<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A-1
Current Report
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): August 19, 1996.
---------------
INTERNATIONAL REALTY GROUP, INC.
--------------------------------
(Exact name of registrant as specified in its charter)
Delaware 0-20180 62-1277260
-------- ------- ----------
(State or other jurisdiction of Commission File (I.R.S. Employer
incorporation) Number Identification No.)
111 Northwest 183rd Street, Suite 350, Miami, Florida 33169
- ----------------------------------------------------- -----
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (305) 944-8811
--------------
<PAGE> 2
The Registrant's Form 8-K, dated August 19, 1996 and filed with the Commission
on September 4, 1996, is hereby amended to include the financial statements
required by Item 7.a of Form 8-K and the Pro Forma financial information
required by Item 7.b of Form 8-K.
Item 7: Financial Statement and Exhibits
- ------------------------------------------
a. Financial Statements of Businesses Acquired
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>
2
<PAGE> 3
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>
3
<PAGE> 4
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>
b. Pro Forma Financial Information
International Realty Group, Inc. and Subsidiaries
Unaudited Pro-Forma Condensed Consolidated Financial Statements
Balance Sheet as of December 31, 1995 F-131
Statement of Operations Year Ended
December 31, 1995 F-132
Balance Sheet as of June 30, 1996 F-133
Statement of Operations ended
June 30, 1996 F-134
Notes to Financial Statements F-135
4
<PAGE> 5
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
INTERNATIONAL REALTY GROUP, INC.
(Registrant)
Date: October 24, 1996 By: /s/ Richard M. Bradbury
---------------- -------------------------------
Richard M. Bradbury, President
5
<PAGE> 6
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> 7
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> 8
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> 9
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> 10
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> 11
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> 12
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> 13
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> 14
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> 15
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> 16
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> 17
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> 18
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> 19
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> 20
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> 21
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> 22
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> 23
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> 24
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> 25
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> 26
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> 27
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> 28
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> 29
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> 30
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> 31
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> 32
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> 33
[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> 34
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> 35
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> 36
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> 37
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> 38
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> 39
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> 40
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> 41
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> 42
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> 43
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> 44
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> 45
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> 46
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> 47
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> 48
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> 49
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> 50
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> 51
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> 52
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> 53
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> 54
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> 55
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> 56
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> 57
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> 58
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> 59
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> 60
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> 61
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> 62
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> 63
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> 64
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> 65
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> 66
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> 67
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> 68
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> 69
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> 70
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> 71
[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> 72
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> 73
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> 74
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> 75
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> 76
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> 77
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> 78
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> 79
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> 80
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> 81
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> 82
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> 83
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> 84
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> 85
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> 86
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> 87
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> 88
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> 89
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> 90
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> 91
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> 92
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> 93
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> 94
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> 95
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> 96
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> 97
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> 98
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> 99
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> 100
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> 101
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> 102
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> 103
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> 104
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> 105
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> 106
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> 107
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> 108
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> 109
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> 110
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> 111
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> 112
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> 113
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> 114
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> 115
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> 116
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> 117
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> 118
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> 119
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> 120
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> 121
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> 122
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> 123
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> 124
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> 125
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> 126
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> 127
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> 128
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> 129
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> 130
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> 131
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> 132
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> 133
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> 134
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.
F-130
<PAGE> 135
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.
F-131
<PAGE> 136
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.
F-132
<PAGE> 137
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.
F-133
<PAGE> 138
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.
F-134
<PAGE> 139
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.
F-135
<PAGE> 140
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.
F-136
<PAGE> 141
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.
F-137
<PAGE> 142
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.
F-138
<PAGE> 143
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>
F-139
