an aggregate of 41,074,732 shares of Common Stock. The shares
of Common Stock issued to Hemisphere on the Closing Date and upon conversion of
the Hemisphere Note have and will be issued by the Company in reliance on the
exemption from registration under the Securities Act of 1933 provided by
Regulation S. The Hemisphere Agreement provides that such shares of Common
Stock will be afforded certain demand and piggyback registration rights.
The Hemisphere Transaction was consummated pursuant to the Amendment to
Agreement between the Company and Hemisphere, dated July 31, 1996. The
Amendment to Agreement modified and supplemented the original Agreement with
Hemisphere, dated February 7, 1996, as described in the Company's Current Report
on Form 8-K, dated February 28, 1996. The original Agreement with Hemisphere
contemplated the acquisition of Las Arboledas, Ensenada Blanca, Playas de Brisa
Mar, and El Quelele, which Participating Associations the Company has elected
not to acquire in the Hemisphere Transaction as a result of the completion of
the Company's due diligence review of the transaction. The original Agreement
with Hemisphere and Amendment (collectively referred to herein as the
"Hemisphere Agreements") are attached to this Information Statement as Appendix
D and E respectively.
HEMISPHERE/NUEVA TIERRA ASSETS
Nueva Tierra, all of the stock of which the Company has acquired in the
DSC and Hemisphere Transactions, has a majority interest in four real estate
projects in Mexico, as set forth below.
Villas del Carbon, a Participating Association formed under the laws of
Mexico on January 19, 1996, owns a residential development located in Villa del
Carbon, State of Mexico, in which Nueva Tierra has a 79.1 percent interest.
The 25-acre property, which is presently being held by the Company for
investment, is partially developed and presently has a clubhouse, roads and
utility lines to the property boundary. Preliminary development plans call for
development of 180 home sites for sale to builders or individuals who wish to
construct weekend country houses. This property is not subject to any
mortgage. For additional information regarding this property, see "CERTAIN
INFORMATION CONCERNING THE COMPANY--Description of Property."
Barra del Tordo, a Participating Association formed under the laws of
Mexico on January 17, 1996, owns a resort development project located in Barra
del Tordo in the state of Tamaulipas, Mexico, in which Nueva Tierra has a 79.8
percent interest. The property consists of approximately 670 acres of land,
including 3.5 kilometers of beachfront property facing the Gulf of Mexico. At
present, construction of 24 condominiums is approximately 80 percent complete.
Nueva Tierra had planned to complete the initial 24 condominiums at some point
in the future when market conditions are appropriate; accordingly the project
is being held for investment or future development. The property is subject to
a mortgage (including accrued interest) in the amount of $3,490,298, as of June
30, 1996. For additional information regarding this property, see "CERTAIN
INFORMATION REGARDING THE COMPANY--Description of Property."
7
<PAGE> 10
Hacienda del Franco, a Participating Association formed under the laws of
Mexico on January 10, 1996, owns a residential development project located near
Silao in the State of Guanajuato, in which Nueva Tierra has a 81.1 percent
interest. The property consists of approximately 260 acres of land and
includes a traditional colonial style hacienda. The property is being held for
investment or possible development centered around the hacienda. The property
is subject to a mortgage (including accrued interest) in the amount of $511,227,
as of June 30, 1996. For additional information regarding this property, see
"CERTAIN INFORMATION REGARDING THE COMPANY--Description of Property."
Bahia de Cortez, a Participating Association formed under the laws of
Mexico on February 7, 1996, owns a resort development project located in Baja
California near La Paz, in which Nueva Tierra has a 78.1 percent interest. The
property consists of approximately 3,080 acres of land, including over five
kilometers of beachfront property. The property is not subject to any
mortgage. For additional information regarding this property, see "CERTAIN
INFORMATION REGARDING THE COMPANY--Description of Property."
CHANGE IN CONTROL OF COMPANY
A change in control of the Company will occur upon the conversion of the
DSC and Hemisphere Notes. At such time, DSC will own approximately 25 percent,
Hemisphere will own approximately 47 percent, and NAFIN will own approximately
18 percent of the then outstanding Common Stock. See "Certain Information
Concerning the Company--Voting Securities and Principal Stockholders." As a
result, any two of these companies acting in concert will be in a position to
determine the outcome for the election of directors and thereby control the
Company. The change of control is expected to occur during the fourth quarter
of 1996. At such time, approximately 88,974,836 shares of Common Stock will be
issued and outstanding.
The Company intends to call a special meeting of the stockholders after
the conversion of the DSC and Hemisphere Notes to elect three to five
directors, one of which will be proposed by the Company, one of which will be
proposed by Hemisphere and the remainder proposed by DSC. The DSC Agreement
provides that Mr. Bradbury will enter into an employment agreement with the
Company on terms similar to his present employment agreement with the Company.
In addition, it is expected that Mr. Bradbury will continue to serve on the
Board.
REASONS FOR THE TRANSACTION
Factors Considered By the Board of Directors.
The Board of Directors (the "Board") has given careful consideration to
the Transaction, including, the relative values of the Company, the DSC Assets
and the Hemisphere Assets, the potential benefits of the share exchange, the
interests of management in the share exchange, and the risks of the share
exchange to the Company's existing shareholders. The Board also considered,
upon the opinion of its appraisal subsidiary, the fairness to the Company's
shareholders of the value of the property being acquired in exchange for the
Company's Common Stock. Based on the foregoing considerations and as discussed
in detail below, the Board of Directors believes that the transactions
contemplated by the DSC
8
<PAGE> 11
Agreement and the Hemisphere Agreement are fair and in the best interest of the
Company and its stockholders.
Valuation of the Company.
The Common Stock is thinly traded. For the year 1995, the total trading
volume of the Common Stock was 9,500 shares at prices ranging from $.75 to
$1.00. Given the lack of public market, the parties to the transaction have
determined, for purposes of the Transaction, the value of the Common Stock
based upon the agreed upon value of the Company of $7,000,000, divided by the
8,954,187 shares of Common Stock issued and outstanding as of the date of
Closing. The agreed upon value of the Company is based upon the value of the
Company's present operations ($1,500,000) and the Company's land on Caye Bokel,
Belize (approximately $5,500,000, predicated on a land residual approach,
assuming a 250 unit destination resort). The stockholders of the Company prior
to the Transaction may benefit from the negotiated value placed on the Company
since such value significantly exceeds the recorded value of the Company's
stockholders' equity and the fair value of the Company's net assets.
Valuation of DSC and Hemisphere Assets.
In valuing the DSC Assets and the Hemisphere Assets, the Board received
appraisals prepared by a third party valuation firm. See "Reasons for the
Transaction and Share Exchange - Third Party Appraisals." The Board requested
Appraisal Group, Inc., its valuation subsidiary, to review the appraisals to
determine whether the value of the DSC Assets and the Hemisphere Assets are at
least equivalent to that of the Common Stock to be issued in the Transaction.
After inspecting the properties, the property appraisals and the information
provided by DSC and Hemisphere, Appraisal Group, Inc. concluded the overall
portfolio value was equivalent to the Company's Common Stock being issued. The
Board of Directors concluded that given the factors discussed above and the
other benefits believed by the Board to accrue to the Company by virtue of the
Transaction that the values established for the DSC Assets and the Hemisphere
Assets are fair to the Company's stockholders from a financial point of view.
Board Approval of the Transaction.
Prior to the Transaction, the Company's strategy has been to be a boutique
international appraisal and valuation firm and to expand its operations through
acquisitions. The Company's initial strategy was to acquire a network of
appraisal firms to perform appraisal valuation activities in their particular
market areas. The Company initially was successful in this strategy with the
acquisition (through a joint venture with Novotrade Rt.) and formation of
Appraisal Group International, Rt., Budapest Hungary, as described elsewhere
herein. However, the lack of sufficient assets of the Company to qualify to be
listed on the "NASDAQ SmallCap Market" and the lack of an active market for the
Company's shares has been a detriment in the Company's ability to acquire
strategically-located
9
<PAGE> 12
appraisal firms to enhance the Company's growth. The acquisition of Caye Bokel
Limited, described herein, has helped to provide additional asset base to meet
the "NASDAQ SmallCap Market" listing requirements. The difficulties in
identifying feasible acquisitions of strategically-located appraisal firms as
well as the Company's lack of significant resources to effectuate acquisitions
in real estate investments has hampered the success of the Company's growth
strategy.
The Board believes that the assets acquired in the Transaction and the
relationship with DSC and Hemisphere will improve the Company's ability to
effect acquisitions, generate cash flows, provide access to the capital markets
and will thereby enhance the Company's long-term growth prospects. This
potential for growth resulting from the Transaction in comparison to such
growth potential without the Transaction and the existing lack of a meaningful
market for the Company's stock was a strong factor in support of the Board's
conclusion that the Transaction was fair to shareholders. In the course of the
Transaction, DSC and Hemisphere have provided a willingness to provide
financial support to the Company, thereby enhancing the Company's ability to
achieve its desired growth through acquisition and real estate investments on
more advantageous terms than what might otherwise be available.
The Board further believes that the Company will benefit from the
Transaction, by giving the Company the ability to expand its operations in
Latin America through the existing relationships of DSC and Hemisphere. The
Transaction may also provide additional intangible benefits that the Board
believes will be instrumental to the Company's success. These potential
benefits include, among others, increased recognition in the international real
estate market, development of a fluid market for the Common Stock, possible
access to the capital and equity markets, (particularly, with respect to
potential acquisitions by the Company) and other benefits accruing from an
association with a company whose businesses are compatible with the Company's
business. These factors, as well as the fact that the Board believes that the
value in DSC and Hemisphere to the Company are greater than the value given by
the Company in the share exchange, are in the view of the Board, supportive of
the fairness to shareholders of the Transaction.
CERTAIN CONSIDERATIONS
In addition to the other information contained in this Information
Statement, the Company's stockholders should be aware of the following risks
related to the Transaction and the Company.
1. Losses from Operations and Need for Financing. The Company has
continuously sustained losses from operations. The Company incurred losses of
$359,800 and $236,700 during the last two fiscal years ended December 31, 1995
and 1994, respectively. The Company will require additional financing in order
to fully implement the Company's business strategy. To raise additional
financing, the Company may have to seek such funds through public or private
equity or debt financing. Should the Company raise capital through such equity
financing arrangement, the then existing stockholders may experience substantial
dilution in the their investment in the Company. At the present time, there are
no agreements, understandings or arrangements with any parties with respect to
additional financing for the Company. Accordingly, there can be no assurance
that an agreement will be reached with respect to any additional financing.
2. Substantial Indebtedness and Ability to Service Debt. Giving effect to the
Transaction, the Company has approximately $5,774,000 of total liabilities as
of the date of this Information Statement. In addition, the Company may be
required to incur additional indebtedness in the
10
<PAGE> 13
future in order to fully implement the Company's business strategy. See above.
The level of the Company's indebtedness could have important consequences to the
stockholders of the Company, including the following: (i) the ability of the
Company to obtain any necessary debt financing in the future for working
capital, capital expenditure or other purposes may be limited; (ii) any cash
flow from operations must be dedicated to payment of principle and interest on
its indebtedness and will not be available for other purposes; (iii) the
Company's level of indebtedness could limit its flexibility in planning for or
reacting to changes in its business; (iv) the Company's high level of
indebtedness may make it more vulnerable in the event of a downturn in its
business or the economy in general; and (v) in the event that the Company is
unable to service its debt requirements, the Company may be required to sell its
assets in order to meet its debt service requirements, which sales may be
required to be made at prices below the then market value of such assets.
Unless the Company is able to generate cash flow from operations or obtain
additional financing for debt service requirements, the Company will face
substantial liquidity problems. See "CERTAIN INFORMATION CONCERNING THE COMPANY
- -- Management's Discussion and Analysis."
3. Development Risks. The Company owns eight properties which it currently
holds for investment purposes. Although the diversity in the size, type and
location of its properties should reduce the risks attended upon the ownership
of any single property, the Company will be subject to the risks generally
inherent in the ownership of real estate properties such as a downturn in
general or local economic conditions or an increase in the real property tax
rate. In the event that in the future the Company develops such properties,
the Company will be subject to various additional risks including inability to
obtain financing, inability to obtain building permits or necessary zoning
changes, construction delays, inability to complete construction at projected
costs and to fund any excess construction costs, strikes, adverse weather
conditions, and other conditions beyond the control of the Company. No
assurance can be given that the Company will be successful in completing any
development projects undertaken.
4. Assumed Liabilities. The Company could become liable for liabilities
associated with the properties acquired in the Transaction. Such liabilities
may include various contingent or undisclosed liabilities. Although the Company
is not aware of any such liabilities that would be material to the Company, the
existence of such liabilities could have a substantial adverse effect on the
Company.
5. Competition. The Company's business is highly competitive. The Company's
appraisal and real estate consulting business competes with, among other
persons, "Big 6" accounting firms which have substantially greater financial
and other resources than the Company. See "CERTAIN INFORMATION CONCERNING THE
COMPANY -- Business Operations." In addition, to the extent that the Company
seeks to develop its real estate properties, the Company will be required to
compete with numerous developers ranging from small local to larger regional
and national builders and developers, some of which have greater sales and
financial resources than the Company. No assurance can be given that the
Company will be able to compete with such other builders and developers. See
"CERTAIN INFORMATION CONCERNING COMPANY -- Description of Property."
6. Lack of Public Market for the Common Stock. The Common Stock is thinly
traded. For the year 1995, the total trading volume of the Common Stock was
9,500 shares. The
11
<PAGE> 14
Common Stock is eligible for trading on the NASD Electronic Bulletin Board.
As compared with other markets, an investor may find it more difficult to
dispose of or obtain accurate quotations for the price of securities traded on
the NASD Electronic Bulletin Board. In addition, if the trading price of the
Common Stock is less than $5.00 per share, trading in the Common Stock would
also be subject to certain rules promulgated under the 1934 Act, which require
additional disclosure by broker-dealers in connection with any trades involving
a stock defined as a penny stock (generally, any non-NASDAQ equity security that
has a market price of less than $5.00 per share, subject to certain
exceptions). Such rules require the delivery, prior to any penny stock
transaction, of a disclosure schedule explaining the penny stock market and
the risks associated therewith, and impose various sales practice requirements
on broker-dealers who sell penny stock to persons other than established
customers and accredited investors. For these types of transactions, the
broker-dealer must make a special suitability determination for the purchaser
and have received the purchaser's written consent to the transaction prior to
sale. The additional burdens imposed upon broker-dealers by such requirements
may discourage broker-dealers from effecting transactions in the Common Stock,
which could severely limit the market liquidity of the Common Stock and the
ability of persons to sell the Common Stock.
7. No Appraisal Rights. Under the applicable provisions of the Delaware
General Corporations Law, the Company will not have any dissenters' appraisal
rights in connection with the Transaction or any other transaction described in
this Information Statement.
8. No Dividends. The Company has not paid any cash dividends on this Common
Stock since its inception, does not anticipate paying any cash dividends in the
foreseeable future and intends to retain earnings, if any, to provide funds for
general corporate purposes and the expansion of the Company's business. The
payment of any future dividends by the Company will be dependent upon the
earnings of the Company, its financial requirements and other relevant factors.
9. Control by Principal Stockholders. Upon conversion of the DSC and
Hemisphere Notes, DSC will own approximately 25 percent, Hemisphere will own
approximately 47 percent, and NAFIN will own approximately 18 percent of the
then outstanding Common Stock. See "Certain Information Concerning the
Company--Voting Securities and Principal Stockholders." As a result, any two
of these companies acting in concert will be in a position to determine the
outcome for the election of directors and thereby control the Company.
ACCOUNTING TREATMENT OF TRANSACTION
The Company has accounted for the Transaction as a purchase of the
companies and the interests in the Participating Associations that it has
acquired.
THIRD PARTY APPRAISAL
Third Party Appraisals and Valuation services have been performed by
Sergio H. Parra R., Engineer, with the Mexican designation of "Perito Valuador"
Mr. Parra holds professional designations and licenses as a Topography and
Hydro Engineer, Professor of Mathematics and Valuation (Appraiser),
specializing in land tracts. Mr. Parra since 1990 has been registered with the
Mexican National Banking Committee, and has been performing valuation services
12
<PAGE> 15
on behalf of large financial institutions including Bancomar, Banamex and Bital
with respect to their loans to residential and resort land developers. The
selection of Mr. Parra to perform the third party appraisals was based on his
extensive experience preparing similar valuations on behalf of financial
institutions. Mr. Parra is not affiliated with the Company or any of the
parties to the Transaction.
Mr. Parra independently determined the value of each of the properties
described herein, utilizing the valuation practices and procedures used in
Mexico. The methodology utilized for large parcels of vacant land is the
Residual Technique. This concept analyzes the overall parcel giving the
highest value to the beachfront and decreasing value to the remainder portion
of the parcel and establishing a value for the entire land parcel. In
addition, the Depreciated Replacement Cost Method is utilized for improvements
on the property.
FEDERAL INCOME TAX CONSEQUENCES
The transaction will have no federal income tax effects on the Company or
its stockholders.
NO APPRAISAL RIGHTS
Under the applicable provisions of the Delaware General Corporations Law,
the Company will not have any dissenters' appraisal rights in connection with
the Transaction or any other transaction described in this Information
Statement.
REGULATORY REQUIREMENTS
The Company is not aware of any federal or state regulatory requirements
that must be complied with or regulatory approval that must be obtained in
connection with the agreements with DSC and Hemisphere and the transaction
contemplated thereby, other than the filing of a Certificate of Amendment to
the Company's Certificate of Incorporation pursuant to the applicable
provisions of the Delaware General Corporation Law.
13
<PAGE> 16
PRO FORMA FINANCIAL INFORMATION
INTERNATIONAL REALTY GROUP, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The unaudited Pro Forma Condensed Consolidated Balance Sheet for the year
ended December 31, 1995 and for the six months ended June 30, 1996 assumes that
the Transaction, as described herein, had been consummated on December 31, 1995
and on June 30, 1996.
The unaudited Pro Forma Condensed Consolidated Statement of Operations for
the year ended December 31, 1995 and for the six months ended June 30, 1996
assumes that the Transaction, as described herein, had been consummated at the
beginning of such periods.
The following unaudited pro forma condensed consolidated financial
statements are presented to reflect the estimated impact on the historical
Consolidated Financial Statements of the Company, and of the issuance to
Hemisphere of 514,070 shares, on December 31, 1995 and June 30, 1996, of Common
Stock and a Convertible Note in the amount of $31,455,000 on December 31, 1995
and $32,120,000 on June 30, 1996, and the issuance to DSC of 495,930 shares on
December 31, 1995 and June 30, 1996, of Common Stock and a Convertible Note in
the amount $28,992,000 on December 31, 1995 and $29,674,000 on June 30, 1996
for the companies and interests acquired on August 19, 1996. The Transaction
has been accounted for as a purchase.
The pro forma condensed consolidated financial statements have not been
audited or reviewed by the Company s independent certified public accountants.
Accordingly, these statements are subject to adjustments upon audit, which will
be conducted for the fiscal year ended December 31, 1996. These statements
give effect only to the reclassifications and adjustments set forth in the
accompanying notes to the unaudited pro forma condensed consolidated financial
statements. Unaudited pro forma information is not necessarily indicative of
the results of operations or financial position which would have occurred had
the Transaction been consummated at the beginning of the earliest period
presented, nor is it necessarily indicative of the Company s future results of
operations or future financial period.
14
<PAGE> 17
INTERNATIONAL REALTY GROUP, INC. and SUBSIDIARIES
Unaudited Pro Forma Condensed Consolidated Balance Sheet
As of December 31, 1995
(000 Omitted)
<TABLE>
<CAPTION>
BARRA DEL BAHIA DE
--------- --------
COMPANY CENTRO IXTAPA TORDOS CORTES
------- ------ ------ ------ ------
ASSETS
------
<C> <C> <C> <C> <C>
Current Assets
Cash and Equivalents $ 19 $ --- $ --- $ --- $ ---
Accounts Receivable,
Trade 222 --- --- --- ---
Accounts Receivable, Related --- 242 1,416 --- ---
Income and V.A.T.Tax Refundable --- --- 433 --- ---
Other Current Assets 27 --- --- --- ---
-------- --------- --------- ---------- -----------
TOTAL CURRENT ASSETS 268 242 1,849 --- ---
Marketable Securities Avail.For Sale 35 --- --- --- ---
Property Held for Investment 481 839 17,020 9,942 45,728
Furniture, Equip. and Improvements 206 --- --- --- ---
Note Receivable, Related --- --- --- --- ---
Excess of Cost over Fair Value of
Net Assets Acquired 140 --- --- --- ---
Other Assets 52 --- --- --- ---
-------- --------- --------- ---------- -----------
TOTAL ASSETS $ 1,182 $ 1,081 $ 18,869 $ 9,942 $ 45,728
======== ========= ========= ========== ===========
LIABILITIES & SHAREHOLDERS EQUITY
Liabilities:
Accounts Payable $ 135 $ 58 $ 68 $ --- $ ---
Mortgages and Notes Payable 152 340 --- 2,080 ---
Accrued Liabilities 403 375 83 1,339 ---
Notes Payable - Related 27 1 5,505 --- ---
Long-term Debt 49 --- --- --- ---
-------- --------- --------- ---------- -----------
TOTAL LIABILITIES 766 774 5,656 3,419 ---
Convertible Note --- --- --- --- ---
Minority Equity 35 --- 3,306 1,316 10,015
-------- --------- --------- ---------- -----------
801 774 8,962 4,735 10,015
-------- --------- --------- ---------- -----------
Shareholder's Equity
Common stock 9 1 10 7 46
Capital in excess of par 835 306 9,897 5,200 35,667
Accumulated Deficit <463> --- --- --- ---
-------- --------- --------- ---------- -----------
TOTAL SHAREHOLDERS EQUITY 381 307 9,907 5,207 35,713
-------- --------- --------- ---------- -----------
TOTAL LIABILITIES &
SHAREHOLDERS' EQUITY $ 1,182 $ 1,081 $ 18,869 $ 9,942 $ 45,728
======= ========= ========= ========== ===========
<CAPTION>
VILLAS DEL HACIENDA CLUSTERS PRO FORMA PRO FORMA
---------- -------- -------- --------- ---------
CARBON DE FRANCO NOTE ADJUSTMENTS CONSOLIDATED
------ --------- ---- ----------- ------------
<C> <C> <C> <C> <C>
Current Assets
Cash and Equivalents $ --- $ --- $ --- $ --- $ 19
Accounts Receivable, Trade --- --- --- --- 222
Accounts Receivable, Related --- --- --- --- 1,658
Income and V.A.T.Tax Refundable --- --- --- --- 433
Other Current Assets --- --- --- --- 27
------- --------- --------- ---------- ----------
TOTAL CURRENT ASSETS --- --- --- --- 2,359
Marketable Securities Avail.For Sale --- --- --- --- 35
Property Held for Investment 1,203 4.986 --- --- 80,199
Furniture, Equip. and Improvements --- --- --- --- 206
Note Receivable, Related --- --- 5,505 <5,505> ----------
Excess of Cost over Fair Value of Net
Assets Acquired --- --- --- --- 140
Other Assets --- --- --- --- 52
------- --------- --------- ---------- ----------
TOTAL ASSETS $ 1,203 $ 4,986 $ 5,505 $ <5,505> $ 82,991
======= ========= ========= ========== ==========
LIABILITIES & SHAREHLDERS' EQUITY
Liabilities:
Accounts Payable $ --- $ --- $ --- $ --- $ 261
Mortgages and Notes Payable --- 474 --- --- 3,046
Accrued Liabilities --- 27 --- --- 2,227
Notes Payable - Related --- --- --- 5,505 28
Long-term Debt --- --- --- --- 49
------- --------- --------- ---------- ----------
TOTAL LIABILITIES --- 501 --- 5,505 5,611
Convertible Note --- --- --- <60,447> 60,447
Minority Equity 252 846 --- --- 15,770
------- --------- --------- ---------- ----------
252 1,347 --- <54,942> 81,828
------- --------- --------- ---------- ----------
Shareholder s Equity
Common stock 1 5 7 76 10
Capital in excess of par 950 3,634 5,498 60,371 1,616
Accumulated Deficit --- --- --- --- <463>
------- --------- --------- ---------- ----------
TOTAL SHAREHOLDERS EQUITY 951 3,639 5,505 60,447 1,163
------- --------- --------- ---------- ----------
TOTAL LIABILITIES &
SHAREHOLDERS EQUITY $ 1,203 $ 4,986 $ 5,505 $ 5,505 $ 82,991
======= ========= ========= ========== ==========
</TABLE>
The accompanying notes are an integral part of the unaudited pro forma
condensed consolidated financial statements.
15
<PAGE> 18
INTERNATIONAL REALTY GROUP, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
COMPANY CENTRO IXTAPA PRO FORMA
------- ------ ------ ---------
CONSOLIDATED
------------
<S> <C> <C> <C> <C>
Revenue:
Professional Fees $1,024,600 $ --- $ --- $ 1,024,600
Interest 95,000 --- 7,031,860 7,126,860
Other 102,500 --- --- 102,500
---------- --------- ----------- -----------
TOTAL REVENUE 1,222,100 --- 7,031,860 8,253,960
---------- --------- ----------- -----------
Operating Expenses
Amortization and Depreciation 87,800 --- --- 87,800
Bad Debt 73,300 --- --- 73,300
Direct Operating 620,800 --- --- 620,800
Interest 27,000 130,135 9,820,967 9,978,102
Payroll and Related 415,700 --- --- 415,700
Rent 55,400 --- --- 55,400
Selling, General and Administrative 246,900 --- --- 246,900
---------- --------- ----------- -----------
TOTAL OPERATING EXPENSE 1,526,900 130,135 9,820,967 11,478,002
---------- --------- ----------- -----------
Loss Before Other Additions, Minority
Interests and Taxes <304,800> <130,135> <2,789,107> <3,224,042>
---------- --------- ----------- -----------
Gain or Loss from foreign currency --- --- 373,833 373,833
Other Deductions <51,500> <113,038> <2,812> <167,350>
---------- --------- ----------- -----------
<51,500> <113,038> 371,021 206,483
---------- --------- ----------- -----------
Loss Before Provision for Income Tax <356,300> <243,173> <2,418,086> <3,017,559>
Provision for Income Tax (Benefit) 2,900 --- <16,219> <13,319>
---------- --------- ----------- -----------
Loss Before Minority Interest <359,200> <243,173> <2,401,867> <3,004,240>
Minority Interest <600> --- --- <600>
---------- --------- ----------- -----------
Net Loss $ <359,800> $ <243,173> $<2,401,867> $<3,004,840>
========== ========== =========== ===========
Loss per Common share $ <0.04> --- --- $ <0.30>
========== ========== =========== ===========
Weighted average Common shares,
outstanding 8,324,395 --- --- 9,954,250
========== ========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the unaudited pro forma
condensed consolidated financial statements.
16
<PAGE> 19
INTERNATIONAL REALTY GROUP, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
AS OF JUNE 30, 1996
(000 Omitted)
<TABLE>
<CAPTION>
BARRA DEL BAHIA DE
--------- --------
COMPANY CENTRO IXTAPA TORDOS CORTES
------- ------ ------ ------ ------
ASSETS
------
<C> <C> <C> <C> <C>
Current Assets
Cash and Equivalents $ 18 $ --- $ 18 $ --- $ ---
Accounts Receivable, Trade 147 --- --- --- ---
Accounts Receivable, Related --- 247 1,912 --- ---
Income and V.A.T.Tax Refundable --- --- 33 --- ---
Other Current Assets 90 --- --- --- ---
---------- -------- --------- ---------- ------------
TOTAL CURRENT ASSETS 255 247 1,963 --- ---
Marketable Securities Avail.For Sale 35 --- --- --- ---
Property Held for Investment 485 857 17,334 10,150 46,683
Furniture, Equip. and Improvements 197 --- --- --- ---
Note Receivable, Related --- --- --- --- ---
Excess of Cost over Fair Value of
Net Assets Acquired 132 --- --- --- ---
Other Assets 8 --- --- --- ---
---------- -------- --------- ---------- ------------
TOTAL ASSETS $ 1,112 $ 1,104 $ 19,297 $ 10,150 $ 46,683
========== ======== ========= ========== ============
LIABILITIES & SHAREHOLDERS EQUITY
Liabilities:
Accounts Payable $ 129 $ 59 $ 70 $ --- $ ---
Mortgages and Notes Payable 197 334 --- 2,123 ---
Accrued Liabilities 448 332 120 1,367 ---
Notes Payable - Related 38 --- 5,625 --- ---
Long-term Debt 46 --- --- --- ---
---------- -------- --------- ---------- ------------
TOTAL LIABILITIES 858 725 5,815 3,490 ---
Convertible Note --- --- --- --- ---
Minority Equity 32 --- 3,370 1,344 10,224
---------- -------- --------- ---------- ------------
890 725 9,188 4,834 10,224
---------- -------- --------- ---------- ------------
Shareholder s Equity
Common stock 9 1 13 7 47
Capital in excess of par 879 378 10,099 5,309 36,412
Accumulated Deficit <666> --- --- --- ---
---------- -------- --------- ---------- ------------
TOTAL SHAREHOLDERS 222 379 10,112 5,316 36,459
---------- -------- --------- ---------- ------------
EQUITY
TOTAL LIABILITIES &
SHAREHOLDERS $ 1,112 $ 1,104 $ 19,297 $ 10,150 $ 46,683
========== ======== ========= ========== ============
EQUITY
<CAPTION>
VILLAS DEL HACIENDA CLUSTERS PRO FORMA PRO FORMA
---------- -------- -------- --------- ---------
CARBON DE FRANCO NOTE ADJUSTMENTS CONSOLIDATED
------ --------- ---- ----------- ------------
<C> <C> <C> <C> <C>
Current Assets
Cash and Equivalents $ --- $ --- $ --- $ --- $ 36
Accounts Receivable, Trade --- --- --- --- 147
Accounts Receivable, Related --- --- --- --- 2,159
Income and V.A.T.Tax Refundable --- --- --- --- 33
Other Current Assets --- --- --- --- 90
--------- --------- --------- ----------- ----------
TOTAL CURRENT ASSETS --- --- --- --- 2,465
Marketable Securities Avail.For Sale --- --- --- --- 35
Property Held for Investment 1,228 5,090 --- --- 81,827
Furniture, Equip. and Improvements --- --- --- --- 197
Note Receivable, Related --- --- 5,625 (5,625) ---
Excess of Cost over Fair Value of
Net Assets Acquired --- --- --- --- 132
Other Assets --- --- --- --- 8
--------- --------- --------- ----------- ----------
TOTAL ASSETS $ 1,228 $ 5,090 $ 5,625 $ (5,625) $ 84,664
========= ========= ========= =========== ==========
Liabilities:
Accounts Payable $ --- $ --- $ --- $ --- $ 258
Mortgages and Notes Payable --- 484 --- --- 3,138
Accrued Liabilities --- 27 --- --- 2,294
Notes Payable - Related --- --- --- 5,625 38
Long-term Debt --- --- --- --- 46
--------- --------- --------- ----------- ----------
TOTAL LIABILITIES --- 511 --- 5,625 5,774
Convertible Note --- --- --- <61,794> 61,794
Minority Equity 257 864 --- --- 16,091
--------- --------- --------- ----------- ----------
257 1,375 --- <56,169> 83,659
--------- --------- --------- ----------- ----------
Shareholder s Equity
Common stock 1 5 7 80 10
Capital in excess of par 970 3,710 5,618 61,714 1,661
Accumulated Deficit --- --- --- --- <666>
--------- --------- --------- ----------- ----------
TOTAL SHAREHOLDERS 971 3,715 5,625 61,794 1,005
--------- --------- --------- ----------- ----------
EQUITY
TOTAL LIABILITIES &
SHAREHOLDERS $ 1,228 $ 5,090 $ 5,625 $ 5,625 $ 84,664
========= ========= ========= =========== ==========
EQUITY
</TABLE>
The accompanying notes are an integral part of the unaudited pro forma
condensed consolidated financial statements.
17
<PAGE> 20
INTERNATIONAL REALTY GROUP, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1996
<TABLE>
<CAPTION>
COMPANY CENTRO IXTAPA PRO FORMA
------- ------ ------ ---------
CONSOLIDATED
------------
<S> <C> <C> <C> <C>
Revenue:
Professional Fees $ 309,800 $ --- $ --- $ 309,800
Interest --- 56,363 56,363
---------- --------- --------- ------------
TOTAL REVENUE 309,800 --- 56,363 366,163
---------- --------- --------- ------------
Operating Expenses
Amortization and Depreciation 27,400 --- --- 27,400
Bad Debt 24,200 --- --- 24,200
Direct Operating 163,000 --- --- 163,000
Interest 4,400 --- --- 4,400
Payroll and Related 147,000 --- --- 147,000
Rent 22,000 --- --- 22,000
Selling, General and Administrative 77,400 --- --- 77,400
---------- --------- --------- ------------
TOTAL OPERATING EXPENSE 465,400 --- --- 465,400
---------- --------- --------- ------------
Income (Loss) Before Other Additions,
Minority Interests and Taxes <155,600> --- 56,363 <99,237>
---------- --------- --------- ------------
Gain (Loss) on Sale of Assets --- --- <497> <497>
Other Deductions --- <28> <8,164 <8,192>
---------- --------- --------- ------------
--- <28> <8,661 <8,689>
---------- --------- --------- ------------
Income (Loss) Before Provision for Income Tax <155,600> <28> 47,702 <107,926>
Provision for Income Tax --- --- 16,219 16,219
---------- --------- --------- ------------
Income (Loss) Before Minority Interest <155,600> <28> 31,483 <124,145>
Minority Interest 2,900 2,900
---------- --------- --------- ------------
Net Income (Loss) $ <152,700> $ <28> $ 31,483 $ <121,245>
========== ========= ========= ============
Loss per Common share $ <0.02> --- --- $ <0.01>
========== ========= ========= ============
Weighted average Common shares, 8,954,182 --- --- 9,954,250
outstanding ========== ========= ========= ============
</TABLE>
The accompanying notes are an integral part of the unaudited pro forma
condensed consolidated financial statements.
18
<PAGE> 21
INTERNATIONAL REALTY GROUP, INC.
AND SUBSIDIARIES
NOTES TO PRO-FORMA CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(UNAUDITED)
The foregoing financial information has been prepared from the audited and
unaudited financial statements of the Company, Centro de Promociones Guerraro,
S.A. de C.V. ("Centro"), and Cluster Inmobiliaria de Ixtapa, S.A. de C.V.
("Ixtapa"), dated December 31, 1995 and June 30, 1996 and the audited and
unaudited financial statements of Barra del Tordo, Participating Association
("Barra del Tordo"), Bahia de Cortes, Participating Association ("Bahia de
Cortes"), Villas del Carbon Participating Association ("Villas del Carbon"),
and Hacienda de Franco Participating Association ("Hacienda de Franco"), dated
March 31, 1996 and June 30, 1996 and should be read in conjunction with such
statements and the related notes, included elsewhere herein.
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF ACCOUNTING:
International Realty Group, Inc., and subsidiaries, prepares its financial
statements in accordance with generally accepted accounting principles. This
basis of accounting involves the application of accrual accounting;
consequently, revenues and gains are recognized when earned, and expenses and
losses are recognized when incurred. Financial statement items are recorded at
historical cost and often involve the utilization of estimates. Consequently,
financial statement items do not necessarily represent current values.
PRINCIPLES OF CONSOLIDATION:
The consolidated financial statements include the accounts of International
Realty Group, Inc. (the "Company") and all material subsidiaries. All
significant intercompany balances and transactions have been eliminated in
consolidation for the Company.
PURCHASE METHOD:
The Company utilized the purchase method of accounting for the treatment
of the acquisition of the companies and interest from DSC and Hemisphere. At
Closing, the Company issued its Common Stock and Notes in consideration of the
purchase price for the assets acquired.
DEVELOPMENT STAGE:
The Company acquired 100% ownership in Nueva Tierra S.A. de C.V.(" Nueva
Tierra"), 70% from Hemisphere and 30% from DSC, at Closing. Nueva Tierra s
assets consist of its majority interest in the four Participating Associations,
Barra del Tordo, Bahia de Cortes, Villas del Carbon and Hacienda de Franco.
The associations were formed during January and February 1996. The
Associations are considered as being in the development stage. From their
inception to date, the entities have been devoted primarily to planning the
developments, raising capital, securing debt financing and negotiating with
lenders and have not implemented the development plan for the respective
properties.
19
<PAGE> 22
LAND HELD FOR INVESTMENT:
Land held for investment is stated at cost. All property acquired in the
Transaction, as described herein, is currently held for investment until such
time as the property is sold or the development plan of the property is
implemented by the Company, which would reclassify the property to land under
development. As provided herein, any development of the above properties by
the Company is contingent upon the completion of a development plan for the
individual property, including the determination of the highest and best use,
market viability, the estimated cost to complete the project, and a
determination by the Company that it has sufficient capital resources to meet
the quantified development costs as budgeted in the development plan.
LAND HELD FOR DEVELOPMENT:
Land held for development is stated at cost. When the development plan
has been approved by management, and the project commences construction, the
property is reclassified to land held for development. Period interest and all
development costs will be capitalized, but interest is not capitalized during
material delays.
2. NOTES TO PRO FORMA DATED DECEMBER 31, 1995
The foregoing financial information has been prepared from the audited
consolidated financial statements of the Company, and the audited financial
statements of the following companies: Centro de Promociones Guerraro, S.A. de
C.V., Cluster Inmobiliaria de Ixtapa, S.A. de C.V., dated December 31, 1995 and
the audited financial statements of Barra del Tordo, Bahia de Cortes, Villas
del Carbon, and Hacienda de Franco, dated March 31, 1996 and should be read in
conjunction with such statements and the related notes, included elsewhere
herein.
ACCOUNTS AND NOTES RECEIVABLE AND NOTES PAYABLE -- RELATED:
Various related entities are engaged in transactions including, but not
limited to, short-term advances to cover operating costs and working capital.
All such transactions were with entities related to DSC, S.A. de C.V. Group and
are recorded in separate accounts that comprise the amounts due from affiliates
and amounts due to affiliates. Balances due from or to the related parties as a
result of these transactions are non-interest bearing and unsecured. In the
opinion of management, the realization of amounts due from affiliates and the
payment of amounts due to affiliates will be realized/liquidated during the
normal course of business.
At Closing, the Company acquired from DSC a Note Receivable--Related, from
Clusters Ixtapa, which the Company acquired 75% of in the Transaction, in the
amount of $5,505,000 and a corresponding Note Payable from Clusters Ixtapa to
DSC for the same amount. The Note Receivable and Note Payable from Clusters
Ixtapa was eliminated in consolidation.
STOCKHOLDER EQUITY:
The pro forma adjustments to Common Stock, additional paid-in capital and
Convertible Notes as of December 31, 1995 reflect the issuance of 514,070
shares of Common Stock, par value $.001, to Hemisphere and a Convertible Note
of $31,455,000, and 495,930 shares of Common Stock, par value $.001, to DSC and
a Convertible Note of $28,992,000. Upon the authorization of the increase in
capital of the Company, each Convertible Note would be convertible into the
Company s Common Stock on the basis of $.782 per share. The number of shares
to be issued would be to Hemisphere Developments Limited 40,223,785 shares and
to DSC, S.A. de C.V. 37,074,168 shares.
20
<PAGE> 23
The net transfer value( net equity) for the companies and interests
acquired from Hemisphere and DSC as of December 31, 1995 would have been:
HEMISPHERE DSC
<TABLE>
<CAPTION>
Net Transfer Value Net Transfer Value
(000 omitted) (000 omitted)
<S> <C> <C> <C>
Barra del Tordo $ 5,207 Centro Promociones $ 307
Bajia de Cortes 35,713 Clusters Ixtapa 9,907
Villa de Carbon 951 Clusters Note 5,505
Hacienda de Franco 3,639
--------- ---------
TOTAL Nueva Tierra $ 45,510 15,719
=========
70% Nueva Tierra 31,857 30% Nueva Tierra 13,653
--------- ---------
TOTAL $ 31,857 TOTAL $ 29,372
========= =========
Issued 514,070 shares 402 Issued 495,930 shares 380
Convertible Note 31,455 Convertible Note 28,992
--------- ---------
TOTAL $ 31,857 TOTAL $ 29,372
========= =========
</TABLE>
At Closing, the Company acquired 100% of Nueva Tierra by the acquisition
of 30% from DSC and the acquisition of Newland Corporation, whose sole asset
is its 70% ownership of Nueva Tierra, from Hemisphere.
FOREIGN CURRENCY TRANSLATION:
Adjustments for currency exchange rate changes are excluded from net
income for those fluctuations that do not impact cash flow. Local currency is
generally considered the functional currency outside the United States. All
assets and liabilities are translated into United States dollars at period-end
exchange rates. Income and expense items are translated at average rates of
exchange prevailing during the year. The Mexican exchange rate used for the
twelve months ended December 31, 1995 was NP$7.7396 and was obtained from the
Diario Official de la Federacion. The Hungarian exchange rate used for the
twelve months ended December 31, 1995 was HUF 139.81. Temporary gains and
losses resulting from translation, if material, are reflected as currency
translation adjustments in shareholders' equity. Permanent adjustments are
reflected in the consolidated statements of operations. The Mexican exchange
rate for March 31, 1996 was NP$7.5. The financial statements for the
companies with this reporting date were adjusted to reflect the peso exchange
rate as of December 31, 1995.
3. NOTES FOR PRO FORMA DATED JUNE 30, 1996
The foregoing financial information has been prepared from the unaudited
consolidated financial statements of the Company, and the unaudited financial
statements of the following companies: Centro de Promociones Guerraro, S.A. de
C.V., Cluster Inmobiliaria de Ixtapa, S.A. de C.V., Barra del Tordo, Bahia de
Cortes, Villas del Carbon, and Hacienda de Franco, and should be read in
conjunction with such statements and the related notes, included elsewhere
herein.
21
<PAGE> 24
FOREIGN CURRENCY TRANSLATION:
Adjustments for currency exchange rate changes are excluded from net
income for those fluctuations that do not impact cash flow. Local currency is
generally considered the functional currency outside the United States. All
assets and liabilities are translated into United States dollars at period-end
exchange rates. Income and expense items are translated at average rates of
exchange prevailing during the year. The Mexican exchange rate used for the
six months ended June 30, 1996 was NP$7.5814. Rates for 1996 were obtained
from the Diario Official de la Federacion. The Hungarian exchange rate used
for the six months ended June 30, 1996 was HUF153.05. Temporary gains and
losses resulting from translation, if material, are reflected as currency
translation adjustments in shareholders' equity. Permanent adjustments are
reflected in the consolidated statements of operations.
STOCKHOLDER EQUITY:
The pro forma adjustments to Common Stock, additional paid-in capital and
Convertible Notes as of June 30, 1996 reflect the issuance of 514,070 shares of
Common Stock, par value $.001, to Hemisphere and a Convertible Note of
$32,120,000, and 495,930 shares of Common Stock, par value $.001, to DSC and a
Convertible Note of $29,674,000. Upon the authorization of the increase in
capital of the Company, each Convertible Note would be convertible into the
Company s Common Stock on the basis of $.782 per share. The number of shares
to be issued would be to Hemisphere Developments Limited 41,074,732 shares and
to DSC, S.A. de C.V. 37,945,854 shares.
The net transfer value (net equity) for the companies and interests
acquired from Hemisphere and DSC as of June 30, 1996 is:
HEMISPHERE DSC
<TABLE>
<CAPTION>
Net Transfer Value Net Transfer Value
(000 omitted) (000 omitted)
<S> <C> <C> <C>
Barra del Tordo $ 5,316 Centro Promociones $ 377
Bajia de Cortes 36,459 Clusters Ixtapa 10,109
Villa de Carbon 971 Clusters Note 5,628
Hacienda de Franco 3,715
--------- ---------
TOTAL Nueva Tierra $ 46,461 $ 16,114
========= =========
70% Nueva Tierra 32,522 30% Nueva Tierr 13,938
--------- ---------
TOTAL $ 32,522 TOTAL $ 30,052
========= =========
Issued 514,070 shares 402 Issued 495,930 shares 380
Convertible Note 32,120 Convertible Note 29,674
--------- ---------
TOTAL $ 32,522 TOTAL $ 30,052
========= =========
</TABLE>
At Closing, the Company acquired 100% of Nueva Tierra by the acquisition
of 30% from DSC and the acquisition of Newland Corporation, whose sole asset is
its 70% ownership of Nueva Tierra, from Hemisphere.
22
<PAGE> 25
CONVERTIBLE NOTES:
Upon authorization of the increase in capital, the Convertible Notes will
be retired and the Company s shareholders equity would be as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1995 JUNE 30, 1996
----------------- -------------
PRO FORMA AS CONVERTED PRO FORMA AS CONVERTED
<S> <C> <C> <C> <C>
COMMON STOCK 10 86 10 90
CAPITAL IN EXCESS OF PAR 1,616 61,993 1,659 63,373
ACCUMULATED DEFICIT <463> <463> <666> <666>
------ ------- ------ -------
$1,163 $61,616 $1,003 $62,797
</TABLE>
ACCOUNTS AND NOTES RECEIVABLE AND NOTES PAYABLE -- RELATED:
Various related entities are engaged in transactions including, but not
limited to, short-term advances to cover operating costs and working capital.
All such transactions were with entities related to DSC, S.A. de C.V. Group and
are recorded in separate accounts that comprise the amounts due from affiliates
and amounts due to affiliates. Balances due from or to the related parties as
a result of these transactions are non-interest bearing and unsecured. In the
opinion of management, the realization of amounts due from affiliates and the
payment of amounts due to affiliates will be realized/liquidated during the
normal course of business.
At Closing, the Company acquired from DSC a Note Receivable--Related, from
Clusters Ixtapa, which the Company acquired 75% of in the Transaction, in the
amount of $5,628,000 and a corresponding Note Payable from Clusters Ixtapa to
DSC for the same amount. The Note Receivable and Note Payable from Clusters
Ixtapa was eliminated in consolidation.
SUBSIDIARIES:
Subsidiaries of the Company as of August 19, 1996 are as follows:
<TABLE>
<CAPTION>
NAME OF SUBSIDIARY OWNERSHIP DATE OF STATE OR COUNTRY
- ------------------ --------- ------- ----------------
% INCORPORATION OF INCORPORATION
- ------------- ----------------
<S> <C> <C> <C>
The Appraisal Group, Inc. 100 August 21, 1974 Florida
U.S. Properties Investment & Auction, Inc. 100 March 31, 1987 Florida
Appraisal Group International., Inc. 100 July 7, 1989 Florida
Stragix International., Inc. 100 April 1, 1990 Florida
Appraisal Group International., Rt. 75 June 6, 1990 Hungary
IRG Financial Services, Inc. 100 June 15, 1992 Florida
Caye Bokel Limited 100 January 27, 1995 Belize
Newland Corp. 100 December 12, 1995 Marshall Islands
Nueva Tierra S.A. de C.V. 100 October 6, 1995 Mexico
Centro de Promociones Guerraro, S.A. de C.V. 100 March 13, 1989 Mexico
Clusters Inmobiliaria de Ixtapa, S.A. de C.V. 75 July 24, 1991 Mexico
Villa Del Carbon A.P. 79.08 January 19, 1996 Mexico
Hacienda Del Franco A.P. 81.13 January 10, 1996 Mexico
Barra Del Tordo A.P. 79.82 January 17, 1996 Mexico
Bahia de Cortes A.P. 78.1 February 7, 1996 Mexico
</TABLE>
23
<PAGE> 26
CERTAIN INFORMATION CONCERNING THE COMPANY
GENERAL
International Realty Group, Inc., together with its consolidated
subsidiaries (the "Company") have their principal executive offices at 111
Northwest 183rd Street, Suite 350, Miami, Florida 33169, telephone number (305)
944-8811, fax number (305) 651-3394. The Company currently is a provider of
real estate consulting services. The Company's operations provide appraisal,
valuation and other real estate and business consulting services on an
international basis.
The Company was incorporated in Delaware on April 13, 1970 and operated
under the name Bosco Resources Corporation until June 10, 1973, when it ceased
operations after its assets were nationalized without compensation by the
Libyan Government. The Company remained inactive until December 15, 1986 when
it acquired all of the outstanding shares of Appraisal Group, Inc. in exchange
for 4,150,000 shares of common stock (after a 1 for 8 reverse split) and
changed its name to Appraisal Group International Inc. Subsequently, on August
10, 1989, the Company's name was changed to International Realty Group, Inc.
BUSINESS OPERATIONS
The Company operates through its domestic and foreign subsidiaries, which
represented 44% and 56%, respectively, of total revenue in 1995. The Company's
operating strategy is to market its professional services in the United States,
Latin America, Europe, the Pacific Rim and other emerging markets. By
emphasizing the Company as a boutique appraisal practice with the ability to
perform the more complex and unique appraisal assignments on a domestic and
international level, the Company believes it will continue to attract a
superior client base providing above market service fees and income. In
addition to its valuation practice, the Company's other activities, which
during 1995 did not provide meaningful revenue, involve real estate brokerage
and mortgage consulting services. Such other services could enhance the
Company's operating capabilities as they are developed and marketed to the
Company's client base.
Appraisal Group, Inc.
Appraisal Group, Inc. is an appraisal and valuation company specializing
in commercial real estate, machinery, equipment, business and residential
appraisals. Founded by Jack Birnholz, in 1957, Appraisal Group, Inc. operated
in New Jersey from 1957 to 1974. From 1974 to the present, the subsidiary has
been located in Miami, Florida.
Appraisals are performed on a domestic and international level, including
recent engagements in Mexico, China, Lithuania, Estonia, Panama, and Hungary.
It is estimated that 60% percent of appraisal revenue is derived from projects
in the United States and 40% percent from international projects. Commercial
properties such as office buildings, shopping centers, apartment complexes,
hotels, resorts, golf courses, townhouses, condominiums, and warehouses
constitute the bulk of Appraisal Group, Inc.'s business. Appraisal Group, Inc.
also performs single family appraisals in order to fully service its clients.
The appraisals are generally full narrative appraisals prepared in
accordance with the Uniform Standards of Professional Appraisal Practice. A
typical commercial appraisal is approximately 125 to 200 pages. The fee range
for commercial appraisals is from $2,500 to $50,000 with an average fee
24
<PAGE> 27
of $5,500. The appraisals are utilized by governmental agencies, banks,
institutions, property owners, developers and attorneys for a variety of
purposes, including financing, insurance, portfolio analysis, litigation
support, estate analysis and current market valuation. The residential
appraisals are for the most part, completed on forms promulgated by the Federal
National Mortgage Association (Fannie Mae) and Federal Home Loan Mortgage
Corporation (FHLMC) and are less time consuming than commercial appraisals, with
an average fee of $300.
Machinery and equipment appraisals are primarily performed at industrial
and commercial facilities. Clients are typically governmental agencies, buyers
or sellers of the facilities, persons seeking financing, trustees of estates
and lenders. The typical machinery and equipment appraisal is a detailed
valuation of either market value, replacement value or liquidation value,
depending upon the purpose of the appraisal and the client's parameters. The
fee for a typical machinery and equipment appraisal can range from $1,500 to
$25,000, with an average fee of $3,200.
Business valuations have become an increasingly important marketing area.
A business valuation analyzes the value of a company's present assets. The
evaluation of a business utilizes different methods and techniques from the
appraisal of real estate. A business valuation attempts to determine a
company's goodwill value by determining if it generates income in excess of
what is required to provide an acceptable rate of return to the owners. The
range of fees for business valuations are $3,000 to in excess of $25,000 with
an average fee of $5,000.
In connection with all facets of its valuation activities, Appraisal
Group, Inc. performs litigation support services. Such services primarily
consists of court testimony in federal and state courts, bankruptcy and estate
proceedings and commercial litigation.
Except for salaries of the Chief Executive Officer, secretary and
administrative staff, the staff of Appraisal Group, Inc. consists of
independent contractors who accept assignments pursuant to negotiated fee
arrangements. All appraisers must be licensed and certified real estate
appraisers, pursuant to applicable law. In addition to the appraisers in the
Miami office, the company contracts with other licensed and certified
independent contractors on an as-assignment basis internationally.
Title XI of the Federal Financial Institutions Reform Recovery and
Enforcement Act of 1989 ("FIRREA") effectively has regulated the appraisal
profession. Under FIRREA, federally-insured financial institutions are
required to use state licenses and certified appraisers. In connection with
this statute, the Appraisal Foundation was formed to represent various
appraisal organizations and is the parent organization of the Appraiser
Qualifications Board and the Appraisal Standards Board.
The Appraisal Standards Board sets standards for contents and methodology
of appraisals. Appraisal Group, Inc. appraisers perform their assignments in
compliance with relevant provisions and regulations of both boards noted above
as well as the Uniform Standards of Professional Appraisal Practice.
Appraisal Group International, Rt.
Appraisal Group International, Rt. ("AGI Rt."), a Hungarian company is 75%
owned by Stragix International, Inc. ("Stragix"), which is itself a
wholly-owned subsidiary of the Company. AGI Rt. is engaged in valuations of
businesses, real estate, management, consulting, privatization management and
trade brokerage in Central and Eastern Europe. AGI Rt. was originally formed
25
<PAGE> 28
on June 6, 1990 between Stragix and Novotrade Rt., a Hungarian company. On
October 12, 1992, Stragix acquired Novotrade's 50% interest in AGI Rt. for cash,
assumption of debt, and a note payable. On June 30, 1995, the Company sold 25%
of its interest to certain officers and directors of AGI Rt.
AGI Rt. employs ten full-time employees (all Hungarian) consisting of
administrative and staff consultants and in addition retains outside business
consultants and appraisers on assignments as required. Using Budapest, Hungary
as a base, AGI Rt. markets its services to other European countries. AGI Rt.
utilizes the technical know-how and methodology of Appraisal Group, Inc. to
appraise properties and business. The utilization of western appraisal
technology brings credibility to valuations, presenting an area of conformity
to investors in Central and Eastern Europe.
The majority of business of AGI Rt. has been the valuation of businesses
and real estate, primarily for the State Property Agency, an agency of the
Hungarian government and local city municipalities. In addition, AGI Rt. is an
official court appointed liquidator. As court appointed liquidator, the
Company is responsible to oversee the operational and financial integrity of
the liquidating companies. Currently AGI Rt. is liquidating 130 separate
companies on behalf of the court. As of December 31, 1995, AGI Rt. had on
deposit $678,882 in restricted cash on behalf of the companies they were
liquidating. AGI Rt. is reimbursed by the liquidating companies for its
direct expense during the liquidation process and a "success fee" of
approximately four to five percent of the net recovery upon liquidation of the
company. The complete liquidation process for an individual company takes
approximately two years.
Competition
There is significant competition in the field of appraisals and real
estate consulting services. Industry sources estimate that the appraisal
service industry in the United States includes over 84,000 state licensed and
certified appraisers in the United States. The Company's competition generally
comes from three types of organizations: (i) "Big Six" accounting firms; (ii)
multi-office appraisal firms; and (iii) small appraisal firms. A majority of
the large accounting firms have appraisal departments. The name recognition of
these large accounting firms provides such firms with a competitive advantage,
however, the Company believes that their relatively high fees for services
allow market penetration by firms such as the Company. All of the major
accounting firms possess substantially greater financial and other resources
that the Company. The most prominent United States multi-office appraisal
firms are American Appraisal Company, Marshal & Stevens, Joseph Blake &
Associates, Cushman & Wakefield and Valuation Consultants International Ltd.
The majority of appraisal firms employ one to five appraisers who are primarily
involved in residential appraisals, although some small firms do perform
commercial appraisals. These firms may have lower overhead then the Company,
however, they may lack the expertise to perform complex commercial appraisals
and accept assignments on an international basis as the Company routinely does.
OTHER ACTIVITIES
U.S. Property Investment & Auction, Inc. ("U.S. Properties"), was
organized in March 1987 and is a licensed Florida Real Estate Broker. The
company provides to its foreign and domestic clients real estate brokerage and
property management services.
26
<PAGE> 29
IRG Financial Services, Inc. ("IRG FS") was organized in June 1992. The
company provides financial consulting and mortgage loan packaging services to
its foreign and domestic clients.
Caye Bokel Limited ("Caye Bokel") was organized on January 27, 1995, under
the laws of the country of Belize. The Company owns 87 acres of undeveloped
land on the Island of Caye Bokel, country of Belize, held for investment. See
"Description of Property" and "Management's Discussion and Analysis or Plan of
Operations - Liquidity and Capital Resources".
EMPLOYEES
The Company, as a whole, employs 16 full-time employees. In addition, the
Company retains 21 independent contractors to perform professional services on
a regular basis and additional independent contractors to perform professional
services on an ad hoc basis.
DESCRIPTION OF PROPERTY
The Company, or through its subsidiaries, currently is subject to two
leases for office facilities and owns eight properties currently held for
investment.
The Company leases 3,308 square feet of office space located in Miami,
Florida, which serves as the Company's corporate headquarters and its domestic
operations. In addition, it leases 2,500 square feet of office space in
Budapest, Hungary, which is utilized by its foreign operations. Both leases
are on a month-to-month basis. The Company's aggregate lease payments per
month are approximately $4,000.
Title or ownership of the Company's properties are held by two methods:
Fee simple and through Trust agreements. Property owned through Trust
agreements (Trust rights) is a unique form of ownership in Mexico. In 1859
the Mexican Federal Constitution forbade real estate to be sold in fee to
non-Mexicans within fifty kilometers from Mexico's shores or within one hundred
kilometers along Mexico's borders (the "restricted zone"). Under Section 346
of Mexico's Credit Instruments and Transactions Law, non-Mexicans may own real
estate through the utilization of Trust agreements. Under a trust agreement,
the property owner, called the settlor, settles property in trust with a
trustee, a credit institution, for a determined legal purpose and for the
benefit of a beneficiary who may be settlor himself. Ownership is typically
divided among three parties: the settlor; the trustee; and the beneficiary.
None of these parties is thus considered to be a full owner in fee of the
property settled in trust. Therefore, the Trust vehicle provides to both
Mexican and non-Mexican all of the rights, use, enjoyment, ability to encumber,
rent, modify, construct, and sell the real estate placed in trust. All of the
Company s properties located in Mexico are held pursuant to "Trust Rights."
The Company s real estate properties include:
(i) Clear Lake Pines - two developed vacant lots totaling one acre
located in Clear Lake Pines, La Grange, Texas, which is wholly owned by the
Company s subsidiary, Appraisal Group, Inc. The property is currently being
held for investment purposes. Clear Lake Pines is a second-home recreational
development. The property is not subject to a mortgage or other encumbrances.
27
<PAGE> 30
(ii) Caye Bokel - an 87 acre parcel of undeveloped land on the Island of
Big Caye Bokel, located in the Turneffe Islands in the country of Belize, which
is wholly owned by the Company s subsidiary, Caye Bokel Limited. The property
is currently being held for investment purposes. Although the Company presently
has no understandings or agreements with respect to the development of Caye
Bokel, management believes that the highest and best use for the property is a
250-unit hotel/villa destination resort with marina to attract both North and
South American tourists interested in the sports fishing, scuba and other water
sports activities available on the Barrier Reef the property is located adjacent
to. The Company is aware of at least four small (10 to 25 rooms) potentially
competitive resorts in the Turneffe Islands, including a 22 room resort on the
island adjacent to Big Caye Bokel that caters to divers and sport fishermen.
The property is not subject to any mortgage or other encumbrances.
(iii) Campo de Tiro - an 8-acre partially developed property, located in
the city of Acapulco, State of Guerraro, Mexico, which is wholly owned by the
Company s subsidiary Centro de Promociones Guerraro S.A. de C.V. The property
is currently being held for investment. Although the Company presently has no
understandings or agreements with respect to Campo de Tiro, the preliminary
development plan calls for construction of social housing, which is government
assisted residential housing over a period of 24 months, consisting of 124
two-story duplex townhouses, 250 units in total. The Company believes that all
necessary licenses, permits, and governmental approvals have been obtained for
the construction of residential housing on such property. The Company is aware
of one other social housing development which is proposed to be constructed
within 10 miles of the Campo de Tiro site. Accordingly, the Company believes
that in the event that the Company so develops the Campo de Tiro site, the
development will be able to effectively compete in its market. The property is
subject to a mortgage in the principal amount, as of June 30, 1996, of
$334,004, at 6% over the average bank deposit rate in Mexico. Accrued interest
on this mortgage was $325,504 as of June 30, 1996. The bank has committed to a
total construction mortgage loan of $874,861 maturing in March, 1997.
(iv) Clusters Ixtapa - a 26-acre partially developed property located
within the 208-acre planned unit development called Marina Ixtapa located in
the town of Ixtapa-Zihuatanejo on the Pacific Coast of Mexico, approximately
240 kilometers northwest of the port of Acapulco, which is majority (75%) owned
by the Company s subsidiary Clusters Inmobiliaria de Ixtapa, S.A. de C.V.. The
preliminary site work has been completed and the property is currently held for
investment. Although the Company presently has no understandings or agreements
with respect to the development of the property, the development plans call for
the construction of 144 residential and commercial condominium units in three
buildings of four-stories each, and the development of 60 single family
residential villas. Management estimates that future improvement and
development costs to complete this project are approximately $37,000,000 over
a five-year period. The project would be completed in intervals in order to
allow the Company to build the project in 20% stages through a revolving
construction line of credit. The Company is aware of at least five similar
projects developed or under development in Marina Ixtapa. Preliminary market
research indicates that the competition in the market for single family
developments is intense, while the competitive conditions for the commercial
and condominium developments is less intense. The property is subject to a
mortgage in the approximate amount of $5,625,000 at an interest rate of 5.25%.
Pursuant to the DSC Transaction, the Company acquired from DSC the $5,625,000
debt obligation of Clusters Ixtapa on the Closing Date. See "DSC Assets" and
the "Pro Forma Financial Information" contained herein.
28
<PAGE> 31
(v) Villas del Carbon Residential Complex - a 24-acre partially developed
property located in Villa del Carbon, State of Mexico, Mexico, one hour
northwest of Mexico City by highway, between the villages of Atlacomulco and
picturesque Tepozotlan, which is majority (79.1%) owned by the Company s
subsidiary Nueva Tierra. The property presently has a clubhouse, roads, and
utility lines to the property boundary. The property is currently held for
investment. Although the Company presently has no understandings or agreements
with respect to the development of the property, development plans call for
development of 180 home sites for sale to builders or individuals who wish to
construct weekend country houses. Prior to sale of the home sites, the
development plan calls for construction of electric lines, water supply,
stormwater drain pipes and street lighting to each of the individual lots. The
cost to complete this project would be approximately $1,700,000 in four stages.
The Company is not aware of any similar existing or proposed projects in the
area immediately adjacent to Villas del Carbon, although any such development
will compete with other weekend country house developments that are within a 1
to 2 hour drive of Mexico City. The first stage would require a revolving
construction line of credit in the approximate amount of $400,000. This
property is not subject to any mortgage or encumbrances.
(vi) Barra del Tordo Resort Complex - a 670-acre partially developed
property located in Barra del Tordo in the state of Tamaulipas, Mexico,
approximately 250 miles south of Brownsville, Texas and 50 kilometers north of
the port of Tampico, Mexico, which is majority (79.82%) owned by the Company s
subsidiary Nueva Tierra. The property has 3.5 kilometers of beachfront facing
the Gulf of Mexico within the tourist corridor known as "La Pesca-Barra del
Tordo". At present, construction of 24 condominiums is approximately 80%
complete. Roads, sewers, waterlines and utilities have been constructed for
these condominiums. The property is currently held for investment. Although
the Company presently has no understandings or agreements with respect to the
development of the property, preliminary development plans call for the
completion of the existing 24 condominium units and the design and cost
estimates for the balance of the project. Subject to completion, the Company
believes that this condominium development will be able to effectively compete
against the other small hotel properties within the La Pesca-Barra del Tordo
corridor. This property is subject to mortgages in the principal sum of
$2,123,200 at interest rates ranging from 3.0% to 12% with the average rate
being 5.2%, due at various maturity dates between 1996 and the year 2008.
Accrued interest on the mortgage was approximately $1,367,098, as of June 30,
1996.
(vii) Hacienda del Franco - a 260-acre partially developed property,
located approximately 3 kilometers from the city of Silao, in the State of
Guanajuato, Mexico, which is majority (81.13%) owned by the Company s
subsidiary Nueva Tierra At present, the property contains a traditional
colonial style hacienda (a countryside estate), roads have been graded,
utilities, sewers and water system is on the property. Preliminary plans call
for the development of multi acre single family haciendas. Preliminary market
research indicates that there are no similar type developments in the market
area. This property is currently being held for investment. The property is
subject to mortgages in the principal sum of $483,618 at interest rates of 4.5%
and 5.2%, maturing in the year 2007. Accrued interest on this mortgage was
approximately $27,609, as of June 30, 1996.
(viii) Bahia de Cortes - a 3,080-acre undeveloped property located in La
Paz, Baja California Sur, which is majority (78%) owned by the Company s
subsidiary, Nueva Tierra. The property consists of approximately 3,080 acres of
land including over five kilometers of beachfront. The property is currently
held for investment and is not subject to any mortgage or
29
<PAGE> 32
encumbrances. To the extent that this property is developed, it will face
significant competition from other established properties in the La Paz area of
Baja California Sur.
Any development of the above properties by the Company is contingent upon
the completion of a development plan, determining the highest and best use of
the properties, the estimated cost, the market viability, a determination by
the Company that it has sufficient capital resources to meet the quantified
development cost as budgeted in the development plan.
MINORITY INTERESTS
At the Closing of the DSC Transaction, the Company also elected not to
acquire DSC's 12.3 percent interest in Malecon S.A. de C.V. and DSC's 30
percent interest in Corporacion Inmobiliaria del Norte, S.A. de C.V., since
such interests were subject to a right of first refusal by the majority
stockholders of the respective companies and certain pledges to banks or other
financial institutions. In the event that such rights of first refusal are
waived and such pledges are removed or accepted by the Company, the DSC
Agreement provides that the Company may acquire such interests by issuing to
DSC a convertible note (on terms similar to the DSC Note) in the principal
aggregate amount of $2,600,855. Set forth below is certain information
regarding such interests.
Corporacion Inmobiliaria Del Norte, S.A. de C.V. owns property designated
as the Las Flores Residential Complex in Hermosillo, Mexico, which consists of
approximately 200 acres of land, located approximately five kilometers south of
downtown Hermosillo in northern Mexico. Development plans call for the
construction of "social housing," which is government assisted housing for low
income families. The plans call for construction in stages over a period of
eight years of 3,960 houses built on an average area of 117 square meters, with
50 square meters of construction. Financing in the amount of $7,720,000 is
being negotiated for construction of 909 houses. At this time, government
approvals have been obtained for construction of 340 of these houses, and
construction is expected to be completed in December of 1996 with the balance
of construction proceeding as additional government approvals are received.
Each house will be listed for sale at approximately $12,130.
Malecon Cancun, S.A. de C.V. ("Malecon"), which was incorporated in Mexico
on June 11, 1991, owns 230 acres of land located in Cancun, Mexico. This land
is held for investment or possible development.
ENVIRONMENTAL REGULATIONS
The Company has been advised by DSC that the acquired companies are not
subject to any claims for liability for cleanup of waste sites or environmental
contamination of property and that such companies do not currently anticipate
any material adverse effect on the results of operations, earnings or
competitive position as a result of compliance with environmental regulations.
Such companies are subject to numerous environmental laws of Mexico, its states
and local governments relating to the development of real estate. DSC believes
that the existing environmental controls procedures are adequate, and there are
no current plans for substantial capital expenditures in this area.
30
<PAGE> 33
REAL ESTATE INVESTMENT POLICY
The Company's real estate investment policy is to acquire both existing
income-producing real estate properties to provide current income and cash flow
and undeveloped properties to provide capital appreciation. The real estate
policy is not subject to shareholder approval and does not restrict the Company
to a particular type, size or geographic location for any such acquisitions or
the number or amount of mortgages that my be placed on any one piece of
property. The Company seeks to acquire properties that: (i) are significantly
under-valued in relation to its market or type; (ii) where the properties debt
can be restructured to provide enhanced cash flow; (iii) where a property is
partially developed and can be acquired for a discount and the development
completed and operated at above-average returns. At this time management
believes there are a number of such opportunities in Mexico, the Caribbean and
other South American countries. The Company may acquire its ownership through
the direct purchase of the property or through the acquisition of the Common
Stock or other equity securities of an entity whose primary activity is the
operation or development of the real estate property. The Company may acquire
its real estate acquisitions through the issuance of its Common Stock or the
assumption of existing debt. In all instances the minimization of mortgage
debt and debt service requirements will be a prime consideration to a
particular property acquisition.
LEGAL PROCEEDINGS
There are no legal proceedings pending against the Company.
CHANGE IN ACCOUNTANT
On April 30, 1994 Herb Woll (the "Accountant"), the Company's independent
public accountant, advised the Board of Directors that he was entering into
semi-retirement and would not stand for re-election after completion of the
1993 annual audit.
The Accountant's report, dated May 6, 1994, of the company and
consolidated balance sheets for the fiscal year ended december 31, 1993 and
1992 and the related consolidated statements of operation of stockholder's
equity and of cash flows did not contain any adverse opinion or was modified as
to uncertainty, audit scope or accounting principals. During such period and
through April 30, 1994, there were no disagreements with the Accountant,
whether or not resolved, on any matter of accounting principals or practices,
financial statement disclosure, or auditing scope or procedure, which, if not
resolved to the Accountant's satisfaction, would have caused it to make
reference to the subject matter of the disagreement in connection with its
report.
On June 1, 1994 the Company engaged the firm of Hixson, Marin, Powell &
DeSanctis, P.A. as its new independent accountant.
DESCRIPTION OF COMMON STOCK
The Company is authorized to issue 10,000,000 shares of Common Stock of
which 9,954,250 shares are currently outstanding. No preferred stock is
presently authorized to be issued by the Company. As noted elsewhere herein,
the Board of Directors of the Company have approved an amendment to the
Company's Certificate of Incorporation to increase the
31
<PAGE> 34
authorized shares of Common Stock from 10,000,000 shares to 450,000,000 shares
and two stockholders of the Company have indicated that they intend to execute a
written stockholder consent on or about the date of this Information Statement
approving such amendment to the Company's Certificate of Incorporation.
Holders of the Common Stock are entitled to one vote for each share held
by them of record on the books of the Company in all matters to be voted on by
the Company's stockholders. No cumulative voting of the Common Stock is
permitted. Holders of the Common Stock do not have any conversion, preemptive
or preferential rights with respect to the Common Stock. The holders of the
Common Stock are entitled to receive ratably such dividends, if any, as may be
declared by the Board of Directors out of funds legally available for the
payment of dividends. There are no redemptive or sinking fund provisions
applicable to the Common Stock. All outstanding Common Stock is fully paid and
are non-assessable. The Common Stock is eligible for trading on the NASD
Electronic Bulletin Board under the symbol IRGR.
32
<PAGE> 35
PRINCIPAL STOCKHOLDERS
The following table sets forth the beneficial ownership of the Common
Stock (as of the date of this Information Statement and as adjusted to give
effect to the conversion of the DSC and Hemisphere notes) by: (i) each of the
Company's Officers and Directors, (ii) each person who is known by the Company
to beneficially own more than 5% of the outstanding Common Stock, and (iii) all
of the officers and directors as a group.
<TABLE>
<CAPTION>
Name and Address Before Conversion of DSC After Conversion of DSC
of Beneficial Owner and Hemisphere Notes(1) and Hemisphere Notes (2)
- ------------------- ------------------------ ------------------------
Percentage Percentage
Amount of Class Amount of Class
------ ---------- ------ ----------
<S> <C> <C> <C> <C>
Jack Birnholz(3) 4,160,000 41.8% 4,160,000 4.6%
Richard Bradbury(3) 1,253,000 12.6% 1,253,000 1.4%
Alton Hollis(3) 9,000 * 9,000 *
DSC S.A. de C.V.(4) 485,930 4.8% 22,440,784 25.2%
Bernardo Dominguez Moreno(4) 485,930 4.8% 22,440,784 25.2%
Bernardo Dominguez Cereceres(4) 485,930 4.8% 22,440,784 25.2%
Jorge Lopez Nunez(4) 485,930 4.8% 22,440,784 25.2%
Pablo Macedo(4) 0 * 0 *
Hemisphere Developments
Limited (5) 514,070 5.2% 41,588,802 46.7%
Monique Roggero-Ciana 514,070 5.2% 41,588,802 46.7%
Nacional Financiera, S.N.C. (6) 0 * 15,991,000 18.0%
All Officers and Directors as
a Group (4 persons) 1,747,930 17.5% 23,702,784 26.6%
=======================================================================================
</TABLE>
* Represents less than one percent of class
(1) As of the date of this Information Statement, there are 9,954,250 shares
of the Company's Common Stock issued and outstanding.
(2) Reflects the beneficial ownership of the Common Stock after the
conversion of the DSC and Hemisphere Notes, which is expected to occur
approximately 20 days after the distribution of this Information Statement
to the Company's stockholders and gives effect to the transfer of
approximately 15,991,000 shares of Common Stock from DSC to NAFIN. See
"The Transaction." As of such date, there will be approximately
88,974,836 shares of Common Stock issued and outstanding.
(3) Such person's address is c/o International Realty Group, Inc., 111 NW 183
Street, Suite 350, Miami, Florida 33169.
(4) Such person's address is c/o DSC, Monterrey 150, Col. Roma Sur, C.P.
06760, Mexico, D.F.
(5) Such person's address is c/o Hemisphere, Atlantic House, 4-8 Circular Road,
Douglas, Isle of Man.
(6) Such person's address is Insurjendes Sur No. 1971, Tower 4, Floor 9, Mexico
City, 01020, Mexico
33
<PAGE> 36
MANAGEMENT'S DISCUSSION & ANALYSIS OR PLAN OF OPERATION:
This discussion should be read in conjunction with the consolidated
financial statements of the Company and the notes thereto, included elsewhere
herein. The historical financial data set forth below for the fiscal years
ended December 31, 1994 and 1995, and June 30, 1996 and as of the end of each
of such periods have been derived from the audited and unaudited financial
statements.
RESULTS OF OPERATIONS:
SIX MONTHS ENDED JUNE 30, 1996 COMPARED TO SIX MONTHS ENDED JUNE 30, 1995.
Total revenues for the six month period ended June 30, 1996 totaled
$309,800 compared to $625,600 for the comparable 1995 six month period, a
decrease of $315,800, or approximately 50%. Domestic operations had total
revenue for the period of $185,300 compared to $295,300 for the comparable 1995
period, a 37% decrease, and foreign operations based in Budapest, Hungary had
total revenue of $117,300 compared to $332,600, a 65% decrease for the
comparable 1995 period. The decrease in revenues for foreign operations is a
direct result of a decrease in consulting assignments awarded to AGI Rt. by its
primary client, the Hungarian government, for privatization activities.
Management continues to explore other government and private sector areas to
market its consulting services, as well as exploring other business activities
in the region.
Total Operating expenses for the six months ended June 30, 1996 were
$465,500 compared to $859,700 for the comparable 1995 period, a decrease of
$394,200, or 46%. Foreign operations accounted for $128,700 or 28% of
operating expenses for the period.
Selling, General and Administrative expenses for the six months ended June
30, 1996 were $77,400 compared to $157,200 for the same period in 1995 a
decrease of $77,800. Bad debt expense for the period was $24,200 compared to
$46,400 for the comparable 1995 period. The Company has instituted legal
proceedings that could result in repayment to the Company of such bad debt.
Amortization and Depreciation expense for the six months ended June 30, 1996
decreased from $46,300 in 1995 to $17,300 in 1996. Rent expense decreased from
$28,000 to $23,000 in 1996. Interest expense decreased from $23,900 in 1995,
to $4,400 in 1996; this decrease was attributable to reduced borrowings by the
foreign operation.
Direct expenses for the six months ended June 30, 1996 including the
production of appraisal reports, appraisers' fees, travel, reproduction,
photography and all related expenses decreased from $315,00 in 1995 to $162,000
in 1996, a decrease of $153,000 or 49%. Such decrease corresponds with the
overall decrease in consulting assignments for the period and the utilization
of the Company s independent contractors. Of direct expenses for the period,
foreign operations accounted for 46%.
Payroll and related benefits expense for the six month period ended June
30, 1996 were $147,000 versus $245,900 for the same period in 1995, a decrease
of $98,900. In addition, to enhance the Company's cash flow, $49,000 of
salary and related expenses was accrued and deferred during this period.
34
<PAGE> 37
The current six month period generated a pre-tax loss, before minority
interest of ($155,600) compared to a pre-tax loss of ($234,100) for the same
1995 period.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
Total revenue for the year 1995 decreased 8% from $1,328,200 in 1994 to
$1,222,100 in 1995. Revenues from foreign operations increased 15% from
$584,000 in 1994 to $690,800 in 1995. The increase in foreign revenue is
attributed to consulting assignments awarded in 1995 by various Hungarian
government agencies and municipalities, which had been postponed during the
1994 Hungarian national elections. Revenues from domestic operations decreased
20% from $744,200 in 1994 to $531,300 in 1995
Total Operating Expenses for the year 1995 decreased 4% from $1,586,100 in
1994 to $1,526,900 in 1995. Corporate General and Overhead Operating Expenses
for the year 1995 were $246,900 versus $276,700, a decrease of $29,800 or 12%.
Bad Debt Expense decreased 46% from $136,500 in 1994 to $73,300 in 1995. Of
the 1995 Bad Debt expense, $19,000 is attributed to domestic operations and
$54,300 to foreign operations. The Company's policy is to monitor collections
on a continuing basis, and recognize such bad debt expenses in the period they
occur. Direct expenses including the production of appraisal reports,
appraisers' fees, travel, reproduction, photography and all related expenses
increased 6% from $582,800 in 1994 to $620,800 in 1995. Included in direct
expenses is approximately $30,000 of accounting, legal and auditing expenses
incurred in the last quarter by the foreign subsidiary. These expenses are
attributable to the foreign operations activities on behalf of the Hungarian
court, which are required in the final phase of the liquidation process.
Interest expense increased $8,794 to $27,000 in 1995, an increase of
$18,300. This increase is attributable to the foreign operations borrowing
cost for short-term working capital requirements. Payroll and related benefits
were consistent, between the periods, with $411,300 in 1994 to $415,700 in
1995. Of this amount, the Chairman and President accrued and deferred $169,400
of said 1995 payroll expense. Rent expense decreased from $79,700 in 1994 to
$55,400 in 1995, a decrease of $24,300. The foreign operations benefitted from
the relocation of their offices and decreased operating cost. Amortization and
Depreciation expenses were consistent between the periods.
LIQUIDITY AND CAPITAL RESOURCES:
Growth Strategy. The Company believes that substantial shareholder value can
be created with the acquisition of real estate development and other income
producing assets. Such acquisitions will produce a broader asset and income
base for the Company.
In conjunction with this growth strategy, the Company has acquired from
DSC S.A. de C.V. and Hemisphere Developments Limited certain developmental real
property. The properties acquired are located in major Mexican resort areas
including Acapulco, Ixtapa, Baja California Sur as well as several mid-sized
cities in Mexico. The properties consist of six land tracts totaling 4,100
acres which the Company believes are suitable to develop for resort,
residential or commercial use.
35
<PAGE> 38
The Company intends to implement a development plan for each of the
properties acquired to determine the total cost for development, the timing for
each development, and the most suitable financing for the particular
development. Until such time as the Company is able to identify an appropriate
funding source for a particular project, the Company intends to hold such
property for investment purposes and will utilize its current resources for
working capital, including debt service obligations. Such sources shall include
its cash flow from current operations and the accounts receivable currently due
the Company from all sources, including those acquired in the transaction with
DSC and Hemisphere. In addition to its own resources, the Company intends,
although it has no understandings or agreements at this time, to explore
financing for project development from outside sources, including bank
financing, the private placement of the Company s securities, a public offering
of the Company s securities, or joint venture arrangements with other
developers.
While the Company has no current understandings or agreements, it intends
to pursue the acquisition of income-producing assets to enhance and complement
the assets acquired.
Cash Flow From Operations. The Company incurred for the six months ended June
30, 1996 a net loss of $152,800 with a deficit cash flow from operations of
$34,800 compared to a net loss of $234,100 while maintaining a positive cash
flow from operations of $86,900 for the comparable period in 1995.
Working Capital. The Company's current liabilities exceed its current assets
by approximately $562,200 as of June 30, 1996. This excess in current
liabilities consists principally of related party liabilities. This liability
consists of accrued officer's salaries amounting to approximately $415,000,
shareholder loans of $37,000, and advances from DSC in conjunction with the DSC
and Hemisphere Transaction amounting to $130,000. The elimination of the
related party current liability totaling $582,000 would eliminate the working
capital deficiency and current assets would exceed current liabilities by
approximately $19,800.
The Company has limited external financing sources at this time and has
relied principally on internal financing provided by its executive officers.
External working capital has been provided to the Company's foreign operations
through bank borrowings and to domestic operations in conjunction with the
transaction with DSC.
Long-Term Debt. At June 30, 1996, notes payable totaled $197,000 which
consisted of $67,000 unsecured, used for the operations of the foreign
subsidiary and $130,000 due to DSC. DSC has loaned the Company $130,000 as of
June 30, 1996 to reimburse the Company for expenses incurred in conjunction
with the Transaction, approximately $75,000, and working capital for the
Company, approximately $55,000. The loans are collateralized by the Company's
account receivable, are non interest bearing and were paid at Closing. See
"The Transaction" contained herein. Long-Term Debt consists of $39,500 plus
its current portion to a related party.
As part of the DSC and Hemisphere acquisition, the Company acquired assets
of $89,180,000, principally real property but including notes and accounts
receivable totaling $2,210,000, and assumed liabilities including minority
interests of $26,604,000. Included in liabilities acquired are mortgages and
notes payable of approximately $2,941,000 plus accrued interest of $1,846,000.
At Closing, the Company acquired a Note Receivable and an offsetting Note
Payable from Clusters Ixtapa (the Clusters Note) in the amount of $5,625,000,
which was eliminated in consolidation. See "The Pro Forma Financial
Information" contained herein.
Such mortgages and notes payable presently provide for the payment of
principal and interest in varying amounts from 1997 to 2007. The principal
payments due are $1,750,000 in 1997, $322,000 in 1998, $277,000 in 1999. From
2000 to 2007, the annual principal payment is approximately $65,000. In
addition, interest will accrue on such debt at rates varying from 5.2% to 13.2%
per year and is expected to be approximately $275,000 in 1997. The Company
intends to satisfy its debt obligations through the sale of housing lots or
completed units if and when fully developed and through current accounts
receivables in the amount of $2,306,000, including those acquired from DSC in
the Transaction. See "Pro Forma Financial Information" contained herein. In
addition, the Company has entered into discussions with its lenders to modify
the principal payments and the presently due and payable accrued interest of
$1,846,000 under the existing mortgages (including the possibility of issuing
the Company's securities in exchange for the reduction or elimination of such
debt) or enter into refinancing arrangements with such lenders (or other
persons).
Currency Risk. The Company's operating entities are not subject to direct
currency conversion risks. The Company's primary operating entities provide
consulting services to their clients in their own geographic locations. All
consulting services performed by Appraisal Group, Inc.
36
<PAGE> 39
based in Miami, Florida are reported and paid in U.S. dollars. Services
provided by Appraisal Group International, Rt. based in Hungary are reported in
and paid in Hungarian forint. For reporting purposes foreign operations are
converted from Hungarian forints (HUF) to $US at the end of each reporting
period. The conversion rate of the HUF on June 30, 1995 and 1996 was 125.84 HUF
and 153.05 HUF respectively. The conversion rate of the Mexican Peso on June
30, 1995 and 1996 was 7.7396 and 7.5814 respectively. The Company does not
employ any hedging techniques due to the fact the cost to employ them outweighs
any potential benefits.. From its formation in June 6, 1990 to June 30, 1995
and June 30, 1996, the Company has reduced its investment in its foreign
subsidiary and as part of shareholder equity recognized currency fluctuation
losses of <$194,000> and <$208,600> respectively.
37
<PAGE> 40
INDEX TO FINANCIAL STATEMENTS
INTERNATIONAL REALTY GROUP, INC. AND SUBSIDIARIES:
CONSOLIDATED FINANCIAL STATEMENTS:
YEARS ENDED DECEMBER 31, 1995 AND 1994:
<TABLE>
<S> <C>
Independent Auditors' Report F-2
Consolidated Balance Sheets F-3
Consolidated Statements of Operations F-4
Consolidated Statements of Shareholders' Equity F-5
Consolidated Statements of Cash Flows F-6
Summary of Significant Accounting Policies F-8
Notes to Consolidated Financial Statements F-11
INTERNATIONAL REALTY GROUP, INC. AND SUBSIDIARIES:
CONSOLIDATED FINANCIAL STATEMENTS:
Consolidated Balance Sheets-June 30, 1996 and 1995 F-25
Consolidated Statements of Operations for the three
and six months ended June 30, 1996 and 1995 F-26
Consolidated Statements of Cash Flows for the six
months ended June 30, 1996 F-27
CENTRO DE PROMOCIONES GUERRERO, S.A. DE C.V.:
FINANCIAL STATEMENTS:
YEARS ENDED DECEMBER 31, 1995 AND 1994:
Independent Auditors' Report F-29
Balance Sheets F-30
Statements of Operations F-31
Statements of Shareholders' Equity (Deficiency) F-32
Statements of Cash Flows F-33
Notes to Financial Statements F-35
CENTRO DE PROMOCIONES GUERRERO, S.A. DE C.V.:
FINANCIAL STATEMENTS:
Independent Auditors' Report F-41
Balance Sheets - June 30, 1996 and 1995 F-42
Statements of Operations for the six months ended
June 30, 1996 and 1995 F-43
Statements of Shareholders' Equity (Deficiency) for the
six months ended June 30, 1996 and 1995 F-44
Statements of Cash Flows for the six months ended
June 30, 1996 and 1995 F-45
Notes to Financial Statements F-47
</TABLE>
<PAGE> 41
INDEX TO FINANCIAL STATEMENTS (CONTINUED)
CLUSTER INMOBILIARIA DE IXTAPA, S.A. DE C.V.:
FINANCIAL STATEMENTS:
<TABLE>
<S> <C>
Independent Auditors' Report F-53
Balance Sheets - December 31, 1995 and 1994 F-54
Statements of Operations for the years ended
December 31, 1995 and 1994 F-55
Statements of Shareholders' Equity for the years ended
December 31, 1995 and 1994 F-56
Statements of Cash Flows for the years ended
December 31, 1995 and 1994 F-57
Notes to Financial Statements F-59
CLUSTER INMOBILIARIA DE IXTAPA, S.A. DE C.V.:
FINANCIAL STATEMENTS:
Independent Auditors' Report F-67
Balance Sheets - June 30, 1996 and 1995 F-68
Statements of Operations for the six months ended
June 30, 1996 and 1995 F-69
Statements of Shareholders' Equity for the six months
ended June 30, 1996 and 1995 F-70
Statements of Cash Flows for the six months ended
June 30, 1996 and 1995 F-71
Notes to Financial Statements F-73
BAHIA DE CORTES:
FINANCIAL STATEMENT:
Independent Auditors' Report F-81
Balance Sheet - March 31, 1996 F-82
Notes to Financial Statement F-83
BAHIA DE CORTES:
FINANCIAL STATEMENT:
Independent Auditors' Report F-86
Balance Sheet - June 30, 1996 F-87
Notes to Financial Statement F-88
BARRA DEL TORDO:
FINANCIAL STATEMENT:
Independent Auditors' Report F-91
Balance Sheet - March 31, 1996 F-92
Notes to Financial Statement F-93
</TABLE>
<PAGE> 42
INDEX TO FINANCIAL STATEMENTS (CONTINUED)
BARRA DEL TORDO:
FINANCIAL STATEMENT:
<TABLE>
<S> <C>
Independent Auditors' Report F-100
Balance Sheet - June 30, 1996 F-101
Notes to Financial Statement F-102
HACIENDA DE FRANCO:
FINANCIAL STATEMENT:
Independent Auditors' Report F-109
Balance Sheet - March 31, 1996 F-110
Notes to Financial Statement F-111
HACIENDA DE FRANCO:
FINANCIAL STATEMENT:
Independent Auditors' Report F-115
Balance Sheet - June 30, 1996 F-116
Notes to Financial Statement F-117
VILLAS DEL CARBON:
FINANCIAL STATEMENT:
Independent Auditors' Report F-121
Balance Sheet - March 31, 1996 F-122
Notes to Financial Statement F-123
VILLAS DEL CARBON:
FINANCIAL STATEMENT:
Independent Auditors' Report F-126
Balance Sheet - June 30, 1996 F-127
Notes to Financial Statement F-128
</TABLE>
<PAGE> 43
INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareholders
International Realty Group, Inc. and Subsidiaries
North Miami Beach, Florida
We have audited the accompanying consolidated balance sheets of International
Realty Group, Inc. and Subsidiaries as of December 31, 1995 and 1994, and the
related consolidated statements of operations, shareholders' equity and cash
flows for the years then ended. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits. We did not audit the financial statements of Appraisal Group
International, RT, a subsidiary, which statements reflected total assets of
$232,600 and $373,000 ($911,500 less $678,900 and $1,653,000 less $1,290,000 of
trust assets not deemed assets of the subsidiary) as of December 31, 1995 and
1994, respectively, and total revenues of $690,800 and $584,000, respectively,
for the years then ended. Those statements were audited by other auditors
whose report has been furnished to us, and our opinion, insofar as it relates
to the amounts included for Appraisal Group International, RT, is based solely
on the report of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we 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 used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits and the report of the other
auditors provides a reasonable basis for our opinion.
In our opinion, based on our audits and the reports of other auditors, the 1995
and 1994 consolidated financial statements referred to above present fairly, in
all material respects, the financial position of International Realty Group,
Inc. and Subsidiaries, as of December 31, 1995 and 1994, and the results of
their operations and their cash flows for the years then ended in conformity
with generally accepted accounting principles.
/s/ HIXSON, MARIN, POWELL & DE SANCTIS, P.A.
North Miami Beach,
Florida
March 22, 1996
F-2
<PAGE> 44
INTERNATIONAL REALTY GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
ASSETS
1995 1994
------------ ------------
<S> <C> <C>
Current assets:
Cash and equivalents $ 19,400 $ 33,300
Accounts receivable, deemed
fully collectible 221,500 420,300
Refundable income tax - 3,200
Other current assets 26,800 23,500
------------ ------------
Total current assets 267,700 480,300
Note receivable - 45,000
Marketable securities available for sale 34,700 -
Land held for investment 481,000 31,600
Furniture, equipment and
improvements 205,900 209,600
Excess of cost over estimated fair
value of net assets acquired 140,800 158,500
Other assets 51,800 39,800
------------ ------------
$ 1,181,900 $ 964,800
------------ ------------
</TABLE>
<TABLE>
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
1995 1994
------------ ------------
<S> <C> <C>
Current liabilities:
Current portion of long-term debt $ 151,900 $ 145,000
Accounts payable 134,900 171,000
Accrued liabilities 396,200 251,400
Billings in excess of costs and estimated
earnings on uncompleted contracts 7,700 -
Shareholders loans 26,700 -
Income taxes payable - 3,500
------------ ------------
Total current liabilities 717,400 570,900
------------ ------------
Long-term debt, less current portion 49,000 92,000
------------ ------------
Liquidity and strategic planning,
restatements, concentration of credit
risk, commitments, transactions with
related parties and trust assets
(Notes 2, 3, 4, 8, 11 and 13)
Minority interest 35,300 -
------------ ------------
Shareholders' equity:
Common stock, $.001 par; authorized
10,000,000 shares; 8,954,187 and
7,898,112 common shares issued at
1995 and 1994, respectively 9,000 7,900
Capital in excess of par 1,053,400 597,000
Cummulative translation adjustment (203,500) (184,100)
Accumulated deficit (463,200) (103,400)
------------ ------------
395,700 317,400
Less shares of common stock held
in treasury, at cost 15,500 15,500
------------ ------------
380,200 301,900
------------ ------------
$ 1,181,900 $ 964,800
------------ ------------
</TABLE>
Read the accompanying summary of significant accounting
policies and notes to consolidated financial
statements, both of which are an integral part of this
consolidated financial statement.
F-3
<PAGE> 45
INTERNATIONAL REALTY GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
1995 1994
Revenues: ------------ ------------
<S> <C> <C>
Professional fees $ 1,024,600 $ 1,284,700
Interest 95,000 29,600
Other 102,500 13,900
------------ ------------
1,222,100 1,328,200
------------ ------------
Operating expenses:
Amortization and depreciation 87,800 90,400
Bad debts 73,300 136,500
Direct 620,800 582,800
Interest 27,000 8,700
Payroll and related benefits 415,700 411,300
Rent 55,400 79,700
Selling, general and
administration 246,900 276,700
------------ ------------
1,526,900 1,586,100
------------ ------------
Loss before other deductions, provision
for income taxes and minority interest (304,800) (257,900)
Other deductions (51,500) -
------------ ------------
Loss before provision for income taxes
and minority interest (356,300) (257,900)
------------ ------------
Provision for income taxes (benefit):
Current, including foreign taxes
(1995, $2,900; 1994, $6,000) 2,900 2,800
Deferred - (24,000)
------------ ------------
2,900 (21,200)
------------ ------------
Loss before minority interest (359,200) (236,700)
Minority interest 600 -
------------ ------------
Net loss $ (359,800) $ (236,700)
============ ============
Loss per share of common share: $ (0.04) $ (0.04)
============ ============
Weighted average common shares 8,324,395 6,546,934
============ ============
</TABLE>
Read the accompanying summary of significant accounting policies
and notes to consolidated financial statements, both of which are an integral
part of this consolidated financial statement.
F-4
<PAGE> 46
INTERNATIONAL REALTY GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
Common stock Capital in
------------------------- Excess of
Total Shares Amount Par
------------ ---------- ----------- ------------
<S> <C> <C> <C> <C>
Balance, beginning, as previously
reported $ 605,200 6,530,612 $ 6,500 $ 421,400
Cummulative effect of restatement
for amortization of intangibles
($45,000) and contribution of
accrued officers salaries to
capital in excess of par ($175,600) (45,000) - - 175,600
------------ ---------- ----------- ------------
Balance, beginning, as restated 560,200 6,530,612 6,500 597,000
Add (deduct):
Currency translation adjustment (23,000) - - -
Common stock issued 1,400 1,367,500 1,400 -
Net loss (236,700) - - -
------------ ---------- ----------- ------------
Balance, December 31, 1994 301,900 7,898,112 7,900 597,000
Add (deduct):
Currency translation adjustment (19,400) - - -
Common stock issued 457,500 1,056,075 1,100 456,400
Net loss (359,800) - - -
------------ ---------- ----------- ------------
Balance, ending $ 380,200 8,954,187 $ 9,000 $ 1,053,400
============ ========== =========== ============
</TABLE>
<TABLE>
<CAPTION>
Retained
Cummulative Earnings Treasury Stock
Translation (Accumulated ---------------------------
Adjustment Deficit) Shares Amount
------------ ------------- ------------ -------------
<S> <C> <C> <C> <C>
Balance, beginning, as previously
reported $ (161,100) $ 353,900 17,500 $ (15,500)
Cummulative effect of restatement
for amortization of intangibles
($45,000) and contribution of
accrued officers salaries to
capital in excess of par ($175,600) - (220,600) - -
------------ ------------ ----------- ------------
Balance, beginning, as restated (161,100) 133,300 17,500 (15,500)
Add (deduct):
Currency translation adjustment (23,000) - - -
Common stock issued - - - -
Net loss - (236,700) - -
------------ ------------ ----------- ------------
Balance, December 31, 1994 (184,100) (103,400) 17,500 (15,500)
Add (deduct):
Currency translation adjustment (19,400) - - -
Common stock issued - - - -
Net loss - (359,800) - -
------------ ------------ ----------- ------------
Balance, ending $ (203,500) $ (463,200) 17,500 $ (15,500)
============ ============ =========== ============
</TABLE>
Read the accompanying summary of significant accounting
policies and notes to consolidated financial
statements, both of which are an integral part of this
consolidated financial statement.
F-5
<PAGE> 47
INTERNATIONAL REALTY GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
1995 1994
----------------------------- -----------------------------
<S> <C> <C>
Cash flows from operating activities:
Sources of cash:
Clients and other $ 1,230,400 $ 1,035,600
Interest 102,700 $ 1,333,100 10,600 $ 1,046,200
----------- -----------
Uses of cash:
Cash paid to:
Direct costs 656,900 541,300
Operating 343,300 347,300
Payroll and related benefits 244,300 228,800
Interest 27,500 7,200
Income taxes 3,200 1,275,200 6,000 1,130,600
----------- ----------- ----------- -----------
Cash provided by (used-in) operating activities 57,900 (84,400)
----------- -----------
Cash flows from investing activities:
Uses of cash:
Acquisition of equipment 21,500 7,100
Real estate 700 1,900
Acquisition costs 43,900 -
----------- -----------
Cash (used-in) investing activities (66,100) (9,000)
----------- -----------
Cash flows from financing activities:
Sources of cash:
Long-term debt 62,500 134,000
Shareholders loans 26,700 89,200 - 134,000
----------- -----------
Uses of cash:
Payment of:
Long-term debt 75,500 107,200
Shareholders loans - 75,500 6,600 113,800
----------- ----------- ----------- -----------
Cash provided by financing activities 13,700 20,200
----------- -----------
Effect of exchange rates on cash and equivalents (19,400) (23,000)
----------- -----------
Decrease in cash and equivalents (13,900) (96,200)
Cash and equivalents, beginning 33,300 129,500
----------- -----------
Cash and equivalents, ending $ 19,400 $ 33,300
=========== ===========
</TABLE>
Read the accompanying summary of significant accounting policies
and notes to consolidated financial statements, both of which
are an integral part of this consolidated financial statement.
F-6
<PAGE> 48
INTERNATIONAL REALTY GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
YEARS ENDED DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
1995 1994
----------- ------------
<S> <C> <C>
Reconciliation of net loss to cash provided
by (used-in) operating activities:
Net loss $ (359,800) $ (236,700)
----------- -----------
Adjustments to reconcile net loss to cash
provided by (used-in) operating activities:
Amortization and depreciation 87,800 90,400
Minority interest 600 -
Common stock issued as compensation 32,100 1,400
Changes in assets and liabilities:
Accounts receivable 198,800 (131,500)
Refundable income tax 3,200 3,200
Other current assets (3,300) (9,900)
Accounts payable (36,100) 32,500
Accrued liabilities 145,400 196,600
Costs in excess of billings 7,700 -
Income taxes (3,500) -
Deferred tax liability - (24,000)
Other (15,000) (6,400)
----------- -----------
Total adjustments 417,700 152,300
----------- -----------
Cash provided by (used-in) operating activities $ 57,900 $ (84,400)
=========== ===========
Supplemental schedule of non-cash activities:
Operating activities:
Common stock issued as compensation $ 32,100 $ 1,400
=========== ===========
Furniture and equipment in exchange for
accounts receivable $ 15,000
===========
Investing activities:
Common stock issued in exchange
for real property $ 401,700
Reduction of note receivable in
exchange for real property 45,000
-----------
$ 446,700
===========
Financing activities:
Common stock issued in exchange for
cancellation of long-term debt $ 23,100
===========
</TABLE>
Read the accompanying summary of significant accounting policies
and notes to consolidated financial statements, both of which are an integral
part of this consolidated financial statement.
F-7
<PAGE> 49
INTERNATIONAL REALTY GROUP, INC AND SUBSIDIARIES
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
YEARS ENDED DECEMBER 31, 1995 AND 1994
BASIS OF ACCOUNTING:
International Realty Group, Inc, (the Company) prepares its financial
statements in accordance with generally accepted accounting principles. This
basis of accounting involves the application of accrual accounting;
consequently, revenues and gains are recognized when earned, and expenses and
losses are recognized when incurred. Financial statement items are recorded
at historical cost and may not necessarily represent current values.
MANAGEMENT ESTIMATES:
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements,
and the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Those estimates that are considered significant to the accompanying
consolidated financial statements include the per share value used in the
acquisition of various investments.
FAIR VALUE OF FINANCIAL INSTRUMENTS:
Financial instruments which include cash and equivalents, accounts
receivable, accounts payable and accrued liabilities are reflected in the
financial statements at fair values. Based on the borrowing rates currently
available to the Company for bank loans with similar terms and average
maturities, debt is stated at their fair values.
PRINCIPLES OF CONSOLIDATION:
The consolidated financial statements include the accounts of International
Realty Group, Inc. and all material subsidiaries. All significant
inter-company balances and transactions have been eliminated in
consolidation.
REVENUE RECOGNITION:
Service revenues are recognized on the percentage of completion method of
accounting. Percentage of completion is determined by reference to the
extent of contract performance, future performance and costs incurred. Costs
and estimated earnings in excess of billings on uncompleted contracts are
reported as unbilled receivables. Billings in excess of costs and estimated
earnings on uncompleted contracts are reported as deferred revenues.
Contracts in process are reviewed quarterly and revenues are adjusted in
current accounting periods based on revisions. Provisions for estimated
losses on contracts are recorded when identified. Substantially all service
contracts have been short term.
F-8
<PAGE> 50
INTERNATIONAL REALTY GROUP, INC AND SUBSIDIARIES
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
YEARS ENDED DECEMBER 31, 1995 AND 1994
CASH AND EQUIVALENTS:
The Company considers all highly liquid debt instruments purchased with an
initial maturity of three months or less to be cash equivalents.
FOREIGN CURRENCY TRANSLATION:
Adjustments for currency exchange rate changes are excluded from net income
for those fluctuations that do not impact cash flow. All assets and
liabilities of operations outside the United States are translated into
United States dollars at period-end exchange rates. The Hungarian exchange
rate used for the years ended December 31, 1995 and 1994 was H$139.81 and
H$113.62, respectively. Temporary gains and losses resulting from
translation, if material, are reflected as currency translation adjustments
in shareholders' equity. Permanent adjustments are reflected in the
consolidated statements of operations.
INVESTMENTS:
Investments in equity securities are classified as either trading securities
or available for sale securities. The net unrealized holding gains and
losses for trading securities would be included in earnings. There were no
trading securities during the periods. Equity securities have been
categorized as available for sale and, as a result, are stated at fair value.
Any unrealized gains and losses would be reported as a separate component of
shareholders' equity. There were no unrealized gains and losses at the
balance sheet date.
FURNITURE, EQUIPMENT, IMPROVEMENTS, DEPRECIATION AND AMORTIZATION:
Furniture, equipment and leasehold improvements are stated at cost less
accumulated depreciation and amortization. Depreciation and amortization are
computed on the straight-line method over the estimated useful lives as
follows:
<TABLE>
<CAPTION>
Estimated Useful Lives
(In years)
-----------------------
<S> <C>
Furniture and equipment 10 years
Leasehold improvements 10 years
Library 7 years
</TABLE>
F-9
<PAGE> 51
INTERNATIONAL REALTY GROUP, INC AND SUBSIDIARIES
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
YEARS ENDED DECEMBER 31, 1995 AND 1994
FURNITURE, EQUIPMENT, IMPROVEMENTS, DEPRECIATION AND AMORTIZATION (CONTINUED):
Repairs, maintenance and renewals are charged to operations as incurred, and
expenditures for significant betterments and renewals are capitalized.
The cost of fixed assets retired or sold, together with the related
accumulated depreciation, are removed from the appropriate asset and
depreciation accounts, and the resulting gain or loss is included in net
earnings.
EXCESS OF COST OVER ESTIMATED FAIR VALUE OF NET ASSETS ACQUIRED:
The excess of cost over estimated fair value of net assets acquired is being
amortized by the straight-line method over the estimated useful life of ten
(10) years. The Company evaluates the amortization period of intangibles on
an ongoing basis in light of changes in any business conditions and events or
circumstances that may indicate the potential impairment of the intangible
asset. The Company evaluates the historical and projected operating
performance of acquired businesses, specific industry trends and general
economic conditions to assess whether the remaining estimated useful life may
warrant revision or that the remaining balance of the intangible assets may
not be recoverable. If such factors, events or circumstances indicate that
the value is impaired, the Company will provide for the decline in that
period.
OTHER ASSETS:
Other assets consist primarily of organizational costs which are stated at
cost and are being amortized over a five year period using the straight-line
method.
INCOME TAXES:
Deferred income taxes are provided for temporary differences resulting from
inclusion of income and expenses for financial reporting purposes in years
other than when recognized for income tax purposes. Accordingly, deferred
income taxes are provided for the temporary differences resulting from use of
the cash method of accounting for income tax purposes and the accrual method
of accounting for financial statement purposes.
RECLASSIFICATION:
In order to facilitate comparison of financial information, certain amounts
reported in the prior year have been reclassified to conform with the current
year presentation.
F-10
<PAGE> 52
INTERNATIONAL REALTY GROUP, INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995 AND 1994
1. ORGANIZATION AND BUSINESS:
International Realty Group, Inc. was organized and incorporated under the
laws of the State of Delaware on April 13, 1970. The Company provides
commercial real estate and business valuations and appraisals both
domestically and on an international basis.
Wholly-owned subsidiaries of the Company are as follows except Appraisal
Group International, RT which is 75% owned by Stragix International,
Inc.:
<TABLE>
<CAPTION>
State or Country Date of
Company of Incorporation Incorporation
- --------------------------------- ----------------- ---------------
<S> <C> <C>
The Appraisal Group, Inc. Florida August 21, 1974
U.S. Property Investment and
Auction, Inc. Florida March 31, 1987
Appraisal Group International, Inc. Florida July 7, 1989
Stragix International, Inc. Florida April 1, 1990
Appraisal Group International, RT Hungary June 6, 1990
IRG Financial Services, Inc. Florida June 15, 1992
Caye Bokel, Limited Belize January 27, 1995
</TABLE>
2. LIQUIDITY AND STRATEGIC PLANNING:
As reflected in the accompanying consolidated balance sheets, the
Company's current liabilities exceed its current assets as of December
31, 1995 by approximately $449,700, which is an increase of $359,100 from
1994. Accrued officers salaries of approximately $375,900 and
shareholders loans of approximately $26,700 are significant amounts of
the working capital deficiency. If these related party items were not
considered, the working capital deficiency would be reduced to
approximately $47,100. For the year ended December 31, 1995, the Company
reported positive cash flows from operations while reporting a net loss
of $359,800. Subsequent to December 31, 1995, an additional $55,000 has
been loaned to the Company as additional working capital. The Company
has a significant investment in goodwill and other intangible assets, the
recoverability of which is dependent upon the success of future
operations.
The Company has filed a Form 14C, Preliminary Information Statement, with
the Securities and Exchange Commission. The purpose of the Information
Statement is to disclose formal discussions regarding the Company's
acquisition of interest owned by DSC, S.A. de C.V. and Hemisphere
Development, Ltd. (DSC). If the proposed transaction were to be
consummated, the controlling shareholder of DSC would be the controlling
shareholder of the Company. The Company is in the process of notifying
the Secretary of State of the State of Delaware of its intention to
increase the authorized shares from 10,000,000 common shares to
450,000,000 common shares.
F-11
<PAGE> 53
INTERNATIONAL REALTY GROUP, INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1995 AND 1994
2. LIQUIDITY AND STRATEGIC PLANNING (CONTINUED):
Under the proposal, the Company would acquire Clusters, S.A. de C.V.
(Clusters), a wholly owned subsidiary of DSC. In addition, the Company
would acquire DSC's 30% interest in Nueva Tierra, S.A. de C.V. (Nueva
Tierra) and the remaining 70% interest of Nueva Tierra from Hemisphere
Development Ltd. (Hemisphere). All acquisitions would be in exchange for
the common stock of the Company. DSC, Clusters and Nueva Tierra are
corporations organized under the laws of Mexico while Hemisphere is a
corporation organized under the laws of the Isle of Man. The transaction
has been valued at $88,651,100 (Clusters, $34,832,000; Nueva Tierra,
$16,145,059; Hemisphere, $37,674,095), subject to adjustments at the date
of closing. The Company would issue 113,364,647 shares of common stock
valued at $.782 cents per share. Of the total shares to be issued,
65,188,055 will be issued to DSC, and 48,176,592 will be issued to
Hemisphere. 15,991,049 of the shares issued to DSC will in turn be
transferred to a financial institution to extinguish $12,505,000 of
short-term debt owed by DSC. Costs associated with this transaction will
be charged to shareholders' equity upon completion.
The per share value of $.782 has been estimated by management as follows:
<TABLE>
<S> <C> <C>
a) Caye Bokel:
Discounted forecasted cash flow
assuming a fully developed
destination resort. Discounts
of 20% to 25% were used. $ 5,500,000
b) Valuation:
Management's valuation of the
domestic and foreign valuation
services, including liquidation fees. 1,500,000
------------
$ 7,000,000
============
Shares outstanding at valuation date 8,954,187
============
Per share value $ .782
============
</TABLE>
F-12
<PAGE> 54
INTERNATIONAL REALTY GROUP, INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1995 AND 1994
2. LIQUIDITY AND STRATEGIC PLANNING (CONTINUED):
After completion of the proposed transaction, the Company would expand
its business operations from professional services into additional
segments which would include:
a) Lodging
b) Development of commercial and
residential properties
To assist the Company in accomplishing its strategic plans, DSC has
advanced working capital loans to the Company. As of December 31, 1995,
$62,500 was advanced. An additional $55,000 was advanced in 1996.
During 1995, in a transaction which was previously disclosed, the Company
was negotiating with Trinity Energy Corporation (Trinity). The
negotiations were terminated by the Company after it determined that
Trinity was not prepared or willing to consummate the proposed
transaction. Costs incurred with the proposed transaction amounted to
approximately $35,500 and were charged to current operations.
3. ADJUSTMENTS TO OPENING BALANCE OF SHAREHOLDERS' EQUITY:
The Company has restated retained earnings (accumulated deficit) for the
correction of errors originating prior to 1994. The corrections result
from changing the amortization of certain intangible costs from ten (10)
years to five (5) years and the reclassification of officers payroll
which had previously been accrued and subsequently contributed to
capital. The effect of the restatement on shareholders' equity was a
reduction of $45,000. Officers payroll in the amount of $175,600 was
accrued during the year ended December 31, 1993. The officers waived
payment of the accrued payroll and such amount was in turn treated as a
contribution to the Company. As a result, capital in excess of par was
increased and retained earnings were decreased by the same $175,600. The
following table summarizes the restatement impact on net loss and net
loss per share for the years 1994 and 1993:
<TABLE>
<CAPTION>
1994 1993
------------ -------------
<S> <C> <C>
Net loss, as previously reported $ (221,700) $ (11,300)
------------ -------------
Effect of restatement:
Amortization 15,000 15,000
Payroll - 175,600
------------ -------------
15,000 190,600
------------ -------------
Net loss, as restated $ (236,700) $ (201,900)
============ =============
</TABLE>
F-13
<PAGE> 55
INTERNATIONAL REALTY GROUP, INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1995 AND 1994
3. ADJUSTMENTS TO OPENING BALANCE OF SHAREHOLDERS EQUITY (CONTINUED):
<TABLE>
<CAPTION>
1995 1994
------------ ------------
<S> <C> <C>
Per share amounts as previously reported $ (0.03) $ 0.00
Effect of restatement (0.01) (0.03)
--------- ---------
Per share amounts, as restated $ (0.04) $ (0.03)
========= =========
</TABLE>
4. CONCENTRATION OF CREDIT RISK:
Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of cash and accounts
receivable. During the year, the Company's account balances with
financial institutions may exceed federally insured limits. Management
regularly monitors their balances and attempts to keep this potential
risk to a minimum by maintaining their accounts with financial
institutions they believe are of good quality.
A concentration of credit risk may exist with respect to accounts
receivable. The Company has a large number of customers on which it
performs ongoing credit evaluations and generally does not require
collateral from its customers. The Company maintains an allowance for
uncollectible accounts receivable based upon expected collectibility of
all accounts receivable. Credit losses have been provided for in the
consolidated financial statements.
A significant portion of the Company's revenues consist of fees to major
customers on credit. Net revenues in 1995 to major customers are as
follows:
<TABLE>
<CAPTION>
Amount Percentage
------ ----------
<S> <C> <C>
Domestic:
Customer A $106,600 20.0%
Foreign:
Customer A $552,600 80.0%
</TABLE>
Both customers are governmental agencies. There are no other customers which
contribute revenues in excess of 5%.
F-14
<PAGE> 56
INTERNATIONAL REALTY GROUP, INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1995 AND 1994
5. LAND HELD FOR INVESTMENT:
Land held for investment consists of one (1.0) acre of developed vacant
land in La Grange, Texas, and eighty seven (87) acres of undeveloped land
on the Island of Caye Bokel in the country of Belize. A summary is as
follows:
<TABLE>
<CAPTION>
1995 1994
------------ ------------
<S> <C> <C>
La Grange, Texas $ 31,600 $ 31,600
Caye Bokel, Belize 449,400 -
------------ ------------
$481,000 $ 31,600
============ ============
</TABLE>
Management intends to hold the property for either future sale or
development. As part of the purchase of the Caye Bokel property, the
Company exchanged 515,000 shares of common stock valued at $.782 per
share in October, 1995. An independent appraisal of the property valued
the transaction in excess of the recorded amount.
6. MARKETABLE SECURITIES:
During the current year, the Board of Directors of Appraisal Group
International, RT (AGI RT), with the concurrence of its parent,
authorized the exchange of twenty five percent (25.0%) of AGI RT common
stock with certain directors/officers/employees of the Corporation for
marketable securities of other Hungarian corporations owned by these
directors/officers/employees. The fair values of the marketable
securities were based on the fair value of AGI RT compared to the net
equity of the companies in the exchange of securities. The securities do
not represent controlling interest in other Hungarian companies.
Minority interest represents the minority shareholders' proportionate
share of the equity in Appraisal Group International, RT. At December
31, 1995, the Company owned seventy five percent (75.0%) of the capital
stock of AGI RT. Investments are stated at fair value as determined by
the Board of Directors. Because of the inherent uncertainty of such
valuations, the estimated values may differ significantly from the values
that would have been used had a ready market for the securities existed,
and the differences could be material.
F-15
<PAGE> 57
INTERNATIONAL REALTY GROUP, INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
7. DETAILS OF FINANCIAL STATEMENT COMPONENTS: 1995 1994
------------ ------------
<S> <C> <C>
OTHER CURRENT ASSETS:
Interest receivable $ 11,300 $ 19,000
Prepaid expenses 15,500 4,500
------------ ------------
$ 26,800 $ 23,500
============ ============
FURNITURE, EQUIPMENT AND IMPROVEMENTS:
Furniture and equipment $ 164,600 $ 128,300
Leasehold improvements 12,400 12,400
Library 207,600 205,100
------------ ------------
384,600 345,800
Less accumulated deprecation
and amortization 178,700 136,200
------------ ------------
$ 205,900 $ 209,600
============ ============
OTHER ASSETS:
Acquisition costs $ 43,900 $ -
Deposits 7,700 7,700
Organization costs 200 32,100
------------ ------------
$ 51,800 $ 39,800
============ ============
ACCRUED LIABILITIES:
Payroll and payroll taxes $ 375,900 $ 212,800
Interest 1,000 1,500
Foreign taxes, other than on income 13,600 23,000
Other 5,700 14,100
------------ ------------
$ 396,200 $ 251,400
============ ============
</TABLE>
F-16
<PAGE> 58
INTERNATIONAL REALTY GROUP, INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
8. LONG-TERM DEBT: 1995 1994
------------ ------------
<S> <C> <C>
Note payable, demand,
interest at 6.0%,
collateralized by 50,000
shares of common stock,
matured on August 27, 1992. $ - $ 23,100
Note payable, related party,
unsecured, interest at 2.0%
per annum, payable monthly,
balloon payment of $49,000
due on December 31, 1997. 49,000 49,000
Note payable, unsecured,
interest at 7.25% for 1995
and 1994. 89,400 134,000
Note payable, unsecured,
interest at 7%, payable
quarterly, matured on
December 31, 1994. - 30,900
Note payable, related party,
collateralized by accounts
receivable, non-interest
bearing, due on demand. 62,500 -
--------- ------------
200,900 237,000
Less current portion 151,900 145,000
--------- ------------
$ 49,000 $ 92,000
========= ============
</TABLE>
Maturities of long-term debt subsequent to December 31, 1995 are as
follows:
<TABLE>
<CAPTION>
Years ending
December 31, Amount
------------ ------------
<S> <C> <C>
1996 $ 151,900
1997 49,000
-----------
$ 200,900
===========
</TABLE>
F-17
<PAGE> 59
INTERNATIONAL REALTY GROUP, INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1995 AND 1994
9. INCOME TAXES:
Components of the net deferred tax liability as reflected on the
Company's consolidated balance sheets are as follows:
<TABLE>
<CAPTION>
1995 1994
------------ ------------
<S> <C> <C>
Deferred tax assets:
Accounts payable $ 45,900 $ 64,300
Accrued liabilities 134,700 94,500
Net operating loss 92,500 82,600
--------- ------------
273,100 241,400
Less valuation allowance (197,800) (76,300)
--------- ------------
75,300 165,100
Deferred tax liabilities:
Accounts receivable (75,300) (165,100)
--------- ------------
$ - $ -
========= ============
</TABLE>
The valuation allowance is provided when it is more likely than not that
the tax benefit may not be realized.
The components of the provision for income taxes (benefit) for the years
ended December 31, 1995 and 1994, are as follows:
<TABLE>
<S> <C> <C>
Current payable (receivable):
Federal $ - $ (3,200)
Foreign 2,900 6,000
Deferred:
Federal - (19,100)
State - (4,900)
------------ ------------
$ 2,900 $ (21,200)
============ ============
</TABLE>
F-18
<PAGE> 60
INTERNATIONAL REALTY GROUP, INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1995 AND 1994
9. INCOME TAXES (CONTINUED):
The income tax benefit for the year ended December 31, 1995, differs from
that which would result from applying statutory tax rates primarily due
to certain operating expenses which are not tax deductible. The
provision for income taxes differs from the amount obtained by applying
the federal statutory income tax rate to income before provision for
income taxes as follows:
<TABLE>
<CAPTION>
1995 1994
------------ -------------
<S> <C> <C>
Provision at statutory rate $ - $ -
State taxes, less federal benefit - -
Foreign taxes 2,900 6,000
Utilization of operating loss
carrybacks/carryforwards - (3,200)
Foreign sales benefit - (1,500)
Other differences - (22,500)
------------ -------------
$ 2,900 $ (21,200)
============ =============
</TABLE>
At December 31, 1995, the Company had available federal net operating
loss carryforwards of approximately $304,100 which will generally expire
beginning in the year 2011.
The Company has not provided for federal income taxes on approximately
$15,500 of undistributed earnings of its foreign subsidiaries which have
been reinvested in their operations. If these earnings were distributed,
net operating loss carryforwards and foreign tax credits available under
current law would eliminate the resulting federal income tax liability.
10. LOSS PER SHARE:
Loss per share of common stock were computed by dividing net loss by the
weighted average number of shares of common stock. The number of shares
used in the computation of loss per share of common stock during 1995 and
1994 were 8,324,395; and 6,546,934, respectively.
F-19
<PAGE> 61
INTERNATIONAL REALTY GROUP, INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1995 AND 1994
11. COMMITMENTS, TRANSACTIONS WITH RELATED PARTIES AND BACKLOG:
The Company leases office facilities on a month to month basis. Future
minimum lease payments under this agreement are $3,800, per month.
The Company has entered into two (2) employment agreements with
shareholders/officers of the Company. The agreements provide for
employment terms through 1996 with minimum annual compensation of
approximately $204,000 per annum, plus bonuses if declared by the Board
of Directors. No bonuses have been declared for the years ended December
31, 1995 and 1994.
During the years ended December 31, 1995 and 1994, the Company paid
compensation to shareholders/officers of $204,000 and $226,000,
respectively. These amounts have been charged to operations either as
payroll or consulting fees. The aggregate shares controlled by the
shareholders receiving the compensation was approximately sixty-three
percent (63.0%) for 1995 and seventy-five percent (75.0%) for 1994.
The Company has a back-log of engagement agreements amounting to
$115,000. The agreements signed in September, 1995 should commence about
April, 1996.
12. STOCK OPTIONS AND AWARDS:
The Company has granted stock options which are part of the employment
agreement with a key employee. One million two hundred thousand
(1,200,000) shares of the Company's common stock has been issued or
reserved for issuance under the agreement. The terms of options granted
under the agreement is determined at the time of the grant. The option
price may not be less than the fair market value per share on the date of
grant. The Company also awarded common stock to certain other employees
which were granted at par value, which was deemed to be fair value.
Stock option/award activity under the Agreement is as follows:
<TABLE>
<CAPTION>
1995 1994
--------- ------------
<S> <C> <C>
Number of option shares:
Outstanding, beginning 400,000 1,000,000
Add (deduct):
Granted/awarded 200,000 767,500
Exercised 400,000 1,367,500
Cancelled - -
--------- ------------
Outstanding, ending 200,000 400,000
========= ============
Option price range
Granted $ .001 $ .001
Exercised .001 .001
Cancelled - -
--------- ------------
Outstanding, ending $ .001 $ .001
========= ============
</TABLE>
F-20
<PAGE> 62
INTERNATIONAL REALTY GROUP, INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1995 AND 1994
12. STOCK OPTIONS AND AWARDS (CONTINUED):
The 400,000 shares exercised under the option agreement were valued at
par on the exercise dates of April 1, 1995 and June 1, 1995.
Management, with the concurrence of the majority shareholders, granted
employee stock awards for 1995. All eligible employees of the Company
were granted stock awards (32,575 shares). In addition, the Company also
granted an award of 8,500 shares of common stock to all members of the
Board of Directors, some of whom are officers. Amounts charged against
current earnings for the awards was approximately $32,100. The per unit
share was based upon the fair value ($.782) of the common stock at year
end.
13. TRUST ASSETS:
AGI RT maintains cash (1995, $678,900; 1994, $1,290,000) in a fiduciary
or agency capacity (trust funds) for certain customers which is not
included in the accompanying consolidated balance sheet. The trust funds
represent funds for companies being liquidated under court supervision.
In 1994, former employees of AGI Rt invested trust funds in securities of
an entity. The investment was outside the fiduciary scope of
responsibility of AGI RT as Trustee and was done without its knowledge or
consent. The investments were liquidated in 1995 at a loss, and the
Company has voluntarily indemnified the trust fund for such losses.
Management of the Company is instituting legal proceedings against the
former employees seeking restitution. The ability of recovery has not
been determined, and accordingly, amounts paid as indemnification
($51,500) have been charged to current operations.
<TABLE>
<CAPTION>
14. SUPPLEMENTAL INFORMATION: 1995 1994
Charged to: ------------ -----------
<S> <C> <C>
Direct:
Consulting, appraisal $ 526,000 $ 492,000
Reports, film and
other 94,800 90,800
----------- -----------
$ 620,800 $ 582,800
=========== ===========
Selling, general and
Administrative:
Utilities $ 42,500 $ 39,500
Insurance 6,500 5,900
Office 48,600 76,000
Professional 71,600 36,100
Selling 23,100 51,100
Other 54,600 68,100
----------- -----------
$ 246,900 $ 276,700
=========== ===========
</TABLE>
F-21
<PAGE> 63
INTERNATIONAL REALTY GROUP, INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1995 AND 1994
15. BUSINESS SEGMENT:
Information about the Company's operations in different geographic areas
for the years ended December 31, 1995 and 1994 is as follows:
<TABLE>
<CAPTION>
Consolidated United
Total States Hungary
----------- ----------- ----------
<S> <C> <C> <C>
Net revenues:
1995 $1,222,100 $ 531,300 $ 690,800
1994 1,328,200 744,200 584,000
Income (loss) from
continuing operations
before other deductions,
income taxes and
minority interest:
1995 (304,800) (361,600) 56,800
1994 (257,900) (259,900) 2,000
Identifiable assets:
1995 666,200 467,200 199,000
1994 885,000 512,000 373,000
Capital expenditures:
1995 36,500 15,200 21,300
1994 7,100 7,100 -
Depreciation and amortization:
1995 87,800 82,900 4,900
1994 90,400 84,400 6,000
</TABLE>
Income (loss) form continuing operations is revenue less operating
expenses. In determining income (loss) from continuing operations, the
following items have not been included:
a) Other deductions
b) Income taxes
c) Minority interest
Identifiable assets are those assets that are identified with the
operations in each geographic area.
F-22
<PAGE> 64
INTERNATIONAL REALTY GROUP, INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1995 AND 1994
16. SELECTED QUARTERLY FINANCIAL SUMMARY (UNAUDITED):
For the years ended December 31:
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
---------- -------- -------- --------
<S> <C> <C> <C> <C>
1995:
Revenues $ 290,300 $335,300 $ 305,700 $ 290,800
Operating expenses 397,700 462,000 285,000 434,300
-------- -------- --------- ---------
Income (loss) before
income taxes (107,400) (126,700) 20,700 (143,500)
Provision for income
taxes (benefit) - - 2,400 500
--------- --------- --------- ---------
Net income (loss) $(107,400) $(126,700) $ 18,300 $(144,000)
========= ========= ========= =========
Net income (loss) per
common share $ (0.01) $ (0.02) $ 0.03 $ (0.04)
========= ========= ========= =========
1994:
Revenues $ 426,900 $ 269,400 $ 235,500 $ 396,400
Operating expenses 468,300 337,100 274,100 506,600
--------- --------- --------- ---------
Loss before income
taxes (41,400) (67,700) (38,600) (110,200)
Provision for income
taxes (benefit) (11,400) (19,600) 2,900 6,900
--------- --------- --------- ---------
Net loss $ (30,000) $ (48,100) $(41,500) $(117,100)
========= ========= ========= =========
Net loss per common
share $ - $ (0.01) $ (0.01) $ (0.02)
========= ========= ========= =========
</TABLE>
F-23
<PAGE> 65
INTERNATIONAL REALTY GROUP, INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1995 AND 1994
16. SELECTED QUARTERLY FINANCIAL SUMMARY (UNAUDITED) (CONTINUED):
The 1995 and 1994 quarters have been restated for $15,000 of
amortization, which resulted from changing the estimated amortization
period from ten (10) to five (5) years. Major fluctuations between the
third and fourth quarters of 1995 and 1994 are as follows:
<TABLE>
<CAPTION>
1995:
<S> <C>
Bad Debts, foreign $ 36,800
Other deductions, foreign 51,500
1994:
Bad Debts, domestic 110,000
Payroll, domestic 28,300
</TABLE>
Circumstances were not evident that the bad debts arose prior to the
fourth quarter for both 1995 and 1994.
F-24
<PAGE> 66
INTERNATIONAL REALTY GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - JUNE 30, 1996 AND 1995
(UNAUDITED)
<TABLE>
<CAPTION>
ASSETS
1996 1995
------------- -------------
<S> <C> <C>
Current assets:
Cash and equivalents $ 17,800 $ 100,400
Accounts receivable, deemed
fully collectible 147,200 336,800
Refundable income tax - 3,200
Other current assets 90,300 15,500
------------- -------------
Total current assets 255,300 455,900
Note receivable - 45,000
Marketable securities available for sale 34,700 -
Land held for investment 485,300 33,500
Furniture, equipment and
improvements 196,700 195,700
Excess of cost over estimated fair
value of net assets acquired 132,000 135,400
Other assets 7,800 54,600
------------- -------------
$ 1,111,800 $ 920,100
------------- -------------
</TABLE>
<TABLE>
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
1996 1995
------------- -------------
<S> <C> <C>
Current liabilities:
Notes payable $ 197,000 $ 139,100
Current portion of long-term debt 6,000 54,000
Accounts payable 129,300 290,600
Accrued liabilities 444,200 320,500
Billings in excess of costs and estimated
earnings on uncompleted contracts 3,800 -
Shareholders loans 37,000 -
Income taxes payable 200 1,000
------------- -------------
Total current liabilities 817,500 805,200
------------- -------------
Long-term debt, less current portion 39,500 49,000
------------- -------------
Minority interest 32,400 -
------------- -------------
Shareholders' equity:
Common stock, $.001 par; authorized
10,000,000 shares; 8,954,187 and
8,398,112 common shares issued at
1996 and 1995, respectively 9,000 8,400
Capital in excess of par 1,053,400 597,000
Cummulative translation adjustment (208,500) (194,000)
Accumulated deficit (616,000) (330,000)
------------- -------------
237,900 81,400
Less shares of common stock held
in treasury, at cost 15,500 15,500
------------- -------------
222,400 65,900
------------- -------------
$ 1,111,800 $ 920,100
------------- -------------
</TABLE>
F-25
<PAGE> 67
INTERNATIONAL REALTY GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE AND SIX MONTHS ENDED JUNE 30, 1996 AND 1995
(UNAUDITED)
<TABLE>
<CAPTION>
1996 1995
-------------------------- --------------------------
Three months Six months Three months Six months
Ended Ended Ended Ended
June 30, June 30, June 30, June 30,
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues $ 147,600 $ 309,800 $ 335,300 $ 625,600
----------- ----------- ----------- -----------
Operating expenses:
Amortization and
depreciation 13,000 27,400 17,300 43,300
Bad debts - 24,200 - 46,400
Direct 50,000 162,000 169,900 315,000
Interest 900 4,400 22,300 23,900
Payroll and related
benefits 79,400 147,000 155,300 245,900
Rent 11,500 23,000 13,200 28,000
Selling, general and
administration 51,700 77,400 84,000 157,200
----------- ----------- ----------- -----------
206,500 465,400 462,000 859,700
----------- ----------- ----------- -----------
Loss before minority interest (58,900) (155,600) (126,700) (234,100)
Minority interest (700) (2,800) - -
----------- ----------- ----------- -----------
Net loss $ (58,200) $ (152,800) $ (126,700) $ (234,100)
=========== =========== =========== ===========
Loss per share of common stock: $ 0.00 $ 0.00 $ 0.00 $ 0.00
=========== =========== =========== ===========
Weighted average shares
of common stock 8,954,200 8,954,200 8,954,200 8,954,200
=========== =========== =========== ===========
</TABLE>
F-26
<PAGE> 68
INTERNATIONAL REALTY GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1996
(UNAUDITED)
<TABLE>
<S> <C> <C>
Cash flows from operating activities:
Sources of cash:
Clients and other $ 354,300
Interest 1,700 $ 356,000
------------
Uses of cash:
Cash paid to:
Direct costs 167,600
Operating 119,200
Payroll and related benefits 99,600
Interest 4,400 390,800
------------ -----------
Cash (used-in) operating activities (34,800)
-----------
Cash flows from investing activities:
Uses of cash:
Acquisition of equipment 9,300
Investment in real estate 4,300
------------
Cash (used-in) investing activities (13,600)
-----------
Cash flows from financing activities:
Sources of cash:
Note payable 45,100
Shareholders loans 39,100 84,200
------------
Uses of cash:
Payment of:
Long-term debt 3,500
Shareholders loans 28,800 32,300
------------ -----------
Cash provided by financing activities 51,900
-----------
Effect of exchange rates on cash and equivalents (5,100)
-----------
Decrease in cash and equivalents (1,600)
Cash and equivalents, beginning 19,400
-----------
Cash and equivalents, ending $ 17,800
===========
</TABLE>
F-27
<PAGE> 69
INTERNATIONAL REALTY GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS (CONTINUED)
SIX MONTHS ENDED JUNE 30, 1996
(UNAUDITED)
<TABLE>
<S> <C>
Reconciliation of net loss to cash (used-in)
operating activities:
Net loss $ (152,800)
-----------
Adjustments to reconcile net loss to cash
(used-in) operating activities:
Amortization and depreciation 27,400
Minority interest (2,800)
Changes in assets and liabilities:
Accounts receivable 74,300
Other current assets (19,600)
Accounts payable (5,600)
Accrued liabilities 48,000
Billings in excess of costs (3,900)
Income taxes 200
-----------
Net adjustments 118,000
-----------
Cash (used-in) operating activities $ (34,800)
===========
</TABLE>
The foregoing financial statements has been prepared from the records of the
Company and have not been audited or reviewed by the Company's certified public
accountants. Accordingly, these statements are subject to adjustments upon
audit, which audit will be conducted for the Fiscal Year ending December 31,
1996. Reference is made to the footnotes to the financial statements prepared by
the Company's auditors for the Fiscal Year ended December 31, 1995. In the
opinion of management there have been no developments requiring footnote
disclosure for the periods covered by the foregoing financial statements that
are not adequately disclosed in the footnotes to the December 31, 1995
statements, included elsewhere herein.
F-28
<PAGE> 70
[LOGO] GONZALEZ MACIN Y CIA.
- ----------------------------------
Board of Directors and Shareholders
Centro de Promociones Guerrero, S.A. de C.V.
Mexico City, Mexico
We have audited the accompanying balance sheets of Centro de Promociones
Guerrero, S.A. de C.V. (a subsidiary of Clusters, S.A. de C.V.), as of December
31, 1995 and 1994 and the related statements of operations, shareholders'
equity (deficiency) and cash flows for the years then ended. As described in
Note 1 of Notes to financial statements, the accompanying financial statements
have been prepared on the basis of accounting principles generally accepted in
the United States, expressed in United States dollars. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards, in the United States and Mexico. Those standards require that we
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 used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, based on our audits, the 1995 and 1994 financial statements
referred to above present fairly, in all material respects, the financial
position of Centro de Promociones Guerrero, S.A. de C.V. (a subsidiary of
Clusters, S.A. de C.V.) as of December 31, 1995 and 1994 and the results of its
operations and its cash flows for the years then ended in conformity with
generally accepted accounting principles.
/S/ C.P. GUILLERMO GONZALEZ MACIN
C.P. Guillermo Gonzalez Macin
Mexico, D.F.
April 2, 1996
RIO EBRO NO. 45 COLONIA CUAUHTEMOC DELEGACION CUAUHTEMOC C.P. 06500 TEL. (915)
525-31-34
F-29
<PAGE> 71
CENTRO de PROMOCIONES GUERRERO, S.A. de C.V.
(A SUBSIDIARY OF CLUSTERS, S.A. de C.V.)
BALANCE SHEETS - DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
ASSETS
1995 1994
------------ ------------
<S> <C> <C>
Current assets:
Due from affiliates $ 242,223 $ -
Marketable securities in affiliates - 1,978
Refundable income and value added taxes 107 116
------------ ------------
Total current assets 242,330 2,094
Property held for development 403,591 403,591
------------ ------------
$ 645,921 $ 405,685
============ ============
</TABLE>
<TABLE>
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIENCY)
1995 1994
------------- ------------
<S> <C> <C>
Current liabilities:
Mortgage note, bank $ 340,974 $ 507,500
Accrued interest, bank 368,962 298,427
Due to affiliates 1,224 1,282
Accounts payable 58,078 86,442
Accrued liabilities 6,357 11,164
------------ ------------
Total current liabilities 775,595 904,815
------------ ------------
Shareholders' equity (deficiency):
Common stock, no par value; 1,531,000
shares authorized, issued and outstanding
at stated value 460,975 460,975
Capital in excess of stated value 315,769 -
Cummulative translation adjustment 742,647 445,787
Accumulated deficit (1,649,065) (1,405,892)
------------ ------------
(129,674) (499,130)
------------ ------------
$ 645,921 $ 405,685
============ ============
</TABLE>
Read the accompanying notes to financial statements, which are
an integral part of this financial statement.
F-30
<PAGE> 72
CENTRO de PROMOCIONES GUERRERO, S.A. de C.V.
(A SUBISIDIARY OF CLUSTERS, S.A. de C.V.)
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
1995 1994
------------ -------------
<S> <C> <C>
Other additions (deductions):
Interest expense $ (130,135) $ (165,420)
Gain (loss) from foreign currency (112,727) 56,373
Other (311) (107)
------------ ------------
Net loss $ (243,173) $ (109,154)
------------ ------------
</TABLE>
Read the accompanying notes to financial statements,
which are an integral part of this financial statement.
F-31
<PAGE> 73
CENTRO de PROMOCIONES GUERRERO, S.A. de C.V.
(A SUBSIDIARY OF CLUSTERS, S.A. de C.V.)
STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIENCY)
YEARS ENDED DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
Common stock Capital in Cummulative
--------------------------- Excess of Translation Accumulated
Total Shares Amount Stated value Adjustment Deficit
------------ ----------- ------------ ------------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Balance, beginning $ (835,763) 1,531,000 $ 460,975 $ - $ - $ (1,296,738)
Add (deduct):
Net loss (109,154) - - - - (109,154)
Currency translation adjustment 445,787 - - - 445,787 -
------------ ----------- ------------ ------------ ------------ -------------
Balance, December 31, 1994 (499,130) 1,531,000 460,975 - 445,787 (1,405,892)
Add (deduct):
Gain on sale of related parties
securities to related parties 315,769 - - 315,769 - -
Net loss (243,173) - - - - (243,173)
Currency translation adjustment 296,860 - - - 296,860 -
------------ ----------- ------------ ------------ ------------ -------------
Balance, ending $ (129,674) 1,531,000 $ 460,975 $ 315,769 $ 742,647 $ (1,649,065)
============ =========== ============ ============ ============ =============
</TABLE>
Read the accompanying notes to financial statements,
which are an integral part of this financial statement.
F-32
<PAGE> 74
CENTRO de PROMOCIONES GUERRERO, S.A. de C.V.
(A SUBSIDIARY OF CLUSTERS, S.A. de C.V.)
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
1995 1994
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Source of cash:
Income taxes $ 9 $ 26,601
- 1,437
----------- -----------
9 28,038
----------- -----------
Uses of cash:
Interest 59,600 161,597
Operating expenses 146,209 -
----------- -----------
205,809 161,597
----------- -----------
Cash (used-in) operating activities (205,800) (133,559)
----------- -----------
Cash flows from investing activities:
Source of cash:
Proceeds from sale of related party securities 317,747 -
Use of cash:
Purchase of related party securities - 1,978
----------- -----------
Cash provided by (used-in) investing activities 317,747 (1,978)
----------- -----------
Cash flow from financing activities:
Uses of cash:
Payments of:
Mortgage note, bank 166,526 285,088
Related party 242,281 25,162
----------- -----------
408,807 310,250
----------- -----------
Cash (used-in) financing activities (408,807) (310,250)
----------- -----------
Effect of exchange rates on cash and equivalents 296,860 445,787
----------- -----------
Increase (decrease) in cash - -
Cash, beginning - -
----------- -----------
Cash, ending $ - $ -
=========== ===========
</TABLE>
Read the accompanying notes to financial statements,
which are an integral part of this financial statement.
F-33
<PAGE> 75
CENTRO de PROMOCIONES GUERRERO, S.A. de C.V.
(A SUBSIDIARY OF CLUSTERS, S.A. de C.V.)
STATEMENTS OF CASH FLOWS (CONTINUED)
YEARS ENDED DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
1995 1994
------------ ------------
<S> <C> <C>
Reconciliation of net loss to cash (used-in)
operating activities:
Net loss $ (243,173) $ (109,154)
----------- -----------
Adjustment to reconcile net loss to cash (used-in)
operating activities:
Changes in assets and liabilities:
Refundable income tax 9 26,601
Accrued interest 70,535 3,823
Accounts payable (28,364) (48,559)
Accrued liabilities (4,807) (6,270)
----------- -----------
Total adjustments 37,373 (24,405)
----------- -----------
Cash (used-in) operating activities $ (205,800) $ (133,559)
=========== ===========
</TABLE>
Read the accompanying notes to financial statements,
which are an integral part of this financial statement.
F-34
<PAGE> 76
CENTRO DE PROMOCIONES GUERRERO, S.A. DE C.V.
(A SUBSIDIARY OF CLUSTERS, S.A. DE C.V.)
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995 AND 1994
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
ORGANIZATION AND BUSINESS:
Centro de Promociones Guerrero, S.A. de C.V. is a majority owned
subsidiary of Clusters, S.A. de C.V. which was incorporated on March 13,
1989 under the laws of Mexico. Clusters, S.A. de C.V. is a wholly owned
subsidiary of DSC, S.A. de C.V. Group of Mexico City, Mexico. Since
1989, the Company has acquired real property, which will be developed
into resort and commercial properties. Once the properties are
developed, the Company will be engaged in the marketing of resort hotel
lodging, timeshare interests and other ancillary real estate activities.
From March, 1989 to November, 1990, the Company was deemed in the
development stage. During this period, management was devoted primarily
to raising capital, securing debt financing and seeking a qualified
property to develop. The Company ceased to be in the development stage
when the Company acquired real property on November 28, 1990. The
current project under development is known as Campo de Tiro.
BASIS OF ACCOUNTING:
The Company prepares its financial statements in accordance with
generally accepted accounting principles in the United States, expressed
in United States dollars. This basis of accounting involves the
application of accrual accounting; consequently, revenues and gains are
recognized when earned, and expenses and losses are recognized when
incurred. Financial statement items are recorded at historical cost and
may not necessarily represent current values.
MANAGEMENT ESTIMATES:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements, and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS:
Financial instruments which include cash, due from affiliates, accounts
payable, accrued liabilities and due to affiliates are reflected in the
financial statements at fair values. Based on the borrowing rates
currently available to the Company for bank loans with similar terms and
average maturities, debt is stated at their fair values.
F-35
<PAGE> 77
CENTRO DE PROMOCIONES GUERRERO, S.A. DE C.V.
(A SUBSIDIARY OF CLUSTERS, S.A. DE C.V.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1995 AND 1994
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
FOREIGN CURRENCY TRANSLATION:
Adjustments for currency exchange rate changes are excluded from net
income for those fluctuations that do not impact cash flow. Local
currency is generally considered the functional currency outside the
United States. All assets and liabilities are translated into United
States dollars at period-end exchange rates. Income and expense items
are translated at average rates of exchange prevailing during the year.
The Mexican exchange rate used for the years ended December 31, 1995 and
1994 was NP$7.7396 and NP$5.2000, respectively. Rates for 1995 were
obtained from the Diario Official de la Federacion and rates for 1994
were obtained from the free market rates utilized by the National Bank
of Mexico, Mexican Stock Exchange and the Exchange Office Euromex.
Temporary gains and losses resulting from translation, if material, are
reflected as currency translation adjustments in shareholders' equity.
Permanent adjustments are reflected in the consolidated statements of
operations.
INVESTMENTS:
Investments in equity securities of related parties are classified as
either trading securities or available for sale securities. The net
unrealized holding gains and losses for trading securities would be
included in earnings. There were no trading securities during the
periods. Equity securities have been categorized as available for sale
and, as a result, are stated at fair value. Any unrealized gains and
losses would be reported as a separate component of shareholders'
equity. There were no unrealized gains and losses at the balance sheet
date.
LAND HELD FOR DEVELOPMENT:
Land held for development is stated at cost. When the project commences
construction period interest will be capitalized. Interest is not
capitalized during material delays.
INCOME TAXES:
Income taxes are accounted for by the asset/liability method. Deferred
taxes represent the expected future tax benefits/consequences when the
reported amounts of assets and liabilities are recovered or paid. They
arise from differences between the financial reporting and tax bases of
assets and liabilities and are adjusted for changes in tax laws and
rates when those changes are enacted.
F-36
<PAGE> 78
CENTRO DE PROMOCIONES GUERRERO, S.A. DE C.V.
(A SUBSIDIARY OF CLUSTERS, S.A. DE C.V.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1995 AND 1994
2. LIQUIDITY AND STRATEGIC PLANNING:
As reflected in the accompanying balance sheets, the Company's current
liabilities exceed its current assets by $533,265 in 1995 and $791,263 in
1994, which resulted in an decrease in the working capital deficiency by
$257,998. From inception the Company has sustained substantial losses and
has had working capital deficiencies. The Company is in the process of
restructuring its operations in order to reverse the current deficiencies.
The Company is dependent upon its parent company and related affiliates
for loan guarantees for short-term funding to meet current liabilities as
they become due and the continued funding of other costs.
International Realty Group, Inc. (IRG) has entered into an agreement with
D.S.C., S.A. de C.V. (DSC) the parent company of Clusters, S.A. de C.V. to
acquire the Company in exchange for common stock of IRG. The transaction
has been valued at $1,104,018 less liabilities, subject to adjustment at
date of closing (August 15, 1996). DSC would receive shares of common
stock valued at $.782 per share for its investment. The fair market value
of the properties is based upon independent appraisals performed in 1996
by Ingeniero Sergio H. Parra - R.
3. CONCENTRATION OF CREDIT RISK:
Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of amounts due from
affiliates. The Company's account balances with financial institutions
are guaranteed by the government of Mexico. The Company has a large
number of transactions with related parties and generally does not require
collateral. The Company maintains an allowance for uncollectible accounts
based upon expected collectibility of all accounts receivable. Credit
losses have been provided for in the financial statements.
F-37
<PAGE> 79
CENTRO DE PROMOCIONES GUERRERO, S.A. DE C.V.
(A SUBSIDIARY OF CLUSTERS, S.A. DE C.V.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1995 AND 1994
4. DUE FROM/TO AFFILIATES:
Various related entities are engaged in transactions including, but not
limited to, short-term advances to cover operating costs and working
capital. All such transactions are with entities related to DSC, S.A. de
C.V. Group (the parent company of Clusters, S.A. de C.V.) and are recorded
in separate accounts that comprise the amounts due from affiliates and
amounts due to affiliates. Balances due from or to the related parties as
a result of these transactions are non-interest bearing and unsecured. In
the opinion of management, the realization of amounts due from affiliates
and the payment of amounts due to affiliates will be realized/liquidated
during the normal course of business.
A summary of amounts due from/to affiliates is as follows:
<TABLE>
<CAPTION>
1995 1994
------------- -------------
<S> <C> <C>
DUE FROM AFFILIATES:
D.S.C., S.A. de C.V. $ 242,223 $ -
============= =============
DUE TO AFFILIATES:
D.S.C., S.A. de C.V. $ 95 $ -
D.S.C. Ingenieria y Proyectos,
S.A. de C.V. 63 -
Groupo Tropical Club, S.A. de C.V. 862 1,282
Satur, S.A. de C.V. 204 -
------------- -------------
$ 1,224 $ 1,282
============= =============
</TABLE>
5. MARKETABLE SECURITIES, AFFILIATES:
The Company had acquired the common stock of Tropical Club de Isla
Mujeres, S.A. de C.V. at a cost of $1,978. These securities were sold to
a related party (DSC Group) for $317,747 resulting in a gain of $315,569.
Under Mexican standards, gains from related party transactions flow
through the statement of operations. For purposes of the accompanying
financial statements, the gain has been credited to shareholders' equity
as capital in excess of stated value.
The gain was offset by unused net operating loss carryforwards.
F-38
<PAGE> 80
CENTRO DE PROMOCIONES GUERRERO, S.A. DE C.V.
(A SUBSIDIARY OF CLUSTERS, S.A. DE C.V.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1995 AND 1994
6. PROPERTY HELD FOR DEVELOPMENT:
<TABLE>
<CAPTION>
1995 1994
------------ ------------
<S> <C> <C>
Land $ 214,253 $ 214,253
Construction in process 189,338 189,338
----------- ------------
$ 403,591 $ 403,591
=========== ============
</TABLE>
Property held for development is collateralized to mortgage note, bank.
Land held for development is land acquired under trust rights. Trust
rights gives the holder exclusive use and ownership of the property. The
rights are valid for thirty (30) years and are renewable each thirty (30)
years at no cost. Trust rights can be used to collateralize debt or be
hypothecated in any form.
7. MORTGAGE NOTE, BANK:
<TABLE>
<S> <C> <C>
Banca Confia, S.A., together with
accrued interest (1995, $368,962;
1994, $298,427) interest at six (6)
points over Average Bank Deposit
Rate in Mexico in 1995 and 1994,
collateralized by land and construction
in process with net book value of
$403,591 The bank has committed to
a construction mortgage loan
amounting to $874,861. Draws against
the construction loan will be based
upon the percentage of completion
of the project as estimated by bank
appraisers. Maturing in March, 1997 $ 340,974 $ 507,500
============ ============
</TABLE>
F-39
<PAGE> 81
CENTRO DE PROMOCIONES GUERRERO, S.A. DE C.V.
(A SUBSIDIARY OF CLUSTERS, S.A. DE C.V.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1995 AND 1994
8. INCOME TAXES:
The Company requires recognition of income tax benefits for loss
carryforwards, credit carryforwards and certain temporary differences for
which tax benefits have not been previously recorded. The tax benefits
recognized must be reduced by a valuation allowance where it is more
likely than not that the benefits may not be realized.
Deferred tax asset balances are primarily the result of net operating loss
carryforwards. There are no deferred tax liability balances.
It is more likely than not that all future tax benefits will not be
realized, therefore, a valuation allowance has been recorded for the
deferred net tax assets. There was no prior balance in the valuation
allowance.
As of December 31, 1995, the Company has a net operating loss carryforward
of approximately $26,359 that may be used to offset future taxable income
expiring in varying years to 2005.
9. CONTINGENCY, LITIGATION AND COMMITMENT:
During 1994, the Mexican peso was permitted to float against the U.S.
dollar and other currencies, and as a result, the peso had been devalued
from $3.4662 pesos/dollar to approximately $3.9413 pesos/dollar. It is
not possible to determine what effect the devaluation will have upon
future pricing or costs, however, it is managements opinion that the
devaluation will not have a material adverse effect upon the Company's
future operations.
Management estimated that future improvement and development cost to
complete this project is approximately $2,750,000. The completion of the
project is anticipated to be over a 18 month period. The total amount of
the project of $3,750,000 would be completed at intervals in order to
allow the Company to build a portion (25%) and then sell that portion to
pay-off the then construction loans. This would permit an effective
revolving line to be developed to construct and finance each portion. The
total project calls for 250 residential units in 125 duplex townhomes.
In order to complete this project management has been in discussion with
the current lenders. In addition, management has also engaged in new
conversations with new prospective lenders, both private and public, as to
the required financing necessary to complete the current project. The
current lenders have not indicated that they would oppose to continued
financing.
F-40
<PAGE> 82
GONZALEZ MACIN Y CIA.
- ----------------------------------------------
Board of Directors and Shareholder
Centro de Promociones Guerrero, S.A. de C.V.
Mexico City, Mexico
We have reviewed the accompanying balance sheets of Centro de Promociones
Guerrero, S.A. de C.V. (a subsidiary of Clusters, S.A. de C.V.), as of June 30,
1996 and 1995 and the related statements of operations, shareholders' equity
(deficiency) and cash flows for the six months then ended, in accordance with
Statements on Standards for Accounting and Review Services issued by the
American Institute of Certified Public Accountants. As described in Note 1 of
Notes to financial statements, the accompanying financial statements have been
prepared on the basis of accounting principles generally accepted in the United
States, expressed in United States dollars. All information included in these
financial statements is the representation of the management of Centro de
Promociones Guerrero, S.A. de C.V.
A review consists principally of inquires of Company personnel and analytical
procedures applied to financial data. It is substantially less in scope than
an audit in accordance with generally accepted auditing standards, the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the accompanying financial statements in order for them to be in
conformity with generally accepted accounting principles.
/S/ C.P. GUILLERMO GONZALEZ MACIN
Mexico, D.F.
July 15, 1996
RIO EBRO NO. 45 COLONIA CUAUHTEMOC DELEGACION CUAUHTEMOC C.P. 06500 TEL. (915)
525-31-34
F-41
<PAGE> 83
CENTRO de PROMOCIONES GUERRERO, S.A. de C.V.
(A SUBSIDIARY OF CLUSTERS, S.A. de C.V.)
BALANCE SHEETS - JUNE 30, 1996 AND 1995
<TABLE>
<CAPTION>
ASSETS
1996 1995
------------ ------------
<S> <C> <C>
Current assets:
Due from affiliates $ 247,277 $ 297,572
Refundable income and value added taxes 109 132
------------ ------------
Total current assets 247,386 297,704
Property held for development 403,591 403,591
------------ ------------
$ 650,977 $ 701,295
============ ============
</TABLE>
<TABLE>
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIENCY)
1996 1995
------------- -------------
<S> <C> <C>
Current liabilities:
Mortgage note, bank $ 334,004 $ 418,889
Accrued interest, bank 325,504 353,194
Due to affiliates 1,277 1,308
Accounts payable 59,290 71,349
Accrued liabilities 6,490 9,238
------------- -------------
Total current liabilities 726,565 853,978
------------- -------------
Shareholders' equity (deficiency):
Common stock, no par value; 1,531,000
shares authorized, issued and outstanding
at stated value 460,975 460,975
Capital in excess of stated value 315,769 315,769
Cummulative translation adjustment 796,761 603,571
Accumulated deficit (1,649,093) (1,532,998)
------------- -------------
(75,588) (152,683)
------------- -------------
$ 650,977 $ 701,295
============ =============
</TABLE>
Read the accompanying notes to financial statements,
which are an integral part of this financial statement.
F-42
<PAGE> 84
CENTRO de PROMOCIONES GUERRERO, S.A. de C.V.
(A SUBISIDIARY OF CLUSTERS, S.A. de C.V.)
STATEMENTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
Other additions (deductions):
Interest $ - $ (108,249)
Foreign currency - (18,618)
Other (28) (239)
----------- -----------
Net loss $ (28) $ (127,106)
=========== ===========
</TABLE>
Read the accompanying notes to financial statements,
which are an integral part of this financial statement.
F-43
<PAGE> 85
CENTRO de PROMOCIONES GUERRERO, S.A. de C.V.
(A SUBSIDIARY OF CLUSTERS, S.A. de C.V.)
STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIENCY)
SIX MONTHS ENDED JUNE 30, 1996 AND 1995
<TABLE>
<CAPTION>
Common stock Capital in Cummulative
--------------------------- Excess of Translation Accumulated
Total Shares Amount Stated value Adjustment Deficit
------------ ----------- ------------ ------------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1994 $ (499,130) 1,531,000 $ 460,975 $ - $ 445,787 $ (1,405,892)
Add (deduct):
Net loss (127,106) - - - - (127,106)
Gain on sale of related parties
securities to related parties 315,769 - - 315,769 - -
Currency translation adjustment 157,784 - - - 157,784 -
------------ ----------- ------------ ------------ ------------ -------------
Balance, June 30, 1995 $ (152,683) 1,531,000 $ 460,975 $ 315,769 $ 603,571 $ (1,532,998)
============ =========== ============ ============ ============ =============
Balance, December 31, 1995 $ (129,674) 1,531,000 $ 460,975 $ 315,769 $ 742,647 $ (1,649,065)
Add (deduct):
Net loss (28) - - - - (28)
Currency translation adjustment 54,114 - - - 54,114 -
------------ ----------- ------------ ------------ ------------ -------------
Balance, ending $ (75,588) 1,531,000 $ 460,975 $ 315,769 $ 796,761 $ (1,649,093)
============ =========== ============ ============ ============ =============
</TABLE>
Read the accompanying notes to financial statements,
which are an integral part of this financial statement.
F-44
<PAGE> 86
CENTRO de PROMOCIONES GUERRERO, S.A. de C.V.
(A SUBSIDIARY OF CLUSTERS, S.A. de C.V.)
STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Uses of cash:
Interest and other 42,142 53,498
Operating expenses - 35,876
----------- -----------
Cash (used-in) operating activities (42,142) (89,374)
----------- -----------
Cash flows from investing activities:
Source of cash:
Proceeds from sale of related party securities - 317,747
----------- -----------
Cash provided by investing activities - 317,747
----------- -----------
Cash flows from financing activities:
Uses of cash:
Payments of:
Mortgage note, bank 6,971 88,611
Related party 5,001 297,546
----------- -----------
Cash (used-in) financing activities 11,972 386,157
----------- -----------
Effect of exchange rates on cash and equivalents 54,114 157,784
----------- -----------
Increase (decrease) in cash - -
Cash, beginning - -
----------- -----------
Cash, ending $ - $ -
=========== ===========
</TABLE>
Read the accompanying notes to financial statements,
which are an integral part of this financial statement.
F-45
<PAGE> 87
CENTRO de PROMOCIONES GUERRERO, S.A. de C.V.
(A SUBSIDIARY OF CLUSTERS, S.A. de C.V.)
STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
Reconciliation of net loss to cash (used-in)
operating activities:
Net loss $ (28) $ (127,106)
----------- -----------
Adjustment to reconcile net loss to cash
(used-in) operating activities:
Changes in assets and liabilities:
Refundable income tax - (16)
Accrued interest (43,458) 54,767
Accounts payable 1,211 (15,093)
Accrued liabilities 133 (1,926)
----------- -----------
Total adjustments (42,114) 37,732
----------- -----------
Cash (used-in) operating activities $ (42,142) $ (89,374)
=========== ===========
</TABLE>
Read the accompanying notes to financial statements,
which are an integral part of this financial statement.
F-46
<PAGE> 88
CENTRO DE PROMOCIONES GUERRERO, S.A. DE C.V.
(A SUBSIDIARY OF CLUSTERS, S.A. DE C.V.)
NOTES TO FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 1996 AND 1995
(READ INDEPENDENT ACCOUNTANTS' REVIEW REPORT)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
ORGANIZATION AND BUSINESS:
Centro de Promociones Guerrero, S.A. de C.V. is a majority owned
subsidiary of Clusters, S.A. de C.V. which was incorporated on March 13,
1989 under the laws of Mexico. Clusters, S.A. de C.V. is a wholly owned
subsidiary of DSC, S.A. de C.V. Group of Mexico City, Mexico. Since
1989, the Company has acquired real property, which will be developed
into resort and commercial properties. Once the properties are
developed, the Company will be engaged in the marketing of resort hotel
lodging, timeshare interests and other ancillary real estate activities.
From March, 1989 to November, 1990, the Company was deemed in the
development stage. During this period, management was devoted primarily
to raising capital, securing debt financing and seeking a qualified
property to develop. The Company ceased to be in the development stage
when the Company acquired real property on November 28, 1990. The
current project under development is known as Campo de Tiro.
BASIS OF ACCOUNTING:
The Company prepares its financial statements in accordance with
generally accepted accounting principles in the United States, expressed
in United States dollars. This basis of accounting involves the
application of accrual accounting; consequently, revenues and gains are
recognized when earned, and expenses and losses are recognized when
incurred. Financial statement items are recorded at historical cost and
may not necessarily represent current values.
MANAGEMENT ESTIMATES:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements, and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS:
Financial instruments which include cash, due from affiliates, accounts
payable, accrued liabilities and due to affiliates are reflected in the
financial statements at fair values. Based on the borrowing rates
currently available to the Company for bank loans with similar terms and
average maturities, debt is stated at their fair values.
F-47
<PAGE> 89
CENTRO DE PROMOCIONES GUERRERO, S.A. DE C.V.
(A SUBSIDIARY OF CLUSTERS, S.A. DE C.V.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SIX MONTHS ENDED JUNE 30, 1996 AND 1995
(READ INDEPENDENT ACCOUNTANTS' REVIEW REPORT)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
FOREIGN CURRENCY TRANSLATION:
Adjustments for currency exchange rate changes are excluded from net
income for those fluctuations that do not impact cash flow. Local
currency is generally considered the functional currency outside the
United States. All assets and liabilities are translated into United
States dollars at period-end exchange rates. Income and expense items
are translated at average rates of exchange prevailing during the year.
The Mexican exchange rate used for the six months ended June 30, 1996
and 1995 was NP$7.5814 and NP$6.3000, respectively. Rates for 1996 and
1995 were obtained from the Diario Official de la Federacion. Temporary
gains and losses resulting from translation, if material, are reflected
as currency translation adjustments in shareholders' equity. Permanent
adjustments are reflected in the consolidated statements of operations.
INVESTMENTS:
Investments in equity securities of related parties are classified as
either trading securities or available for sale securities. The net
unrealized holding gains and losses for trading securities would be
included in earnings. There were no trading securities during the
periods. Equity securities have been categorized as available for sale
and, as a result, are stated at fair value. Any unrealized gains and
losses would be reported as a separate component of shareholders'
equity. There were no unrealized gains and losses at the balance sheet
date.
LAND HELD FOR DEVELOPMENT:
Land held for development is stated at cost. When the project commences
construction period interest will be capitalized. Interest is not
capitalized during material delays.
INCOME TAXES:
Income taxes are accounted for by the asset/liability method. Deferred
taxes represent the expected future tax benefits/consequences when the
reported amounts of assets and liabilities are recovered or paid. They
arise from differences between the financial reporting and tax bases of
assets and liabilities and are adjusted for changes in tax laws and
rates when those changes are enacted.
F-48
<PAGE> 90
CENTRO DE PROMOCIONES GUERRERO, S.A. DE C.V.
(A SUBSIDIARY OF CLUSTERS, S.A. DE C.V.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SIX MONTHS ENDED JUNE 30, 1996 AND 1995
(READ INDEPENDENT ACCOUNTANTS' REVIEW REPORT)
2. LIQUIDITY AND STRATEGIC PLANNING:
As reflected in the accompanying balance sheets, the Company's current
liabilities exceed its current assets by $479,179 in 1996 and $556,274 in
1995, which resulted in an decrease in the working capital deficiency by
$54,086. From inception the Company has sustained substantial losses and
has had working capital deficiencies. The Company is in the process of
restructuring its operations in order to reverse the current deficiencies.
The Company is dependent upon its parent company and related affiliates
for loan guarantees for short-term funding to meet current liabilities as
they become due and the continued funding of other costs.
International Realty Group, Inc. (IRG) has entered into an agreement with
D.S.C., S.A. de C.V. (DSC) the parent compnay of Clusters, S.A. de C.V. to
acquire the Company in exchange for common stock of IRG. The transaction
has been valued at $17,384,907 less liabilities and minority shareholder
value, subject to adjustment at date of closing (August 15, 1996). DSC
would receive shares of common stock valued at $.782 per share for its
investment. The fair market value of the properties is based upon
independent appraisals performed in 1996 by Ingeniero Segio H. Parra - R.
3. CONCENTRATION OF CREDIT RISK:
Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of amounts due from
affiliates. The Company's account balances with financial institutions
are guaranteed by the government of Mexico. The Company has a large
number of transactions with related parties on and generally does not
require collateral. The Company maintains an allowance for uncollectible
accounts based upon expected collectibility of all accounts receivable.
Credit losses have been provided for in the financial statements.
F-49
<PAGE> 91
CENTRO DE PROMOCIONES GUERRERO, S.A. DE C.V.
(A SUBSIDIARY OF CLUSTERS, S.A. DE C.V.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SIX MONTHS ENDED JUNE 30, 1996 AND 1995
(READ INDEPENDENT ACCOUNTANTS' REVIEW REPORT)
4. DUE FROM/TO AFFILIATES:
Various related entities are engaged in transactions including, but not
limited to, short-term advances to cover operating costs and working
capital. All such transactions are with entities related to DSC, S.A. de
C.V. Group (the parent company of Clusters, S.A. de C.V.) and are recorded
in separate accounts that comprise the amounts due from affiliates and
amounts due to affiliates. Balances due from or to the related parties as
a result of these transactions are non-interest bearing and unsecured. In
the opinion of management, the realization of amounts due from affiliates
and the payment of amounts due to affiliates will be realized/liquidated
during the normal course of business.
A summary of amounts due from/to affiliates is as follows:
<TABLE>
<CAPTION>
1996 1995
------------- -------------
<S> <C> <C>
DUE FROM AFFILIATES:
D.S.C., S.A. de C.V. $ 247,277 $ 257,572
============= =============
DUE TO AFFILIATES:
D.S.C., S.A. de C.V. $ 97 $ -
D.S.C. Ingenieria y Proyectos,
S.A. de C.V. 65 -
Groupo Tropical Club, S.A. de C.V. 879 1,058
Satur, S.A. de C.V. 208 250
D.S.C. Servicios Constructivos,
S.A. de C.V. 28 -
------------- -------------
$ 1,277 $ 1,308
============= =============
</TABLE>
5. MARKETABLE SECURITIES, AFFILIATES:
The Company had acquired the common stock of Tropical Club de Isla
Mujeres, S.A. de C.V. at a cost of $1,978. These securities were sold to
a related party (DSC Group) for $317,747 resulting in a gain of $315,569.
Under Mexican standards, gains from related party transactions flow
through the statement of operations.
The gain was offset by unused net operating loss carryforwards.
F-50
<PAGE> 92
CENTRO DE PROMOCIONES GUERRERO, S.A. DE C.V.
(A SUBSIDIARY OF CLUSTERS, S.A. DE C.V.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SIX MONTHS ENDED JUNE 30, 1996 AND 1995
(READ INDEPENDENT ACCOUNTANTS' REVIEW REPORT)
6. PROPERTY HELD FOR DEVELOPMENT:
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
Land $ 214,253 $ 214,253
Construction in process 189,338 189,338
------------ ------------
$ 403,591 $ 403,591
============ ============
</TABLE>
Property held for development is collateralized to mortgage note, bank.
Land held for development is land acquired under trust rights. Trust
rights gives the holder exclusive use and ownership of the property. The
rights are valid for thirty (30) years and are renewable each thirty (30)
years at no cost. Trust rights can be used in collateralize debt or be
hypothecated in any form.
7. MORTGAGE NOTE, BANK:
<TABLE>
<S> <C>
Banca Confia, S.A., together with
accrued interest (1996, $325,504;
1995, $353,194) interest at six (6)
points over Average Bank Deposit
Rate in Mexico in 1995 and 1994,
collateralized by land and construction
in process with net book value of
$403,591 The bank has committed to
a construction mortgage loan
amounting to $874,861. Draws against
the construction loan will be based
upon the percentage of completion
of the project as estimated by bank
appraisers. Maturing in March, 1997 $ 334,004 $ 418,889
============ ============
</TABLE>
F-51
<PAGE> 93
CENTRO DE PROMOCIONES GUERRERO, S.A. DE C.V.
(A SUBSIDIARY OF CLUSTERS, S.A. DE C.V.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SIX MONTHS ENDED JUNE 30, 1996 AND 1995
(READ INDEPENDENT ACCOUNTANTS' REVIEW REPORT)
8. INCOME TAXES:
The Company requires recognition of income tax benefits for loss
carryforwards, credit carryforwards and certain temporary differences for
which tax benefits have not been previously recorded. The tax benefits
recognized must be reduced by a valuation allowance where it is more
likely than not that the benefits may not be realized.
Deferred tax asset balances were primarily the result of net operating
loss carryforwards. There are no deferred tax liability balances.
It is more likely than not that all future tax benefits will not be
realized, therefore, a valuation allowance has been recorded for the
deferred net tax assets. There was no prior balance in the valuation
allowance.
As of June 30, 1996, the Company has a net operating loss carryforward of
approximately $26,359 that may be used to offset future taxable income
expiring in varying years to 2005.
9. CONTINGENCY, LITIGATION AND COMMITMENT:
During 1994, the Mexican peso was permitted to float against the U.S.
dollar and other currencies, and as a result, the peso had been devalued
from $3.4662 pesos/dollar to approximately $3.9413 pesos/dollar. It is
not possible to determine what effect the devaluation will have upon
future pricing or costs, however, it is managements opinion that the
devaluation will not have a material adverse effect upon the Company's
future operations.
Management estimated that future improvement and development cost to
complete this project is approximately $2,750,000. The completion of the
project is anticipated to be over a 18 month period. The total amount of
the project of $3,750,000 would be completed at intervals in order to
allow the Company to build a portion (25%) and then sell that portion to
pay-off the then construction loans. This would permit an effective
revolving line to be developed to construct and finance each portion. The
total project calls for 250 residential units in 125 duplex townhomes.
In order to complete this project management has been in discussion with
the current lenders. In addition, management has also engaged in new
conversations with new prospective lenders, both private and public, as to
the required financing necessary to complete the current project. The
current lenders have not indicated that they would oppose to continued
financing.
F-52
<PAGE> 94
GONZALEZ MACIN Y CIA.
- ----------------------------------------
Board of Directors and Shareholders
Cluster Inmobiliaria de Ixtapa, S.A. de C.V.
Mexico City, Mexico
We have audited the accompanying balance sheets of Cluster Inmobiliaria de
Ixtapa, S.A. de C.V. (a subsidiary of Clusters, S.A. de C.V.), as of December
31, 1995 and 1994 and the related statements of operations, shareholders'
equity and cash flows for the years then ended. As described in Note 1 of
Notes to financial statements, the accompanying financial statements have been
prepared on the basis of accounting principles generally accepted in the United
States, expressed in United States dollars. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards, in the United States and Mexico. Those standards require that we
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 used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, based on our audits, the 1995 and 1994 financial statements
referred to above present fairly, in all material respects, the financial
position of Cluster Inmobiliaria de Ixtapa, S.A. de C.V. (a subsidiary of
Clusters, S.A. de C.V.) as of December 31, 1995 and 1994 and the results of its
operations and its cash flows for the years then ended in conformity with
generally accepted accounting principles.
/S/ C.P. GUILLERMO GONZALEZ MACIN
Mexico, D.F. C.P. Guillermo Gonzalez Macin
March 13, 1996
RIO EBRO NO. 45 COLONIA CUAUHTEMOC DELEGACION CUAUHTEMOC C.P. 06500 TEL. (915)
525-31-34
F-53
<PAGE> 95
CLUSTER INMOBILIARIA de IXTAPA, S.A. de C.V.
(A SUBSIDIARY OF CLUSTERS, S.A. de C.V.)
BALANCE SHEETS - DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
ASSETS
1995 1994
------------ ------------
<S> <C> <C>
Current assets:
Cash $ 93 $ 577
Due from affiliates 1,416,177 3,934,503
Marketable securities in affiliates - 1,245,220
Refundable income and value added taxes 416,679 363,698
Deferred taxes 16,219 -
Other current assets 232 -
------------ ------------
Total current assets 1,849,400 5,543,998
Land held for development 9,054,885 9,054,885
------------ ------------
$ 10,904,285 $ 14,598,883
============ ============
</TABLE>
<TABLE>
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
1995 1994
------------ ------------
<S> <C> <C>
Current liabilities:
Note payable, governmental agency $ - $ 6,394,363
Due to affiliates 5,505,177 1,412,683
Accounts payable 68,149 115,138
Accrued liabilities 82,609 700,330
------------ ------------
Total current liabilities 5,655,935 8,622,514
------------ ------------
Shareholders' equity:
Common stock, no par value; 50,158,160
shares authorized, issued and outstanding
at stated value 8,795,939 8,795,939
Capital in excess of stated value 255,096 -
Cummulative translation adjustment 2,978,569 1,559,817
Accumulated deficit (6,781,254) (4,379,387)
------------ ------------
5,248,350 5,976,369
------------ ------------
$ 10,904,285 $ 14,598,883
============ ============
</TABLE>
Read the accompanying notes to financial statements,
which are an integral part of this financial statement.
F-54
<PAGE> 96
CLUSTER INMOBILIARIA de IXTAPA, S.A. de C.V.
(A SUBISIDIARY OF CLUSTERS, S.A. de C.V.)
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
1995 1994
------------- --------------
<S> <C> <C>
Other additions (deductions):
Interest expense $ (9,820,967) $ (4,076,795)
Interest income 7,031,860 2,984,186
Gain from foreign currency 373,833 828,398
Other (2,812) (37,591)
------------ ------------
Loss before provision for income tax benefit (2,418,086) (301,802)
Provision for income tax benefit 16,219 -
------------ ------------
Net loss $ (2,401,867) $ (301,802)
============ ============
</TABLE>
Read the accompanying notes to financial statements,
which are an integral part of this financial statement.
F-55
<PAGE> 97
CLUSTER INMOBILIARIA de IXTAPA, S.A. de C.V.
(A SUBSIDIARY OF CLUSTERS, S.A. de C.V.)
STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
Common stock Capital in Cummulative
--------------------------- Excess of Translation Accumulated
Total Shares Amount Stated value Adjustment Deficit
------------- ------------ ------------- ------------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Balance, beginning $ 4,718,354 50,158,160 $ 8,795,939 $ - $ - $ (4,077,585)
Add (deduct):
Net loss (301,802) - - - - (301,802)
Currency translation adjustment 1,559,817 - - - 1,559,817 -
------------ ----------- ------------ ------------ ------------ -------------
Balance, December 31, 1994 5,976,369 50,158,160 8,795,939 - 1,559,817 (4,379,387)
Add (deduct):
Gain on sale of related parties
securities to related parties 255,096 - - 255,096 - -
Net loss (2,401,867) - - - - (2,401,867)
Currency translation adjustment 1,418,752 - - - 1,418,752 -
------------ ----------- ------------ ------------ ------------ -------------
Balance, ending $ 5,248,350 50,158,160 $ 8,795,939 $ 255,096 $ 2,978,569 $ (6,781,254)
============ =========== ============ ============ ============ =============
</TABLE>
Read the accompanying notes to financial statements,
which are an integral part of this financial statement.
F-56
<PAGE> 98
CLUSTER INMOBILIARIA de IXTAPA, S.A. de C.V.
(A SUBSIDIARY OF CLUSTERS, S.A. de C.V.)
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
1995 1994
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Sources of cash:
Interest $ 7,031,860 $ 2,485,588
Other - 1,215,202
------------ ------------
7,031,860 3,700,790
------------ ------------
Uses of cash:
Interest 9,820,967 3,560,455
Operating expenses 346,902 -
------------ ------------
10,167,869 3,560,455
------------ ------------
Cash (used-in) provided by operating activities (3,136,009) 140,335
------------ ------------
Cash flows from investing activities:
Source of cash:
Proceeds from sale of related party securities 1,500,316 -
Use of cash:
Purchase of related party securities - 1,245,220
------------ ------------
Cash provided by (used-in) investing activities 1,500,316 (1,245,220)
------------ ------------
Cash flows from financing activities:
Source of cash:
Related party 6,610,820 2,429,804
Use of cash:
Payments of:
Notes payable, governmental agencies 6,394,363 2,884,338
------------ ------------
Cash provided by (used-in) financing activities 216,457 (454,534)
------------ ------------
Effect of exchange rates on cash and equivalents 1,418,752 1,559,817
------------ ------------
(Decrease) increase in cash (484) 398
Cash, beginning 577 179
------------ ------------
Cash, ending $ 93 $ 577
============ ============
</TABLE>
Read the accompanying notes to financial statements,
which are an integral part of this financial statements.
F-57
<PAGE> 99
CLUSTER INMOBILIARIA de IXTAPA, S.A. de C.V.
(A SUBSIDIARY OF CLUSTERS, S.A. de C.V.)
STATEMENTS OF CASH FLOWS (CONTINUED)
YEARS ENDED DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
1995 1994
------------ ------------
<S> <C> <C>
Reconciliation of net loss to cash (used in)
provided by operating activities:
Net loss $ (2,401,867) $ (301,802)
------------ ------------
Adjustment to reconcile net loss to cash
(used-in) provided by operating activities:
Changes in assets and liabilities:
Refundable income and value added taxes (53,213) 234,149
Deferred taxes (16,219) -
Accrued interest - 17,742
Accrued liabilities (664,710) 190,246
------------ ------------
Total adjustments (734,142) 442,137
------------ ------------
Cash (used-in) provided by operating activities: $ (3,136,009) $ 140,335
============ ============
</TABLE>
Read the accompanying notes to financial statements,
which are an integral part of this financial statements.
F-58
<PAGE> 100
CLUSTER INMOBILIARIA DE IXTAPA, S.A. DE C.V.
(A SUBSIDIARY OF CLUSTERS, S.A. DE C.V.)
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995 AND 1994
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
ORGANIZATION AND BUSINESS:
Cluster Inmobiliaria de Ixtapa, S.A. de C.V. is a majority owned
subsidiary of Clusters, S.A. de C.V. which was incorporated on July 24,
1991 under the laws of Mexico. Clusters, S.A. de C.V. is a wholly owned
subsidiary of DSC, S.A. de C.V. Group of Mexico City, Mexico. Since
1991, the Company has acquired real property, which will be developed
into resort and commercial properties. Once the properties are
developed, the Company will be engaged in the marketing of resort hotel
lodging, timeshare interests and other ancillary real estate activities.
From July 1991 to October 1991, the Company was deemed in the
development stage. During this period, management was devoted primarily
to raising capital, securing debt financing and seeking a qualified
property to develop. The Company ceased to be in the development stage
when the Company acquired real property in October, 1991.
BASIS OF ACCOUNTING:
The Company prepares its financial statements in accordance with
generally accepted accounting principles in the United States, expresses
in United States dollars. This basis of accounting involves the
application of accrual accounting; consequently, revenues and gains are
recognized when earned, and expenses and losses are recognized when
incurred. Financial statement items are recorded at historical cost and
may not necessarily represent current values.
MANAGEMENT ESTIMATES:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements, and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS:
Financial instruments which include cash, due from affiliates, accounts
payable, accrued liabilities and due to affiliates are reflected in the
financial statements at fair values. Based on the borrowing rates
currently available to the Company for bank loans with similar terms and
average maturities, debt is stated at their fair values.
F-59
<PAGE> 101
CLUSTER INMOBILIARIA DE IXTAPA, S.A. DE C.V.
(A SUBSIDIARY OF CLUSTERS, S.A. DE C.V.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1995 AND 1994
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
FOREIGN CURRENCY TRANSLATION:
Adjustments for currency exchange rate changes are excluded from net
income for those fluctuations that do not impact cash flow. Local
currency is generally considered the functional currency outside the
United States. All assets and liabilities are translated into United
States dollars at period-end exchange rates. Income and expense items
are translated at average rates of exchange prevailing during the year.
The Mexican exchange rate used for the years ended December 31, 1995 and
1994 was NP$7.7396 and NP$5.2000, respectively. Rates for 1995 were
obtained from the Diario Official de la Federacion and rates for 1994
were obtained from the free market rates utilized by the National Bank
of Mexico, Mexican Stock Exchange and the Exchange Office Euromex.
Temporary gains and losses resulting from translation, if material, are
reflected as currency translation adjustments in shareholders' equity.
Permanent adjustments are reflected in the consolidated statements of
operations.
INVESTMENTS:
Investments in equity securities of related parties are classified as
either trading securities or available for sale securities. The net
unrealized holding gains and losses for trading securities would be
included in earnings. There were no trading securities during the
periods. Equity securities have been categorized as available for sale
and, as a result, are stated at fair value. Any unrealized gains and
losses would be reported as a separate component of shareholders'
equity. There were no unrealized gains and losses at the balance sheet
date.
LAND HELD FOR DEVELOPMENT:
Land held for development is stated at cost. When the project commences
construction period interest will be capitalized. Interest is not
capitalized during material delays.
INCOME TAXES:
Income taxes are accounted for by the asset/liability method. Deferred
taxes represent the expected future tax benefits/consequences when the
reported amounts of assets and liabilities are recovered or paid. They
arise from differences between the financial reporting and tax bases of
assets and liabilities and are adjusted for changes in tax laws and
rates when those changes are enacted.
F-60
<PAGE> 102
CLUSTER INMOBILIARIA DE IXTAPA, S.A. DE C.V.
(A SUBSIDIARY OF CLUSTERS, S.A. DE C.V.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1995 AND 1994
2. LIQUIDITY AND STRATEGIC PLANNING:
As reflected in the accompanying balance sheets, the Company's current
liabilities exceed its current assets by $3,806,535 in 1995 and $3,078,516
in 1994, which is an increase of $728,019. From inception the Company has
sustained losses and has had working capital deficiencies. The Company is
in the process of restructuring its operations in order to reverse the
current deficiencies. The Company is dependent upon its parent company
and related affiliates for loan guarantees for short-term funding to meet
current liabilities as they become due and the continued funding of other
operating costs.
International Realty Group, Inc. (IRG) has entered into an agreement with
DSC, S.A. de C.V. (DSC) the parent company of Clusters, S.A. de C.V. to
acquire the Company in exchange for common stock of IRG. The transaction
has been valued at $17,384,907 less liabilities and minority shareholder
value, subject to adjustment at date of closing (August 15, 1996). DSC
would receive shares of common stock valued at $.782 per share for its
investment. The fair market value of the properties is based upon
independent appraisals performed in 1996 by Ingeniero Sergio H. Parra - R.
3. CONCENTRATION OF CREDIT RISK:
Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of amounts due from
affiliates. The Company's account balances with financial institutions
are guaranteed by the government of Mexico. The Company has a large
number of transactions with related parties and generally does not require
collateral. The Company maintains an allowance for uncollectible accounts
based upon expected collectibility of all accounts receivable. Credit
losses have been provided for in the financial statements.
F-61
<PAGE> 103
CLUSTER INMOBILIARIA DE IXTAPA, S.A. DE C.V.
(A SUBSIDIARY OF CLUSTERS, S.A. DE C.V.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1995 AND 1994
4. DUE FROM/TO AFFILIATES:
Various related entities are engaged in transactions including, but not
limited to, short-term advances to cover operating costs and working
capital. All such transactions are with entities related to DSC, S.A. de
C.V. Group (the parent company of Clusters, S.A. de C.V.) and are recorded
in separate accounts that comprise the amounts due from affiliates and
amounts due to affiliates. Balances due from or to the related parties as
a result of these transactions are non-interest bearing and unsecured. In
the opinion of management, the realization of amounts due from affiliates
and the payment of amounts due to affiliates will be realized/liquidated
during the normal course of business.
A summary of amounts due from/to affiliates is as follows:
<TABLE>
<CAPTION>
1995 1994
------------ ------------
<S> <C> <C>
DUE FROM AFFILIATES:
D.S.C., S.A. de C.V. $ - $ 3,561,948
D.S.C. Hoteles, S.A. de C.V. 58,411 86,939
D.S.C. Servicios Constructivos,
S.A. de C.V. 77,455 96,601
D.S.C. Ingenieria y Proyectos,
S.A. de C.V. 64,949 96,172
D.S.C.I.F.I., S.A. de C.V. 1,168,373 23,545
Others 46,989 69,298
------------ ------------
$ 1,416,177 $ 3,934,503
============ ============
DUE TO AFFILIATES:
D.S.C., S.A. de C.V. $ 4,553,319 $ -
Fomento al Desarrollo Inmobiliario
y Turistico, S.A. de C.V. 542,326 807,190
D.S.C. Ingenieria y Desarrollo
Inmobiliario, S.A. de C.V. 355,294 530,569
D.S.C. Ingenieria de Producto
Inmobiliario, S.A. de C.V. 39,065 58,144
Others 15,173 16,780
------------ ------------
$ 5,505,177 $ 1,412,683
============ ============
</TABLE>
F-62
<PAGE> 104
CLUSTER INMOBILIARIA DE IXTAPA, S.A. DE C.V.
(A SUBSIDIARY OF CLUSTERS, S.A. DE C.V.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1995 AND 1994
5. MARKETABLE SECURITIES, AFFILIATES:
The Company had acquired the common stock of two (2) related parties at a
cost of $1,245,220. These securities were sold to a related party (DSC
Group) for $1,500,316 resulting in a gain to the Company of $255,096.
Under Mexican standards gains from related party transactions flow through
the statements of operations. For purposes of the accompanying financial
statements, the gain has been credited to Shareholders'' Equity as Capital
in Excess of Stated Value.
The gain was offset by unused net operating loss carryforwards.
A summary of the purchases of marketable securities, related parties, is
as follows:
<TABLE>
<CAPTION>
Entity Cost Proceeds
--------------------------------------- ------------ -------------
<S> <C> <C>
Pez Maya, S.A. de C.V. $ 68,207 $ 82,179
Promocaribe, S.A. de C.V. 1,177,013 1,418,137
------------ -----------
$ 1,245,220 $ 1,500,316
============ ===========
</TABLE>
6. LAND HELD FOR DEVELOPMENT:
Land held for development in 1995 and 1994 is land acquired under trust
rights. Trust rights gives the holder exclusive use and ownership of the
property. The rights are valid for thirty (30) years and are renewable
each thirty (30) years at no cost. Trust rights can be used to
collateralize debt or be hypothecated in any form.
The trust rights were originally acquired by a related party for
$8,792,652 in 1990. During October, 1991, the Company acquired the trust
rights from the related party for $9,054,885. The related party recorded
a gain on sale of $259,233. The transaction was recorded through
intercompany accounts.
On October 26, 1991, the shareholders of the related party voted to
exchange the related party debt of $8,792,652 (original cost basis of
land) for additional common stock of the Company. On May 18, 1992, the
Company guaranteed the original purchase price ($8,792,652) of the land to
the original seller.
F-63
<PAGE> 105
CLUSTER INMOBILIARIA DE IXTAPA, S.A. DE C.V.
(A SUBSIDIARY OF CLUSTERS, S.A. DE C.V.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1995 AND 1994
7. NOTE PAYABLE, GOVERNMENTAL AGENCY:
On July 2, 1992, Nacional Financiera, S.N.C. (NAFIN), a Mexican
governmental agency, entered into an agreement with the Company for the
issuance of medium term promissory notes to the general public. Land held
for development was collateralized to the promissory notes, which were
also guaranteed by NAFIN and DSC, S.A. de C.V. the parent company of
Clusters, S.A. de C.V.
In accordance with the NAFIN agreement, the Company issued promissory
notes of $13,980,769, with interest at five and a quarter percent (5.25%),
maturing on July 10, 1995. All proceeds from the promissory notes were
invested in NAFIN fixed income securities. All interest earned through
NAFIN accrue to the benefit of the Company which is utilized to partially
liquidate the promissory notes.
At maturity date, the Company could not liquidate its debt and the
mortgage note holder exercised its guarantee against NAFIN. NAFIN
liquidated the mortgage notes and commenced debt restructuring with the
Company and its guarantors. On December 29, 1995, DSC, S.A. de C.V. (the
parent of Clusters, S.A. de C.V.) and the parent of the Company agreed to
restructure approximately $23,007,000 due NAFIN by the Company. Under the
restructuring agreement NAFIN accepted a payment of approximately
$15,340,000 from Clusters, S.A. de C.V. (parent company) and the proposed
transfer of approximately 15,991,000 shares of common stock to be acquired
by DSC, S.A. de C.V. in International Realty Group (IRG). The shares of
IRG common stock is valued at $.782 per share by the parties. If the
transaction is not completed, NAFIN has no recourse against the Company.
<TABLE>
<S> <C>
A summary of the promissory mortgage notes is as follows:
Proceeds from sale of promissory
mortgage notes $13,980,769
Accrued interest from inception 2,619,153
Currency fluctuation 2,995,800
-----------
19,595,722
-----------
Less:
NAFIN fixed income securities 8,846,204
Interest earned on NAFIN fixed
income securities 4,355,155
-----------
13,201,359
-----------
Balance, December 31, 1994 6,394,363
Less exercise of guarantor 6,394,363
-----------
Balance, December 31, 1995 $ -
===========
</TABLE>
F-64
<PAGE> 106
CLUSTER INMOBILIARIA DE IXTAPA, S.A. DE C.V.
(A SUBSIDIARY OF CLUSTERS, S.A. DE C.V.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1995 AND 1994
8. INCOME TAXES:
The Company requires recognition of income tax benefits for loss
carryforwards, credit carryforwards and certain temporary differences for
which tax benefits have not been previously recorded. The tax benefits
recognized must be reduced by a valuation allowance where it is more
likely than not that the benefits may not be realized.
Significant components of the net deferred tax asset/liability at December
31, 1995 and 1994 are as follows:
<TABLE>
<CAPTION>
1995 1994
Deferred tax assets: ---------- ---------
<S> <C> <C>
Net operating loss carryforwards $ 152,002 $ 49,389
Less valuation allowance (135,783) (49,389)
---------- ---------
$ 16,219 $ -
========== =========
</TABLE>
Deferred tax asset balances are primarily the result of net operating loss
carryforwards. There are no deferred tax liability balances.
It is more likely than not that all future tax benefits will not be
realized, therefore, a valuation allowance has been recorded for the
deferred net tax assets. There was no prior balance in the valuation
allowance.
As of December 31, 1995, the Company has a net operating loss carryforward
of approximately $447,064 that may be used to offset future taxable income
expiring in varying years to 2005.
9. CONTINGENCY, LITIGATION AND COMMITMENT:
During 1994 the Mexican peso was permitted to float against the U.S.
dollar and other currencies. As a result, the peso has been devalued from
$3.4662 pesos/dollar to approximately $3.9413 pesos/dollar. It is not
possible to determine what effect the devaluation will have upon future
pricing or costs, however, it is managements opinion that the devaluation
will not have a material adverse effect upon the Company's future
operations.
Clusters Inmobiliaria de Ixtapa, S.A. de C.V. has been named as a
defendant in an action brought by a former property owner in a transaction
with Nacional Financiera, S.N.C. for $6,132,172. The plaintiff seeks to
remove NAFIN as the seller of the real property since the Company had
defaulted. It is the opinion of counsel that the plaintiff's position is
without merit and the Company will be dismissed from the claim.
F-65
<PAGE> 107
CLUSTER INMOBILIARIA DE IXTAPA, S.A. DE C.V.
(A SUBSIDIARY OF CLUSTERS, S.A. DE C.V.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1995 AND 1994
9. CONTINGENCY, LITIGATION AND COMMITMENT (CONTINUED):
Management estimates that future improvement and development cost to
complete this project are approximately $37,300,000 over a five (5) year
period. The total amount of the project of $37,300,000 would be completed
at intervals in order to allow the Company to build a portion (20%) and
then sell that portion to pay-off the then construction loans. This would
permit an effective revolving line to be developed to construct and
finance each portion. The total project calls for 144 residential and
commercial condominium units in three (3) buildings of four (4) stories
each. In addition, the project anticipates building sixty (60) villas. A
summary of the Clusters Ixtapa project will be as follows:
<TABLE>
<CAPTION>
Quantity Type of Unit
-------- --------------------
<S> <C>
36 Commercial condo units
108 Residential condo units
60 Villas
</TABLE>
In order to complete this project management has been in discussion with
the current lenders. In addition, management has also engaged in
conversations with new prospective lenders, both private and public, as to
the required financing necessary to complete the current project. The
current lenders have not indicated that they would be opposed to continued
financing.
F-66
<PAGE> 108
[LOGO] GONZALEZ MACIN Y CIA.
===============================================================================
Board of Directors and Shareholders
Cluster Inmobiliaria de Ixtapa, S.A. de C.V.
Mexico City, Mexico
We have reviewed the accompanying balance sheets of Cluster Inmobiliaria de
Ixtapa, S.A. de C.V. (a subsidiary of Clusters, S.A. de C.V.), as of June 30,
1996 and 1995 and the related statements of operations, shareholders' equity
and cash flows for the six months then ended, in accordance with Statements on
Standards for Accounting and Review Services issued by the American Institute
of Certified Public Accountants. As described in Note 1 of Notes to financial
statements, the accompanying financial statements have been prepared on the
basis of accounting principles generally accepted in the United States,
expressed in United States dollars. All information included in these
financial statements is the representation of the management of Cluster
Inmobiliaria de Ixtapa, S.A. de C.V.
A review consists principally of inquiries of Company personnel and analytical
procedures applied to financial data. It is substantially less in scope than
an audit in accordance with generally accepted auditing standards, the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the accompanying financial statements in order for them to be in
conformity with generally accepted accounting principles.
/S/ C.P. GUILLERMO GONZALEZ MACIN
C.P. GUILLERMO GONZALEX MACIN
Mexico, D.F.
July 15, 1996
RIO EBRO NO. 45 COLONIA CUAUHTEMOC DELEGACION CUAUHTEMOC C.P. 06500
TEL. (915) 525-31-34
F-67
<PAGE> 109
CLUSTER INMOBILIARIA DE IXTAPA, S.A.
de C.V. (A SUBSIDIARY OF
CLUSTERS, S.A. de C.V.)
BALANCE SHEETS - JUNE 30,
1996 AND 1995
(READ INDEPENDENT ACCOUNTANTS' REVIEW REPORT)
<TABLE>
<CAPTION>
ASSETS
1996 1995
---------- -----------
<S> <C> <C>
Current assets:
Cash $ 17,756 $ 87
Due from affiliates 1,912,189 4,652,585
Refundable income and value added taxes 32,646 427,084
Other current assets 237 -
----------- -----------
Total current assets 1,962,828 5,079,756
Land held for development 9,054,885 9,054,885
----------- -----------
$11,017,713 $14,134,641
----------- -----------
</TABLE>
<TABLE>
LIABILITIES AND SHAREHOLDERS' EQUITY
1996 1995
----------- -----------
<C> <C> <C>
Current liabilities:
Note payable, governmental agency $ - $ 7,142,327
Due to affiliates 5,628,426 1,166,917
Accounts payable 69,571 95,034
Accrued liabilities 119,653 696,739
----------- -----------
Total current liabilities 5,817,650 9,101,017
----------- -----------
Shareholders' equity:
Common stock, no par value; 50,158,160
shares authorized, issued and outstanding
at stated value 8,795,939 8,795,939
Capital in excess of stated value 255,096 255,096
Cummulative translation adjustment 2,898,799 2,314,754
Accumulated deficit (6,749,771) (6,332,165)
----------- -----------
5,200,063 5,033,624
----------- -----------
$11,017,713 $14,134,641
----------- -----------
</TABLE>
Read the accompanying notes to financial statements, which are an
integral part of this financial statement.
F-68
<PAGE> 110
CLUSTER INMOBILIARIA DE IXTAPA, S.A. de C.V.
(A SUBISIDIARY OF CLUSTERS, S.A. de C.V.)
STATEMENTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1996 AND 1995
(READ INDEPENDENT ACCOUNTANTS' REVIEW REPORT)
<TABLE>
<CAPTION>
1996 1995
--------- -----------
<S> <C> <C>
Other additions (deductions):
Interest expense $- $(5,661,720)
Interest income 56,363 3,774,540
Loss from foreign currency (497) (64,372)
Other 8,164 1,226
------- ----------
Income (loss) before provision for income taxes 47,702 (1,952,778)
Provision for income taxes 16,219 -
------- -----------
Net income (loss) $31,483 $(1,952,778)
------- -----------
</TABLE>
Read the accompanying notes to financial statements,
which are an integral part of this financial statement.
F-69
<PAGE> 111
CLUSTER INMOBILIARIA DE IXTAPA, S.A. de C.V.
(A SUBSIDIARY OF CLUSTERS, S.A. de C.V.)
STATEMENTS OF SHAREHOLDERS' EQUITY
SIX MONTHS ENDED JUNE 30, 1996 AND 1995
(READ INDEPENDENT ACCOUNTANTS' REVIEW REPORT)
<TABLE>
<CAPTION>
Common stock
--------------------------
Total Shares Amount
------------- ----------- ------------
<S> <C> <C> <C>
Balance, December 31, 1994 $ 5,976,369 50,158,610 $ 8,795,939
Add (deduct):
Net loss (1,952,778)
Gain on sale of related parties
securities to related parties 255,096
Currency translation adjustment 754,937
------------ ----------- ------------
Balance, June 30, 1995 $ 5,033,624 50,158,610 $ 8,795,939
------------ ----------- ------------
Balance, December 31, 1995 $ 5,248,350 50,158,610 $ 8,795,939
Add (deduct):
Net loss 31,483
Currency translation adjustment (79,770)
------------ ----------- ------------
Balance, June 30, 1996 $ 5,200,063 50,158,610 $ 8,795,939
============ =========== ============
</TABLE>
<TABLE>
Capital in Cummulative
Excess of Translation Accumulated
Stated value Adjustment Deficit
------------- ------------- --------------
<C> <C> <C> <C>
Balance, December 31, 1994 $ - $ 1,559,817 $ (4,379,387)
Add (deduct):
Net loss (1,952,778)
Gain on sale of related parties
securities to related parties 255,096
Currency translation adjustment 754,937
------------ ------------ -------------
Balance, June 30, 1995 $ 255,096 $ 2,314,754 $ (6,332,165)
------------ ------------ -------------
Balance, December 31, 1995 $ 255,096 $ 2,978,569 $ (6,781,254)
Add (deduct):
Net loss 31,483
Currency translation adjustment (79,770)
------------ ------------ -------------
Balance, June 30, 1996 $ 255,096 $ 2,898,799 $ (6,749,771)
============ ============ =============
</TABLE>
Read the accompanying notes to financial statements,
which are an integral part of this financial statement.
F-70
<PAGE> 112
CLUSTER INMOBILIARIA DE IXTAPA, S.A. de C.V.
(A SUBSIDIARY OF CLUSTERS, S.A. de C.V.)
STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1996 AND 1995
(READ INDEPENDENT ACCOUNTANTS' REVIEW REPORT)
<TABLE>
<CAPTION>
1996 1995
--------- -----------
<S> <C> <C>
Cash flows from operating activities:
Sources of cash:
Interest $ 56,363 $ 834,054
Other 413,833 -
--------- -----------
470,196 834,054
--------- -----------
Uses of cash:
Interest - 1,139,870
Operating expenses - 89,567
--------- -----------
- 1,229,437
--------- -----------
Cash provided by (used-in) operating activities 470,196 (395,383)
--------- -----------
Cash flows from investing activities:
Source of cash:
Proceeds from sale of related party securities - 1,500,316
--------- -----------
Cash flows from financing activities:
Uses of cash:
Payments of:
Notes payable, governmental agencies - 896,512
Related party 372,763 963,848
--------- -----------
Cash (used-in) financing activities (372,763) (1,860,360)
--------- -----------
Effect of exchange rates on cash and equivalents (79,770) 754,937
--------- -----------
Increase (decrease) in cash 17,663 (490)
Cash, beginning 93 577
--------- -----------
Cash, ending $ 17,756 $ 87
========= ===========
</TABLE>
Read the accompanying notes to financial statements,
which are an integral part of this financial statement.
F-71
<PAGE> 113
CLUSTER INMOBILIARIA DE IXTAPA, S.A. de C.V.
(A SUBSIDIARY OF CLUSTERS, S.A. de C.V.)
STATEMENTS OF CASH FLOWS (CONTINUED)
SIX MONTHS ENDED JUNE 30, 1996 AND 1995
(READ INDEPENDENT ACCOUNTANTS' REVIEW REPORT)
<TABLE>
<CAPTION>
1996 1995
----------- ----------
<S> <C> <C>
Reconciliation of net loss to cash provided by
(used-in) operating activities:
Net income (loss) $ 31,483 $(1,952,778)
-------- -----------
Adjusted to reconcile net loss to cash provided by
(used-in) operating activities:
Changes in assets and liabilities
Refundable income tax 384,033 (274)
Deferred taxes 16,219 -
Other current assets (5) -
Accrued interest - 1,581,364
Accounts payable 1,422 (20,104)
Accrued liabilities 37,044 (3,591)
-------- -----------
Total adjustments 438,713 1,557,395
-------- -----------
Cash provided by (used-in) operating activities $470,196 $ (395,383)
======== ===========
</TABLE>
Read the accompanying notes to financial statement, which are
an integral part of this financial statement.
F-72
<PAGE> 114
CLUSTER INMOBILIARIA DE IXTAPA, S.A. DE C.V.
(A SUBSIDIARY OF CLUSTERS, S.A. DE C.V.)
NOTES TO FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 1996 AND 1995
(READ INDEPENDENT ACCOUNTANTS' REVIEW REPORT)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
ORGANIZATION AND BUSINESS:
Cluster Inmobiliaria de Ixtapa, S.A. de C.V. is a majority owned
subsidiary of Clusters, S.A. de C.V. which was incorporated on July 24,
1991 under the laws of Mexico. Clusters, S.A. de C.V. is a wholly owned
subsidiary of DSC, S.A. de C.V. Group of Mexico City, Mexico. Since
1991, the Company has acquired real property, which will be developed
into resort and commercial properties. Once the properties are
developed, the Company will be engaged in the marketing of resort hotel
lodging, timeshare interests and other ancillary real estate activities.
From July 1991 to October 1991, the Company was deemed in the development
stage. During this period, management was devoted primarily to raising
capital, securing debt financing and seeking a qualified property to
develop. The Company ceased to be in the development stage when the
Company acquired real property in October, 1991.
BASIS OF ACCOUNTING:
The Company prepares its financial statements in accordance with
generally accepted accounting principles in the United States, expressed
in United States dollars. This basis of accounting involves the
application of accrual accounting; consequently, revenues and gains are
recognized when earned, and expenses and losses are recognized when
incurred. Financial statement items are recorded at historical cost and
may not necessarily represent current values.
MANAGEMENT ESTIMATES:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements, and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS:
Financial instruments which include cash, due from affiliates, accounts
payable, accrued liabilities and due to affiliates are reflected in the
financial statements at fair values. Based on the borrowing rates
currently available to the Company for bank loans with similar terms and
average maturities, debt is stated at their fair values.
F-73
<PAGE> 115
CLUSTER INMOBILIARIA DE IXTAPA, S.A. DE C.V.
(A SUBSIDIARY OF CLUSTERS, S.A. DE C.V.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SIX MONTHS ENDED JUNE 30, 1996 AND 1995
(READ INDEPENDENT ACCOUNTANTS' REVIEW REPORT)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
FOREIGN CURRENCY TRANSLATION:
Adjustments for currency exchange rate changes are excluded from net
income for those fluctuations that do not impact cash flow. Local
currency is generally considered the functional currency outside the
United States. All assets and liabilities are translated into United
States dollars at period-end exchange rates. Income and expense items
are translated at average rates of exchange prevailing during the year.
The Mexican exchange rate used for the six months ended June 30, 1996
and 1995 was NP$7.5814 and NP$6.3000, respectively. Rates for 1996 and
1995 were obtained from the Diario Official de la Federacion. Temporary
gains and losses resulting from translation, if material, are reflected
as currency translation adjustments in shareholders' equity. Permanent
adjustments are reflected in the consolidated statements of operations.
INVESTMENTS:
Investments in equity securities of related parties are classified as
either trading securities or available for sale securities. The net
unrealized holding gains and losses for trading securities would be
included in earnings. There were no trading securities during the
periods. Equity securities have been categorized as available for sale
and, as a result, are stated at fair value. Any unrealized gains and
losses would be reported as a separate component of shareholders' equity.
There were no unrealized gains and losses at the balance sheet date.
LAND HELD FOR DEVELOPMENT:
Land held for development is stated at cost. When the project commences
construction period interest will be capitalized. Interest is not
capitalized during material delays.
INCOME TAXES:
Income taxes are accounted for by the asset/liability method. Deferred
taxes represent the expected future tax benefits/consequences when the
reported amounts of assets and liabilities are recovered or paid. They
arise from differences between the financial reporting and tax bases of
assets and liabilities and are adjusted for changes in tax laws and
rates when those changes are enacted.
F-74
<PAGE> 116
CLUSTER INMOBILIARIA DE IXTAPA, S.A. DE C.V.
(A SUBSIDIARY OF CLUSTERS, S.A. DE C.V.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SIX MONTHS ENDED JUNE 30, 1996 AND 1995
(READ INDEPENDENT ACCOUNTANTS' REVIEW REPORT)
2. LIQUIDITY AND STRATEGIC PLANNING:
As reflected in the accompanying balance sheets, the Company's current
liabilities exceed its current assets by $3,854,822 in 1996 and $4,021,261
in 1995, which resulted in a decrease in the working capital deficiency by
$166,439. From inception the Company has sustained substantial losses and
has had working capital deficiencies. The Company is in the process of
restructuring its operations in order to reverse the current deficiencies.
The Company is dependent upon its parent company and related affiliates
for loan guarantees for short-term funding to meet current liabilities as
they become due and the continued funding of other costs.
International Realty Group, Inc. (IRG) has entered into an agreement with
D.S.C., S.A. de C.V. (DSC) the parent company of Clusters, S.A. de C.V. to
acquire the Company in exchange for common stock of IRG. The transaction
has been valued at $17,384,907 less liabilities and minority shareholder
value, subject to adjustment at date of closing (August 15, 1996). DSC
would receive shares of common stock valued at $.782 per share for its
investment. The fair market value of the properties is based upon
independent appraisals performed in 1996 by Ingeniero Sergio H. Parra - R.
3. CONCENTRATION OF CREDIT RISK:
Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of amounts due from
affiliates. The Company's account balances with financial institutions
are guaranteed by the government of Mexico. The Company has a large
number of transactions with related parties and generally does not require
collateral. The Company maintains an allowance for uncollectible accounts
based upon expected collectibility of all accounts receivable. Credit
losses have been provided for in the financial statements.
F-75
<PAGE> 117
CLUSTER INMOBILIARIA DE IXTAPA, S.A. DE C.V.
(A SUBSIDIARY OF CLUSTERS, S.A. DE C.V.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SIX MONTHS ENDED JUNE 30, 1996 AND 1995
(READ INDEPENDENT ACCOUNTANTS' REVIEW REPORT)
4. DUE FROM/TO AFFILIATES:
Various related entities are engaged in transactions including, but not
limited to, short-term advances to cover operating costs and working
capital. All such transactions are with entities related to DSC, S.A. de
C.V. Group (the parent company of Clusters, S.A. de C.V.) and are recorded
in separate accounts that comprise the amounts due from affiliates and
amounts due to affiliates. Balances due from or to the related parties as
a result of these transactions are non-interest bearing and unsecured. In
the opinion of management, the realization of amounts due from affiliates
and the payment of amounts due to affiliates will be realized/liquidated
during the normal course of business.
A summary of amounts due from/to affiliates is as follows:
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
DUE FROM AFFILIATES:
D.S.C., S.A. de C.V. $ - $2,940,021
D.S.C. Hoteles, S.A. de C.V. 59,630 71,759
D.S.C. Servicios Constructivos,
S.A. de C.V. 196,002 79,735
D.S.C. Ingenieria y Proyectos,
S.A. de C.V. 66,304 79,380
D.S.C.I.F.I., S.A. de C.V. 1,192,753 1,424,492
Others 397,500 57,198
---------- ----------
$1,912,189 $4,652,585
========== ==========
DUE TO AFFILIATES:
D.S.C., S.A. de C.V. $4,649,169 $ -
Fomento al Desarrollo Inmobiliario
y Turistico, S.A. de C.V. 363,911 666,252
D.S.C. Ingenieria y Desarrollo
Inmobiliario, S.A. de C.V. 436,481
D.S.C. Ingenieria de Producto
Inmobiliario, S.A. de C.V. 39,880 47,992
Others 575,466 16,192
---------- ----------
$5,628,426 $1,166,917
========== ==========
</TABLE>
F-76
<PAGE> 118
CLUSTER INMOBILIARIA DE IXTAPA, S.A. DE C.V.
(A SUBSIDIARY OF CLUSTERS, S.A. DE C.V.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SIX MONTHS ENDED JUNE 30, 1996 AND 1995
(READ INDEPENDENT ACCOUNTANTS' REVIEW REPORT)
5. MARKETABLE SECURITIES, AFFILIATES:
The Company had acquired the common stock of two (2) related parties at a
cost of $1,245,220. These securities were sold to a related party (DSC
Group) for $1,500,316 resulting in a gain of $255,096. Under Mexican
standards, gains from related party transactions flow through the
statement of operations. For purposes of the accompanying financial
statements, the gain has been credited to shareholders' equity as capital
in excess of stated value.
The gain was offset by unused net operating loss carryforwards.
A summary of the purchases of marketable securities, related parties, is
as follows:
<TABLE>
<CAPTION>
Entity Cost Proceeds
----------------------------- ---------- -----------
<S> <C> <C>
Pez Maya, S.A. de C.V. $ 68,207 $ 82,179
Promocaribe, S.A. de C.V. 1,177,013 1,418,137
---------- ----------
$1,245,220 $1,500,316
========== ==========
</TABLE>
6. LAND HELD FOR DEVELOPMENT:
Land held for development in 1996 and 1995 is land acquired under trust
rights. Trust rights gives the holder exclusive use and ownership of the
property. The rights are valid for thirty (30) years and are renewable
each thirty (30) years at no cost. Trust rights can be used to
collateralized debt or be hypothecated in any form.
The trust rights were originally acquired by a related party for
$8,792,652 in 1990. During October, 1991, the Company acquired the trust
rights from the related party for $9,054,885. The related party recorded
a gain on sale of $259,233. The transaction was recorded through
intercompany accounts.
On October 26, 1991, the shareholders of the related party voted to
exchange the related party debt of $8,792,652 (original cost basis of
land) for additional common stock of the Company. On May 18, 1992, the
Company guaranteed the original purchase price ($8,792,652) of the land to
the original seller.
7. NOTE PAYABLE, GOVERNMENTAL AGENCY:
On July 2, 1992, Nacional Financiera, S.N.C. (NAFIN), a Mexican
governmental agency, entered into an agreement with the Company for the
issuance of medium term promissory notes to the general public. Land held
for development was collateralized to the promissory notes, which were
also guaranteed by NAFIN and DSC, S.A. de C.V. the parent company of
Clusters, S.A. de C.V.
F-77
<PAGE> 119
CLUSTER INMOBILIARIA DE IXTAPA, S.A. DE C.V.
(A SUBSIDIARY OF CLUSTERS, S.A. DE C.V.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SIX MONTHS ENDED JUNE 30, 1996 AND 1995
(READ INDEPENDENT ACCOUNTANTS' REVIEW REPORT)
7. NOTE PAYABLE, GOVERNMENTAL AGENCY (CONTINUED):
In accordance with the NAFIN agreement, the Company issued promissory
notes of $13,980,769, with interest at five and a quarter percent (5.25%),
maturing on July 10, 1995. All proceeds from the promissory notes were
invested in NAFIN fixed income securities. All interest earned through
NAFIN accrue to the benefit of the Company which is utilized to partially
liquidate the promissory notes.
At maturity date, the Company could not liquidate its debt and the
mortgage note holder exercised its guarantee against NAFIN. NAFIN
liquidated the mortgage notes and commenced debt restructuring with the
Company and its guarantors. On December 29, 1995, DSC, S.A. de C.V. (the
parent of Clusters, S.A. de C.V.) and the parent of the Company agreed to
restructure approximately $23,007,000 due NAFIN by the Company. Under the
restructuring agreement NAFIN accepted a payment of approximately
$15,340,000 from Clusters, S.A. de C.V. (parent company) and the proposed
transfer of approximately 15,991,000 shares of common stock to be acquired
by DSC, S.A. de C.V. in International Realty Group (IRG). The shares of
IRG common stock is valued at $.782 per share by the parties. If the
transaction is not completed, NAFIN has no recourse against the Company.
A summary of the promissory notes is as follows:
<TABLE>
<S> <C>
Proceeds from sale of promissory notes $11,539,682
Accrued interest from inception 3,018,127
Currency fluctuation 7,028,676
-----------
21,676,485
-----------
Less:
NAFIN fixed income securities 7,301,629
Interest earned on NAFIN fixed
income securities 7,232,529
-----------
14,534,158
-----------
Balance, June 30, 1995 $ 7,142,327
===========
</TABLE>
F-78
<PAGE> 120
CLUSTER INMOBILIARIA DE IXTAPA, S.A. DE C.V.
(A SUBSIDIARY OF CLUSTERS, S.A. DE C.V.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SIX MONTHS ENDED JUNE 30, 1996 AND 1995
(READ INDEPENDENT ACCOUNTANTS' REVIEW REPORT)
8. INCOME TAXES:
The Company requires recognition of income tax benefits for loss
carryforwards, credit carryforwards and certain temporary differences for
which tax benefits have not been previously recorded. The tax benefits
recognized must be reduced by a valuation allowance where it is more
likely than not that the benefits may not be realized.
Deferred tax asset balances were primarily the result of net operating
loss carryforwards. There are no deferred tax liability balances.
It is more likely than not that all future tax benefits will not be
realized, therefore, a valuation allowance has been recorded for the
deferred net tax assets. There was no prior balance in the valuation
allowance.
As of June 30, 1996, the Company has a net operating loss carryforward of
approximately $399,362 that may be used to offset future taxable income
expiring in varying years to 2005.
9. CONTINGENCY, LITIGATION AND COMMITMENT:
During 1994 the Mexican peso was permitted to float against the U.S.
dollar and other currencies. As a result, the peso had been devalued from
$3.4662 pesos/dollar to approximately $3.9413 pesos/dollar. It is not
possible to determine what effect the devaluation will have upon future
pricing or costs, however, it is managements opinion that the devaluation
will not have a material adverse effect upon the Company's future
operations.
Clusters Inmobiliaria de Ixtapa, S.A. de C.V. has been named as a
defendant in an action brought by a former property owner in a transaction
with Nacional Financiera, S.N.C. for $6,132,172. The plaintiff seeks to
remove NAFIN as the seller of the real property since the Company had
defaulted. It is the opinion of counsel that the plaintiff's position is
without merit and the Company will be dismissed from the claim.
F-79
<PAGE> 121
CLUSTER INMOBILIARIA DE IXTAPA, S.A. DE C.V.
(A SUBSIDIARY OF CLUSTERS, S.A. DE C.V.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SIX MONTHS ENDED JUNE 30, 1996 AND 1995
(READ INDEPENDENT ACCOUNTANTS' REVIEW REPORT)
9. CONTINGENCY, LITIGATION AND COMMITMENT (CONTINUED):
Management estimates that future improvement and development cost to
complete this project are approximately $37,300,000 over a five (5) year
period. The total amount of the project of $37,300,000 would be completed
at intervals in order to allow the Company to build a portion (20%) and
then sell that portion to pay-off the then construction loans. This would
permit an effective revolving line to be developed to construct and
finance each portion. The total project calls for 144 residential and
commercial condominium units in three (3) buildings of four (4) stories
each. In addition, the project anticipates building sixty (60) villas. A
summary of the Clusters Ixtapa project will be as follows:
<TABLE>
<CAPTION>
Quantity Type of Unit
-------- --------------------
<S> <C>
36 Commercial condo units
108 Residential condo units
60 Villas
</TABLE>
In order to complete this project management has been in discussion with
the current lenders. In addition, management has also engaged in
conversations with new prospective lenders, both private and public, as to
the required financing necessary to complete the current project. The
current lenders have not indicated that they would opposed to continued
financing.
F-80
<PAGE> 122
GONZALEZ MACIN Y CIA.
_______________________________________________________________________________
Participating Associates
Bahia de Cortes
Mexico City, Mexico
We have audited the accompanying balance sheet of Bahia de Cortes, Asociacion en
Participacion, a Mexican Participating Association (an Association in the
development stage) as of March 31, 1996. As described in Note 1 of Notes to
financial statement, the accompanying balance sheet has been prepared on the
basis of accounting principles generally accepted in the United States,
expressed in United States dollars. This financial statement is the
responsibility of the Association's management. Our responsibility is to
express an opinion on this financial statement based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the balance sheet is free of material misstatements. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the balance sheet. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall balance sheet presentation. We believe that our audit
of the balance sheet provides a reasonable basis for our opinion.
In our opinion, the balance sheet referred to above presents fairly, in all
material respects, the financial position of Bahia de Cortes, Asociacion en
Participacion, a Mexican Participating Association, as of March 31, 1996, in
conformity with generally accepted accounting principles.
We direct your attention to Note 1 of Notes to financial statement which
discusses development stage.
C.P. GUILLERMO GONZALEZ MACIN
Mexico, D.F.
June 18, 1996
RIO EBRO NO. 45 COLONIA CUAUHTEMOC DELEGACION CUAUHTEMOC C.P. 06500
TEL. (915) 525-31-34
F-81
<PAGE> 123
BAHIA DE CORTES, ASOCIACION EN PARTICIPACION
(A MEXICAN PARTICIPATING ASSOCIATION)
(AN ASSOCIATION IN THE DEVELOPMENT STAGE)
NOTES TO FINANCIAL STATEMENT
FROM INCEPTION (FEBRUARY 7, 1996) TO MARCH 31, 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
ORGANIZATION AND BUSINESS:
Bahia de Cortes, Asociacion en Participacion (the Association) was
formed on February 7, 1996 pursuant to the laws of Mexico. Asociacion
en Participacion (Participating Association) is similar to a limited
partnership. The Association will remain in existence until 2026,
unless termination is accelerated in accordance with the agreement. The
Associationp has selected a year end of December 31. The Association
will develop real property located in Mexico into commercial and resort
hotel lodging, timeshare interests and ancillary real estate services.
From inception to date, the Association is considered as being in the
development stage. During this period, the entity has been devoted
primarily to raising capital, securing debt financing and negotiating
with lenders. The initial asset acquisition by the Association, through
a contribution by the Limited Associates, occurred in February, 1996.
The shareholder of the General Associate, Nueva Tierra, S.A. de C.V.
(Nueva Tierra) has entered into an agreement to sell a controlling
interest in the General Associate to International Realty Group, Inc.
Under the terms of the agreement, the General Associate will receive
shares of stock valued at $.782 per share for its investment. In
management's opinion, the Association will no longer be in the
development stage as it will have the ability to secure the necessary
financing to complete the development of its properties. The
accompanying balance sheet has been prepared on the going concern basis.
Under the terms of the Agreement, real property was contributed to the
Association by the Limited Associates. The General and Limited
Associates received full credit for the fair market value of the
properties based upon independent appraisals performed in 1996 by
Ingeniero Sergio H. Parra - R. As consideration for the General
Associate's (Nueva Tierra) ability to develop, market, finance and
operate the property, the Limited Associates agreed to share the profits
and losses of the Association based upon certain ratios on a per project
basis. The Limited Associates further agreed to allocate a certain
portion of their capital to the capital account of the General
Associate.
The Limited Associates contributed land located in La Paz, Baja
California, SUR. The project is known as Las Animas which consists of
3,470 acres of land. Under the terms of the Agreement, the profit and
loss ratio for this project will be 77.89% to the General Associate and
22.11% to the Limited Associates.
F-82
<PAGE> 124
BAHIA DE CORTES, ASOCIACION EN PARTICIPACION
(A MEXICAN PARTICIPATING ASSOCIATION)
(AN ASSOCIATION IN THE DEVELOPMENT STAGE)
NOTES TO FINANCIAL STATEMENT (CONTINUED)
FROM INCEPTION (FEBRUARY 7, 1996) TO MARCH 31, 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
ORGANIZATION AND BUSINESS (CONTINUED):
A summary of the purchase allocation is as follows:
<TABLE>
Property
------------------------------------------------- Acquisition
Location Description Cost
-------------- ------------------------ ------------
<S> <C> <C>
La Paz, Baja Real property known as
California, SUR. Las Animas $47,189,333
Less special allocation of Limited Associates
equity transferred to the General Associate in
accordance with the terms of the Agreement 36,755,771
-----------
Limited Associates capital contribution $10,433,562
===========
</TABLE>
BASIS OF ACCOUNTING:
The Association prepares its financial statements in accordance with
generally accepted accounting principles in the United States, expressed
in United States dollars. This basis of accounting involves the
application of accrual accounting; consequently, revenues and gains are
recognized when earned, and expenses and losses are recognized when
incurred. Financial statement items are recorded at historical cost and
may not necessarily represent current values.
MANAGEMENT ESTIMATES:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements. Actual results could differ from those estimates.
F-83
<PAGE> 125
BAHIA DE CORTES, ASOCIACION EN PARTICIPACION
(A MEXICAN PARTICIPATING ASSOCIATION)
(AN ASSOCIATION IN THE DEVELOPMENT STAGE)
NOTES TO FINANCIAL STATEMENT (CONTINUED)
FROM INCEPTION (FEBRUARY 7, 1996) TO MARCH 31, 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
FOREIGN CURRENCY TRANSLATION:
Adjustments for currency exchange rate changes are excluded from net
income for those fluctuations that do not impact cash flow. Local
currency is generally considered the functional currency outside the
United States. All assets and liabilities are translated into United
States dollars at period-end exchange rates. Income and expense items
are translated at average rates of exchange prevailing during the year.
The Mexican exchange rate used for the current period was NP$7.5000, as
obtained from the Diario Official de la Federacion. Temporary gains and
losses resulting from translation, if material, are reflected as
currency translation adjustments in partners' equity. Permanent
adjustments would be reflected in the statements of operations, when
appropriate.
LAND:
Land is stated at acquisition cost to the Association.
INCOME TAXES:
No provision for income taxes have been made as the Associates will
include their pro-rata share of the income or loss of the Association in
their tax returns.
2. LAND HELD FOR INVESTMENT:
Land held for investment was acquired under trust rights. Trust rights
gives the holder exclusive use and ownership of the property. The rights
are valid for thirty (30) years and are renewable each thirty (30) years
at no cost. Trust rights can be used to collateralize debt or be
hypothecated in any form.
Land is held for investment until such time as the property is sold or the
development plan of the property is implemented, which would reclassify
the property to land under development.
F-84
<PAGE> 126
Gonzalez Macin y Cia.
- -------------------------------------------------------------------------------
Participating Associates
Bahia de Cortes
Mexico City, Mexico
We have reviewed the accompanying balance sheet of Bahia de Cortes, Asociacion
en Participacion, a Mexican Participating Association (an Association in the
development stage) as of June 30, 1996 in accordance with Statements on
Standards for Accounting and Review Services issued by the American Institute of
Certified Public Accountants. As described in Note 1 of Notes to financial
statement, the accompanying financial statement has been prepared on the basis
of accounting principles generally accepted in the United States, expressed in
United States dollars. All information included in these financial statements
is the representation of the management of Bahia de Cortes, Asociacion en
Participacion.
A review consists principally of inquires of the Associations' personnel and
analytical procedures applied to financial data. It is substantially less in
scope than an audit in accordance with generally accepted auditing standards,
the objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the accompanying financial statement in order for it to be in
conformity with generally accepted accounting principles.
GUILLERMO GONZALEZ MACIN
Mexico, D.F.
August 5, 1996
F-85
<PAGE> 127
BAHIA DE CORTES, ASOCIACION EN PARTICIPACION
(A MEXICAN PARTICIPATING ASSOCIATION)
(AN ASSOCIATION IN THE DEVELOPMENT STAGE)
BALANCE SHEET - MARCH 31, 1996
ASSETS
<TABLE>
<S> <C>
Land held for investment $ 47,189,333
============
ASSOCIATES' EQUITY
Associates' equity:
General Associate $ 36,755,771
Limited Associates 10,433,562
------------
$ 47,189,333
============
</TABLE>
Read the accompanying notes to financial statement, which are an
integral part of this financial statement.
F-86
<PAGE> 128
BAHIA DE CORTES, ASOCIACION EN PARTICIPACION
(A MEXICAN PARTICIPATING ASSOCIATION)
(AN ASSOCIATION IN THE DEVELOPMENT STAGE)
NOTES TO FINANCIAL STATEMENT
FROM INCEPTION (FEBRUARY 7, 1996) TO JUNE 30, 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
ORGANIZATION AND BUSINESS:
Bahia de Cortes, Asociacion en Participacion (the Association) was formed
on February 7, 1996 pursuant to the laws of Mexico. Asociacion en
Participacion (Participating Association) is similar to a limited
partnership. The Association will remain in existence until 2026, unless
termination is accelerated in accordance with the agreement. The
Association has selected a year end of December 31. The Association will
develop real property located in Mexico into commercial and resort hotel
lodging, timeshare interests and ancillary real estate services.
From October 6, 1995 to date, the Association is considered as being in
the development stage. During this period, the entity has been devoted
primarily to raising capital, securing debt financing and negotiating with
lenders. The initial asset acquisition by the Partnership, through a
contribution by the Limited Associates, occurred in February, 1996.
The shareholder of the General Associate, Nueva Tierra, S.A. de C.V.
(Nueva Tierra) has entered into an agreement to sell a controlling
interest in the General Associate to International Realty Group, Inc.
Under the terms of the agreement, the General Associate will receive
shares of stock valued at $.782 per share for its investment. In
management's opinion, the Association will no longer be in the development
stage as it will have the ability to secure the necessary financing to
complete the development of its properties. The accompanying balance
sheet has been prepared on the going concern basis.
Under the terms of the Agreement, real property was contributed to the
Association by the Limited Associates. The General and Limited Associates
received full credit for the fair market value of the properties based
upon independent appraisals performed in 1996 by Ingeniero Sergio H. Parra
- R. As consideration for the General Associate's (Nueva Tierra) ability
to develop, market, finance and operate the property, the Limited
Associates agreed to share the profits and losses of the Assoication based
upon certain ratios on a per project basis. The Limited Associates
further agreed to allocate a certain portion of their capital to the
capital account of the General Associate.
The Limited Associates contributed land located in La Paz, Baja
California, SUR. The project is known as Las Animas which consists of
3,470 acres of land. Under the terms of the Agreement, the profit and
loss ratio for this project will be 77.89% to the General Associate and
22.11% to the Limited Associates.
F-87
<PAGE> 129
BAHIA DE CORTES, ASOCIACION EN PARTICIPACION
(A MEXICAN PARTICIPATING ASSOCIATION)
(AN ASSOCIATION IN THE DEVELOPMENT STAGE)
NOTES TO FINANCIAL STATEMENT
FROM INCEPTION (FEBRUARY 7, 1996) TO JUNE 30, 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
ORGANIZATION AND BUSINESS (CONTINUED):
A summary of the purchase allocation is as follows:
<TABLE>
<CAPTION>
Property
------------------------------------------------- Acquisition
Location Description Cost
-------------- ------------------------ ------------
<S> <C> <C>
La Paz, Baja Real property known as
California, SUR. Las Animas $46,682,670
Less special allocation of Limited Associates
equity transferred to the General Associate in
accordance with the terms of the Agreement 36,361,132
-----------
Limited Associates capital contribution $10,321,538
===========
</TABLE>
The difference between total asset value between March 31, 1996 to June
30, 1996 is a result of the change in foreign currency translation
adjustment from NP$7.5000 to NP$7.5814 between periods, respectively. The
cumulative translation adjustment of $506,663 represents a decrease in
total assets and partners' equity, respectively.
BASIS OF ACCOUNTING:
The Association prepares its financial statements in accordance with
generally accepted accounting principles in the United States, expressed
in United States dollars. This basis of accounting involves the
application of accrual accounting; consequently, revenues and gains are
recognized when earned, and expenses and losses are recognized when
incurred. Financial statement items are recorded at historical cost and
may not necessarily represent current values.
MANAGEMENT ESTIMATES:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements. Actual results could differ from those estimates.
F-88
<PAGE> 130
BAHIA DE CORTES, ASOCIACION EN PARTICIPACION
(A MEXICAN PARTICIPATING ASSOCIATION)
(AN ASSOCIATION IN THE DEVELOPMENT STAGE)
NOTES TO FINANCIAL STATEMENT
FROM INCEPTION (FEBRUARY 7, 1996) TO JUNE 30, 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
FOREIGN CURRENCY TRANSLATION:
Adjustments for currency exchange rate changes are excluded from net
income for those fluctuations that do not impact cash flow. Local
currency is generally considered the functional currency outside the
United States. All assets and liabilities are translated into United
States dollars at period-end exchange rates. Income and expense items
are translated at average rates of exchange prevailing during the year.
The Mexican exchange rate used for the current period was NP$7.5814, as
obtained from the Diario Official de la Federacion. Temporary gains and
losses resulting from translation, if material, are reflected as currency
translation adjustments in partners' equity. Permanent adjustments would
be reflected in the statements of operations, when appropriate.
LAND:
Land is stated at acquisition cost to the Association.
INCOME TAXES:
No provision for income taxes have been made as the Associates will
include their pro-rata share of the income or loss of the Association in
their tax returns.
2. LAND HELD FOR INVESTMENT:
Land held for investment was acquired under trust rights. Trust rights
gives the holder exclusive use and ownership of the property. The rights
are valid for thirty (30) years and are renewable each thirty (30) years
at no cost. Trust rights can be used to collateralize debt or be
hypothecated in any form.
Land is held for investment until such time as the property is sold or
the development plan of the property is implemented, which would
reclassify the property to land under development.
F-89
<PAGE> 131
GONZALEZ MACIN Y CIA.
________________________________________________________________________________
Participating Associates
Barra del Tordo
Mexico City, Mexico
We have audited the accompanying balance sheet of Barra del Tordo, Asociacion en
Participacion, a Mexican Participating Association (an Association in the
development stage) as of March 31, 1996. As described in Note 1 of Notes to
financial statement, the accompanying balance sheet has been prepared on the
basis of accounting principles generally accepted in the United States,
expressed in United States dollars. This financial statement is the
responsibility of the Association's management. Our responsibility is to
express an opinion on this financial statement based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the balance sheet is free of material misstatements. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the balance sheet. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall balance sheet presentation. We believe that our audit
of the balance sheet provides a reasonable basis for our opinion.
In our opinion, the balance sheet referred to above presents fairly, in all
material respects, the financial position of Barra del Tordo, Asociacion en
Participacion, a Mexican Participating Association, as of March 31, 1996, in
conformity with generally accepted accounting principles.
We direct your attention to Notes 1 and 3 of Notes to financial statement which
discusses development stage and mortgages and notes payable, financial and
governmental institutions, including certain amounts in default.
C.P. GUILLERMO GONZALEZ MACIN
Mexico, D.F.
June 18, 1996
RIO EBRO NO. 45 COLONIA CUAUHTEMOC DELEGACION CUAUHTEMOC C.P. 06500
TEL. (915) 525-31-34
F-90
<PAGE> 132
BARRA DEL TORDO, ASOCIACION EN PARTICIPACION
(A MEXICAN PARTICIPATING ASSOCIATION)
(AN ASSOCIATION IN THE DEVELOPMENT STAGE)
BALANCE SHEET - MARCH 31, 1996
ASSETS
<TABLE>
<S> <C>
Properties under development $10,259,965
===========
LIABILITIES AND ASSOCIATES' EQUITY
Liabilities:
Mortgages and notes payable, financial and $ 2,146,253
governmental institutions
Accrued interest on mortgages and notes payable 1,381,940
-----------
3,528,193
-----------
Associates' equity:
General Associates 5,306,656
Limited Associate 1,425,116
-----------
6,731,772
-----------
$10,259,965
===========
</TABLE>
Read the accompanying notes to financial statement, which are
an integral part of this financial statement.
F-91
<PAGE> 133
BARRA DEL TORDO, ASOCIACION EN PARTICIPACION
(A MEXICAN PARTICIPATING ASSOCIATION)
(AN ASSOCIATION IN THE DEVELOPMENT STAGE)
NOTES TO FINANCIAL STATEMENT
FROM INCEPTION (JANUARY 17, 1996) TO MARCH 31, 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
ORGANIZATION AND BUSINESS:
Barra del Tordo, Asociacion en Participacion (the Association) was
formed on January 17, 1996 pursuant to the laws of Mexico. Asociacion
en Participacion (Participating Association) is similar to a limited
partnership. The Association will remain in existence until 2026,
unless termination is accelerated in accordance with the agreement. The
Association has selected a year end of December 31. The Association
will develop real property located in Mexico into commercial and resort
hotel lodging, timeshare interests and ancillary real estate services.
From inception to date, the Association is considered as being in the
development stage. During this period, the entity has been devoted
primarily to raising capital, securing debt financing and negotiating
with lenders. The initial asset acquisitions by the Association,
through a contribution by the Limited Associates, occurred in February,
1996.
The shareholder of the General Associate, Nueva Tierra, S.A. de C.V.
(Nueva Tierra) has entered into an agreement to sell a controlling
interest in the General Associate to International Realty Group, Inc.
Under the terms of the agreement, the General Associate will receive
shares of stock valued at $.782 per share for its investment. In
management's opinion, the Association will no longer be in the
development stage as it will have the ability to secure the necessary
financing to complete the development of its properties. The
accompanying balance sheet has been prepared on the going concern basis.
Under the terms of the Agreement, real property, subject to liabilities,
was contributed to the Association by the Limited Associates. The
General and Limited Associates received full credit for the fair market
value of the properties based upon independent appraisals performed in
1996 by Ingeniero Sergio H. Parra - R. As consideration for the General
Associate's (Nueva Tierra) ability to develop, market, finance and
operate the property, the Limited Associates agreed to share the profits
and losses of the Association based upon certain ratios on a per project
basis. The Limited Associates further agreed to allocate a certain
portion of their capital to the capital account of the General
Associate.
The Limited Associates contributed two projects located in Aldama,
Tamaulipas. The first project is known as Santa Ines which consists of
149 acres of land. The second project is known as Los Tauros which
consists of 421 acres of land. Under the terms of the Agreement, the
profit and loss ratio for these projects will be 75.83% to the General
Associate and 24.17% to the Limited Associates, for the Santa Ines
project; and 81.83% to the General Associate and 18.17% to the Limited
Associates for the Los Tauros project.
F-92
<PAGE> 134
BARRA DEL TORDO, ASOCIACION EN PARTICIPACION
(A MEXICAN PARTICIPATING ASSOCIATION)
(AN ASSOCIATION IN THE DEVELOPMENT STAGE)
NOTES TO FINANCIAL STATEMENT (CONTINUED)
FROM INCEPTION (JANUARY 17, 1996) TO MARCH 31, 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
ORGANIZATION AND BUSINESS (CONTINUED):
A summary of the purchase allocation is as follows:
<TABLE>
<CAPTION>
Property
---------------------------------------------- Acquisition
Location Description Cost
-------------- ------------------------- -----------
<S> <C>
Aldama, Real property known as
Tamaulipas Santa Ines and Los Tauros $10,259,965
Less debt assumed by the Association 3,528,193
-----------
6,731,772
Less special allocation of Limited Associates
equity transferred to the General Associate
in accordance with the terms of the Agreement 5,306,656
-----------
Limited Associates capital contribution $ 1,425,116
===========
</TABLE>
BASIS OF ACCOUNTING:
The Association prepares its financial statements in accordance with
generally accepted accounting principles in the United States, expressed
in United States dollars. This basis of accounting involves the
application of accrual accounting; consequently, revenues and gains are
recognized when earned, and expenses and losses are recognized when
incurred. Financial statement items are recorded at historical cost and
may not necessarily represent current values.
MANAGEMENT ESTIMATES:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements. Actual results could differ from those estimates.
F-93
<PAGE> 135
BARRA DEL TORDO, ASOCIACION EN PARTICIPACION
(A MEXICAN PARTICIPATING ASSOCIATION)
(AN ASSOCIATION IN THE DEVELOPMENT STAGE)
NOTES TO FINANCIAL STATEMENT (CONTINUED)
FROM INCEPTION (JANUARY 17, 1996) TO MARCH 31, 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
FOREIGN CURRENCY TRANSLATION:
Adjustments for currency exchange rate changes are excluded from net
income for those fluctuations that do not impact cash flow. Local
currency is generally considered the functional currency outside the
United States. All assets and liabilities are translated into United
States dollars at period-end exchange rates. Income and expense items
are translated at average rates of exchange prevailing during the year.
The Mexican exchange rate used for the current period was NP$7.5000, as
obtained from the Diario Official de la Federacion. Temporary gains and
losses resulting from translation, if material, are reflected as
currency translation adjustments in partners' equity. Permanent
adjustments would be reflected in the statements of operations, when
appropriate.
PROPERTIES UNDER DEVELOPMENT:
Properties under development consist of land and buildings which are
stated at acquisition cost to the Association, including construction
period interest.
INCOME TAXES:
No provision for income taxes have been made as the Associates will
include their pro-rata share of the income or loss of the Association in
their tax returns.
2. PROPERTIES UNDER DEVELOPMENT:
<TABLE>
<S> <C>
Land $ 9,243,997
Buildings 1,015,968
-----------
$10,259,965
===========
</TABLE>
Substantially all land and building held for development is collateralized
to mortgages and notes payable, financial and governmental institutions.
Land under development is land acquired under trust rights. Trust rights
gives the holder exclusive use and ownership of the property. The rights
are valid for thirty (30) years and are renewable each thirty (30) years
at no cost. Trust rights can be used to collateralize debt or be
hypothecated in any form.
F-94
<PAGE> 136
BARRA DEL TORDO, ASOCIACION EN PARTICIPACION
(A MEXICAN PARTICIPATING ASSOCIATION)
(AN ASSOCIATION IN THE DEVELOPMENT STAGE)
NOTES TO FINANCIAL STATEMENT (CONTINUED)
FROM INCEPTION (JANUARY 17, 1996) TO MARCH 31, 1996
3. MORTGAGES AND NOTES PAYABLE, FINANCIAL AND GOVERNMENTAL INSTITUTIONS:
SANTA INES PROJECT:
BANCOMER, S.A.:
<TABLE>
<S> <C>
Mortgage note, bank, interest
at 8 points above the Average
bank deposit rate (5.2%)
per annum, maturing in October, 1997,
collateralized by real property.
Accrued interest at March 31, 1996
amounts to $191,841 $ 305,198
Note payable, bank, interest at 8 points
above the Average bank deposit rate
(5.2%) per annum with annual
principal reductions during 1995 and
1996 with a balloon payment due 1997 of
about $434,724. Note is in default due
to non-payment of 1995 principal reduction.
Accrued interest at March 31, 1996 amounts
to $317,212 507,351
BANPAIS, S.A.:
Note payable, bank, interest at 4 points
above Mexican Treasury Certificates (5.2%)
per annum, in default, collateralized by
real property. Accrued interest at
March 31, 1996 amounts to $8,325 41,626
MULTIBANCO COMERMEX, S.A.:
Note payable, other, interest at Average
bank deposit rate (5.2%) per annum,
in default, collateralized by real property.
Accrued interest at March 31, 1996
amounts to $98,877 210,110
----------
1,064,285
----------
</TABLE>
F-95
<PAGE> 137
BARRA DEL TORDO, ASOCIACION EN PARTICIPACION
(A MEXICAN PARTICIPATING ASSOCIATION)
(AN ASSOCIATION IN THE DEVELOPMENT STAGE)
NOTES TO FINANCIAL STATEMENT (CONTINUED)
FROM INCEPTION (JANUARY 17, 1996) TO MARCH 31, 1996
3. MORTGAGES AND NOTES PAYABLE, FINANCIAL AND GOVERNMENTAL INSTITUTIONS
(CONTINUED):
<TABLE>
<S> <C>
LOS TAUROS PROJECT:
MULTIBANCO COMERMEX, S.A.:
Mortgage note, bank, interest at Average
bank deposit rate (5.2%), collateralized
by land, principal payments commence 2002
and matures in 2009. Accrued interest at
March 31, 1996 amounts to $8,403 $ 11,467
BANCO DE CREDITO RURAL DEL NORESTRE, S.N.C.:
Mortgage note, interest at 3.0%,
collateralized by real property, payable
annually between 1995 to 1999. Note is in
default due to non-payment of 1995 principal
reduction. Accrued interest at March 31,
1996 amounts to $63,208 133,041
Note payable, interest at 3.0%, collateralized
by equipment, in default. Accrued interest
at March 31, 1996 amounts to $14,185 29,893
Note payable, interest at 6 points above the
Average Bank Deposit Rate (5.2%), collateralized
by equipment, matured in 1995. Accrued interest
at March 31, 1996 amounts to $119,731 157,541
MULTIBANCO MERCANTIL PROBURSA, S.A.:
Mortgage note, interest at 6 points above the
Average Bank Deposit Rate (5.2%), collateralized
by real property and personal guarantees of a
limited associate on the Los Tauros Project, payable
semi-annually commencing June, 1995 and maturing
in December, 2000. Note is in default due to non-
payment of 1995 principal reduction. Accrued
interest at March 31, 1996 amounts to $169,530 223,066
</TABLE>
F-96
<PAGE> 138
BARRA DEL TORDO, ASOCIACION EN PARTICIPACION
(A MEXICAN PARTICIPATING ASSOCIATION)
(AN ASSOCIATION IN THE DEVELOPMENT STAGE)
NOTES TO FINANCIAL STATEMENT (CONTINUED)
FROM INCEPTION (JANUARY 17, 1996) TO MARCH 31, 1996
3. MORTGAGES AND NOTES PAYABLE, FINANCIAL AND GOVERNMENTAL INSTITUTIONS
(CONTINUED):
LOS TAUROS PROJECT (CONTINUED):
<TABLE>
<S> <C>
ARRENDADORA BANCOMER:
Installment loans, interest ranging from 6.3%
to 12.0%, collateralized by equipment,
in default. Accrued interest at March 31,
1996 amounts to $364,800 $ 480,000
OTHER:
Note payable, other, interest at Average bank
deposit rate (5.2%), collateralized by
land. Accrued interest at March 31, 1996
amounts to $25,828 46,960
----------
1,081,968
----------
$2,146,253
==========
</TABLE>
Maturities of mortgages and notes payable, subsequent to March 31, 1996
are as follows:
<TABLE>
<CAPTION>
Twelve Months
Ended
March 31, Amount
------------- ----------
<S> <C>
1997 $1,403,471
1998 279,150
1999 234,291
2000 49,785
2001 16,809
2002 to 2007 156,440
2008 thereafter 6,307
----------
$2,146,253
==========
</TABLE>
F-97
<PAGE> 139
BARRA DEL TORDO, ASOCIACION EN PARTICIPACION
(A MEXICAN PARTICIPATING ASSOCIATION)
(AN ASSOCIATION IN THE DEVELOPMENT STAGE)
NOTES TO FINANCIAL STATEMENT (CONTINUED)
FROM INCEPTION (JANUARY 17, 1996) TO MARCH 31, 1996
4. ACCRUED INTEREST ON MORTGAGES AND NOTES PAYABLE:
<TABLE>
<S> <C>
Bancomer, S.A. $ 509,053
Banpais, S.A. 8,325
Multibanco Comermex, S.A. 8,403
Banco de Credito Rural Del Norestre, S.N.C. 197,124
Multibanco Mercantil Probursa, S.A. 169,530
Arrendadora Bancomer 364,800
Other 124,705
---------
$1,381,940
==========
</TABLE>
F-98
<PAGE> 140
GONZALEZ MACIN Y CIA.
_______________________________________________________________________________
Participating Associates
Barra del Tordo
Mexico City, Mexico
We have reviewed the accompanying balance sheet of Barra del Tordo, Asociacion
en Participacion, a Mexican Participating Association (an Association in the
development stage) as of June 30, 1996 in accordance with Statements on
Standards for Accounting and Review Services issued by the American Institute
of Certified Public Accountants. As described in Note 1 of Notes to financial
statement, the accompanying financial statement has been prepared on the basis
of accounting principles generally accepted in the United States, expressed in
United States dollars. All information included in these financial statements
is the representation of the management of Barra del Tordo, Asociacion en
Participacion.
A review consists principally of inquires of the Associations' personnel and
analytical procedures applied to financial data. It is substantially less in
scope than an audit in accordance with generally accepted auditing standards,
the objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the accompanying financial statement in order for it to be in
conformity with generally accepted accounting principles.
/s/ C.P. GUILLERMO GONZALEZ MACIN
Mexico, D.F.
August 5, 1996
RIO EBRO NO. 45 COLONIA CUAUHTEMOC DELEGACION CUAUHTEMOC C.P. 06500
TEL. (915) 525-31-34
F-99
<PAGE> 141
BARRA DEL TORDO, ASOCIACION EN PARTICIPACION
(A MEXICAN PARTICIPATING ASSOCIATION)
(AN ASSOCIATION IN THE DEVELOPMENT STAGE)
BALANCE SHEET - JUNE 30, 1996
ASSETS
<TABLE>
<S> <C>
Properties under development $10,149,806
===========
LIABILITIES AND ASSOCIATES' EQUITY
Liabilities:
Mortgages and notes payable, financial and $ 2,123,200
governmental institutions
Accrued interest on mortgages and notes payable 1,367,098
-----------
3,490,298
-----------
Associates' equity:
General Associates 5,315,619
Limited Associate 1,343,889
-----------
6,659,508
-----------
$10,149,806
===========
</TABLE>
Read the accompanying notes to financial statement, which are
an integral part of this financial statement.
F-100
<PAGE> 142
BARRA DEL TORDO, ASOCIACION EN PARTICIPACION
(A MEXICAN PARTICIPATING ASSOCIATION)
(AN ASSOCIATION IN THE DEVELOPMENT STAGE)
NOTES TO FINANCIAL STATEMENT
FROM INCEPTION (JANUARY 17, 1996) TO JUNE 30, 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
ORGANIZATION AND BUSINESS:
Barra del Tordo, Asociacion en Participacion (the Association) was
formed on January 17, 1996 pursuant to the laws of Mexico. Asociacion
en Participacion (Participating Association) is similar to a limited
partnership. The Association will remain in existence until 2026,
unless termination is accelerated in accordance with the agreement. The
Association has selected a year end of December 31. The Association
will develop real property located in Mexico into commercial and resort
hotel lodging, timeshare interests and ancillary real estate services.
From inception to date, the Association is considered as being in the
development stage. During this period, the entity has been devoted
primarily to raising capital, securing debt financing and negotiating
with lenders. The initial asset acquisitions by the Association,
through a contribution by the Limited Associates, occurred in February,
1996.
The shareholder of the General Associate, Nueva Tierra, S.A. de C.V.
(Nueva Tierra) has entered into an agreement to sell a controlling
interest in the General Associate to International Realty Group, Inc.
Under the terms of the agreement, the General Associate will receive
shares of stock valued at $.782 per share for its investment. In
management's opinion, the Association will no longer be in the
development stage as it will have the ability to secure the necessary
financing to complete the development of its properties. The
accompanying balance sheet has been prepared on the going concern basis.
Under the terms of the Agreement, real property, subject to liabilities,
was contributed to the Association by the Limited Associates. The
General and Limited Associates received full credit for the fair market
value of the properties based upon independent appraisals performed in
1996 by Ingeniero Sergio H. Parra - R. As consideration for the General
Associate's (Nueva Tierra) ability to develop, market, finance and
operate the property, the Limited Associates agreed to share the profits
and losses of the Association based upon certain ratios on a per project
basis. The Limited Associates further agreed to allocate a certain
portion of their capital to the capital account of the General
Associate.
The Limited Associates contributed two projects located in Aldama,
Tamaulipas. The first project is known as Santa Ines which consists of
149 acres of land. The second project is known as Los Tauros which
consists of 421 acres of land. Under the terms of the Agreement, the
profit and loss ratio for these projects will be 75.83% to the General
Associate and 24.17% to the Limited Associates, for the Santa Ines
project; and 81.83% to the General Associate and 18.17% to the Limited
Associates for the Los Tauros project.
F-101
<PAGE> 143
BARRA DEL TORDO, ASOCIACION EN PARTICIPACION
(A MEXICAN PARTICIPATING ASSOCIATION)
(AN ASSOCIATION IN THE DEVELOPMENT STAGE)
NOTES TO FINANCIAL STATEMENT (CONTINUED)
FROM INCEPTION (JANUARY 17, 1996) TO JUNE 30, 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
ORGANIZATION AND BUSINESS (CONTINUED):
A summary of the purchase allocation is as follows:
<TABLE>
<CAPTION>
Property
---------------------------------------------- Acquisition
Location Description Cost
-------------- ------------------------ -----------
<S> <C> <C>
Aldama, Real property known as
Tamaulipas Santa Ines and Los Tauros $10,149,806
Less debt assumed by the Association 3,490,298
-----------
6,659,508
Less special allocation of Limited Associates
equity transferred to the General Associate in
accordance with the terms of the Agreement 5,315,619
-----------
Limited Associates capital contribution $ 1,343,889
===========
</TABLE>
The difference between total asset value between March 31, 1996 to June
30, 1996 is a result of the change in foreign currency translation
adjustment from NP$7.5000 to NP$7.5814 between periods, respectively.
The cumulative translation adjustment of $110,159 decreased total
liabilities by $37,895 and partners equity $72,264.
BASIS OF ACCOUNTING:
The Association prepares its financial statements in accordance with
generally accepted accounting principles in the United States,
expressed in United States dollars. This basis of accounting involves
the application of accrual accounting; consequently, revenues and gains
are recognized when earned, and expenses and losses are recognized when
incurred. Financial statement items are recorded at historical cost
and may not necessarily represent current values.
MANAGEMENT ESTIMATES:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements. Actual results could differ from
those estimates.
F-102
<PAGE> 144
BARRA DEL TORDO, ASOCIACION EN PARTICIPACION
(A MEXICAN PARTICIPATING ASSOCIATION)
(AN ASSOCIATION IN THE DEVELOPMENT STAGE)
NOTES TO FINANCIAL STATEMENT (CONTINUED)
FROM INCEPTION (JANUARY 17, 1996) TO JUNE 30, 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
FOREIGN CURRENCY TRANSLATION:
Adjustments for currency exchange rate changes are excluded from net
income for those fluctuations that do not impact cash flow. Local
currency is generally considered the functional currency outside the
United States. All assets and liabilities are translated into United
States dollars at period-end exchange rates. Income and expense items
are translated at average rates of exchange prevailing during the year.
The Mexican exchange rate used for the current period was NP$7.5814,
as obtained from the Diario Official de la Federacion. Temporary gains
and losses resulting from translation, if material, are reflected as
currency translation adjustments in partners' equity. Permanent
adjustments would be reflected in the statements of operations, when
appropriate.
PROPERTIES UNDER DEVELOPMENT:
Properties under development consist of land and buildings which are
stated at acquisition cost to the Association, including construction
period interest.
INCOME TAXES:
No provision for income taxes have been made as the Associates will
include their pro-rata share of the income or loss of the Association
in their tax returns.
2. PROPERTIES UNDER DEVELOPMENT:
<TABLE>
<S> <C>
Land $ 9,144,746
Buildings 1,005,060
-----------
$10,149,806
===========
</TABLE>
Substantially all land and building held for development is collateralized
to mortgages and notes payable, financial and governmental institutions.
Land under development is land acquired under trust rights. Trust rights
gives the holder exclusive use and ownership of the property. The rights
are valid for thirty (30) years and are renewable each thirty (30) years
at no cost. Trust rights can be used to collateralize debt or be
hypothecated in any form.
F-103
<PAGE> 145
BARRA DEL TORDO, ASOCIACION EN PARTICIPACION
(A MEXICAN PARTICIPATING ASSOCIATION)
(AN ASSOCIATION IN THE DEVELOPMENT STAGE)
NOTES TO FINANCIAL STATEMENT (CONTINUED)
FROM INCEPTION (JANUARY 17, 1996) TO JUNE 30, 1996
3. MORTGAGES AND NOTES PAYABLE, FINANCIAL AND GOVERNMENTAL INSTITUTIONS:
<TABLE>
<S> <C>
SANTA INES PROJECT:
BANCOMER, S.A.:
Mortgage note, bank, interest at 8
points above the Average bank deposit
rate (5.2%) per annum, maturing in
October, 1997, collateralized by
real property. Accrued interest at
June 30, 1996 amounts to $189,781 $ 301,921
Note payable, bank, interest at 8 points
above the Average bank deposit rate
(5.2%) per annum with annual
principal reductions during 1995 and
1996 with a balloon payment due 1997 of
about $434,724. Note is in default due
to non-payment of 1995 principal reduction.
Accrued interest at June 30, 1996 amounts
to $313,806 501,903
BANPAIS, S.A.:
Note payable, bank, interest at 4 points
above Mexican Treasury Certificates (5.2%)
per annum, in default, collateralized by
real property. Accrued interest at
June 30, 1996 amounts to $8,235 41,179
MULTIBANCO COMERMEX, S.A.:
Note payable, other, interest at Average
bank deposit rate (5.2%) per anuum,
in default, collateralized by real
property. Accrued interest at June 30,
1996 amounts to $97,815 207,854
----------
1,052,857
----------
</TABLE>
F-104
<PAGE> 146
BARRA DEL TORDO, ASOCIACION EN PARTICIPACION
(A MEXICAN PARTICIPATING ASSOCIATION)
(AN ASSOCIATION IN THE DEVELOPMENT STAGE)
NOTES TO FINANCIAL STATEMENT (CONTINUED)
FROM INCEPTION (JANUARY 17, 1996) TO JUNE 30, 1996
3. MORTGAGES AND NOTES PAYABLE, FINANCIAL AND GOVERNMENTAL INSTITUTIONS
(CONTINUED):
<TABLE>
<S> <C>
LOS TAUROS PROJECT:
MULTIBANCO COMERMEX, S.A.:
Mortgage note, bank, interest at Average
bank deposit rate (5.2%), collateralized
by land, principal payments commence 2002
and matures in 2009. Accrued interest at
June 30, 1996 amounts to $8,312 $ 11,343
BANCO DE CREDITO RURAL DEL NORESTRE, S.N.C.:
Mortgage note, interest at 3.0%,
collateralized by real property, payable
annually between 1995 to 1999. Note is in
default due to non-payment of 1995 principal
reduction. Accrued interest at June 30,
1996 amounts to $62,529 131,612
Note payable, interest at 3.0%, collateralized
by equipment, in default. Accrued interest at
June 30, 1996 amounts to $14,032 29,572
Note payable, interest at 6 points above the
Average Bank Deposit Rate (5.2%), collateralized
by equipment, matured in 1995. Accrued interest
at June 30, 1996 amounts to $118,445 155,849
MULTIBANCO MERCANTIL PROBURSA, S.A.:
Mortgage notes, interest at 6 points above the
Average Bank Deposit Rate (5.2%), collateralized
by real property and personal guarantees of a
limited associate on the Los Tauros Project, payable
semi-annually commencing June, 1995 and maturing
in December, 2000. Note is in default due to non-
payment of 1995 principal reduction. Accrued
interest at June 30, 1996 amounts to $167,710 220,671
</TABLE>
F-105
<PAGE> 147
BARRA DEL TORDO, ASOCIACION EN PARTICIPACION
(A MEXICAN PARTICIPATING ASSOCIATION)
(AN ASSOCIATION IN THE DEVELOPMENT STAGE)
NOTES TO FINANCIAL STATEMENT (CONTINUED)
FROM INCEPTION (JANUARY 17, 1996) TO JUNE 30, 1996
3. MORTGAGES AND NOTES PAYABLE, FINANCIAL AND GOVERNMENTAL INSTITUTIONS
(CONTINUED):
<TABLE>
<S> <C>
LOS TAUROS PROJECT (CONTINUED):
ARRENDADORA BANCOMER:
Installment loans, interest ranging from 6.3%
to 12.0%, collateralized by equipment, in
default. Accrued interest at June 30, 1996
amounts to $360,883 $ 474,840
OTHER:
Note payable, other, interest at Average
bank deposit rate (5.2%), collateralized
by land. Accrued interest at June 30, 1996
amounts to $25,550 46,456
----------
1,070,343
----------
$2,123,200
==========
</TABLE>
Maturities of mortgages and notes payable, subsequent to June 30, 1996
are as follows:
<TABLE>
<CAPTION>
Twelve Months
Ended
June 30, Amount
------------- ----------
<S> <C>
1997 $1,388,400
1998 276,200
1999 231,800
2000 49,250
2001 16,600
2002 to 2007 154,800
2008 thereafter 6,150
----------
$2,123,200
==========
</TABLE>
F-106
<PAGE> 148
BARRA DEL TORDO, ASOCIACION EN PARTICIPACION
(A MEXICAN PARTICIPATING ASSOCIATION)
(AN ASSOCIATION IN THE DEVELOPMENT STAGE)
NOTES TO FINANCIAL STATEMENT (CONTINUED)
FROM INCEPTION (JANUARY 17, 1996) TO JUNE 30, 1996
4. ACCRUED INTEREST ON MORTGAGES AND NOTES PAYABLE:
<TABLE>
<S> <C>
Bancomer, S.A. $ 503,587
Banpais, S.A. 8,235
Multibanco Comermex, S.A. 8,312
Banco de Credito Rural Del Norestre, S.N.C. 195,006
Multibanco Mercantil Probursa, S.A. 167,710
Arrendadora Bancomer 360,883
Other 123,365
----------
$1,367,098
==========
</TABLE>
F-107
<PAGE> 149
GONZALEZ MACIN Y CIA.
_______________________________________________________________________________
Participating Associates
Hacienda de Franco
Mexico City, Mexico
We have audited the accompanying balance sheet of Hacienda de Franco, Asociacion
en Participacion, a Mexican Participating Association (an Association in the
development stage) as of March 31, 1996. As described in Note 1 of Notes to
financial statement, the accompanying balance sheet has been prepared on the
basis of accounting principles generally accepted in the United States,
expressed in United States dollars. This financial statement is the
responsibility of the Association's management. Our responsibility is to
express an opinion on this financial statement based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the balance sheet is free of material misstatements. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the balance sheet. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall balance sheet presentation. We believe that our audit
of the balance sheet provides a reasonable basis for our opinion.
In our opinion, the balance sheet referred to above presents fairly, in all
material respects, the financial position of Hacienda de Franco, Asociacion en
Participacion, a Mexican Participating Association, as of March 31, 1996, in
conformity with generally accepted accounting principles.
We direct your attention to Notes 1 and 3 of Notes to financial statement which
discusses development stage and mortgages and notes payable, financial and
governmental institutions, including certain amounts in default.
/s/ C.P. GUILLERMO GONZALEZ MACIN
Mexico, D.F.
June 18, 1996
RIO EBRO NO. 45 COLONIA CUAUHTEMOC DELEGACION CUAUHTEMOC C.P. 06500
TEL. (915) 525-31-34
F-108
<PAGE> 150
HACIENDA DE FRANCO, ASOCIACION EN PARTICIPACION
(A MEXICAN PARTICIPATING ASSOCIATION)
(AN ASSOCIATION IN THE DEVELOPMENT STAGE)
BALANCE SHEET - MARCH 31, 1996
ASSETS
<TABLE>
<S> <C>
Properties under development $5,145,363
==========
LIABILITIES AND ASSOCIATES' EQUITY
Liabilities:
Mortgages and notes payable, financial and $ 488,868
governmental institutions
Accrued interest on mortgages and notes payable 27,910
----------
516,778
----------
Associates' equity:
General Associates 3,755,171
Limited Associate 873,414
----------
4,628,585
----------
$5,145,363
==========
</TABLE>
Read the accompanying notes to financial statement, which are
an integral part of this financial statement.
F-109
<PAGE> 151
HACIENDA DE FRANCO, ASOCIACION EN PARTICIPACION
(A MEXICAN PARTICIPATING ASSOCIATION)
(AN ASSOCIATION IN THE DEVELOPMENT STAGE)
NOTES TO FINANCIAL STATEMENT
FROM INCEPTION (JANUARY 10, 1996) TO MARCH 31, 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
ORGANIZATION AND BUSINESS:
Hacienda de Franco, Asociacion en Participacion (the Association) was
formed on January 10, 1996 pursuant to the laws of Mexico. Asociacion
en Participacion (Participating Association) is similar to a limited
partnership. The Association will remain in existence until 2026,
unless termination is accelerated in accordance with the agreement.
The Association has selected a year end of December 31. The
Association will develop real property located in Mexico into
commercial and resort hotel lodging, timeshare interests and ancillary
real estate services.
From inception to date, the Association is considered as being in the
development stage. During this period, the entity has been devoted
primarily to raising capital, securing debt financing and negotiating
with lenders. The initial asset acquisitions by the Association,
through a contribution by the Limited Associates, occurred in February,
1996.
The shareholder of the General Associate, Nueva Tierra, S.A. de C.V.
(Nueva Tierra) has entered into an agreement to sell a controlling
interest in the General Associate to International Realty Group, Inc.
Under the terms of the agreement, the General Associate will receive
shares of stock valued at $.782 per share for its investment. In
management's opinion, the Association will no longer be in the
development stage as it will have the ability to secure the necessary
financing to complete the development of its properties. The
accompanying balance sheet has been prepared on the going concern
basis.
Under the terms of the Agreement, real property, subject to
liabilities, was contributed to the Association by the Limited
Associates. The General and Limited Associates received full credit
for the fair market value of the properties based upon independent
appraisals performed in 1996 by Ingeniero Sergio H. Parra - R. As
consideration for the General Associate's (Nueva Tierra) ability to
develop, market, finance and operate the property, the Limited
Associates agreed to share the profits and losses of the Association
based upon certain ratios on a per project basis. The Limited
Associates further agreed to allocate a certain portion of their
capital to the capital account of the General Associate.
The Limited Associates contributed a project with land and buildings
located in Silao, Guanajuato. The project is known as Ex-Hacienda de
Franco which consists of 236 acres of land. Under the terms of the
Agreement, the profit and loss ratio for this project will be 81.13% to
the General Associate and 18.87% to the Limited Associates.
F-110
<PAGE> 152
HACIENDA DE FRANCO, ASOCIACION EN PARTICIPACION
(A MEXICAN PARTICIPATING ASSOCIATION)
(AN ASSOCIATION IN THE DEVELOPMENT STAGE)
NOTES TO FINANCIAL STATEMENT (CONTINUED)
FROM INCEPTION (JANUARY 10, 1996) TO MARCH 31, 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
ORGANIZATION AND BUSINESS (CONTINUED):
A summary of the purchase allocation is as follows:
<TABLE>
<S> <C>
Property
---------------------------------------------- Acquisition
Location Description Cost
-------------- ------------------------- ------------
Silao, Real property known as
Guanajuato Ex-Hacienda de Franco $5,145,363
Less debt assumed by the Association 516,778
----------
4,628,585
Less special allocation of Limited Associates
equity transferred to the General Associate in
accordance with the terms of the Agreement 3,755,171
----------
Limited Associates capital contribution $ 873,414
==========
</TABLE>
BASIS OF ACCOUNTING:
The Association prepares its financial statements in accordance with
generally accepted accounting principles in the United States,
expressed in United States dollars. This basis of accounting involves
the application of accrual accounting; consequently, revenues and gains
are recognized when earned, and expenses and losses are recognized when
incurred. Financial statement items are recorded at historical cost
and may not necessarily represent current values.
MANAGEMENT ESTIMATES:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements. Actual results could differ from
those estimates.
F-111
<PAGE> 153
HACIENDA DE FRANCO, ASOCIACION EN PARTICIPACION
(A MEXICAN PARTICIPATING ASSOCIATION)
(AN ASSOCIATION IN THE DEVELOPMENT STAGE)
NOTES TO FINANCIAL STATEMENT (CONTINUED)
FROM INCEPTION (JANUARY 10, 1996) TO MARCH 31, 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
FOREIGN CURRENCY TRANSLATION:
Adjustments for currency exchange rate changes are excluded from net
income for those fluctuations that do not impact cash flow. Local
currency is generally considered the functional currency outside the
United States. All assets and liabilities are translated into United
States dollars at period-end exchange rates. Income and expense items
are translated at average rates of exchange prevailing during the year.
The Mexican exchange rate used for the current period was NP$7.5000,
as obtained from the Diario Official de la Federacion. Temporary gains
and losses resulting from translation, if material, are reflected as
currency translation adjustments in partners' equity. Permanent
adjustments would be reflected in the statements of operations, when
appropriate.
PROPERTIES UNDER DEVELOPMENT:
Properties under development consist of land and buildings which are
stated at acquisition cost to the Association, including construction
period interest.
INCOME TAXES:
No provision for income taxes have been made as the Associates will
include their pro-rata share of the income or loss of the Association
in their tax returns.
2. PROPERTIES UNDER DEVELOPMENT:
<TABLE>
<S> <C>
Land $4,679,306
Buildings 418,324
Equipment 47,733
----------
$5,145,363
==========
</TABLE>
Substantially all land, building and equipment held for development is
collateralized to mortgages and notes payable, financial and governmental
institutions.
Land under development is land acquired under trust rights. Trust rights
gives the holder exclusive use and ownership of the property. The rights
are valid for thirty (30) years and are renewable each thirty (30) years
at no cost. Trust rights can be used to collateralize debt or be
hypothecated in any form.
F-112
<PAGE> 154
HACIENDA DE FRANCO, ASOCIACION EN PARTICIPACION
(A MEXICAN PARTICIPATING ASSOCIATION)
(AN ASSOCIATION IN THE DEVELOPMENT STAGE)
NOTES TO FINANCIAL STATEMENT (CONTINUED)
FROM INCEPTION (JANUARY 10, 1996) TO MARCH 31, 1996
3. MORTGAGES AND NOTES PAYABLE, FINANCIAL AND GOVERNMENTAL INSTITUTIONS:
<TABLE>
<S> <C>
BANCOMER, S.A.:
Mortgage note, bank, interest
at 4.5% per annum, over the Inflation Rate
Index of Mexico, maturing in 2007,
collateralized by real property.
Accrued interest at March 31, 1996
amounts to $22,542 $461,988
Note payable, bank, interest at
the Average bank deposit rate
(5.2%) per annum with principal
reductions commencing during 1998 and
maturing in 2007. Accrued interest at
March 31, 1996 amounts to $5,368 26,880
--------
$488,868
========
</TABLE>
Maturities of mortgages and notes payable, subsequent to March 31, 1996
are as follows:
<TABLE>
Twelve Months
Ended
March 31, Amount
------------- ----------
<S> <C>
1997 $ 26,880
1998 46,199
1999 46,199
2000 46,199
2001 46,199
2002 to 2007 230,995
2008 thereafter 46,197
--------
$488,868
========
</TABLE>
4. ACCRUED INTEREST ON MORTGAGES AND
NOTES PAYABLE:
<TABLE>
<S> <C>
Bancomer, S.A. $ 27,910
========
</TABLE>
F-113
<PAGE> 155
GONZALEZ MACIN Y CIA.
______________________________________________________________________________
Participating Associates
Hacienda de Franco
Mexico City, Mexico
We have reviewed the accompanying balance sheet of Hacienda de Franco,
Asociacion en Participacion, a Mexican Participating Association (an Association
in the development stage) as of June 30, 1996 in accordance with Statements on
Standards for Accounting and Review Services issued by the American Institute of
Certified Public Accountants. As described in Note 1 of Notes to financial
statement, the accompanying financial statement has been prepared on the basis
of accounting principles generally accepted in the United States, expressed in
United States dollars. All information included in these financial statements
is the representation of the management of Hacienda de Franco, Asociacion en
Participacion.
A review consists principally of inquires of the Associations' personnel and
analytical procedures applied to financial data. It is substantially less in
scope than an audit in accordance with generally accepted auditing standards,
the objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the accompanying financial statement in order for it to be in
conformity with generally accepted accounting principles.
/s/ C.P. GUILLERMO GONZALEZ MACIN
Mexico, D.F.
August 5, 1996
RIO EBRO NO. 45 COLONIA CUAUHTEMOC DELEGACION CUAUHTEMOC C.P. 06500
TEL. (915) 525-31-34
F-114
<PAGE> 156
HACIENDA DE FRANCO, ASOCIACION EN PARTICIPACION
(A MEXICAN PARTICIPATING ASSOCIATION)
(AN ASSOCIATION IN THE DEVELOPMENT STAGE)
BALANCE SHEET - JUNE 30, 1996
ASSETS
<TABLE>
<S> <C>
Properties under development $5,090,119
==========
LIABILITIES AND ASSOCIATES' EQUITY
Liabilities:
Mortgages and notes payable, financial and $ 483,618
governmental institutions
Accrued interest on mortgages and notes payable 27,609
----------
511,227
----------
Associates' equity:
General Associates 3,714,856
Limited Associate 864,036
----------
4,578,892
----------
$5,090,119
==========
</TABLE>
Read the accompanying notes to financial statement, which are
an integral part of this financial statement.
F-115
<PAGE> 157
HACIENDA DE FRANCO, ASOCIACION EN PARTICIPACION
(A MEXICAN PARTICIPATING ASSOCIATION)
(AN ASSOCIATION IN THE DEVELOPMENT STAGE)
NOTES TO FINANCIAL STATEMENT
FROM INCEPTION (JANUARY 10, 1996) TO JUNE 30, 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
ORGANIZATION AND BUSINESS:
Hacienda de Franco, Asociacion en Participacion (the Association) was
formed on January 10, 1996 pursuant to the laws of Mexico. Asociacion
en Participacion (Participating Association) is similar to a limited
partnership. The Association will remain in existence until 2026,
unless termination is accelerated in accordance with the agreement. The
Association has selected a year end of December 31. The Association
will develop real property located in Mexico into commercial and resort
hotel lodging, timeshare interests and ancillary real estate services.
From inception to date, the Association is considered as being in the
development stage. During this period, the entity has been devoted
primarily to raising capital, securing debt financing and negotiating
with lenders. The initial asset acquisitions by the Partnership,
through a contribution by the Limited Associates, occurred in February,
1996.
The shareholder of the General Associate, Nueva Tierra, S.A. de C.V.
(Nueva Tierra) has entered into an agreement to sell a controlling
interest in the General Associate to International Realty Group, Inc.
Under the terms of the agreement, the General Associate will receive
shares of stock valued at $.782 per share for its investment. In
management's opinion, the Association will no longer be in the
development stage as it will have the ability to secure the necessary
financing to complete the development of its properties. The
accompanying balance sheet has been prepared on the going concern basis.
Under the terms of the Agreement, real property, subject to liabilities,
was contributed to the Association by the Limited Associates. The
General and Limited Associates received full credit for the fair market
value of the properties based upon independent appraisals performed in
1996 by Ingeniero Sergio H. Parra - R. As consideration for the General
Associate's (Nueva Tierra) ability to develop, market, finance and
operate the property, the Limited Associates agreed to share the profits
and losses of the Association based upon certain ratios on a per project
basis. The Limited Associates further agreed to allocate a certain
portion of their capital to the capital account of the General
Associate.
The Limited Associates contributed a project with land and buildings
located in Silao, Guanajuato. The project is known as Ex-Hacienda de
Franco which consists of 236 acres of land. Under the terms of the
Agreement, the profit and loss ratio for this project will be 81.13% to
the General Associate and 18.87% to the Limited Associates.
F-116
<PAGE> 158
HACIENDA DE FRANCO, ASOCIACION EN PARTICIPACION
(A MEXICAN PARTICIPATING ASSOCIATION)
(AN ASSOCIATION IN THE DEVELOPMENT STAGE)
NOTES TO FINANCIAL STATEMENT (CONTINUED)
FROM INCEPTION (JANUARY 10, 1996) TO JUNE 30, 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
ORGANIZATION AND BUSINESS (CONTINUED):
A summary of the purchase allocation is as follows:
<TABLE>
<S> <C>
Property
---------------------------------------------- Acquisition
Location Description Cost
-------------- ------------------------ -----------
Silao, Real property known as
Guanajuato Ex-Hacienda de Franco $5,090,119
Less debt assumed by the Association 511,227
----------
4,578,892
Less special allocation of Limited Associates
equity transferred to the General Associate in
accordance with the terms of the Agreement 3,714,856
----------
Limited Associates capital contribution $ 864,036
==========
</TABLE>
The difference between total asset value between March 31, 1996 to June
30, 1996 is a result of the change in foreign currency translation
adjustment from NP$7.5000 to NP$7.5814 between periods, respectively.
The cumulative translation adjustment of $55,244 decreases total
liabilities by $5,551 and Associates' equity $49,693.
BASIS OF ACCOUNTING:
The Association prepares its financial statements in accordance with
generally accepted accounting principles in the United States,
expressed in United States dollars. This basis of accounting involves
the application of accrual accounting; consequently, revenues and gains
are recognized when earned, and expenses and losses are recognized when
incurred. Financial statement items are recorded at historical cost
and may not necessarily represent current values.
MANAGEMENT ESTIMATES:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements. Actual results could differ from
those estimates.
F-117
<PAGE> 159
HACIENDA DE FRANCO, ASOCIACION EN PARTICIPACION
(A MEXICAN PARTICIPATING ASSOCIATION)
(AN ASSOCIATION IN THE DEVELOPMENT STAGE)
NOTES TO FINANCIAL STATEMENT (CONTINUED)
FROM INCEPTION (JANUARY 10, 1996) TO JUNE 30, 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
FOREIGN CURRENCY TRANSLATION:
Adjustments for currency exchange rate changes are excluded from net
income for those fluctuations that do not impact cash flow. Local
currency is generally considered the functional currency outside the
United States. All assets and liabilities are translated into United
States dollars at period-end exchange rates. Income and expense items
are translated at average rates of exchange prevailing during the year.
The Mexican exchange rate used for the current period was NP$7.5814,
as obtained from the Diario Official de la Federacion. Temporary gains
and losses resulting from translation, if material, are reflected as
currency translation adjustments in partners' equity. Permanent
adjustments would be reflected in the statements of operations, when
appropriate.
PROPERTIES UNDER DEVELOPMENT:
Properties under development consist of land and buildings which are
stated at acquisition cost to the Association, including construction
period interest.
INCOME TAXES:
No provision for income taxes have been made as the Associates will
include their pro-rata share of the income or loss of the Association
in their tax returns.
2. PROPERTIES UNDER DEVELOPMENT:
<TABLE>
<S> <C>
Land $4,629,065
Buildings 413,832
Equipment 47,220
----------
$5,090,117
==========
</TABLE>
Substantially all land, building and equipment held for development is
collateralized to mortgages and notes payable, financial and governmental
institutions.
Land under development is land acquired under trust rights. Trust rights
gives the holder exclusive use and ownership of the property. The rights
are valid for thirty (30) years and are renewable each thirty (30) years
at no cost. Trust rights can be used to collateralized debt or be
hypothecated in any form.
F-118
<PAGE> 160
HACIENDA DE FRANCO, ASOCIACION EN PARTICIPACION
(A MEXICAN PARTICIPATING ASSOCIATION)
(AN ASSOCIATION IN THE DEVELOPMENT STAGE)
NOTES TO FINANCIAL STATEMENT (CONTINUED)
FROM INCEPTION (JANUARY 10, 1996) TO JUNE 30, 1996
3. MORTGAGES AND NOTES PAYABLE, FINANCIAL AND GOVERNMENTAL INSTITUTIONS:
<TABLE>
<S> <C>
BANCOMER, S.A.:
Mortgage note, bank, interest
at 4.5% per annum, over the Inflation Rate
Index of Mexico, maturing in 2007,
collateralized by real property.
Accrued interest at June 30, 1996
amounts to $22,299 $457,027
Note payable, bank, interest at the
Average bank deposit rate (5.2%)
per annum with principal reductions
commencing during 1998 and maturing
in 2007. Accrued interest at
June 30, 1996 amounts to $5,310 26,591
--------
$483,618
========
</TABLE>
Maturities of mortgages and notes payable, subsequent to June 30, 1996
are as follows:
<TABLE>
<CAPTION>
Twelve Months
Ended
June 30, Amount
------------- ---------
<S> <C>
1997 $ 26,500
1998 45,700
1999 45,700
2000 45,700
2001 45,700
2002 to 2007 228,618
2008 thereafter 45,700
--------
$483,618
========
</TABLE>
4. ACCRUED INTEREST ON MORTGAGES AND
NOTES PAYABLE:
<TABLE>
<S> <C>
Bancomer, S.A. $ 27,609
========
</TABLE>
F-119
<PAGE> 161
GONZALEZ MACIN Y CIA.
______________________________________________________________________________
Participating Associates
Villas del Carbon
Mexico City, Mexico
We have audited the accompanying balance sheet of Villas del Carbon, Asociacion
en Participacion, a Mexican Participating Association (an Association in the
development stage) as of March 31, 1996. As described in Note 1 of Notes to
financial statement, the accompanying balance sheet has been prepared on the
basis of accounting principles generally accepted in the United States,
expressed in United States dollars. This financial statement is the
responsibility of the Association's management. Our responsibility is to
express an opinion on this financial statement based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the balance sheet is free of material misstatements. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the balance sheet. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall balance sheet presentation. We believe that our audit
of the balance sheet provides a reasonable basis for our opinion.
In our opinion, the balance sheet referred to above presents fairly, in all
material respects, the financial position of Villas del Carbon, Asociacion en
Participacion, a Mexican Participating Association, as of March 31, 1996, in
conformity with generally accepted accounting principles.
We direct your attention to Note 1 of Notes to financial statement which
discusses development stage.
/s/ C.P. GUILLERMO GONZALEZ MACIN
Mexico, D.F.
June 18, 1996
RIO EBRO NO. 45 COLONIA CUAUHTEMOC DELEGACION CUAUHTEMOC C.P. 06500
TEL. (915) 525-31-34
F-120
<PAGE> 162
VILLAS DEL CARBON, ASOCIACION EN PARTICIPACION
(A MEXICAN PARTICIPATING ASSOCIATION)
(AN ASSOCIATION IN THE DEVELOPMENT STAGE)
BALANCE SHEET - MARCH 31, 1996
ASSETS
<TABLE>
<S> <C>
Land held for investment $1,241,205
==========
ASSOCIATES' EQUITY
Associates' equity:
General Associate $ 981,545
Limited Associates 259,660
----------
$1,241,205
==========
</TABLE>
Read the accompanying notes to financial statement, which are
an integral part of this financial statement.
F-121
<PAGE> 163
VILLAS DEL CARBON, ASOCIACION EN PARTICIPACION
(A MEXICAN PARTICIPATING ASSOCIATION)
(AN ASSOCIATION IN THE DEVELOPMENT STAGE)
NOTES TO FINANCIAL STATEMENT
FROM INCEPTION (JANUARY 19, 1996) TO MARCH 31, 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
ORGANIZATION AND BUSINESS:
Villas del Carbon, Asociacion en Participacion (the Association) was
formed on January 19, 1996 pursuant to the laws of Mexico. Asociacion
en Participacion (Participating Association) is similar to a limited
partnership. The Association will remain in existence until 2026,
unless termination is accelerated in accordance with the agreement. The
Association has selected a year end of December 31. The Association
will develop real property located in Mexico into commercial and resort
hotel lodging, timeshare interests and ancillary real estate services.
From inception to date, the Association is considered as being in the
development stage. During this period, the entity has been devoted
primarily to raising capital, securing debt financing and negotiating
with lenders. The initial asset acquisition by the Association, through
a contribution by the Limited Associates, occurred in February, 1996.
The shareholder of the General Associate, Nueva Tierra, S.A. de C.V.
(Nueva Tierra) has entered into an agreement to sell a controlling
interest in the General Associate to International Realty Group, Inc.
Under the terms of the agreement, the General Associate will receive
shares of stock valued at $.782 per share for its investment. In
management's opinion, the Association will no longer be in the
development stage as it will have the ability to secure the necessary
financing to complete the development of its properties. The
accompanying balance sheet has been prepared on the going concern basis.
Under the terms of the Agreement, real property was contributed to the
Association by the Limited Associates. The General and Limited
Associates received full credit for the fair market value of the
properties based upon independent appraisals performed in 1996 by
Ingeniero Sergio H. Parra - R. As consideration for the General
Associate's (Nueva Tierra) ability to develop, market, finance and
operate the property, the Limited Associates agreed to share the profits
and losses of the Association based upon certain ratios on a per project
basis. The Limited Associates further agreed to allocate a certain
portion of their capital to the capital account of the General
Associate.
The Limited Associates contributed land located in Villas del Carbon,
Jilotepec. The project is known as Las Aranas which consists of 24
acres of land. Under the terms of the Agreement, the profit and loss
ratio for this project will be 79.08% to the General Associate and
20.92% to the Limited Associates.
F-122
<PAGE> 164
VILLAS DEL CARBON, ASOCIACION EN PARTICIPACION
(A MEXICAN PARTICIPATING ASSOCIATION)
(AN ASSOCIATION IN THE DEVELOPMENT STAGE)
NOTES TO FINANCIAL STATEMENT (CONTINUED)
FROM INCEPTION (JANUARY 19, 1996) TO MARCH 31, 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
ORGANIZATION AND BUSINESS (CONTINUED):
A summary of the purchase allocation is as follows:
<TABLE>
<CAPTION>
Property
---------------------------------------------------- Acquisition
Location Description Cost
-------------- ------------------------ -------------
<S> <C> <C>
Villas del Carbon Real property known as
Jilotepec Las Aranas $1,241,205
Less special allocation of Limited Associates
equity transferred to the General Associate in
accordance with the terms of the Agreement 981,545
----------
Limited Assoicates capital contribution $ 259,660
==========
</TABLE>
BASIS OF ACCOUNTING:
The Association prepares its financial statements in accordance with
generally accepted accounting principles in the United States,
expressed in United States dollars. This basis of accounting involves
the application of accrual accounting; consequently, revenues and gains
are recognized when earned, and expenses and losses are recognized when
incurred. Financial statement items are recorded at historical cost
and may not necessarily represent current values.
MANAGEMENT ESTIMATES:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements. Actual results could differ from
those estimates.
F-123
<PAGE> 165
VILLAS DEL CARBON, ASOCIACION EN PARTICIPACION
(A MEXICAN PARTICIPATING ASSOCIATION)
(AN ASSOCIATION IN THE DEVELOPMENT STAGE)
NOTES TO FINANCIAL STATEMENT (CONTINUED)
FROM INCEPTION (JANUARY 19, 1996) TO MARCH 31, 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
FOREIGN CURRENCY TRANSLATION:
Adjustments for currency exchange rate changes are excluded from net
income for those fluctuations that do not impact cash flow. Local
currency is generally considered the functional currency outside the
United States. All assets and liabilities are translated into United
States dollars at period-end exchange rates. Income and expense items
are translated at average rates of exchange prevailing during the year.
The Mexican exchange rate used for the current period was NP$7.5000,
as obtained from the Diario Official de la Federacion. Temporary gains
and losses resulting from translation, if material, are reflected as
currency translation adjustments in partners' equity. Permanent
adjustments would be reflected in the statements of operations, when
appropriate.
LAND:
Land is stated at acquisition cost to the Association.
INCOME TAXES:
No provision for income taxes have been made as the Associates will
include their pro-rata share of the income or loss of the Association
in their tax returns.
2. LAND HELD FOR INVESTMENT:
Land held for investment was land acquired under trust rights. Trust
rights gives the holder exclusive use and ownership of the property.
The rights are valid for thirty (30) years and are renewable each thirty
(30) years at no cost. Trust rights can be used to collateralize debt
or be hypothecated in any form.
Land is held for investment until such time as the property is sold or
the development plan of the property is implemented, which would
reclassify the property to land under development.
F-124
<PAGE> 166
GONZALEZ MACIN Y CIA.
________________________________________________________________________________
Participating Associates
Villas del Carbon
Mexico City, Mexico
We have reviewed the accompanying balance sheet of Villas del Carbon, Asociacion
en Participacion, a Mexican Participating Association (an Association in the
development stage) as of June 30, 1996 in accordance with Statements on
Standards for Accounting and Review Services issued by the American Institute of
Certified Public Accountants. As described in Note 1 of Notes to financial
statement, the accompanying financial statement has been prepared on the basis
of accounting principles generally accepted in the United States, expressed in
United States dollars. All information included in these financial statements
is the representation of the management of Villas del Carbon, Asociacion en
Participacion.
A review consists principally of inquires of the Associations' personnel and
analytical procedures applied to financial data. It is substantially less in
scope than an audit in accordance with generally accepted auditing standards,
the objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the accompanying financial statement in order for it to be in
conformity with generally accepted accounting principles.
/S/ C.P. GUILLERMO GONZALEZ MACIN
Mexico, D.F.
August 5, 1996
RIO EBRO NO. 45 COLONIA CUAUHTEMOC DELEGACION CUAUHTEMOC C.P. 06500
TEL. (915) 525-31-34
F-125
<PAGE> 167
VILLAS DEL CARBON, ASOCIACION EN PARTICIPACION
(A MEXICAN PARTICIPATING ASSOCIATION)
(AN ASSOCIATION IN THE DEVELOPMENT STAGE)
BALANCE SHEET - JUNE 30, 1996
ASSETS
<TABLE>
<S> <C>
Land held for investment $1,227,878
==========
ASSOCIATES' EQUITY
Associates' equity:
General Associate $ 971,006
Limited Associates 256,872
----------
$1,227,878
==========
</TABLE>
Read the accompanying notes to financial statement, which are
an integral part of this financial statement.
F-126
<PAGE> 168
VILLAS DEL CARBON, ASOCIACION EN PARTICIPACION
(A MEXICAN PARTICIPATING ASSOCIATION)
(AN ASSOCIATION IN THE DEVELOPMENT STAGE)
NOTES TO FINANCIAL STATEMENT
FROM INCEPTION (JANUARY 19, 1996) TO JUNE 30, 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
ORGANIZATION AND BUSINESS:
Villas del Carbon, Asociacion en Participacion (the Association) was
formed on January 19, 1996 pursuant to the laws of Mexico. Asociacion
en Participacion (Participating Association) is similar to a limited
partnership. The Association will remain in existence until 2026,
unless termination is accelerated in accordance with the agreement. The
Association has selected a year end of December 31. The Association
will develop real property located in Mexico into commercial and resort
hotel lodging, timeshare interests and ancillary real estate services.
From inception to date, the Association is considered as being in the
development stage. During this period, the entity has been devoted
primarily to raising capital, securing debt financing and negotiating
with lenders. The initial asset acquisition by the Association, through
a contribution by the Limited Associates, occurred in February, 1996.
The shareholder of the General Associate, Nueva Tierra, S.A. de C.V.
(Nueva Tierra) has entered into an agreement to sell a controlling
interest in the General Associate to International Realty Group, Inc.
Under the terms of the agreement, the General Associate will receive
shares of stock valued at $.782 per share for its investment. In
management's opinion, the Association will no longer be in the
development stage as it will have the ability to secure the necessary
financing to complete the development of its properties. The
accompanying balance sheet has been prepared on the going concern basis.
Under the terms of the Agreement, real property was contributed to the
Association by the Limited Associates. The General and Limited
Associates received full credit for the fair market value of the
properties based upon independent appraisals performed in 1996 by
Ingeniero Sergio H. Parra - R. As consideration for the General
Associate's (Nueva Tierra) ability to develop, market, finance and
operate the property, the Limited Associates agreed to share the profits
and losses of the Association based upon certain ratios on a per project
basis. The Limited Associates further agreed to allocate a certain
portion of their capital to the capital account of the General
Associate.
The Limited Associates contributed land located in Villas del Carbon,
Jilotepec. The project is known as Las Aranas which consists of 24
acres of land. Under the terms of the Agreement, the profit and loss
ratio for this project will be 79.08% to the General Associate and
20.92% to the Limited Associates.
F-127
<PAGE> 169
VILLAS DEL CARBON, ASOCIACION EN PARTICIPACION
(A MEXICAN PARTICIPATING ASSOCIATION)
(AN ASSOCIATION IN THE DEVELOPMENT STAGE)
NOTES TO FINANCIAL STATEMENT (CONTINUED)
FROM INCEPTION (JANUARY 19, 1996) TO JUNE 30, 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
ORGANIZATION AND BUSINESS (CONTINUED):
A summary of the purchase allocation is as follows:
<TABLE>
<CAPTION>
Property
------------------------------------------------- Acquisition
Location Description Cost
-------------- ------------------------ ----------
<S> <C> <C>
Villas del Carbon Real property known as
Jilotepec Las Aranas $1,227,878
Less special allocation of Limited Associates
equity transferred to the General Associate in
accordance with the terms of the Agreement 971,006
----------
Limited Associates capital contribution $ 256,872
==========
</TABLE>
The difference between total asset value between March 31, 1996 to June
30, 1996 is a result of the change in foreign currency translation
adjustment from NP$7.5000 to NP$7.5814 between periods, respectively.
The cumulative translation adjustment of $13,327 respresents a decrease
in total assets and partners' equity, respectively.
BASIS OF ACCOUNTING:
The Association prepares its financial statements in accordance with
generally accepted accounting principles in the United States, expressed
in United States dollars. This basis of accounting involves the
application of accrual accounting; consequently, revenues and gains are
recognized when earned, and expenses and losses are recognized when
incurred. Financial statement items are recorded at historical cost and
may not necessarily represent current values.
MANAGEMENT ESTIMATES:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements. Actual results could differ from
those estimates.
F-128
<PAGE> 170
VILLAS DEL CARBON, ASOCIACION EN PARTICIPACION
(A MEXICAN PARTICIPATING ASSOCIATION)
(AN ASSOCIATION IN THE DEVELOPMENT STAGE)
NOTES TO FINANCIAL STATEMENT (CONTINUED)
FROM INCEPTION (JANUARY 19, 1996) TO JUNE 30, 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
FOREIGN CURRENCY TRANSLATION:
Adjustments for currency exchange rate changes are excluded from net
income for those fluctuations that do not impact cash flow. Local
currency is generally considered the functional currency outside the
United States. All assets and liabilities are translated into United
States dollars at period-end exchange rates. Income and expense items
are translated at average rates of exchange prevailing during the year.
The Mexican exchange rate used for the current period was NP$7.5814, as
obtained from the Diario Official de la Federacion. Temporary gains and
losses resulting from translation, if material, are reflected as
currency translation adjustments in partners' equity. Permanent
adjustments would be reflected in the statements of operations, when
appropriate.
LAND:
Land is stated at acquisition cost to the Association.
INCOME TAXES:
No provision for income taxes have been made as the Associates will
include their pro-rata share of the income or loss of the Association
in their tax returns.
2. LAND HELD FOR INVESTMENT:
Land held for investment was land acquired under trust rights. Trust
rights gives the holder exclusive use and ownership of the property.
The rights are valid for thirty (30) years and are renewable each thirty
(30) years at no cost. Trust rights can be used to collateralize debt
or be hypothecated in any form.
Land is held for investment until such time as the property is sold or
the development plan of the property is implemented, which would
reclassify the property to land under development.
F-129
<PAGE> 171
APPENDIX "A"
AMENDMENT TO AGREEMENT
This Amendment to Agreement, ("Amendment"), dated this 31ST day of
July, 1996, modifies, supplements and amends the February 9, 1996 Agreement
("Agreement") between INTERNATIONAL REALTY GROUP, INC., a Delaware corporation
("IRG") and HEMISPHERE DEVELOPMENTS, LIMITED, an Isle of Man corporation
("Hemisphere").
WHEREAS, IRG and Hemisphere have entered into an agreement whereby
Hemisphere shall sell, transfer and convey stock in a company that owns certain
assets all as more specifically set forth and described in the Agreement and
the Amendment and, in consideration for such sale, transfer and conveyance, IRG
shall purchase said company and issue to Hemisphere, IRG common stock as more
specifically set forth and described in the Agreement.
WHEREAS, IRG and Hemisphere desire to further amend the Agreement so
as to provide for the immediate consummation and closing of the transaction as
more particularly set forth in this Amendment.
NOW THEREFORE, in consideration of the covenants and agreements
hereinafter set forth, IRG and Hemisphere agree to amend the Agreement as
follows:
1. RECITALS:
The Recitals hereinabove contained are true and correct and are made a
part hereof.
2. NUEVA TIERRA PARTNERSHIPS:
Nueva Tierra S.A. de C.V., is a Mexico corporation, ("Nueva Tierra")
of which DSC S.A. de C.V. ("DSC") owns 30% of the issued and outstanding stock,
and of which Newland Corporation, a Marshall Islands corporation ("Newland"),
holds the remaining 70% ownership interest. Newland is owned 100% by
Hemisphere. Hemisphere and IRG have agreed that IRG shall purchase, in
exchange for common stock of IRG as stated below, Hemisphere's ownership of
Newland and its 70% ownership interest in Nueva Tierra on the terms and
conditions set forth herein.
The table attached as Exhibit "A", summarizes Nueva Tierra's General
Partnership Interests, Limited Partner Interests, DSC's Ownership Interest,
Book Value Debt, Property Values, and Net Transfer Values as of June 30, 1996.
1
<PAGE> 172
is attached hereto as Exhibit "C") in the amount of $32,120,440. The balance
of the Common Stock, 41,074,732 shares, as stipulated in the Convertible Note,
shall be immediately delivered to Hemisphere 21 days after the issuance of the
Information Statement to IRG shareholders and the increase in authorized
capital.
Prior to, or at Closing, IRG shall receive from Hemisphere a certified
English translation of the following:
1) Updated third party appraisals of the subject Properties
listed on Exhibit A;
2) Documentation evidencing the validity of the existence of the
Limited Partnerships listed on
Exhibit A (including the Limited Partnership Agreements);
3) Documentation evidencing the validity of the existence of
Nueva Tierra S.A. de C.V. and Newland Corporation (including
Charter and By-Laws of both companies);
4) Documentation evidencing the Companies' ownership interest in
the Partnerships listed on Exhibit A;
5) Appropriate corporate resolutions evidencing the authority of
all signatories;
6) Documentation evidencing the ownership interest of the
Partnerships in the subject Properties;
7) Original stock certificates duly endorsed to IRG;
8) An Opinion Letter from Hemisphere's Mexican counsel opining
as to (i) the validity of the Limited Partnerships and
Corporations, (ii) the validity of the equity interest held by
the Corporations in the Limited Partnerships, (iii) the
authority of the signatories, (iv) the validity of the Charter
and By-Laws of the Corporations, (v) the ownership interest in
the subject Properties, and (vi) the validity of the transfer
of stock of the Companies to IRG.
9) A statement from Hemisphere's Mexican accountants verifying
that no adverse, material changes in Hemisphere's financial
condition have occurred from the date of Hemisphere's
financial statements to the date of the Closing.
Prior to, or at Closing, Hemisphere shall receive from IRG the
following:
1) Appropriate corporate resolutions authorizing the transfer of
stock;
2) A copy of the original request to American Stock Transfer for
the issuance of the IRG
stock certificates;
3) Documentation evidencing the authority of the signatories;
4) Documentation evidencing the validity of the Charter and
By-Laws of the Companies (attaching same as exhibits); and
5) Documentation evidencing the validity of the transfer of IRG's
stock to Hemisphere.
The IRG stock issued to Hemisphere pursuant to this transaction shall
be issued to Hemisphere pursuant to SEC Regulation S since Hemisphere is a
company outside of the United States and no directed selling efforts have been
made in the United States by IRG for the sale of the IRG stock to be issued to
Hemisphere.
3
<PAGE> 173
5. INFORMATION STATEMENT:
After Closing, IRG will amend its Certificate of Incorporation to
increase the number of authorized shares of Common Stock from its current level
of 10,000,000 shares to 450,000,000 shares. Jack Birnholz and Richard
Bradbury, who jointly control more than a majority of the issued and
outstanding Common Stock, will execute a written Stockholder Consent approving
such amendment to the Certificate of Incorporation.
In accordance with regulations of the Securities and Exchange
Commission ("SEC"), IRG must file an Information Statement to the SEC. Among
other things, this Information Statement describes the amendment to the
Certificate of Incorporation to be approved by the written consent of two
stockholders as well as the transaction contemplated in this Amendment,
including a description of the properties to be acquired by IRG. Immediately
after Closing, IRG shall diligently prepare the Information Statement for
review by the SEC. After the staff of the SEC has completed its review of the
Information Statement, IRG will mail a copy of the Information Statement to
each stockholder. Twenty-one days after the Information Statement is presented
to its shareholders, and as soon as practical thereafter, IRG shall amend its
Certificate of Incorporation increasing the authorized shares and the
Convertible Notes referenced in this Agreement will be converted to Common
Stock of IRG in the amounts provided for in each note, with DSC and Hemisphere.
8. GOVERNING LAW
This Agreement shall be governed by the laws of the State of Delaware,
U.S.A. and the parties hereby submit to the jurisdiction thereof.
9. NOTICES TO HEMISPHERE OR IRG
Any notices sent to Hemisphere relating to this Agreement shall be
sent by facsimile and overnight delivery addressed as follows:
Mme. Monique Roggero-Ciana
Hemisphere Developments, Limited
Atlantic House
4-8 Circular Road
Douglas, Isle of Man
Fax Number: 44-22-300-1711
4
<PAGE> 174
Any notice sent to IRG relating to this Agreement shall be sent by
facsimile and overnight delivery addressed as follows:
Mr. Richard M. Bradbury, President
International Realty Group, Inc.
111 Northwest 183rd Street
Miami, Florida 33169
Telephone: (305) 944-8811
Fax Number: (305) 651-3394
Any notice sent to either Hemisphere or IRG relating to this Agreement
shall be sent by facsimile and overnight delivery addressed as follows:
Mr. Lee C. Schmachtenberg, Esq.
Schmachtenberg & Associates
1533 Sunset Drive, Suite 201
Miami, Florida 33143
Telephone: (305) 666-4676
Fax Number: (305) 666-4780
10. CONFIDENTIALITY
Each party shall keep information disclosed to it by the other party
relating to its business and financial affairs strictly confidential, except
where disclosure is required by law or the information is public knowledge.
Each party shall ensure that its obligation of confidence is observed by its
employees and professional advisors and/or representatives.
11. HEADINGS
The headings in this Amendment are for reference purposes only and are
not intended to have any meaning or substantive effect.
12. TIME IS OF THE ESSENCE
This Amendment establishes the terms and conditions of the
contemplated transaction. The parties hereto agree that time is of the essence
and that the parties shall use all diligence necessary to expeditiously
consummate this transaction. This Amendment may be executed in counterparts,
and facsimile shall be deemed to be originals.
5
<PAGE> 175
13. CONFLICT IN TERMS
Except as herein modified, all of the terms, provisions and conditions
of the Agreement shall be unmodified and shall remain in full force and effect.
IN WITNESS WHEREOF, the parties have executed this Amendment as of the
date first above written.
HEMISPHERE DEVELOPMENTS, LIMITED
By: / S / Monique Roggero-Ciana
--------------------------------------
Monique Roggero-Ciana
INTERNATIONAL REALTY GROUP, INC.
By: / S / Richard M. Bradbury By:/ S / Jack Birnholz
---------------------------------- -------------------------------
Richard M. Bradbury Jack Birnholz
President, Chief Financial Officer Chairman of the Board
and as Shareholder and as Shareholder
6
<PAGE> 176
EXHIBIT A
The Table below summarizes Nueva Tierra's General Partnership Interests,
Limited Partner Interests, Book Value Debt, Property Values, Ownership
Interests and Net Transfer Values as of June 30, 1996.
<TABLE>
PROPERTIES HELD
FOR INV.
<S> <C> <C> <C> <C> <C>
Villa Del Carbon L.P. 79.08% Villa Del Carbon N$9,309,040 $1,227,878 256,872
Hacienda Del Franco L.P. 81.13% Hacienda Del 38,590,230 5,090,119
Less Book Value Debt Franco -511,228
Transfer Value $4,578,891 864,037
Barra Del Tordo L.P. 79.82% Barra Del Tordo 76,950,740 10,149,806
Less Book Value Debt -3,490,312
Transfer Value $6,659,494 1,343,886
Bahia de Cortes L.P. Bahia de Cortes 353,920,000 $46,682,671 10,223,505
Total Transfer Value $59,148,934 12,688,300
Less Ltd. Ptner. Interest 12,688,300
Net Transfer Value IRG Stock @ .782 59,412,575 shs $46,460,634
(NTV)
DSC 30% IRG Stock @ .782 17,823,773 shs $13,938,191
HEMISPHERE 70% IRG Stock @ .782 41,588,802 shs $32,522,443
</TABLE>
(1) Peso Exchange Rate 7.5814
<PAGE> 177
APPENDIX "B"
SECOND AMENDMENT TO AGREEMENT
This Second Amendment to Agreement, ("Second Amendment"), dated this
31ST day of July, 1996, modifies, supplements and amends the October 6, 1995
Agreement ("Agreement") and the February 7, 1996 First Amendment to Agreement
("First Amendment") . Hereinafter, the Agreement, First Amendment and Second
Amendment shall be referred to as the "DSC Agreement" between INTERNATIONAL
REALTY GROUP, INC., a Delaware corporation ("IRG") and DSC, S.A. DE C.V. a
Mexico corporation ("DSC").
WHEREAS, IRG and DSC have entered into an agreement whereby DSC shall
sell, transfer and convey stock in companies that own certain assets all as
more specifically set forth and described in the Agreement and the First
Amendment and, in consideration for such sale, transfer and conveyance, IRG
shall purchase said companies and issue to DSC, IRG common stock as more
specifically set forth and described in the DSC Agreement.
WHEREAS, the assets of Tropical Club Ixtapa S.A. de C.V., Impulsora
Turistica de Occidente, S.A. de C.V., Tropical Club Isla Mujeres S.A. de C.V.,
Promocaribe, S.A. de C.V., DSC Casa Blanca, S.A. de C.V., and Pez Maya, S.A. de
C.V. are the subject of certain legal proceedings which prevent the
contemplated sale, transfer and conveyance. At this time, neither IRG nor DSC
has an understanding or agreement with any Banks or debt holders for debt
restructuring or settlement of any of the above-referenced companies' debt
which is the subject of the proceedings. IRG and DSC cannot ascertain at the
present time whether it is probable or possible that any agreement can be
reached with any of the banks or debt holders for debt settlement or debt
restructuring of the above-referenced companies and the termination of the
legal proceedings.
WHEREAS, IRG has requested and DSC has agreed to the sale, transfer
and conveyance of the stock in Cluster Inmobiliaria de Ixtapa S.A. de C.V.,
Malecon Cancun S.A. de C.V., Corporacion Inmobiliaria del Norte, S.A. de C.V.,
Centro de Promociones Guerrero S.A. de C.V. and its 30% ownership interest in
Nueva Tierra S.A. de C.V.
WHEREAS, IRG and DSC desire to further amend the Agreement and First
Amendment so as to provide for the immediate consummation and closing of the
transaction as more particularly set forth in this Second Amendment.
NOW THEREFORE, in consideration of the covenants and agreements
hereinafter set forth, IRG and DSC agree to amend the DSC Agreement as follows:
1. RECITALS:
The Recitals hereinabove contained are true and correct and are made a
part hereof.
1
<PAGE> 178
2. NUEVA TIERRA PARTNERSHIPS:
Nueva Tierra, S.A. de C.V., is a Mexico corporation, ("Nueva Tierra")
of which DSC owns 30% of the issued and outstanding stock, and of which Newland
Corporation, a Marshall Islands corporation ("Newland"), holds the remaining
70% ownership interest. Newland is owned 100% by Hemisphere Developments
Limited, an Isle of Man corporation, ("Hemisphere"). DSC and IRG have agreed
that IRG shall purchase, in exchange for common stock of IRG as stated below,
DSC's 30% ownership interest in Nueva Tierra on the terms and conditions set
forth herein. IRG and Hemisphere have entered into a separate agreement for
IRG's purchase of Newland from Hemisphere (the "Hemisphere Agreement").
The table attached as Exhibit "A", summarizes Nueva Tierra's General
Partnership Interests, Limited Partner Minority Interests, Book Value Debt,
Property Values, and Net Transfer Values as of June 30, 1996.
3. DSC COMPANIES:
DSC and IRG entered into the Agreement and First Amendment to
acquire certain majority and minority owned companies from DSC. DSC and IRG
have agreed that IRG shall purchase, in exchange for common stock of IRG as
stated below, DSC's 75% interest in Cluster Inmobiliaria de Ixtapa S.A. de
C.V., DSC's 12.3% interest in Malecon Cancun, S.A. de C.V., DSC's 30% interest
in Corporacion Inmobiliaria del Norte, S.A. de C.V., and DSC's 99.9% interest
in Centro de Promociones Guerrero, S.A. de C.V.
The table attached hereto as Exhibit "B", summarizes the DSC
companies being acquired, the Majority / Minority Interests, Book Value Debt,
Property Values and Net Transfer Values as of June 30, 1996.
4. DSC TRANSFER VALUE:
The Majority / Minority Interest, Net Property Values, Book Value Debt
and Net Transfer Value, as shown on Exhibit B, has been adjusted by DSC and
IRG, based upon the unaudited financial statements of the respective companies
as of June 30, 1996, utilizing the Diario Oficial de la Federacion's U.S.
dollar exchange rate, irrespective of when published, which is in effect on the
same date of the DSC Companies' unaudited financial statements.
The value of the DSC Companies and the value of DSC's 30% interest in
Nueva Tierra, as shown in Exhibit B, is collectively referred to herein as the
"DSC Transfer Value." The DSC Transfer Value is an agreed upon value, which is
based upon appraisals previously prepared by third party appraisers less the
Net Book Value Debt and the Majority/Minority equity holdings. The DSC
Transfer Value as of June 30, 1996 is $30,742,321 U.S. Dollars. This is the
sum of $16,804,130 U.S.
2
<PAGE> 179
Dollars for the DSC Companies as provided in Exhibit B and $13, 938,191 U.S.
Dollars for the value of DSC's 30% interest in Nueva Tierra as provided in
Exhibit A.
IRG'S Common Stock has had limited trading activity at prices ranging
between $.75 and $1.00, but not in what is considered to be a liquid or fluid
market; therefore, for purposes of this transaction, IRG and DSC have agreed
that the value of IRG and its subsidiaries is $7,000,000.00 U.S. Dollars.
Based upon the 8,954,187 shares of IRG common stock presently issued, IRG has a
per share value of $.782. This agreed-upon value is based on the value of its
domestic and foreign valuation operations (approximately $1,500,000) and the
market value of the Caye Bokel undeveloped land predicated on discounted
forecasted cash flows, assuming a fully-developed 250 unit hotel/villa
destination resort (approximately $5,500,000). This per share value will change
if the number of shares issued changes before the Closing. IRG will issue to
DSC at Closing, the number of shares of IRG common stock which, when multiplied
by the per share value, equals the DSC Transfer Value. Based upon a DSC
Transfer Value of $30,742,321 U.S. Dollars, as of June 30, 1996, IRG would
issue 39,312,430 shares to DSC.
5. CLOSING
DSC and IRG agree that the transfer of all required documents by and
between DSC and IRG shall constitute the Closing, which shall only occur if
done simultaneously with the closing of the Hemisphere Agreement. The parties
agree to a Closing date on or before 15 days after the execution of this
Second Amendment. In the event any documents required to consummate the
Closing can not be delivered by the Closing date, through no fault of DSC or
IRG using diligent efforts, the parties may mutually agree in writing to
extend the Closing date to such time as said required documents are available.
If the date which falls 15 days after the execution of this Second Amendment
is a weekend or holiday, the Closing date shall occur on the next business day.
DSC and IRG have concluded their due diligence examination of each
other.
It is acknowledged by DSC and IRG that DSC, on December 29, 1995,
reached an agreement with Nacional Financiera, S.N.C. ("NAFIN"), one of the
lenders to the DSC companies, for the restructuring of debt (the "NAFIN Debt
Restructuring"). Pursuant to the NAFIN Debt Restructuring, NAFIN received
monies held in a trust account of Cluster Inmobiliaria de Ixtapa, S.A. de C.V.,
amounting to approximately $15,340,000 U.S. Dollars, and NAFIN will receive IRG
stock valued by DSC and NAFIN at approximately $12,505,000 U.S. Dollars, which,
based upon an IRG per share value of $.782, would amount to 15,991,049 shares.
The IRG stock to be received by NAFIN will be transferred to NAFIN from the IRG
stock to be received by DSC at the Closing.
As provided for herein, IRG is required to issue to DSC and Hemisphere
at Closing, a total of 80,901,236 shares of its Common Stock. As of June
30, 1996, IRG has authorized 10,000,000 shares of Common Stock. IRG will
prepare an Information Statement describing this transaction and the
authorization of an increase in Capital from 10 million to 450 million shares
of Common Stock.
3
<PAGE> 180
Until such time as the increase in Common Stock is authorized, IRG shall issue
at Closing 1,000,000 shares to DSC and Hemisphere for their individual
proportionate share of the Net Transfer Value and prepare and execute
convertible notes (a copy of the proposed Convertible Note is attached hereto
as Exhibit "C") for the balance of the Net Transfer Value. The balance of the
Common Stock, as stipulated in the Convertible Note, shall be immediately
delivered to the respective parties 21 days after the issuance of the
Information Statement and the increase in authorized capital.
Based on the Net Transfer Value of DSC and Hemisphere, the following
shall be issued by IRG:
<TABLE>
<CAPTION>
COMMON STOCK CONVERTIBLE NOTE BALANCE OF
(AT CLOSING) (AT CLOSING) COMMON STOCK
(AT CONVERSION OF NOTE)
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
DSC 485,930 shares $30,362,322 38,826,500 shares
HEMISPHERE 514,070 shares $32,120,440 41,074,732 shares
- ----------------------------------------------------------------------------------------------------------
</TABLE>
Prior to, or at Closing, IRG shall receive from DSC a certified
English translation of the following:
1) Updated third party appraisals of the subject Properties
listed on Exhibits A and B;
2) Documentation evidencing the validity of the existence of the
Limited Partnerships listed on Exhibit A;
3) Documentation evidencing the validity of the existence of
Nueva Tierra, S.A. de C.V. and the Companies listed on
Exhibit B;
4) Appropriate documentation evidencing the authority of all
signatories;
5) Documentation evidencing the Partnerships' and Companies'
ownership interests in the Properties listed on Exhibits A and
B;
6) Documentation evidencing the Companies' ownership interest in
the Partnerships;
6) Appropriate corporate resolutions authorizing the transfer of
stock;
7) Original stock certificates duly endorsed to IRG;
8) An Opinion Letter from DSC's Mexican counsel opining as to (i)
the validity of the corporate status of each of the DSC
companies being acquired, (ii) the authority of the
signatories, (iii) the validity of the Charter and By-Laws of
the companies (attaching same as exhibits), (iv) the ownership
interest of the companies in the Properties, (v) the validity
of the transfer of stock of those companies to IRG, (vi) IRG's
ownership interest in the companies and (vii) the fact that
the Properties are not subject to any liens, loans or
encumbrances.
9) A statement from DSC's Mexican accountants verifying that no
adverse, material changes in DSC's financial condition have
occurred from the date of DSC's financial statements to the
date of the Closing.
4
<PAGE> 181
Prior to, or at Closing, DSC shall receive from IRG the following:
1) Appropriate corporate resolutions authorizing the transfer of
stocks;
2) A copy of the original request to American Stock Transfer for
the issuance of the IRG stock certificates;
3) Documentation evidencing the authority of the signatories;
4) Documentation evidencing the validity of the Charter and
By-Laws of the Companies (attaching same as exhibits);
5) Documentation evidencing the validity of the transfer of IRG's
stock to DSC; and
6) Documentation evidencing the appraised valued of the Caye
Bokel Property.
The IRG stock issued to DSC pursuant to this transaction shall be
issued to DSC pursuant to SEC Regulation S since DSC is a company outside of
the United States and no directed selling efforts have been made in the United
States by IRG for the sale of the IRG stock to be issued to DSC.
DSC has represented to IRG that under the laws of Mexico, each of the
DSC companies must have more than one shareholder. Accordingly, IRG shall take
appropriate corporate action such that in addition to IRG, one of IRG's wholly
owned subsidiaries shall become a shareholder of each of the DSC companies at
the Closing.
6. CHANGE IN IRG BOARD OF DIRECTORS AND OFFICERS AT CLOSING
JOHN DAY, GEOFFREY BELL and JACK BIRNHOLZ shall resign from the IRG
Board of Directors immediately at the Closing, and the remaining Directors,
RICHARD BRADBURY and ALTON HOLLIS shall elect BERNARDO DOMINGUEZ C. to the
Board of Directors of IRG. SHIRLEY BIRNHOLZ shall resign as Secretary of IRG
at the Closing.
7. PROXY AGREEMENT
Simultaneous with the execution of this Second Amendment, Jack
Birnholz and Richard M. Bradbury shall execute a Proxy Agreement, effective at
the Closing, whereby they shall transfer to DSC the only proxy rights to a
sufficient number of shares of stock in IRG to constitute a majority
controlling interest in IRG. Said shares shall be subject to the terms and
conditions of the Proxy Agreement which will remove all voting rights from Jack
Birnholz and Richard Bradbury and vest such voting rights in DSC. A copy of
the Proxy Agreement is attached hereto as Exhibit "D".
8. INFORMATION STATEMENT:
After Closing, IRG will amend its Certificate of Incorporation to
increase the number of authorized shares of Common Stock from its current level
of 10,000,000 shares to 450,000,000 shares. Jack Birnholz and Richard
Bradbury, who jointly control more than a majority of the issued and
outstanding Common Stock, will execute a written Stockholder Consent approving
such amendment to the Certificate of Incorporation.
5
<PAGE> 182
In accordance with regulations of the Securities and Exchange
Commission ("SEC") , IRG must file an Information Statement to the SEC. Among
other things, this Information Statement describes the amendment to the
Certificate of Incorporation to be approved by the written consent of two
stockholders as well as the transaction contemplated in this Second Amendment,
including a description of the properties to be acquired by IRG. Immediately
after Closing, IRG shall diligently prepare the Information Statement for
review by the SEC within fifteen days from the Closing. After the staff of the
SEC has completed its review of the Information Statement, IRG will mail a copy
of the Information Statement to each stockholder. Twenty-one days after the
Information Statement is presented to its shareholders, and as soon as
practical thereafter, IRG shall amend its Certificate of Incorporation
increasing the authorized shares and the Convertible Notes referenced in this
Agreement will be converted to Common Stock of IRG in the amounts provided for
in each note, with DSC and Hemisphere.
9. GOVERNING LAW
This Agreement shall be governed by the laws of the State of Delaware,
U.S.A. and the parties hereby submit to the jurisdiction thereof.
10. NOTICES TO DSC OR IRG
Any notices sent to DSC relating to this Agreement shall be sent by
facsimile and overnight delivery addressed as follows:
Bernardo Dominguez C.
DSC S.A. de C.V.
Monterey 150 Col. Roma Sur, C.P. 06760 Mexico, D.F.
Telephone: 011 52 5 564-8040
Fax Number: 011 52 5 574-1620
Pablo Macedo
DSC S.A. de C.V.
Monterey 150 Col. Roma Sur, C.P. 06760 Mexico, D.F.
Telephone: 011 525 564-8040
Fax Number: 011 525 574-1620
Any notice sent to IRG relating to this Agreement shall be sent by
facsimile and overnight delivery addressed as follows:
Mr. Richard M. Bradbury, President
International Realty Group, Inc.
6
<PAGE> 183
111 Northwest 183rd Street
Miami, Florida 33169
Telephone: (305) 944-8811
Fax Number: (305) 651-3394
Any notice sent to either DSC or IRG relating to this Agreement shall
be sent by facsimile and overnight delivery addressed as follows:
Mr. Lee C. Schmachtenberg, Esq. Information copies sent to:
Schmachtenberg & Associates
1533 Sunset Drive, Suite 201 Mr. Jack Birnholz
Miami, Florida 33143 2221 N.E. 202nd Street
Telephone: (305) 666-4676 North Miami Beach, FL 33180
Fax Number: (305) 666-4780
11. CONFIDENTIALITY
Each party shall keep information disclosed to it by the other party
relating to its business and financial affairs strictly confidential, except
where disclosure is required by law or the information is public knowledge.
Each party shall ensure that its obligation of confidence is observed by its
employees and professional advisors and/or representatives.
12. HEADINGS
The headings in this Second Amendment are for reference purposes only
and are not intended to have any meaning or substantive effect.
13. TIME IS OF THE ESSENCE
This Second Amendment establishes the terms and conditions of the
contemplated transaction. The parties hereto agree that time is of the essence
and that the parties shall use all diligence necessary to expeditiously
consummate this transaction. This Second Amendment may be executed in
counterparts, and facsimile shall be deemed to be originals.
14. CONFLICT IN TERMS
Except as herein modified, all of the terms, provisions and conditions
of the Agreement and First Amendment shall be unmodified and shall remain in
full force and effect.
7
<PAGE> 184
IN WITNESS WHEREOF, the parties have executed this Second Amendment as
of the date first above written.
DSC, S.A. DE C.V.
By: / S / Bernardo Dominguez C.
-------------------------------
Bernardo Dominguez C.
INTERNATIONAL REALTY GROUP, INC.
By: / S / Richard M. Bradbury By: / S / Jack Birnholz
----------------------------------- ----------------------------
Richard M. Bradbury Jack Birnholz
President, Chief Financial Officer Chairman of the Board
and as Shareholder and as Shareholder
8
<PAGE> 185
EXHIBIT A
The Table below summarizes Nueva Tierra's General Partnership Interests,
Limited Partner Interests, Book Value Debt, Property Values, Ownership
Interests and Net Transfer Values as of June 30, 1996.
<TABLE>
PROPERTIES HELD
FOR INV.
<S> <C> <C> <C> <C> <C>
Villa Del Carbon L.P. 79.08% Villa Del Carbon N$9,309,040 $1,227,878 256,872
Hacienda Del Franco L.P. 81.13% Hacienda Del 38,590,230 5,090,119
Less Book Value Debt Franco -511,228
Transfer Value $4,578,891 864,037
Barra Del Tordo L.P. 79.82% Barra Del Tordo 76,950,740 10,149,806
Less Book Value Debt -3,490,312
Transfer Value $6,659,494 1,343,886
Bahia de Cortes L.P. 77.89% Bahia de Cortes 353,920,000 $46,682,671 10,223,505
Total Transfer Value N$480,270,010 $59,148,934 12,688,300
Less Ltd. Ptner. Interest 12,688,300
Net Transfer Value IRG Stock @ .782 59,412,575 shs $46,460,634
(NTV)
DSC 30% IRG Stock @ .782 17,823,773 shs $13,938,191
HEMISPHERE 70% IRG Stock @ .782 41,588,802 shs $32,522,443
</TABLE>
(1) Peso Exchange Rate 7.5814
<PAGE> 186
EXHIBIT B
The Table below summarizes the DSC Companies being acquired, Majority/Minority
Interests, Book Value Debt, Property Values, Note Receivable and Net Transfer
Values as of June 30, 1996.
<TABLE>
DEVELOPMENT
PROPERTIES
<S> <C> <C> <C> <C> <C>
Cluster Inmobiliaria de Ixtapa 75.0% Clusters N$131,801,937 17,384,907
Less Book Value Debt -3,905,461
Transfer Value $13,479,446 $3,369,861
PROPERTIES HELD FOR
INV.
Malecon Cancun 12.3% Malecon 135,096,000 17,819,400
Less Book Value Debt -5,699,703
Transfer Value $12,119,697 10,628,974
Corporacion 30.0% Las Flores 43,741,610 5,769,595
Inmobiliaria del Norte
Less Book Value Debt -2,069,156
Transfer Value $3,700,439 2,590,307
Centro de 99.9% Campo de Trio 8,370,000 1,104,018
Promociones Guerrero
Less Book Value Debt -726,565
Transfer Value $377,453 -0-
Total Transfer Value N$319,009,547 $29,677,035 $16,589,142
Plus Note Receivable 3,716,237
Less Major/Minority Interest -$16,589,142
Net Transfer Value (NTV) IRG Stock @ .782 21,488,657 shs $16,804,130
</TABLE>
(1) Peso Exchange Rate 7.5814
<PAGE> 187
APPENDIX "C"
AMENDMENT TO AGREEMENT
This is an amendment dated February 7, 1996 to the October 6, 1995
Agreement (the "DSC Agreement") between International Realty Group, Inc. ("IRG")
and DSC, S.A. de C.V. ("DSC").
WHEREAS, IRG and DSC wish to amend the DSC Agreement as hereinafter set
forth;
NOW THEREFORE, IRG and DSC agree to amend the DSC Agreement as follows,
and except as amended hereby, the DSC Agreement shall remain in full force and
effect:
1. Paragraph A.1 Of the DSC Agreement stated that the Contract Rights
might be sold to IRG by a corporation other than DSC. The Contract Rights are
more accurately described as partnership interests in real property, and these
partnership interests are held by Nueva Tierra, S.A. de C.V. a Mexico
corporation, of which DSC owns 30% of the issued and outstanding stock, and of
which Newland Corporation ("Newland"), a Marshall Islands corporation, holds the
remaining 70% ownership interest. Newland is in turn owned by Hemisphere
Developments, Limited ("Hemisphere"), an Isle of Man corporation. DSC and IRG
hereby agree that IRG shall purchase DSC's 30% ownership interest in Nueva
Tierra on the terms and conditions set forth herein, and IRG and Hemisphere
shall enter
<PAGE> 188
into a separate agreement for IRG'S purchase of Newland from Hemisphere (the
"Hemisphere Agreement"). Therefore, there shall be no A-1 Net Transfer Value as
referenced in the DSC Agreement. Instead of the A-1 Net Transfer Value which
reflected the combined value of the DSC Companies and the value of the Contract
Rights, there is an agreed upon value for the DSC Companies and an agreed upon
value for DSC's 30% ownership of Nueva Tierra, all as set forth below in
paragraph 2. In the Hemisphere Agreement, there is an agreed upon value for
IRG's purchase of Newland which owns 70% of Nueva Tierra. DSC and IRG agree
that the Diamante Country Club, Santa Rosalia and Las Arenas properties, which
were described on Exhibit A to the October 6, 1995 Agreement, are not included
among the properties held by Nueva Tierra, and DSC and IRG agree that these
properties will be eliminated from the transaction. DSC and IRG further agree
to add properties known as the Ensenada Blanca property, the El Quelele property
and the Playa de Brisa Mar property to the transaction. Exhibit A to the DSC
Agreement is agreed to be revised accordingly as attached hereto.
2. DSC and IRG agree that, as reflected in Exhibit A, the net transfer
value of the DSC Companies is $228,149,600 pesos ($34,832,000 U.S. dollars as of
9/30/95), and the value of DSC's 30% interest in Nueva Tierra is $105,750,137
pesos ($16,145,059 U.S. dollars as of 9/30/95). The above values are based upon
the
<PAGE> 189
liabilities reflected in the September 30, 1995 financial statements of the DSC
Companies, property values established by third party appraisals, and a
peso/U.S. dollar exchange rate of 6.55 pesos to the dollar. For purposes of
establishing the value of the DSC Companies for this transaction, property
values established by third party appraisals have been substituted for the
historical property values reflected in the financial statements.
The above values and Exhibit A will be adjusted based upon the
liabilities for the DSC Companies and the minority interests reflected in
unaudited financial statements as of the first day of the month in which an
Information Statement is sent to IRG'S shareholders describing the transactions
set forth in the DSC Agreement and the Hemisphere Agreement, and the Banco de
Mexico's peso/U.S. dollar exchange rate, irrespective of when published, which
is in effect on the same date of the DSC Companies' unaudited financial
statements. If the first day of the month falls on a weekend or holiday in
Mexico, the parties agree to use the Banco de Mexico's exchange rate which is in
effect on the next business day following the first day of the month. If there
is a change in the peso exchange rate of five per cent or more between September
30, 1995 and the date used to fix the final exchange rate, the parties agree
that the third party appraisals will be updated no more than 60 days before the
Closing, and the above values will be adjusted based upon the updated
appraisals.
<PAGE> 190
The above value of the DSC Companies and the above value of DSC's 30%
interest in Nueva Tierra is collectively referred to herein as the "DSC Transfer
Value." The DSC Transfer Value is an agreed upon value which is based upon
appraisals previously prepared by third party appraisers, not Salomon Brothers,
less the net book value debt, and minority equity holdings. For example, the
DSC Transfer Value as of September 30, 1995 was $50,977,059 U.S. dollars. This
is the sum of $34,832,000 U.S. dollars for the DSC Companies as calculated in
Exhibit "A," and $16,145,059 U.S. dollars for the value of DSC's 30% interest
in Nueva Tierra. The DSC Transfer Value is subject to IRG's due diligence
review of the DSC Companies as stated in the DSC Agreement.
3. At the closing, which IRG and DSC agree will be simultaneous with the
closing of the Hemisphere Agreement, IRG will issue to DSC the number of shares
of IRG common stock which, when multiplied by the per share value, equal the
DSC Transfer Value. For example, IRG and DSC have agreed that for purposes of
this transaction and the Hemisphere transaction, IRG and its subsidiaries have
a value at closing of $7,000,000 (U.S. dollars). If 8,954,187 shares of IRG
stock are issued and outstanding as of the closing date, IRG's shares would
have a per share value of $.782. Based upon a DSC Transfer value of $50,977,059
(U.S. dollars), at Closing IRG would
<PAGE> 191
issue 65,188,055 shares to DSC.
As stated in paragraph A.1 of the DSC Agreement, in addition to the
shares issued to DSC as determined by the DSC Transfer Value, DSC shall receive
3,000,000 additional shares of IRG stock six months after the closing, or, if
the share price of IRG common stock is greater than one dollar ($1.00) per share
based upon the twenty (20) day average price of the shares for the period
beginning thirty (30) days prior to the issuance of the shares, DSC shall
receive $3,000,000 (U.S. dollars) worth of IRG shares based on the twenty (20)
day average trading price.
IRG represents and warrants for a period up to 18 months after the
Closing, that except with respect to any documents or information supplied by
Hemisphere, DSC or their affiliates for which IRG hereby makes no representation
or warranty, IRG is and will be in compliance with all SEC, NASD and tax laws,
rules and regulations, and is and will not be subject to any fines or penalties
from the SEC, NASD, or any federal, state or foreign government. If within 18
months of the Closing, IRG is notified of any such fine or penalty which relates
to IRG's activities prior to the Closing, and where such activities were not
based upon information or documents supplied by Hemisphere, DSC or their
affiliates, IRG will issue additional shares to DSC calculated in accordance
with the above provisions, except that the agreed upon
<PAGE> 192
value of IRG and its subsidiaries will be reduced by the amount of any such
fine or penalty.
4. DSC and IRG agree that the sale of the individual DSC Companies is
contingent upon DSC's receipt prior to the Closing of any consents or approvals,
required for the sale of such companies to IRG. If such consents or approvals
are not received on or before the Closing for one or more of the DSC Companies,
such company or companies will be removed from the list of DSC Companies to be
sold to IRG, and the DSC Transfer Value, will be reduced as appropriate for that
company or companies. DSC and IRG specifically acknowledge and agree that
consents of third parties may be required for the sale of the stock of the
following DSC Companies, as certain stock has been pledged as described below.
Further, DSC and IRG acknowledge that such pledges of stock may remain in effect
after the Closing. DSC is negotiating with the banks which hold such pledges
pursuant to the restructuring referenced in paragraph A-3 of the Agreement:
a. The stock of Tropical Club de Ixtapa, S.A. de C.V. is pledged
to Banco Nacional del Comercio Exterior, S.N.C.
b. The stock of Impulsora Turistica de Occidente, S.A. de C.V. is
pledged as follows: 41% of the stock is pledged to Bancreser; 20.3% of the
stock is pledged to Banca Serfin.
<PAGE> 193
c. Eighty five percent (85%) of the stock of Tropical Club de Isla
Mujeres, S.A. de C.V. is pledged to Banco Nacional de Comercio Exterior, S.N.C.
d. The 30% stock interest held by DSC in Corporacion Immobiliaria
del Norte, S.A. de C.V. is pledged to Banpais.
e. The 12.3% stock interest held by DSC in Malecon Cancun, S.A.
de C.V. is pledged to UCIC.
5. It is acknowledged by DSC and IRG that DSC has reached an agreement
with Nacional Financiera, S.N.C. ("NAFIN"), one of the lenders to the DSC
Companies, for the restructuring of debt (the "NAFIN Debt Restructuring").
Pursuant to the NAFIN Debt Restructuring, NAFIN will receive monies held in a
trust account of Cluster Inmobiliaria de Ixtapa, S.A. de C.V., amounting to
approximately $15,340,000 U.S. dollars, and NAFIN will receive IRG stock valued
by DSC and NAFIN at $12,505,000 U.S. dollars, which, based upon an IRG per share
value of $.782 would amount to 15,991,049 shares. The IRG stock to be received
by NAFIN will be transferred to NAFIN from the IRG stock to be received by DSC
at the Closing. Prior to the Closing, DSC may assign to NAFIN the right to
receive such shares of IRG stock, in which event the IRG stock will be issued by
IRG directly to NAFIN.
<PAGE> 194
Except with respect to the NAFIN Debt Restructuring, if IRG stock is to
be issued to one or more Banks pursuant to the restructuring negotiations
referenced in paragraph A-3 of the October 6, 1995 DSC Agreement, such stock
shall be issued by IRG after the Closing to one or more banks in exchange for
forgiveness of debt held by such banks.
6. DSC and IRG agree that the Closing shall be simultaneous with the
closing under the Hemisphere Agreement, and agree to extend the Closing Date
from November 30, 1995 to the date which falls 21 days after the submission of
an Information Statement to the IRG shareholders describing the transaction
unless extended by written agreement of the parties. If the date which falls 21
days after the submission of the Information Statement is a weekend or holiday,
the Closing Date shall occur on the next business day. In the event that the
Securities and Exchange Commission submits any comments to the Information
Statement, DSC and IRG agree to take all reasonable measures to respond to any
such comments. DSC and IRG agree to cooperate in preparing and sending the
Information Statement as promptly as reasonably possible.
7. DSC and IRG agree that IRG's obligation to close this transaction is
contingent upon IRG's inspection of the real
<PAGE> 195
property owned by the DSC Companies. IRG has received and reviewed financial
statements for the DSC Companies and has received and reviewed property
descriptions and appraisals for the real property. IRG must complete its
inspection of the properties on or before submission of the Information
Statement to the Shareholders. IRG must notify DSC on or before seven days
after the submission of the Information Statement to the shareholders if IRG's
inspection of the properties, review of final financial statements, or review of
final property appraisals has revealed conditions which have a material adverse
effect on the DSC Transfer Value, or if IRG reasonably believes that the
property values in any of the final property appraisals are not reasonable.
8. DSC and IRG agree that the IRG stock issued to DSC pursuant to this
transaction shall be issued to DSC pursuant to SEC Regulation S since DSC is a
company outside of the United States, and no directed selling efforts have been
made in the United States by IRG for the sale of the IRG stock to be issued to
DSC.
9. IRG acknowledges that under the laws of Mexico, each of the DSC
companies must have more than one shareholder. Accordingly, IRG shall take
appropriate corporate action such that in addition to IRG, one of IRG's wholly
owned subsidiaries shall become a
<PAGE> 196
shareholder of each of the DSC Companies at the Closing.
10. The parties Contemplate that subsequent to the closing, DSC may sell
the following additional DSC subsidiaries to IRG, subject to the following
conditions:
a DSC's 51% interest in Promotora Latinoamericana de Hotels,
S.A. de C.V., a MeXican corporation ("Promotora") which owns 50% of the Hotel
Tuxpan in Varadero, Cuba may be sold to IRG if the laws of the United States
are changed such as to permit a company in the United States to own and operate
a hotel in Cuba, and if DSC and IRG negotiate a mutually satisfactory price and
terms for the purchase and sale of Promotora to IRG.
b. Hogares Metropolitanos, S.A. de C.V. a Mexican corporation
("Hogares") which is a developer of residential social housing in Mexico, may
be sold to IRG if DSC and IRG negotiate a mutually satisfactory price and terms
for the purchase and sale of Hogares.
11. Contingencies
As reflected in the litigation against Pez Maya described in
<PAGE> 197
the financial statements of the DSC Companies, Pez Maya is currently seeking a
judicial ruling reinstating Pez Maya as the trust rights owner of the Qualton
Pez Maya property. In view of this litigation, DSC and IRG agree that if Pez
Maya is not so reinstated within 18 months of the Closing, the sale of Pez Maya
shall be rescinded, and DSC will transfer to IRG property of a similar nature
with a value, as determined by a third party appraiser, of at least the value
of Pez Maya. If the value of the replacement property is $50,000 or higher
than the value of Pez Maya, IRG will issue IRG stock to DSC for that amount
over $50,000 based upon the twenty day average trading price of IRG stock
before such transfer is made.
As reflected in the litigation against Centro de Promociones Guerrero,
DSC Casa Blanca, Cluster Inmobiliaria de Ixtapa, Tropical Club de Isla Mujeres
and Impulsora Turistica de Occidente, each of these companies face the
possibility of judgments whereby the company would lose ownership of its real
property. In view of this litigation, DSC and IRG agree that if one or more of
these companies loses its real property or the litigation is not settled or
resolved as aforesaid within 18 months of the Closing, the sale of that company
or companies shall be rescinded and DSC will transfer to IRG property of
similar nature with a value, as determined by a third party appraiser, of at
least the value of lost property. If the value of the replacement property is
$50,000
<PAGE> 198
or higher than the value of the lost property, IRG will issue IRG stock to DSC
for that amount over $50, 000 based upon the twenty day average trading price
of IRG stock before such transfer is made.
This Amendment may be executed in counterparts and facsimile copies
shall be deemed to be originals.
IN WITNESS WHEREOF, the parties have executed this Amendment as of the
date first above written.
DSC, S.A. de C.V.
By: /s/ Bernardo Dominguez C.
----------------------------------
Bernardo Dominguez C.
President and as Shareholder
INTERNATIONAL REALTY GROUP, INC.
By: /s/ Richard M. Bradbury By: /s/ Jack Birnholz
---------------------------- --------------------------
Richard M. Bradbury Jack Birnholz
President, Chief Chairman of the Board,
Financial Officer and as Shareholder
and as Shareholder
<PAGE> 199
EXHIBIT A
(DSC Companies)
CLUSTERS S.A. de C.V. NET TRANSFER VALUE
As of September 30, 1995
<TABLE>
<CAPTION>
APPRAISED VALUE
COMPANIES PROJECTS PESOS DOLLARS(1)
- --------- -------- ----- ----------
<S> <C> <C> <C>
Tropical Club Ixtapa, Qualton Ixtapa N$116,017,000 $ 17,712,000
S.A. de C.V.
Impulsora Turistica Qualton Vallarta 219,428,000 33,500,000
de Occidente, S.A. de C.V.
Tropical Club Isla Mujeres, Isla Mujeres 67,857,000 10,359,000
S.A. de C.V.
Promocaribe, S.A. de C.V. La Concha 30,700,800 4,687,000
DSC Casa Blanca, S.A. de C.V. Marruecos 4,241,266 647,000
Cluster Inmobiliaria de Clusters 105,441,250 16,098,000
Ixtapa S.A. de C.V.
Malecon Cancun S.A. de C.V. Malecon 135,096,000 20,625,000
Corporacion Inmobiliaria del Las Flores 37,491,000 5,724,000
Norte, S.A. de C.V.
Centro de Promociones Campo de Trio 8,137,500 1,242,000
Guerrero, S.A. de C.V.
Pez Maya, S.A. de C.V. Pez Maya 47,517,000 7,255,000
Total Appraised Value 771,927,000 $117,849,000
Less Cluster Debt -67,618,000
Less Los Flores Debt -1,936,000
Cancun Debt -3,817,000
Less Minority Interest -24,986,000
Plus - NAFIN - Cash 15,340,000
Net Transfer Value (NTV) IRG Stock @ .782 44,542,20OShs $34,832,000
NAFIN IRG Stock @ .782 15,991,049Shs 12,505,000
DSC IRG Stock @ .782 28,551,151Shs $22,327,000
</TABLE>
(1) Peso Exchange Rate 6.55
<PAGE> 200
EXHIBIT A
(Hemisphere Companies)
NEWLAND CORPORATION - NUEVA TIERRA S.A. de C.V.
NET TRANSFER VALUE
As of September 30, 1995
<TABLE>
<CAPTION>
APPRAISED VALUE
PARTNERSHIP PROJECTS PESOS DOLLARS(1)
- ----------- -------- ----- ----------
<S> <C> <C> <C>
Nueva Tierra is a 74% Villa Del Carbon N$7,839,120 $ 1,196,812
General Partner
Nueva Tierra is a 75% Hacienda del 44,952,567 6,862,987
General Partner Franco
Nueva Tierra is a 70% Ensenada Blanca 99,230,000 15,149,618
General Partner
Nueva Tierra is a 80% Las Arboledas 94,897,032 14,488,096
General Partner
Nueva Tierra is a 75% Barra Del Tordo 76,671,035 11,705,502
General Partner
Nueva Tierra is a 75% Playas de Brisa Mar 102,400,000 15,633,588
General Partner
Nueva Tierra is a 80% El Quelele 55,023,640 8,400,556
General Partner
-------------- ------------
Total Appraised Value 481,048,864 73,437,231
Cash 7,634
Less Debt 2,167,940
Minority Interest
Limited Partners 17,457,771
DSC S.A. de C.V. 30% IRG Stock @.782 20,645,855Shs 16,145,059
Stockholders Equity
Hemisphere 70% IRG Stock @.782 48,176,592Shs 37,674,095
------------
</TABLE>
(1) Peso Exchange Rate 6.55
<PAGE> 201
or higher than the value of the lost property, IRG will issue IRG stock to DSC
for that amount over $50,000 based upon the twenty day average trading price of
IRG stock before such transfer is made.
This Amendment may be executed in counterparts and facsimile copies
shall be deemed to be originals.
IN WITNESS WHEREOF, the parties have executed this Amendment as of the
date first above written.
Dac, S.A. de C.V.
By: /s/ Bernardo Dominguez C.
------------------------------
Bernardo Dominguez C.
President and as Shareholder
INTERNATIONAL REALTY GROUP, INC.
By: /s/ Richard M. Bradbury By: /s/ Jack Birnholz
------------------------- ------------------------
Richard M. Bradbury Jack Birnholz
President, Chief Chairman of the Board,
Financial Officer and as Shareholder
and as Shareholder
12
<PAGE> 202
APPENDIX "D"
A G R E E M E N T
This agreement (the "Hemisphere Agreement") made this ninth day of
February, 1996 by and between International Realty Group, Inc., a Delaware
corporation with its principal offices at 111 Northwest 183rd Street, Suite
350, Miami, Florida ("IRG"), and Hemisphere Developments, Limited
("Hemisphere") an Isle of Man corporation with its principal offices at
Atlantic House, 4-8 Circular Road, Douglas, Isle of Man.
1. The Hemisphere/IRG Transaction
a. In exchange for common stock of IRG as stated below, Hemisphere shall
sell to IRG all of the common stock of Hemisphere's wholly owned
subsidiary, Newland Corporation, a Marshall Islands corporation
("Newland"). Newland owns 70% of the issued and outstanding common
stock of Nueva Tierra, S.A. de C.V., a Mexican corporation ("Nueva
Tierra") that holds general partnership interests in properties as
identified in Exhibit "A" attached hereto (the "Properties").
b. For purposes of this transaction, IRG and Hemisphere agree that the
value of IRG and its subsidiaries is $7,000,000 (U.S. dollars). Based
upon the 8,954,187 shares of IRG common stock presently issued, IRG
has a per share value of $.782. This per share value will change if
the number of shares changes
<PAGE> 203
before the closing. IRG and Hemisphere acknowledge and agree that IRG
has agreed to issue shares to DSC, S.A. de C.V., a Mexican
corporation, pursuant to a transaction (the "DSC Transaction")
described in an October 6, 1995 Agreement, as amended by an Amendment
dated February 7, 1996. The closing of the DSC Transaction and IRG's
transaction with Hemisphere described in this Agreement shall occur
simultaneously, and the shares issued to DSC will not be included in
calculating the IRG per share value.
C. IRG and Hemisphere agree that the value of Newland and its 70%
ownership of the Nueva Tierra subsidiary is $246,765,322 (pesos) (the
"Newland Transfer Value") for purposes of this transaction. Based
upon a September 30, 1995 peso/U.S. dollar exchange rate of 6.55 pesos
to the dollar, the Hemisphere Transfer Value would be $37,674,095
(U.S. dollars), but will be adjusted based upon the Banco de Mexico's
peso/U.S. dollar exchange rate which is in effect, irrespective of
when published, on the first day of the month in which an Information
Statement is sent to IRG's shareholders describing the transactions
set forth in the DSC Agreement and the Hemisphere Agreement. If the
first day of the month falls on a weekend or a holiday in Mexico, the
parties agree to use the Banco de Mexico's exchange rate which is in
effect on the next business day following the first day of the month.
The Newland Transfer Value is also subject to IRG's confirmation
2
<PAGE> 204
of this value pursuant to the due diligence review described in
paragraph 5.b. below. In the event that there is a change in the peso
exchange rate of five per cent or more between September 30, 1995 and
the date used to fix the final exchange rate, the parties agree that
the third party appraisals will be updated no more than 60 days before
the Closing, and the Newland Transfer Value will be adjusted based
upon the updated third party appraisals.
d. At Closing, IRG shall issue to Hemisphere the number of shares of IRG
common stock which, when multiplied by the per share value, equals
the Newland Transfer Value. For example, IRG and Hemisphere have
agreed that for purposes of this transaction and the DSC transaction,
IRG and its subsidiaries have a value at closing of $7,000,000 (U.S.
dollars). If 8,954,187 shares of IRG are issued and outstanding as of
the closing, IRG would have a per share value of $.782. If the
Hemisphere Value is $37,674,095 (U.S. dollars), IRG would issue at
the Closing a total of 48,176,592 IRG shares to Hemisphere.
e. IRG represents and warrants for a period up to 18 months after the
Closing, that except with respect to any documents or information
supplied by Hemisphere, DSC or their affiliates for which IRG hereby
makes no representation or warranty, IRG is and will be in
3
<PAGE> 205
compliance with all SEC, NASD and tax laws, rules and regulations, and
is and will not be subject to any fines or penalties from the SEC,
NASD, or any federal, state or foreign government. If within 18
months of the Closing, IRG is notified of any such fine or penalty
which relates to IRG's activities prior to the Closing, and where such
activities were not based upon information or documents supplied by
Hemisphere, DSC or their affiliates, IRG will issue additional shares
to Hemisphere calculated in accordance with the above provisions,
except that the agreed upon value of IRG and its subsidiaries will be
reduced by the amount of any such fine or penalty.
2. Capital, Corporate Actions and Shareholder Approval
IRG shall take all necessary or desirable corporate action to
consummate IRG's purchase of Newland, including holding a special board of
directors meeting, and taking the following actions:
a. If necessary for compliance with SEC regulations, IRG shall cause an
8-K Form to be submitted to the SEC for its review, and Hemisphere
agrees that it will timely provide sufficient information concerning
Newland, and its subsidiaries as appropriate to permit IRG to prepare
an 8-K Form.
4
<PAGE> 206
b. IRG shall send an Information Statement to notify its shareholders of
this transaction. Richard Bradbury and Jack Birnholz, represent and
warrant that as directors, and as shareholders owning 60.46% of the
issued and outstanding stock of IRG, they will vote to approve this
transaction.
c. Hemisphere, a foreign corporation, will if required by SEC regulations,
immediately execute a subscription agreement which among other things
shall acknowledge that Hemisphere will acquire the IRG shares for
investment purposes only or for resale outside of the United States in
compliance with Regulation S and SEC Regulations.
d. After the Closing, IRG shall immediately call for a special meeting of
the shareholders to increase the number of Directors from five (5) to
seven (7) and to elect six (6) new Directors, retaining one (1)
director designated by IRG at the Closing. One of the new directors
will be designated by Hemisphere.
3. Closing
The Closing shall be simultaneous with the closing of the DSC
Transaction, and shall occur twenty one (21) days after submission of an
Information Statement to IRG's shareholders unless extended by written agreement
of the parties. If the twenty first day falls
5
<PAGE> 207
on a weekend or holiday in Mexico, the Closing shall occur on the next business
day. At the closing, the following shall occur;
a. IRG shall deliver to Hemisphere certificates for common stock of IRG
in exchange for the common stock of Newland.
b. All necessary documents and share certificates customarily associated
with the transaction shall be tendered by Hemisphere, Newland and IRG
to properly consummate the transaction and the transfer of ownership
of the common stock.
4. Conditions Precedent to IRG's Obligation to Close
IRG'S obligation to close this transaction shall be subject to the
satisfaction of the following conditions:
a. Hemisphere and Newland shall have received board of directors and
majority shareholders' approval of the transaction;
b. IRG shall review the financial statements of Newland, the Properties
and the third party appraisals as reasonably required to verify that
there is no condition which has a materially adverse effect on the
Newland Transfer Value set forth in this Agreement in paragraph 1.c,
and to verify that the third party appraisals contain reasonable
6
<PAGE> 208
valuations of the Properties. IRG agrees to complete its review and
to notify Hemisphere of any condition which has such a materially
adverse effect on or before submission of the Information Statement to
the shareholders.
c. On or before the Closing, IRG shall have received an opinion written
in English from Hemisphere's counsel opining as to the validity of the
corporate status of Newland and Nueva Tierra, and Nueva Tierra's
ownership of the percentage interests in the Properties as reflected
in Exhibit A and that, other than as disclosed in Newland's financial
statements, the Properties are not subject to any liens, loans or
encumbrances totalling more than $25,000.
d. The truth and accuracy in all material respects of all representations
and warranties, and the satisfaction of all conditions.
5. Conditions Precedent to Hemisphere's Obligation to Close
Hemisphere's obligation to close this transaction shall be subject to
the satisfaction of the following conditions:
a. IRG's board of directors and majority of shareholders shall have
approved the transaction;
7
<PAGE> 209
b. IRG shall have received all required or desirable approvals and
consents from governmental authorities and agencies, the SEC, NASD and
third parties;
c. The due diligence review conducted by Hemisphere shall not have
revealed any matter having a material adverse effect on the
transaction;
d. The truth and accuracy in all material respects of all representations
and warranties and the satisfaction of all conditions;
e. Since September 30, 1995, except for the Caye Bokel transaction
referenced in this Agreement, the business of IRG and its subsidiaries
shall have been conducted in the ordinary course, and there shall have
been no material adverse change in the business prospects, operations,
earnings, assets or financial condition of IRG and its subsidiaries;
f. There shall have been no dividend, redemption or similar distribution,
or any stock split, recapitalization or stock issuance of any kind, by
IRG since September 30, 1995 except the 515,000 shares of common stock
issued by IRG to the former owners of IRG's 87 acre Caye Bokel
property, and 41,075 shares of common stock issued to
8
<PAGE> 210
certain IRG employees and directors on December 20, 1995, or as
otherwise specifically described in this Agreement;
g. IRG shall not have received a notice or demand by any dissenting
shareholder of IRG to the transactions contemplated by this Agreement
which has resulted in a lawsuit or threatened lawsuit which could have
a materially adverse effect on the transaction, or which has resulted
in an appraisal proceeding regarding the valuation of the proposed
transaction contemplated herein.
6. Transaction Expenses
Each party shall bear its own transaction expenses for this matter.
7. Representations and Warranties of Hemisphere.
Hemisphere represents and warrants to IRG that:
a. On the date of Closing, Hemisphere has or will cause good and
unencumbered title to the shares of stock of Newland to be sold and
transferred to IRG.
b. There is no litigation pending or threatened, nor have any summons,
notices or warning been received from any
9
<PAGE> 211
governmental agency, or department with respect to any material fine,
or material violation of any law or ordinance, or other type of
enforcement proceeding, including but not limited to environmental
matters, with respect to Newland, Nueva Tierra or the Properties which
involves in the aggregate a potential monetary recovery in excess of
$500,000 in United States dollars for all such litigation, claims or
fines. Based upon due inquiry by Hemisphere, Hemisphere to the best
of its knowledge and belief states that Newland, Nueva Tierra and the
Properties are in compliance with this paragraph.
c. The Newland Unaudited Financial Statement shall be true and accurate
in all material respects for the periods indicated for the statement,
and shall not omit any material fact or circumstance necessary or
required to prevent the financial information from being misleading.
Since the date of the latest period covered by the Newland Unaudited
Financial Statement and except as specifically referenced in this
Agreement, Newland shall have conducted its business only in the
ordinary and usual course.
8. Representations and Warranties of IRG
IRG represents and warrants to Hemisphere that:
10
<PAGE> 212
a. IRG is authorized to issue 10,000,000 shares of common stock for
value, U.S. $0.001, of which 8,954,187 shares are validly authorized
to be issued, fully paid and non-assessable, and are outstanding.
IRG's shareholders have or will cause an increase in the number of
authorized shares to 450,000,000. IRG owns all of the issued and
outstanding shares of stock of all of its subsidiaries: International
Realty Group (Holdings), Inc., a Florida corporation; The Appraisal
Group, Inc., a Florida corporation; Appraisal Group International,
Inc., a Florida corporation; IRG Financial Services, Inc., a Florida
corporation; U.S. Property Investment and Auction, Inc., a Florida
corporation; and Caye Bokel, Ltd., a Belize corporation, and Stragix
International, Inc., a Florida corporation which in turn owns 75% of
Appraisal Group International Rt., a Hungary corporation;
b. IRG and its subsidiaries own no real properties except the Caye Bokel
property and two vacant lots in LaGrange, Texas, and all leases of
real or other property are valid, enforceable in accordance with their
terms, and not in default.
c. IRG and its subsidiaries have properly filed or caused to be filed all
United States federal, state, local, and foreign income and other tax
returns, reports and declarations that are required by applicable law
to be filed by them, and have paid, or made full and adequate
provisions for the payment of, all federal, state, local,
11
<PAGE> 213
and foreign income and other taxes properly due for the periods
covered by such returns, reports, and declarations, except such taxes,
if any, as are adequately reserved against in the IRG Audited
Financial Statements. Based upon due inquiry by IRG, IRG to the best
of its knowledge and belief states that Appraisal Group International
Rt. is in compliance with this paragraph.
d. There is no litigation pending or threatened, nor have any summons,
notices or warning been received from any governmental agency,
department with respect to any material fine, or material violation of
any law or ordinance, or other type of enforcement proceeding,
including but not limited to environmental matters, with respect to
IRG or its subsidiaries which involve a potential monetary recovery in
excess of $25,000 in United States dollars.
e. IRG has or will have on the date of Closing good and unencumbered title
to the shares of IRG stock necessary to complete this transaction as
provided in paragraph A-1 above, free and clean of all mortgages, liens
and encumbrances of any nature, and has or will have on the Closing
Date the power and authority to transfer said shares to Hemisphere free
and clear of liens and encumbrances on the Closing Date.
12
<PAGE> 214
f. Except as specifically referenced in this Agreement, none of IRG or
its subsidiaries have or will enter into any transaction, incur any
obligation or conduct business affairs except in the normal course of
business between September 30, 1995 and the Closing Date.
g. All of the IRG Audited Financial Statements and filings with the
Securities and Exchange Commission shall be true and accurate in all
material respects for the periods indicated, and shall not omit any
material fact or circumstance necessary or required to prevent the
information from being misleading. Since the date of the last IRG
Audited Financial Statement, IRG and its subsidiaries have no
liabilities, fixed or contingent which are not fully provided for in
the IRG Audited Financial Statements, except for trade payables
incurred in the ordinary course of business. IRG shall provide
Hemisphere a list of liabilities of IRG and its subsidiaries as of the
Closing Date which shall be certified by IRG as true and correct, and
incorporated herein by reference.
h. IRG and its subsidiaries have, and in the past have had no labor
agreements, and no employee benefit plans sponsored, maintained or
contributed to by IRG or its subsidiaries for the benefit of
employees, officers or directors.
13
<PAGE> 215
sponsored, maintained or contributed to by IRG or its subsidiaries for
the benefit of employees, officers or directors.
i. To the best of IRG's knowledge and belief, IRG and its subsidiaries are
in good standing with the SEC, NASD, and each state and country where
they conduct business and have received no notification or inquiry
giving reasonable cause to believe otherwise, and IRG will provide at
closing good standing certificates or their equivalent from each such
country, including Belize and Hungary, and each such state in the
United States. As a part of IRG's due diligence response provided to
Hemisphere, IRG will continue to provide Hemisphere with copies of all
filings made by IRG with the SEC or NASD, and copies of all letters,
notices or other documents sent by IRG to or received by IRG from the
SEC or the NASD up to and including the date of the closing.
9. IRG DUE DILIGENCE
a. Within five (5) business days after execution of this Agreement,
Hemisphere shall give IRG Newland's most recent unaudited financial
statements. The Newland unaudited financial statements will conform
to generally accepted accounting principles in the United States.
14
<PAGE> 216
b. IRG has received descriptions and appraisals of the Properties. IRG
will review the appraisals, updated appraisals if required pursuant to
paragraph 1.c. above, and each of the Properties on or before the
submission of the Information Statement to the IRG shareholders, to
satisfy itself that the appraisals are reasonable and that there is no
adverse condition materially affecting the Newland Transfer Value.
10. HEMISPHERE DUE DILIGENCE
a. Within five (5) business days after execution of this Agreement, IRG
will provide to Hemisphere the due diligence information and documents
provided by IRG to DSC pursuant to the DSC Agreement. IRG agrees to
supplement its due diligence response to Hemisphere as and to the
extent required by the terms of the DSC Agreement, and to
simultaneously provide a copy of such supplemental response to
Hemisphere. As a part of IRG's due diligence response provided to
Hemisphere, IRG will continue to provide Hemisphere with copies of all
filings made by IRG with the SEC or NASD, and copies of all letters,
notices or other documents sent by IRG to or received by IRG from the
SEC or the NASD up to and including the date of the Closing.
15
<PAGE> 217
11. TRANSACTIONS PRIOR TO CLOSING
IRG, its subsidiaries, and Newland, Hemisphere and Nueva Tierra shall
not undertake any transaction, declare any dividend or other distribution or
issue shares of stock, or undertake any other transaction or incur any
commitment not in the ordinary course of business between the date of this
Agreement and the Closing, except as contemplated by this Agreement.
12. Press Releases
The parties shall consult with each other at all times until the
Closing with respect to press releases at such time as they may be desirable or
as they may be obligatory with respect to IRG, and shall cooperate with respect
to reviewing and suggesting the contents of such press releases and determining
the best methods and procedures for distributing said press releases to the
public.
13. Governing Law
This Agreement shall be governed by the laws of the state of Delaware,
USA, and the parties hereby submit to the non-exclusive jurisdiction thereof.
14. COMMISSIONS
16
<PAGE> 218
Both Hemisphere and IRG agree that there are no brokers, agents or
financial advisors involved in this transaction and shall hold each other
harmless against all claims for commissions from any source.
15. NOTICES TO HEMISPHERE OR IRG
Any notice sent to Hemisphere relating to this Agreement shall be sent
by facsimile and Federal Express addressed as follows:
Mme. Monique Roggero-Ciana
Hemisphere Developments, Limited
Atlantic House
4-8 Circular Rd.
Douglas, Isle of Man
Fax number 44-22-300-1711
Any notice sent to IRG relating to this Agreement shall be sent by
facsimile and Federal Express addressed as follows:
Mr. Richard Bradbury, President
International Realty Group, Inc.
111 Northwest 183rd Street
Miami, Florida 33169
Fax number (305) 651-3394
Any notice sent to either Hemisphere or IRG relating to this Agreement
shall be sent by facsimile and Federal Express addressed as follows:
Kenneth I. Trujillo, Esquire
1880 J.F.K. Blvd.
10th Floor
Philadelphia, PA 19103
Fax number: (215) 587-1699
17
<PAGE> 219
16. CONFIDENTIALITY
Each party shall keep information disclosed to it by the other party
relating to its business and financial affairs strictly confidential, except
where disclosure is required by law or the information is public knowledge.
Each party shall ensure that its obligation of confidence is observed by its
employees and professional advisors or representatives.
17. HEADINGS
The headings in this Agreement are for reference purposes only and are
not intended to have any meaning or substantive effect.
18. Time of the Essence
This Agreement establishes the terms and conditions of the contemplated
transaction. The parties hereto agree that time is of the essence and that the
parties shall use all diligence necessary to expeditiously consummate this
transaction.
This Agreement may be executed in counterparts, and facsimile shall be
deemed to be originals.
18
<PAGE> 220
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
HEMISPHERE CORPORATION
By: /s/ Monique Roggero-Ciana By: /s/ Christiane Gays
------------------------------- ---------------------------
Monique Roggero-Ciana Christiane Gays
Title: Director Title: Director
INTERNATIONAL REALTY GROUP, INC.
By: /s/ Richard M. Bradbury By: /s/ Jack Birnholz
-------------------------------- ---------------------------
Richard M. Bradbury, Jack Birnholz,
President, Chief Financial Chairman of the Board
Officer and as Shareholder and as Shareholder
19
<PAGE> 221
E X H I B I T A
<TABLE>
<CAPTION>
==============================================================
NUEVA TIERRA
Percentage Interest
==============================================================
<S> <C>
Barra Del Tordo 75%
Villas Del Carbon 74%
Hacienda De Franco 75%
Las Arboledas 80%
Ensenada Blanca 70%
Playas De Brisa Mar 75%
El Quelele 80%
==============================================================
</TABLE>
<PAGE> 222
APPENDIX "E"
AGREEMENT
This agreement (the "Agreement") made this 6th day of October, 1995 by
and between International Realty Group, Inc., a Delaware corporation with its
principal offices at 111 Northwest 183rd Street, Suite 350, Miami, Florida
("IRG") and DSC, S.A. de C.V., a Mexican corporation with its principal offices
at Monterrey 150, Col. Roma Sur, C.P. 06760, Mexico, D.F. ("DSC").
INTENT
It is the intention of the parties to enter into an exchange of
corporation stock for the mutual benefit of both parties. DSC and IRG have
agreed to proceed, at DSC's sole discretion to be exercised on or before October
10, 1995, with one of the transactions outlined below in paragraphs A-1 and A-2
which will enhance IRG's asset base and market opportunities and will enhance
DSC's real estate ownership and development activities through a publicly traded
company. IRG is a publicly traded company with 882 shareholders and 8,398,112
shares issued with a par value of $.001 as of the date of this Agreement.
<PAGE> 223
A. ACQUISITION
1. Transaction A-1
In exchange for common stock of IRG as stated below, DSC shall sell all of the
common stock owned by DSC in certain affiliates and subsidiary companies
identified on Exhibit A attached hereto (the "Exhibit A Corporations"), and
shall cause to be transferred and assigned to IRG the contracts identified on
page 3, Exhibit A (the "Contract Rights"). DSC owns all of the issued and
outstanding stock of the Exhibit A Corporations except as reflected on Exhibit
A. Prior to closing, DSC may assign the Contract Rights to another corporation
and may consolidate and merge one or more of the Exhibit A Corporations into
one or more newly formed or presently existing wholly owned subsidiaries of DSC
or a DSC subsidiary. The parties agree that the value of the Exhibit A
Corporations and the Contract Rights shall be approximately $103,000,000 (the
"A-1 Net Transfer Value") which will be adjusted if necessary based on the
appraisals and valuations prepared by Salomon Brothers. For purposes of this
transaction, the parties agree that IRG and its subsidiaries have a value at
closing of $7,000,000. Based upon the 8,398,112 shares of IRG common stock
presently issued, IRG would have a per share value of $.8335207, which per
share value will change if the number of issued and outstanding shares of IRG
common stock changes before the closing. At closing, IRG shall issue to DSC
the number of shares of IRG common stock which, when multiplied by the per
share value, equals the A-1 Net Transfer Value. Six months after the closing,
IRG will issue 3,000,000 additional
2
<PAGE> 224
shares of IRG stock to DSC, or, if the share price of IRG common stock is
greater than one dollar ($1.00) per share based upon the twenty (20) day
average price of the shares for the period beginning thirty (30) days prior to
the issuance of the shares, DSC shall receive $3,000,000 worth of IRG shares
based on the twenty (20) day average price.
DSC and IRG acknowledge and agree that DSC is still in the process of
negotiating contracts for one or more of the Contract Rights properties. If at
the closing DSC is unable to assign and transfer one or more of the Contract
Rights properties to IRG, the A-1 Net Transfer Value shall be reduced by the
amount of the Salomon Brothers valuation for that property or properties, but
in no event shall the A-1 Net Transfer Value be less than $60 Million Dollars.
2. Transaction A-2
IRG acknowledges that DSC is presently negotiating with another company,
International Basic Resources, Inc. ("IBR") whereby DSC would sell the Exhibit
A Corporations and cause to be transferred and assigned the Contract Rights to
IBR in exchange for a majority ownership of the stock of IBR. Upon the closing
of the transaction between DSC and IBR, DSC would cause IBR to acquire all of
the issued and outstanding stock of IRG in exchange for the number of shares of
common stock of IBR as calculated by the following formula. The parties agree
that the value of IBR at closing shall be approximately $133,000,000 (the "A-2
Net Transfer Value"), which is based upon the sum of the A-1 Transfer Value and
the agreed upon valuation of IBR
3
<PAGE> 225
of approximately $30,000,000, which value and the A-2 Net Transfer Value will
be adjusted if necessary to reflect the amount of the Salomon Brothers
valuation for IBR and DSC. For purposes of this transaction, the parties also
agree that IRG and its subsidiaries will have a value at closing of $7,000,000.
At closing of Transaction A-2, IBR shall issue to the stockholders of IRG the
number of shares of IBR common stock which, when multiplied by the per share
value of the IBR shares issued and outstanding at the closing, equals
$7,000,000, and IBR will issue to DSC the number of shares of IBR common stock
which, when multiplied by the per share value of the IBR shares issued and
outstanding at the closing, equals $3,000,000. The shares of IBR stock which
are distributed to IRG stockholders will be divided among the stockholders of
IRG in proportion to their respective pre-closing holdings of stock of IRG. If
the IBR Closing does not occur on or before January 31, 1996, DSC and IRG agree
that the transaction with IBR will be terminated and DSC and IRG will proceed
with Transaction A-1 which shall occur on or before March 15, 1996.
No certificates or scrip representing fractional shares of IBR common
stock shall be issued upon the surrender for exchange of certificates
representing IRG stock; accordingly, any such fractional interests shall
entitle the owner thereof to be issued one full share of IBR stock per
fractional share.
3. Renegotiation of Debt of Exhibit A Corporations. The Exhibit
A Corporations are in the process of renegotiating debt held by banks and/or
other lenders (hereinafter
4
<PAGE> 226
collectively referred to as the "Banks"). DSC has been and is continuing to
negotiate with the Banks the terms of some or all of said debt (the
"Renegotiations"). The Renegotiations may include reaching agreements with
some or all of the Banks to cancel the debt in consideration for DSC issuing
and delivering to such Banks, after the Closing Date, newly issued shares of
IRG if Transaction A-1 is closed, or newly issued shares of IBR if Transaction
A-2 is closed. IRG acknowledges and agrees that one or more of the Banks may
require that after the closing the IRG shares carry demand, piggyback and/or
shelf registration rights and that the costs of any such registration will be
borne by IRG. The Renegotiations may also include reaching agreements with the
Banks whereby after the Closing, IRG, if Transaction A-1 is closed, or IBR if
Transaction A-2 is closed, will, after the Closing, pay off the debts in full
or in part, restructure the debts, and/or agree with the Banks that certain of
the debts be transferred and assigned to a wholly owned subsidiary of IRG or
IBR.
4. Capital, Corporate Actions and Shareholder Approval
On or before October 10, 1995, DSC must notify IRG if it will proceed with
transaction A-1 or Transaction A-2. Thereafter, IRG shall take all necessary
or desirable corporate action including a special board of directors meeting
and, if required by NASD, NASDAQ or otherwise, a special meeting of
shareholders, and the following actions:
5
<PAGE> 227
a. IRG shall cause an 8-K Form to be prepared by IRG's SEC counsel to be
submitted to the SEC for its review, and DSC agrees that it will
timely provide sufficient information concerning DSC and/or IBR as
appropriate to permit IRG to prepare an 8-K Form.
b. IRG shall notify shareholders (if required) of a shareholders meeting
to authorize IRG to enter into either Transaction A-1 or Transaction
A-2 as appropriate. Richard Bradbury and Jack Birnholz, represent and
warrant that as directors, and as shareholders owning 72% of the
issued and outstanding stock of IRG, that they will vote to approve
the transaction which was selected by DSC on or before October 10,
1995.
c. DSC, a foreign corporation, must immediately execute a subscription
agreement which among other things shall acknowledge that it will
acquire the IRG shares pursuant to Transaction A-1 for investment
purposes only, and such shares shall be subject to SEC Rule 144 and
will not be tradeable in the market without registration unless
subject to an exemption from registration. IRG shall cause the IRG
common stock being issued to DSC pursuant to Transaction A-1 to carry
piggyback, shelf and
6
<PAGE> 228
demand registration rights. After the closing of Transaction A-1,
upon demand by DSC, IRG at its cost will immediately cause the
registration of such shares tendered by DSC.
d. After the Closing of Transaction A-1, IRG shall immediately call for a
special meeting of the shareholders to increase the number of Directors
from five (5) to seven (7) and to elect six (6) new Directors retaining
one (1) director designated by IRG at the time of Closing.
5. Closing
The closing of Transaction A-1 shall occur on November 30, 1995. For the
alternative transaction, the closing of Transaction A-2 shall occur on or before
January 31, 1996. At the closing, the following shall occur:
a. For Transaction A-1, IRG shall deliver to DSC certificates for common
stock of IRG in exchange for the common stock of the Exhibit A
Corporations and assignment of the Contract Rights.
7
<PAGE> 229
b. All necessary documents and share certificates customarily
associated with the transaction shall be tendered by DSC, IBR
and IRG to properly consummate Transaction A-1 or Transaction
A-2 and the transfer of ownership of the common stock.
6. Conditions Precedent to IRG's Obligation to Close
IRG's obligation to close transaction A-1 or A-2 shall be subject to
the satisfaction of the following conditions:
a. DSC or IBR as appropriate shall have received board of
directors and majority shareholders' approval;
b. IRG shall receive the valuations prepared by Salomon Brothers,
to be attached hereto as Exhibit B, and which shall establish
the values contained in this Agreement in paragraphs A-1 and
A-2.
c. IRG shall have received opinions, on or before November 10,
1995 unless otherwise extended by mutual agreement of the
parties, written in English from DSC's counsel in Mexico
opining to the validity of the corporate status of the Exhibit
A
8
<PAGE> 230
Corporations, the ownership of the properties and the Contract
Right properties.
d. The truth and accuracy in all material respects of all
representations and warranties and the satisfaction of all
conditions;
7. Conditions Precedent to DSC's Obligation to Close
DSC's obligation to close transaction A-1 or A-2 shall be subject to
the satisfaction of the following conditions:
a. IRG's board of directors and shareholders shall have approved the
transaction;
b. IRG shall have received all required or desirable approvals and
consents from governmental authorities and agencies, the SEC,
NASD and third parties;
c. The due diligence review which shall be conducted on or before
November 1, 1995 by DSC shall not have revealed any matter having
a material adverse effect on the transaction;
9
<PAGE> 231
d. The truth and accuracy in all material respects of all
representations and warranties and the satisfaction of all
conditions;
e. At least ten (10) days prior to the closing, IRG shall
provide to DSC a business plan which will set forth
IRG's profit and marketing objectives for the ensuing year.
Included therein will be IRG's plan of action and financial
budget to achieve said objectives. Simultaneous or prior to
the closing, Richard Bradbury shall have entered into a one
year employment contract which is satisfactory to Mr.
Bradbury and DSC; and Jack Birnholz shall have entered into a
one year employment contract which is satisfactory to Mr.
Birnholz and DSC; Mr. Bradbury and Mr. Birnholz will receive
the same salary, without bonus or stock awards, as reflected
for the year of 1994 in IRG's 10K Report for the year ending
December 31, 1994;
f. Since June 30, 1995, except for the Caye Bokel transaction
with Golden Eagle and the Trinity transaction referenced in
this Agreement both of which have been terminated, the
business of IRG and its subsidiaries shall have been
conducted in the ordinary
10
<PAGE> 232
course, and there shall have been no material adverse change
in the business prospects, operations, earnings, assets or
financial condition of IRG and its subsidiaries;
9. IRG shall not have issued a dividend, redemption or similar
distribution, or any stock split, recapitalization or stock
issuance of any kind, since June 30, 1995 except as
specifically described in this Agreement;
h. IRG shall not have received a notice or demand by any
dissenting shareholder of IRG to the transactions contemplated
by this Agreement which has resulted in a lawsuit or threatened
lawsuit which could have a materially adverse effect on the
transaction, or which has resulted in an appraisal proceeding
regarding the valuation of the proposed transaction
contemplated herein.
8. Working Capital
By October 15, 1995, DSC will make a loan of $25,000 to IRG for working capital
costs and $15,000 for transaction costs incurred in this transaction. The loan
and any subsequent loan referenced in this paragraph will be made pursuant to a
loan agreement, and the loan(s) will be
11
<PAGE> 233
secured by IRG accounts receivable. Within thirty (30) days of receipt of any
such loan(s), IRG will provide DSC with documentation of its use of the
loan(s). Thereafter, up to the closing, IRG shall submit, seven (7) days in
advance of the first day of each month, a monthly budget to be approved by DSC
such approval not to be unreasonably withheld. Unless disapproved, the budget
will be deemed approved five days after submission to DSC. DSC shall make
additional loans pursuant to a loan agreement between DSC and IRG to be secured
by IRG accounts receivable in accordance with and not to exceed the following
schedule:
<TABLE>
<S> <C>
November 1, 1995: $25,000
December 1, 1995: $25,000
January 1, 1996: $25,000
February 1, 1996: $25,000
March 1, 1996: $25,000
</TABLE>
DSC shall only be obligated to make the above loans for December 1, 1995 and
thereafter if DSC has selected Transaction A-2, or if the parties by mutual
agreement have extended the closing date for Transaction A-1. IRG acknowledges
and agrees that to the extent that DSC brings new appraisal work to IRG, DSC's
obligation to contribute as set forth in the above schedule will be reduced by
the revenue received by IRG less appraiser's fees and expenses incurred
therein.
9. Transaction Expenses
Each party shall bear its own transaction expenses for this matter.
12
<PAGE> 234
10. Trinity Transaction
It is acknowledged by IRG that it has terminated a pending acquisition of
assets by IRG from Trinity Energy Group, et. al., as previously disclosed in
IRG's 10-KSB and 10 QSB.
11. Executive Offices
The existing executive offices of IRG are located in Miami, Florida. DSC's
executive offices are currently located in Mexico City, Mexico. Post closing,
the IRG Board of Directors will take appropriate action establishing both
operational and administrative responsibilities for the various operating
entities.
12. NASDAQ
As soon as practical after the closing of Transaction A-1, IRG will submit an
application to NASDAQ for a listing on NASDAQ's National Market or other
exchanges as directed by the new Board of Directors.
13. Representations and Warranties of DSC. DSC represents and
warrants to IRG that:
13
<PAGE> 235
a. On the date of Closing, DSC has or will cause good and unencumbered
title to the shares of stock of the Exhibit A Corporations, except as
described in Exhibit A to be transferred to IRG.
b. The Exhibit A Corporations have properly filed or caused to be filed
all federal, government of Mexico, state, local, and foreign income
and other tax returns, reports and declarations that are required by
applicable law to be filed by them, and have paid, or made full and
adequate provisions for the payment of, all federal, government of
Mexico, state, local and foreign income and other taxes properly due
for the periods covered by such returns, reports, and declarations,
except such taxes, if any, as are adequately provided for in the DSC
Audited Financial Statements.
c. There is no litigation pending or threatened, nor have any summons,
notices or warning been received from any governmental agency or
department with respect to any material fine, or material violation of
any law or ordinance, or other type of enforcement proceeding,
including but not limited to environmental matters, with respect to
the Exhibit A Corporations
14
<PAGE> 236
which involves in the aggregate a potential monetary recovery in
excess of $500,000 in United States dollars for all such litigation,
claims or fines, except for that litigation as set forth on Exhibit C
which is attached hereto and incorporated herein by reference, and
which exhibit contains a brief description as to the nature of each
claim or violation and the amount sought or demanded if the matter
involves a potential monetary recovery, and a summary of any other
non-monetary recovery or relief sought or requested.
d. The Exhibit A Corporations own the two hotels, Qualton Ixtapa and
Qualton Vallarta, and the real estate properties referenced on
Exhibit A in the percentage of ownership reflected on Exhibit A. The
two hotels are each insured in the name of the owner of said property
against all such risks as are normally insured against, all premiums
on such insurance have been paid, and the said insurance policies are
in good standing.
e. The DSC Audited Financial Statements shall be true and accurate in all
material respects for the periods indicated for the statement and shall
not omit any material fact or circumstance necessary or required to
prevent the financial information from being
15
<PAGE> 237
misleading. Since the date of the latest period covered by the DSC
Audited Financial Statement and except as specifically referenced in
this Agreement, the Exhibit A Corporations shall have conducted their
businesses only in the ordinary and usual course.
14. Representation and Warranties of IRG
a. IRG is authorized to issue 10,000,000 shares of common stock for
value, U.S. $0.001, of which 8,398,112 shares are validly issued,
fully paid and non-assessable, and are outstanding. IRG's
shareholders have or will cause an increase in the number of
authorized shares to 450,000,000. IRG owns all of the issued and
outstanding shares of stock of all of its subsidiaries: International
Realty Group (Holdings), Inc., a Florida corporation; The Appraisal
Group, Inc., a Florida corporation; Appraisal Group International,
Inc., a Florida corporation; IRG Financial Services, Inc., a Florida
corporation; U.S. Property Investment and Auction, Inc., a Florida
corporation; Caye Bokel, Ltd., a Belize corporation, and Stragix
International, Inc., a Florida corporation which in turn owns 75% of
Appraisal Group International Rt., a Hungary corporation;
16
<PAGE> 238
b. IRG and its subsidiaries own no real properties except the Caye Bokel
property and two vacant lots in LaGrange, Texas, and all leases of
real or other property are valid, enforceable in accordance with their
terms, and not in default.
c. IRG and its subsidiaries have properly filed or caused to be filed all
United States federal, state, local, and foreign income and other tax
returns, reports and declarations that are required by applicable law
to be filed by them, and have paid, or made full and adequate
provisions for the payment of, all federal, state, local, and foreign
income and other taxes properly due for the periods covered by such
returns, reports, and declarations, except such taxes, if any, as are
adequately reserved against in the IRG Audited Financial Statements.
Based upon due inquiry by IRG, IRG to the best of its knowledge and
belief states that Appraisal Group International Rt. is in compliance
with this paragraph.
d. There is no litigation pending or threatened, nor have any summons,
notices or warning been received from any governmental agency,
department with respect to any material fine, or material violation of
any law or ordinance, or other type of
17
<PAGE> 239
enforcement proceeding, including but not limited to environmental
matters, with respect to IRG or its subsidiaries which involve a
potential monetary recovery in excess of $25,000 in United States
dollars, except as set forth on Exhibit D which will be attached
hereto at the Closing and incorporated herein by reference, which
exhibit will contain a brief description as to the nature of each
claim or violation and the amount sought or demanded if the matter
involves a potential monetary recovery, and a summary of any other
non-monetary relief sought or requested.
e. For Transaction A-1, IRG has or will have on the date of Closing good
and unencumbered title to the shares of IRG stock necessary to
complete this transaction as provided in paragraph A-1 above, free and
clean of all mortgages, liens and encumbrances of any nature, and has
or will have on the Closing Date the power and authority to transfer
said shares to DSC free and clear of liens and encumbrances on the
Closing Date.
f. Except as specifically referenced in this Agreement, none of IRG or
its subsidiaries have or will enter into any transaction, incur any
18
<PAGE> 240
obligation or conduct business affairs except in the normal course of
business between June 30, 1995 and the Closing Date.
9. All of the IRG Audited Financial Statements and filings with the
Securities and Exchange Commission shall be true and accurate in all
material respects for the periods indicated, and shall not omit any
material fact or circumstance necessary or required to prevent the
information from being misleading. Since the date of the last IRG
Audited Financial Statement, IRG and its subsidiaries have no
liabilities, fixed or contingent which are not fully provided for in
the IRG Audited Financial Statements, except for trade payables
incurred in the ordinary course of business. IRG shall provide a list
of liabilities of IRG and its subsidiaries as of the Closing Date
which shall be certified by IRG as true and correct, and incorporated
herein by reference.
h. IRG and its subsidiaries have, and in the past have had no labor
agreements, and no employee benefit plans sponsored, maintained or
contributed to by IRG or its subsidiaries for the benefit of
employees, officers or directors.
19
<PAGE> 241
i. To the best of IRG's knowledge and belief, IRG and its
subsidiaries are in good standing with the SEC, NASD, and each
state and country where they conduct business and have
received no notification or inquiry giving reasonable cause to
believe otherwise, and IRG will provide at closing good
standing certificates from each such state in the United
States.
15. Press Releases. The parties shall consult with each other at
all times until the Closing with respect to press releases at such time as they
may be desirable or as they may be obligatory with respect to IRG, and shall
cooperate with respect to reviewing and suggesting the contents of such press
releases and determining the best methods and procedures for distributing said
press releases to the public.
16. Governing Law. With respect to Transaction A-1, this
Agreement shall be governed by the laws of the Republic of Mexico, and the
parties hereby submit to the nonexclusive jurisdiction thereof. With respect
to Transaction A-2, this Agreement shall be governed by the laws of Delaware,
and the parties hereby submit to the non-exclusive jurisdiction thereof.
20
<PAGE> 242
B. DUE DILIGENCE
1. Within fourteen (14) days after execution of this Agreement, DSC
shall give IRG the DSC Audited Financial Statements through
December 31, 1994 for the Exhibit A corporations excepting Malecon
Cancun, S.A. de C. V. and Corporation Immobiliaria del Norte, S.A.
de C. V., and unaudited financial statements through June 30,
1995. On or before November 1, 1995, DSC shall give IRG unaudited
financial statements through September 30, 1995. All DSC audited
and unaudited financial statements will be conformed to generally
accepted accounting principles in the United States.
2. Within five (5) business days after execution of this Agreement
IRG shall provide to DSC the following information, and such other
information as DSC shall reasonably request, with respect to the
companies and/or properties involved in this transaction:
a. FINANCIAL STATEMENTS AND TAX RETURNS
Tax returns and audited financial statements of income,
balance sheets, statements of capital surplus, and statement of
changes in financial position and
21
<PAGE> 243
notes thereto of each of the companies for the last three fiscal
years, and unaudited interim financial statements of income,
balance sheets, etc. through September 30, 1995.
b. SUBSIDIARIES
IRG shall provide DSC with a list of all IRG subsidiaries
including each domestic or foreign corporation with tax I.D.
number, in which the company owns a 10% or more interest.
c. CHARTER
Copies of the certificate of incorporation, articles of
incorporation and any amendments to date, of the companies.
d. BY-LAWS
Copies of the By-Laws, as amended to date, of the
companies.
e. SECURITIES
Specimen of all securities of each of the companies
presently outstanding including options, warrants and other
rights, and the number of shares, units or principal amount
thereof outstanding as of the then present date.
22
<PAGE> 244
f. OPTIONS
Copies of stock options or warrants outstanding relating to
the companies' shares together with a list of the number of units
outstanding as of then present date and the holders thereof.
g. SHAREHOLDERS LIST
A list for each of the companies as of a recent date,
indicating the number of shares held by each shareholder and the
address of the shareholders.
h. QUALIFICATIONS LIST
A list indicating, as to each of the companies and
subsidiaries, each state of jurisdiction in which it is qualified
to do business, conducts business, or owns, leases or licenses
real or personal property.
i. MINUTES
Copies of minutes of all the meetings of shareholders,
directors, and committees of directors of each of the companies.
23
<PAGE> 245
j. DIRECTORS AND OFFICERS
A list showing each director and officer of each of the
companies, their resumes, including social security numbers and
backgrounds as of the date of this Agreement.
k. LITIGATION
A list showing all litigation pending against any of the
companies.
l. SEC, NASD AND NASDAQ
Copies of all correspondence to or from IRG and the SEC,
NASD or NASDAQ from January 1, 1992 to present.
C. TRANSACTIONS PRIOR TO CLOSING
IRG, its subsidiaries and the Exhibit A Corporations shall not undertake
any transaction, declare any dividend or other distribution or issue shares of
stock, or undertake any other transaction or incur any commitment not in the
ordinary course of business between the date of this Agreement and the closing,
except as contemplated by this Agreement. DSC and IRG agree that prior to the
closing IRG will issue such shares of common stock as necessary up to 500,000
shares to the Sellers of the Caye Bokel property to IRG to satisfy in full any
and all obligations
24
<PAGE> 246
IRG has to the Sellers in connection with IRG's purchase of the Caye Bokel
property including any interest which IRG may owe to the Sellers.
D. COMMISSIONS
Both DSC and IRG agree that there are no brokers, agents or financial
advisors involved in this transaction, and shall hold each other harmless
against all claims for commissions from any source.
E. NOTICES TO DSC OR IRG
Any notice sent to DSC relating to this Agreement shall be sent by
facsimile and Federal Express addressed as follows:
Mr. Bernardo Dominguez
Presidencia Ejecutiva
DSC, S.A. de C.V.
Monterrey 150
Col. Roma Sur
C.P. 06760, Mexico
D.F.
Fax number: 011-525-264-1591
25
<PAGE> 247
with a copy to:
Kenneth I. Trujillo, Esquire
1880 J.F.K. Blvd.
10th Floor
Philadelphia, PA 19103
Fax number: (215) 587-1699
Any notice sent to IRG relating to this Agreement shall be sent by
facsimile and Federal Express addressed as follows:
Jack Birnholz, Chairman
International Realty Group, Inc.
111 Northwest 183rd Street
Miami, Florida 33169
Fax number: (305) 651-3394
with a copy to:
Lee C. Schmachtenberg, Esq.
1533 Sunset Drive, Suite 201
Miami, Florida 33143
Fax number: (305) 666-4780
F. CONFIDENTIALITY
Each party shall keep information disclosed to it by the other party
relating to its business and financial affairs strictly confidential, except
where disclosure is required by law or the information is public knowledge. Each
party shall ensure that its obligation of confidence is observed by its
employees and professional advisors or representatives.
26
<PAGE> 248
G. HEADINGS
The headings in this Agreement are for reference purposes only and are
not intended to have any meaning or substantive effect.
This Agreement establishes the terms and conditions of the contemplated
transaction. The parties hereto agree that time is of the essence and that the
parties shall use all diligence necessary to expeditiously consummate this
transaction.
This Agreement may be executed in counterparts and facsimile copies shall
be deemed to be originals.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
(THE REMAINDER OF THIS PAGE HAS BEEN INTENTIONALLY LEFT BLANK.)
27
<PAGE> 249
DSC, S.A. de C.V.
By: /s/ Bernardo Dominguez C.,
-------------------------------
Bernardo Dominguez C.,
President and as Shareholder
INTERNATIONAL REALTY GROUP, INC.
By: /s/ Jack Birnholz and By: /s/ Richard M. Bradbury
-------------------- -----------------------------
Jack Birnholz Richard M. Bradbury
Chairman of the President, Chief
Board, Chief Financial Officer
Executive Officer and as Shareholder
and as Shareholder
28
<PAGE> 250
EXHIBIT A
DSC COMPANIES TO BE ACQUIRED BY IRG
<TABLE>
<CAPTION>
COMPANIES PROJECTS LOCATION
- ---------- -------- --------
<S> <C> <C> <C>
1. Tropical Club Ixtapa, Qualton Ixtapa Ixtapa, Guerrero
S.A. de C.V., 100% of
stock is owned by DSC
or a DSC affiliate
2. Impulsora Turistica de Qualton Vallarta Puerto Vallarta,
Occidente, S.A. de C.V. Jalisco
100% of stock is owned
by DSC or a DSC affiliate
"Suspension de pagos"
is pending
3. Tropical Club Isla Isla Mujeres Isla Mujeres,
Mujeres, S.A. de C.V. Quintana Roo
100% of stock is owned
by DSC or a DSC affiliate
4. Promocaribe, S.A.de C.V. La Concha Cozumel,
100% of stock is owned Quintana Roo
by DSC or a DSC affiliate
5. DSC Casa Blanca, S.A. Marruecos Cuernavaca,
de C.V. Morelos
100% of stock is owned
by DSC or a DSC affiliate
6. Cluster Immobiliaria De Clusters Ixtapa, Guerrero
</TABLE>
1
<PAGE> 251
<TABLE>
<S> <C> <C> <C>
Ixtapa, S.A. de C.V.
75% of stock is owned
by DSC or a DSC affiliate
7. Malecon Cancun, S.A. de C.V. Malecon Cancun, Quintana Roo
12.2% of stock is owned
by DSC or a DSC affiliate
8. Corporacion Immobiliaria Las Flores Hermosillo, Sonora
del Norte, S.A. de C.V.
30% of stock is owned
by DSC or a DSC affiliate
9. Centro de Promociones Campo de Trio Acapulco, Guerrero
Guerrero, S.A. de C.V.
100% of stock is owned
by DSC or a DSC affiliate
10. Pez Maya, S.A. de C.V., Boca Paila Boca Paila
C.V., 100% of stock Quintana Poo
is owned by DSC or a DSC
affiliate.
</TABLE>
2
<PAGE> 252
CONTRACT RIGHTS TO BE ASSIGNED TO IRG
<TABLE>
<CAPTION>
CONTRACT/PROJECTS LOCATION
- ----------------- --------
<S> <C> <C>
1. Villas Del Carbon Villas Del Carbon, Estado
74% of this property de Mexico
will be transferred to IRG.
2. Hacienda de Franco Silao, Guanajuato
75% of this property
will be transferred to IRG.
3. Santa Rosalia Santa Rosalia, Baja
80% of this property California Sur
will be transferred to IRG.
4. Los Arboledas Naucalpan, Mexico, D.F.
80% of this property
will be transferred to IRG.
5. Barradel del Tordo Barra del Tordo, Tamaulipas
75% of this property
will be transferred to IRG.
6. Las Arenas Los Cabos, Baja California Sur
80% of this property
will be transferred to IRG.
7. Diamante Country Club Alcapulco, Guerrero
80% of this property
will be transferred to IRG.
</TABLE>
3
