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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File NO. 0-20180
INTERNATIONAL REALTY GROUP, INC.
DELAWARE 62-1277260
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(State of incorporation) (I.R.S. Employer Identification Number)
111 Northwest 183rd Street, Suite 518
Miami, Florida, 33169
(305) 944-8811
Securities registered under Section 12(b)
of the Exchange Act: NONE.
Securities registered under Section 12(g)
of the Exchange Act: COMMON STOCK PAR VALUE $.001.
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [ ] No [X]
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB [ ]
Revenues for the most recent fiscal year were $604,000.
The aggregate market value of shares of the registrant's voting stock held by
non-affiliates as of December 31, 1996 is significantly below $25,000,000,
although the exact amount is unavailable since there was no active market for
the registrant's common stock. The aggregate number of shares of the
registrant's voting stock held by non-affiliates as of December 31, 1996 is
approximately 3,532,187.
As of September 1, 1997, there were 9,954,313 shares of the registrant's common
stock outstanding.
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TABLE OF CONTENTS
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PART I PAGE
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ITEM 1. Description of Business 2
ITEM 2. Description of Property 4
ITEM 3. Legal Proceedings 6
ITEM 4. Submission of Matters to a Vote of Security Holders 6
PART II
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ITEM 5. Market for Common Equity and Related Stockholder Matters 6
ITEM 6. Management's Discussion & Analysis or Plan of Operations 6
ITEM 7. Financial Statements 9
ITEM 8. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 9
PART III
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ITEM 9. Directors and Executive Officers, Promoters and Control Persons; 10
ITEM 10. Executive Compensation 11
ITEM 11. Security Ownership of Certain Beneficial Owners and Management 12
ITEM 12. Certain Relationships and Related Transactions 12
ITEM 13. Exhibits and Reports on Form 8-K 14
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1
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PART I:
ITEM 1: DESCRIPTION OF BUSINESS
INTERNATIONAL REALTY GROUP, INC.,( the "Company") was incorporated in Delaware
on April 13, 1970 and operated under the name Bosco Resources Corporation until
June 10, 1973, when it ceased operations after its assets were nationalized
without compensation by the Libyan Government. The Company remained inactive
until December 15, 1986 when it acquired all of the outstanding shares of
APPRAISAL GROUP, INC. in exchange for 4,150,000 shares of common stock (after a
1 for 8 reverse split) and changed its name to APPRAISAL GROUP INTERNATIONAL
INC. Subsequently, on August 10, 1989, the Company's name was changed to
INTERNATIONAL REALTY GROUP, INC. Its principle offices are located at 111 N.W.
183 Street, Suite 518, Miami, Florida 33169. Its telephone number is (305)
944-8811.
BUSINESS OPERATIONS
The Company, together with its consolidated subsidiaries, currently operates in
two business segments: (i) real estate consulting services, and (ii) land
development.
REAL ESTATE CONSULTING SERVICES
The Company's real estate consulting services operate through its domestic and
foreign subsidiaries, which represented 55% and 45% respectively, of total
Company revenue in 1996. Domestic operations are performed through Appraisal
Group, Inc. and foreign operations are performed through Appraisal Group
International, Rt.
APPRAISAL GROUP, INC.
Appraisal Group, Inc., organized on August 21, 1974, is an appraisal and
valuation company, specializing in commercial real estate, machinery,
equipment, business and residential appraisals.
Real estate appraisals are performed on a domestic and international level,
including recent engagements in Mexico, China, Lithuania, Estonia, Panama, and
Hungary. An estimated 70% percent of appraisal revenue is derived from projects
in the United States and 30% percent from international projects. Properties
appraised include office buildings, shopping centers, apartment complexes,
hotels, resorts and golf courses. The Company also performs a large volume of
single family appraisals to fully serve its clients.
Commercial appraisals are generally full narrative appraisals prepared in
accordance with the Uniform Standards of Professional Appraisal Practice. The
appraisals are utilized by governmental agencies, banks, institutions, property
owners, developers and attorneys for a variety of purposes, including financing,
insurance, portfolio analysis, litigation support, estate analysis and current
market valuation. The majority of the residential appraisals are completed on
forms promulgated by the Federal National Mortgage Association (Fannie Mae) and
Federal Home Loan Mortgage Corporation (FHLMC) and are normally utilized for
financing and estate purposes. In addition, the company performs business
valuations, equipment and machinery valuations, and litigation support for its
clients.
Except for salaries of the Chief Executive Officer and administrative staff, the
staff of Appraisal Group, Inc. consists of independent contractors who accept
assignments pursuant to negotiated fee arrangements. All appraisers must be
licensed and certified real estate appraisers, pursuant to applicable law. In
addition to the appraisers in the Miami office, the
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PART I: CONTINUED.
ITEM 1: DESCRIPTION OF BUSINESS, CONTINUED.
company has contracts with other licensed and certified independent contractors
on a national basis.
Title XI of the Federal Financial Institutions Reform Recovery and Enforcement
Act of 1989 ("FIRREA") effectively has regulated the appraisal profession. Under
FIRREA, federally-insured financial institutions are required to use state
licenses and certified appraisers. In connection with this statute, the
Appraisal Foundation was formed to represent various appraisal organizations and
is the parent organization of the Appraiser Qualifications Board and the
Appraisal Standards Board.
The Appraisal Standards Board sets standards for contents and methodology of
appraisals. Appraisal Group, Inc. appraisers perform their assignments in
compliance with relevant provisions and regulations of both boards noted above
as well as the Uniform Standards of Professional Appraisal Practice.
APPRAISAL GROUP INTERNATIONAL, RT.
Appraisal Group International, Rt. ("AGII Rt."), organized on June 6, 1990 under
the laws of the country of Hungary, is 75% owned by Stragix International, Inc.
("Stragix"), which is itself a wholly-owned subsidiary of the Company. The
remaining 25% of AGII Rt. is owned by existing AGII Rt. management. See "Certain
Relationships and Related Transactions". AGII Rt. is engaged in valuations of
businesses, real estate, management, consulting, privatization management and
trade brokerage in Central and Eastern Europe.
The majority of business of AGII Rt. has been the valuation of businesses and
real estate, primarily for the State Property Agency, an agency of the Hungarian
government and local city municipalities. In addition, AGII Rt. is an official
court appointed liquidator. As court appointed liquidator, the Company is
responsible to oversee the operational and financial integrity of the companies
it is liquidating. Currently AGII Rt. is liquidating approximately 130 separate
companies on behalf of the court. The complete liquidation process for an
individual company takes approximately two years, after which the Company
typically earns a fee of approximately 3% of the net collected proceeds of the
liquidation.
COMPETITION
There is significant competition in the field of appraisals and real estate
consulting services. Industry sources estimate that the appraisal service
industry in the United States includes over 84,000 state licensed and certified
appraisers in the United States. The Company's competition generally comes from
three types of organizations; (i) "Big Six" accounting firms; (ii) multi-office
appraisal firms; and (iii) small appraisal firms. A majority of the large
accounting firms have appraisal departments. The name recognition of these large
accounting firms provides such firms with a competitive advantage, however, the
Company believes that their relatively high fees for services allow market
penetration by firms such as the Company. All of the major accounting firms
possess substantially greater financial and other resources that the Company.
The most prominent United States multi-office appraisal firms are American
Appraisal Company, Marshal & Stevens, Joseph Blake & Associates, Cushman &
Wakefield and Valuation Consultants International Ltd. The majority of appraisal
firms employ one to five appraisers who are primarily involved in residential
appraisals, although many small firms do perform commercial appraisals. These
firms may have lower overhead than the Company, however, they may lack the
expertise to perform complex commercial appraisals and accept assignments on an
international basis as the Company routinely does.
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PART I: CONTINUED.
ITEM 1: DESCRIPTION OF BUSINESS, CONTINUED.
LAND DEVELOPMENT
Pursuant to the Company's reverse merger transaction with DSC and Hemisphere,
the Company acquired interests in five properties located in Mexico. See "Item
12--Certain Relations and Related Transactions" and "Item 2--Description of
Properties". The Company believes that each of the Mexican properties is
suitable for future development as either a resort, residential or commercial
property. Since the properties secure the Company's obligations under the DSC
and Hemisphere Note, the Company does not plan to undertake any development of
such properties until after the DSC and Hemisphere Notes have been converted.
(While no assurances can be given, the Company expects that the conversion of
the DSC and Hemisphere Notes will occur in the first quarter of 1998.) Any
development of the properties thereafter is contingent upon the Company
obtaining necessary financing. Potential sources of financing include mortgage
financing from financial institutions located in the United States of Mexico, or
the issuance of equity securities of the Company. The Company has no present
understanding, agreement or commitment for financing any such property and there
can be no assurance that financing will be available to the Company on
commercially reasonable terms or at all.
OTHER ACTIVITIES:
U.S. PROPERTY INVESTMENT & AUCTION, INC. ("U.S. PROPERTIES"), was organized in
March 1987 and is a licensed Florida Real Estate Broker. The company provides to
its foreign and domestic clients real estate brokerage and property management
services.
IRG FINANCIAL SERVICES, INC. ("IRG FS") was organized in June 1992. The company
provides financial consulting and mortgage loan packaging services to its
foreign and domestic clients.
EMPLOYEES
The Company, as a whole, employs 16 full-time employees. In addition, the
Company retains 21 independent contractors to perform professional services on a
regular basis and additional independent contractors to perform professional
services on an ad hoc basis.
ITEM 2: DESCRIPTION OF PROPERTY
The Company, or through its subsidiaries, currently is subject to two (2) leases
for office facilities and owns seven (7) properties.
The Company leases 2,500 square feet of office space located in Miami, Florida,
which serves as the Company's corporate headquarters and its domestic
operations. In addition, it leases 2,000 square feet of office space in
Budapest, Hungary, which is utilized by its foreign operations. Both leases are
on a month-to-month basis. The Company's aggregate lease payments per month are
approximately $4,000 .
The Company's real estate properties include:
Clusters Inmobiliaria de Ixtapa, S.A. de C.V. ("Clusters Ixtapa"), a company
formed under the laws of Mexico on July 24, 1991, owns land in Ixtapa, on the
Pacific coast of Mexico, in the
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PART I: CONTINUED.
ITEM 2: DESCRIPTION OF PROPERTY, CONTINUED.
State of Guerrero, Mexico. The Company has a 75% interest. The 26-acre partially
developed property is within the 208-acre planned unit development called
"Marina Ixtapa" located in the town of Ixtapa-Zihuatanejo on the Pacific Coast
of Mexico, approximately 240 kilometers northwest of the port of Acapulco, which
is majority (75%) owned by the Company's subsidiary Clusters Inmobiliaria de
Ixtapa, S.A. de C.V. The preliminary site work has been completed and the
property is being held for future development. Although the Company presently
has no understandings or agreements with respect to the development of the
property, the development plans call for the construction of 144 residential and
commercial condominium units in three buildings of four-stories each, and the
development of 60 single family residential villas. Management estimates that
future improvement and development costs to complete this project are
approximately $37,000,000 over a five-year period. The project would be
completed in intervals in order to allow the Company to build the project in 20%
stages through a revolving construction line of credit. The Company is aware of
at least five similar projects developed or under development in Marina Ixtapa.
Preliminary market research indicates that the competition in the market for
single family developments is intense, while the competitive conditions for the
commercial and condominium developments is less intense. The property is subject
to a mortgage in the approximate amount of $5,628,426 at an interest rate of
5.25%. which the Company holds, and such mortgage is eliminated in
consolidation. Pursuant to the DSC Transaction, the Company acquired from DSC
the $5,625,000 debt obligation of Clusters Ixtapa on the Closing Date.
Caye Bokel, Limited ("Caye Bokel"), a company formed under the laws of Belize,
on January 27, 1995, owns an 87-acre property on the Island of Caye Bokel,
country of Belize, which is being held for future development and is not subject
to a mortgage. Centro de Promociones Guerrero S.A. de C.V. ("Centro"), a company
formed under the laws of Mexico on March 13, 1989, owns land located in
Acapulco, State of Guerrero, Mexico, known as Campo de Tiro. The eight-acre,
partially developed residential property is being held for future development
and is subject to a mortgage in the approximate amount of $632,200 as of
December 31, 1996.
Nueva Tierra, a company formed under the laws of Mexico on October 6, 1995, is
the General Partner of the following Participating Associations, a form of
limited partnership in Mexico.
Villas del Carbon, a Participating Association formed under the laws of Mexico
on January 19, 1996, owns a residential development located in Villa del Carbon,
State of Mexico in which Nueva Tierra has a 79.08 percent interest. The 24-acre
property, which is presently being held by the Company for future development,
is partially developed and presently has a clubhouse, roads and utility lines to
the property boundary. Preliminary development plans call for development of 180
home sites for sale to builders or individuals who wish to construct weekend
country houses. This property is not subject to a mortgage.
Hacienda del Franco, a Participating Association formed under the laws of Mexico
on January 10, 1996, owns a residential development project located near Silao
in the State of Guanajuato, in which Nueva Tierra has an 81.13 percent interest.
The property consists of approximately 236 acres of land and includes a
traditional colonial style hacienda. The property is being held for future
development centered around the hacienda. The property is subject to a mortgage
in the amount of $465,800 as of December 31, 1996.
Bahia de Cortes, a Participating Association formed under the laws of Mexico on
February 7, 1996, owns a resort development project located in Baja California
near La Paz, in which
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PART I: CONTINUED.
ITEM 2: DESCRIPTION OF PROPERTY, CONTINUED.
Nueva Tierra has a 77.89 percent interest. The property, which is being held for
future development, consists of approximately 3,451 acres of land including over
five kilometers of beachfront property The property is not subject to a
mortgage.
Two (2) developed vacant lots totaling 1 acre located in Clear Lake Pines, La
Grange, Texas, a second-home recreational development. The property has no
mortgage nor encumbrances and there are no plans for development as the property
is held for investment.
REAL ESTATE INVESTMENT POLICY
Certain of the Company's properties are held for investment purposes. The
Company's real estate investment policy is to acquire both existing income
producing real estate properties to provide current income and cash flow and
undeveloped properties to provide capital appreciation. The real estate policy
is not subject to shareholder approval and does not restrict the Company to a
particular type, size or geographic location for any such acquisitions or the
number or amount of mortgages that may be placed on any one piece of property.
The Company seeks to acquire properties that: (i) are significantly under-valued
in relation to its market or type; (ii) where the properties debt can be
restructured to provide enhanced cash flow; (iii) where a property is partially
developed and can be acquired for a discount and the development completed and
operated at above-average returns. At this time, management believes there are a
number of such opportunities in Mexico, the Caribbean and other South American
countries. The Company may acquire its ownership through the direct purchase of
the property or through the acquisition of the Common Stock or other equity
securities of an entity whose primary activity is the operation or development
of the real estate property. Subject to the Board of Director's fiduciary
obligations to shareholders, the Company may acquire properties for either
investment or development that are owned directly or indirectly by affiliates of
the Company. The Company may acquire its real estate acquisitions through the
issuance of its Common Stock or the assumption of existing debt.
ITEM 3: LEGAL PROCEEDINGS
None.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5: MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is quoted on the OTC Bulletin Board under the symbol
IRGR. During 1996, there was no trading activity for the Company's Common Stock.
The Company has not declared any cash dividends during 1996. As of December 31,
1996, there were 899 holders of record of Common Stock, with 9,954,250 shares
issued and outstanding. Such number of shares of Common Stock does not include
105,638,300 shares which will be issued upon conversion of the DSC Note and
Hemisphere Note after the Company has increased its authorized shares of Common
Stock. See Item 12 "Certain Relationships and Related Transactions".
ITEM 6: MANAGEMENT'S DISCUSSION & ANALYSIS OR PLAN OF OPERATION:
The following discussion and analysis covers any material changes in financial
condition since December 31, 1995 and any material changes in the results of
operations for the 12 months ended December 31, 1996, as compared to the same
period in 1995. As discussed herein, the Company consummated a share exchange
transaction resulting in a reverse acquisition which has been accounted for in a
manner similar to a pooling of interests. (See Item 12 "Certain
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PART I: CONTINUED.
ITEM 6., CONTINUED.
Relationships and Related Transactions".) Accordingly, the consolidated
financial statements have been retroactively restated to include the accounts of
the companies transferred by DSC and Hemisphere, at historical cost. This
discussion and analysis should be read in conjunction with the audited financial
statements for periods prior to the consummation of the transaction with DSC and
Hemisphere, contained elsewhere herein.
RESULTS OF OPERATIONS:
REVENUE which was derived from consulting services for the year 1996
decreased 46% from $1,129,400 in 1995 to $604,000 in 1996. Revenues from foreign
operations decreased 60% from $690,800 in 1995 to $272,500 in 1996. The decrease
in foreign revenue is attributed to the decrease in consulting assignments from
various Hungarian government agencies. Revenues from domestic operations
decreased 35% from $531,300 in 1995 to $331,500 in 1996. OPERATING EXPENSES for
the year 1996 decreased 26% from $1,502,700 in 1995 to $1,106,000 in 1996.
SELLING, GENERAL AND OVERHEAD OPERATING EXPENSES for the year 1996 were $412,500
versus $378,400 for the comparable period in 1995. Included in this expense
category for 1996 are expenses associated with the reverse acquisition,
amounting to $186,000. Included in the $186,000 of such expenses were $43,600
incurred in 1995 and recognized on the Closing date of the acquisition. DIRECT
expenses including the production of appraisal reports, appraisers' fees,
travel, reproduction, photography and all related expenses decreased 35% from
$620,800 in 1995 to $403,500 in 1996. The decrease in direct expenses follows
the overall decline in revenue for the period. PAYROLL AND RELATED BENEFITS
decreased 44% with $233,400 in 1996 compared to $415,700 in 1995. AMORTIZATION
and DEPRECIATION expenses were consistent between the periods. There were no
operating expenses attributable to land development activities during the
period.
OTHER INCOME AND EXPENSES for the comparative periods were significantly
influenced by the inclusion of the results of operations of Clusters Ixtapa as a
result of the transaction with DSC and Hemisphere. Clusters Ixtapa had received
loans in the principal amount of $23,007,000 (the "NAFIN Debt") from its lender,
National Financiera, S.N.C. Bank ("NAFIN"). On December 29, 1995, Clusters
Ixtapa, DSC and NAFIN entered into a restructuring plan with respect to the
NAFIN Debt, to which the Company was not a party. Pursuant to the restructuring
plan, DSC assumed the NAFIN Debt in exchange for Clusters Ixtapa's payment of
approximately $15,341,000 and DSC's payment of the difference. DSC has advised
the Company it intends to repay such difference, as well as certain other debt
of DSC to NAFIN, through the transfer from DSC to NAFIN of approximately
15,991,000 shares of the Company's Common Stock upon the conversion of the DSC
Note. Subsequently, pursuant to the DSC Transaction, the Company acquired from
DSC a $5,628,426 debt obligation of Clusters Ixtapa on the Closing Date. See
Item 12 "Certain Relationships and Related Transactions".
The majority of interest income ($7,031,900 of the $7,125,900) for the year 1995
(compared to $61,100 in 1996) is attributable to the funds on deposit with NAFIN
on behalf of Clusters Ixtapa. The majority of interest expense ($9,372,700 of
the $9,399,700) for the year 1995 (compared to $128,000 in 1996) is attributable
to Clusters Ixtapa. Gain or (losses) for exchange rate fluctuations $1,458,500
in 1995, compared to ($110,000) in 1996 is attributable to Mexican operations.
Appraisal Group International, Rt. recognized a gain on sale of securities in
the amount of $112,200 during 1996.
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PART II. CONTINUED
ITEM 6. CONTINUED
LIQUIDITY AND CAPITAL RESOURCES:
For the years ended December 31, 1996 and 1995, the Company and its subsidiaries
reported net losses of $569,800 and $975,100, respectively. Although revenues
from the Company's core business (appraisals) have decreased over the past few
years, the Company believes the declines will stabilize. During the early part
of 1997, management instituted new initiatives to increase its appraisal volume.
The results of its initiative has not been disappointing, however, the Company
needs to continue its current efforts in order to reverse the negative trend of
prior years.
CASH FLOW FROM OPERATIONS. The Company incurred for year-end December 31, 1996 a
net loss of $569,800, while maintaining a positive cash flow from operations of
$278,700 compared to a net loss of $975,100 and a deficient cash flow from
operations of $69,300 in 1995.
WORKING CAPITAL. The Company's current assets exceed its current liabilities by
approximately $186,400. Included in current liabilities are accrued officer's
salaries amounting to approximately $462,200 and shareholder loans of
approximately $58,000. During 1995 the Company entered into a share exchange
transaction with DSC and Hemisphere, which was closed on August 19, 1996.
Pursuant to an agreement, DSC agreed to advance $300,000 of working capital to
the Company. As of December 31, 1995 and December 31, 1996 $62,500 and $195,025
of such advances had been made to the Company and were included in the
convertible note as of the Closing date. An additional $100,000 of said advances
have been made to the Company as of the date hereof.
LONG-TERM DEBT. At December 31, 1996, Long-Term debt totaled $1,215,400 compared
to $764,200 in 1995. The increase in long-term debt reflected the acquisition of
Newland Corporation on the Closing date, and the assumption of approximately
$550,600 of debt. Of the long-term debt, mortgages payable secured by the
underlying real estate, payable to Mexican financial institutions totaled
$1,098,000. Unsecured debt attributable to the Company's operating subsidiaries
totaled $113,400 of which $68,400 is attributable to foreign operations and
$49,000 to domestic operations.
CURRENCY RISK. The Company's operating entities are not subject to direct
currency conversion risks. The Company's primary operating entities provide
consulting services to their clients in their own geographic locations. All
consulting services performed by APPRAISAL GROUP, INC. based in Miami, Florida
are reported and paid in U.S. dollars. All assets and liabilities of Hungarian
operations are translated into U.S. dollars at period-end exchange rates with
the resulting translation adjustment recorded in accumulated translation
adjustment in shareholder's equity.
The functional currency of the Mexican companies is the U.S. dollar. Therefore,
all peso denominated transactions represent foreign currency transactions.
Foreign currency transaction gains and losses are included in determining net
income. All foreign currency transaction gains or losses in 1995 or 1996 were
attributable to the Mexican operations.
The Hungarian exchange rate used for the years ended December 31, 1996 and 1995
was HUF$176.25 and HUF$139.81, respectively. The Mexican exchange rate used for
the years ended December 31, 1996 and 1995 was MNP$7.87 and MNP$7.74,
respectively.
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PART II. CONTINUED
ITEM 6. CONTINUED
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
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In connection with the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995 (the "Reform Act"), the Company is hereby
providing cautionary statements identifying important factors that could cause
the Company's actual results to differ materially from those projected in
forward-looking statements (as such term is defined in the Reform Act) made by
or on behalf of the Company herein or orally, whether in presentations, in
response to questions or otherwise. Any statements that express, or involve
discussions as to expectations, beliefs, plans, objectives, assumptions or
future events or performance (often, but not always, through the use of words or
phrases such as "will result", "are expected to", "will continue", "is
anticipated", "estimated", "projection" and "outlook") are not historical facts
and may be forward-looking and, accordingly, such statements involve estimates,
assumptions, and uncertainties which could cause actual results to differ
materially from those expressed in the forward-looking statements. Such
uncertainties include, among other, the following: (i) the Company's ability to
obtain additional financing to implement its business strategy; (ii) real estate
investment risks, including the potential for increases in real property taxes;
(iii) real estate development risks, including obtaining building permits or
necessary zoning changes, construction delays strikes, adverse weather
conditions and other conditions beyond the control of the Company; (iv)
illiquidity of real estate investments; (v) the financial condition of the
Company's clients; (vi) imposition of new regulatory requirements affecting the
Company; (vii) a downturn in general or local economic conditions where the
Company owns real property; (viii) the delay or failure to properly manage
growth and successfully integrate acquired companies and operations; (ix) lack
of geographic diversification; (x) effect of uninsured loss and (ix) other
factors which are described in further detail in the Company's filings with the
Securities and Exchange Commission.
The Company cautions that actual results or outcomes could differ materially
from those expressed in any forward-looking statements made by or on behalf of
the Company. Any forward-looking statement speaks only as of the date on which
such statement is made, and the Company undertakes no obligation to update any
forward-looking statement or statements to reflect events or circumstances after
the date on which such statement is made or to reflect the occurrence of
unanticipated events. New factors emerge from time to time, and it is not
possible for management to predict all of such factors. Further, management
cannot assess the impact of each such factor on the business or the extent to
which any factor, or combination of factors, may cause actual results to differ
materially from those contained in any forward-looking statements.
ITEM 7: FINANCIAL STATEMENTS
The Consolidated Financial Statements of the Company and Notes thereto are
contained elsewhere herein.
ITEM 8: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.
None.
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PART II. CONTINUED.
ITEM 9: DIRECTORS AND EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.
EXECUTIVE OFFICERS OF THE COMPANY
The executive officers of the Company are:
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NAME AGE POSITION HELD WITH THE COMPANY DATE OF SERVICE
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Bernardo Dominguez 36 Chairman of the Board of Directors 1996
Richard Bradbury 53 Director, President & Chief Executive Officer 1993
Pablo Macedo 66 Secretary 1996
Alton Hollis 70 Director 1986
</TABLE>
Pursuant to the DSC and Hemisphere Transaction, simultaneous with Closing on
August 19, 1996, Jack Birnholz, Geoffrey Bell, John Day and Shirley Birnholz
submitted their resignations to the Board of Directors. The Board appointed
Bernardo Dominguez C. to fill one of the vacancies and appointed Pablo Macedo to
serve as the Company's Secretary. (See "Certain Relationships and Related
Transactions" contained herein). There are no family relationships among any of
the executive officers of the Company. There have been no events under
bankruptcy or insolvency laws, no criminal proceedings and no judgments or
injunctions material to the evaluation of the ability and integrity of any
executive officer during the past five years.
The following information is provided for Messrs. Dominguez, Bradbury and
Hollis:
Bernardo Dominguez, Chairman of the Board of the Company, has been with
the Company since August 1996, when the Company completed a share exchange
transaction with DSC, S.A. de C.V.. Mr. Dominguez has been President and Chief
Executive Officer of DSC since 1986 to present... See "Certain Relationships and
Related Transactions".
Richard M. Bradbury has been a Director, President and Chief Financial
Officer of the Company since March 1993. Since August 1996, Mr. Bradbury assumed
the responsibility as Chief Executive Officer. From 1987 to 1993, Mr. Bradbury
served as Executive Vice President of J.S. Karlton Company, New York, where he
was responsible for portfolio and financial management of the firm's office,
industrial, apartment and retail real estate holdings.
General Alton Hollis (USAF Retired), has been a Director of the Company
since 1986. Since his retirement from Military Service in 1981, General Hollis
has served as President of Hollis Appraisal Services, a real estate brokerage
and appraisal firm in Atlanta, Georgia.
Pablo Macedo, Secretary of the Company, has been with the Company since
August 1996, when the Company completed a share exchange transaction with DSC,
S.A. de C.V.. Mr. Macedo has been Executive Vice President of DSC from 1992 to
present. From 1984 to 1992, he was Chief Executive Officer of Promociones
Turisticas Banamex, S.A. de C.V.
ITEM 10: EXECUTIVE COMPENSATION.
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
directors, executive officers and persons who own more than 10% of a registered
class of the Company's equity securities to file with the Securities and
Exchange Commission (the "SEC") initial reports of ownership and reports of
changes in ownership in the Company's common
10
<PAGE> 12
PART II. CONTINUED.
ITEM 10: CONTINUED.
stock and other equity securities of the Company. Executive officers, directors
and persons who own more than 10% of a registered class of the Company's equity
securities are required by the SEC regulation to furnish the Company with copies
of all Section 16(a) forms they file with the SEC.
The following table provides information concerning the compensation paid to
persons who served as the Company's chief executive officer during the 1996
fiscal year and other executive officers of the Company who received salary and
bonus in excess of $100,000 for the 1996 fiscal year.
<TABLE>
<CAPTION>
- ----------------------- --------- -------------- --------- ---------- --------------- ---------- ----------- ----------
NAME/POSITION YEAR SALARY BONUS OTHER RESTRICTED STOCK LTIP ALL
ANNUAL STOCK OPTIONS OTHER
COMP AWARDS PAYOUTS COMP
- ----------------------- --------- -------------- --------- ---------- --------------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Richard Bradbury 1996 100,000(1) 0 0 0 0 0 0
1995 100,000(2) 0 0 202,500(3) 0 0 0
1994 100,000(3) 0 0 800,500 0 0 0
- ----------------------- --------- -------------- --------- ---------- --------------- ---------- ----------- ----------
</TABLE>
NOTES:
(1) Includes accrued and deferred salary of $92,300.
(2) Includes accrued and deferred salary of $82,700.
On December 31, 1995, the Company awarded to Mr. Bradbury 2,500 shares
of Common Stock in consideration for his services rendered in his
capacity as a Director at $.782 per share.
(3) Includes accrued and deferred salary of $95,000.
On December 31, 1994 the Company awarded to Mr. Bradbury 500 shares of
Common Stock in consideration for services rendered in his capacity as
Director of the Company. In addition, Mr. Bradbury's employment
agreement was amended and the revised agreement awarded 300,000 shares
and reduced the number of options from 700,000 to 400,000 and modified
the option terms. 200,000 options became exercisable in 1995 and 1996.
The Company is unable to calculate the dollar value of the such shares
since there was no market for the Common Stock at the time of issuance.
DIRECTORS COMPENSATION: Members of the Board of Directors are entitled to
receive 500 Shares of Common Stock for each meeting attended. During 1996, no
shares of Common Stock were issued for such service.
ITEM 11: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth the beneficial ownership of the Common Stock (as
of the date of this Form 10KSB and as adjusted to give effect to the conversion
of the DSC and Hemisphere notes) by: (i) each of the Company's Officers and
Directors, (ii) each person who is known by the Company to beneficially own more
than 5% of the outstanding Common Stock, and (iii) all of the officers and
directors as a group.
11
<PAGE> 13
PART II. CONTINUED.
ITEM 11. CONTINUED.
<TABLE>
<CAPTION>
Name and Address Before Conversion of DSC and After Conversion of DSC and
of Beneficial Owner Hemisphere Notes (1) Hemisphere Notes (2)
- ---------------------------------------------- ----------------------------------- -----------------------------------
PERCENTAGE OF PERCENTAGE OF
AMOUNT CLASS AMOUNT CLASS
--------- ----- --------- -----
<S> <C> <C> <C> <C> <C>
Jack Birnholz (3) 4,160,000 41.8% 4,160,000 3.6%
Richard M. Bradbury (3) 1,253,000 12.6% 1,253,000 1.1%
Alton Hollis (3) 9,000 * 9,000 *
DSC S.A. de C.V. (4) 485,930 4.8% 37,449,960 32.4%
Bernardo Dominguez Moreno (4) 485,930 4.8% 37,449,960 32.4%
Bernardo Dominguez Cereceres (4) 485,930 4.8% 37,449,960 32.4%
Jorge Lopez Nunez (4) 485,930 4.8% 37,449,960 32.4%
Pablo Macedo (4) 0 0
Hemisphere Developments Limited (5) 514,070 5.2% 53,277,340 46.1%
Monique Roggero-Ciana (5) 514,070 5.2% 53,277,340 46.1%
Nacional Financiera, S.N.C. (6) 0 15,991,000 13.8%
- ---------------------------------------------- -------------- -------------------- ---------------- ------------------
All Officers and Directors as a
Group (3 persons) 1,747,930 17.5% 38,711,960 33.5%
</TABLE>
* Represents less than one percent of class
(1) As of the date of this Form 10KSB, there are 9,954,187 shares of the
Company's Common Stock issued and outstanding.
(2) Reflects the beneficial ownership of the Common Stock after the conversion
of the DSC and Hemisphere Notes, which is expected to occur approximately
20 days after the distribution of an Information Statement to the Company's
stockholders and gives effect to the transfer of approximately 15,991,000
shares of Common Stock from DSC to NAFIN. See "The Transaction". As of such
date there will be approximately 115,592,487 shares of Common Stock issued
and outstanding.
(3) Such person's address is c/o International Realty Group, Inc., 111 NW 183
Street, Suite 518, Miami, Florida 33169
(4) Such person's address is c/o DSC, Constituyentes No.647, Col.16 de
Septiembre, Mexico D.F.11810
(5) Such person's address is c/o Hemisphere, Atlantic House, 4-8 Circular Road,
Douglas, Isle of Man
(6) Such person's address is c/o Insurjendes Sur No.1971, Tower 4, Floor 9,
Mexico City 01020, Mexico
ITEM 12: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
There were no related party transactions between any officer or director which
involved the Company or any of its subsidiaries during 1995 and 1996, except the
following. In 1995, the Board of Directors of Appraisal Group International, RT
(AGII Rt.) with the concurrence of its parent, authorized the exchange of twenty
five percent (25%) of AGII Rt. common stock with certain
directors/officers/employees of the Corporation for securities of other
Hungarian corporations. The fair values of the securities were based on the
estimated fair value of AGII Rt. compared to the net equity of the companies in
the exchange of securities. The securities, included in other assets at December
31, 1995 were sold to third parties in 1996 at a gain of $112,200.
The Company consummated a share exchange transaction ("Transaction") with DSC,
S.A. de C.V. ("DSC") and Hemisphere Developments Limited ("Hemisphere") on
August 19, 1996 (the "Closing Date"). The Transaction has been accounted for in
a manner similar to a pooling of interest. The assets acquired by the Company as
described below were accounted for at historical cost.
12
<PAGE> 14
PART II. CONTINUED
ITEM 12: CONTINUED.
Pursuant to the terms of the Amended and Restated Agreement entered into between
the parties as of August 19, 1996, the Company acquired the following assets
from DSC and Hemisphere as of August 19, 1996; (i) DSC's 100 percent interest in
Centro de Promociones Guerrero S.A. de C.V. ("Centro"); (ii) DSC's 75 percent
interest in Clusters Inmobiliaria de Ixtapa, S.A. de C.V. ("Clusters Ixtapa");
(iii) a promissory note ("Clusters Note") in the principal amount of $5,628,426
of Clusters Ixtapa; (iv) DSC's 30 percent interest in Nueva Tierra, S.A. de C.V.
("Nueva Tierra"); and (v) Hemisphere's 100 percent interest in Newland
Corporation, which, in turn, holds a 70 percent interest in Nueva Tierra. Nueva
Tierra owns a majority interest and is the general partner of the following real
estate Asociacion en Participacion ("Participating Associations"), a form of
limited partnership in Mexico: (x) Villas Del Carbon; (y) Hacienda del Franco;
and (z) Bahia de Cortes. The assets acquired by the Company are collectively
referred to herein as the "Assets". For additional information regarding the
Assets, see "Item 2--Description of Properties".
In exchange for the Assets, the Company issued to DSC on the Closing Date
485,930 shares of the Company's Common Stock and a Convertible Promissory Note
(the "DSC Note") in the principal amount of $4,858,828 convertible into
52,875,030 shares of the Common Stock. The Company issued to Hemisphere on the
Closing Date 514,070 shares of Common Stock and a Convertible Promissory Note
("Hemisphere Note") in the principal amount of $4,848,558 convertible into
52,763,270 shares of Common Stock.
The Company may force the conversion of the DSC and Hemisphere Note after the
Company's Certificate of Incorporation has been amended to increase the number
of authorized shares of Common Stock from 10,000,000 to 450,000,000. The Company
intends to amend its Certificate of Incorporation with the State of Delaware as
soon as possible after the expiration of the twenty day period following the
mailing of an Information Statement to stockholders. The Company anticipates
that, at the earliest, the authorized Common Stock will be increased and the DSC
and Hemisphere Notes converted to Common Stock during the fourth quarter of
1997. The DSC and Hemisphere Notes are secured by the Assets and matures on
January 1, 1998.
The Amended and Restated Agreement provides that DSC will make $300,000 in
working capital advances to the Company. DSC made approximately $195,000 of such
advances to the Company as of the Closing Date and approximately $295,000 as of
the date hereof. The amount of such advances have been added to the amount of
the capital contributed to the Company in Transaction.
The shares of Common Stock issued to DSC and Hemisphere on the Closing Date and
upon conversion of the DSC and Hemisphere Note have and will be issued by the
Company in reliance on the exemption from registration under the Securities Act
of 1933 provided by Regulation S. The Agreement provides that the shares of
Common Stock issued to DSC will be afforded certain demand and piggyback
registration rights.
On the Closing Date, John Day, Geoffrey Bell and Jack Birnholz resigned from the
Company's Board of Directors and the remaining members of the Board -- Richard
Bradbury and Alton Hollis -- appointed Bernardo Dominguez C. (the President of
DSC) to fill a vacancy on the Company's Board of Directors. Pablo Macedo was
elected Secretary of the Company on the Closing Date.
13
<PAGE> 15
PART II. CONTINUED
ITEM 12: CONTINUED.
A change in control of the Company will occur upon the conversion of the DSC and
Hemisphere Notes. At such time, DSC will own approximately 53,360,960 shares of
Common Stock or 46.2 percent of the then outstanding shares of Common Stock, and
Hemisphere will own approximately 53,277,340 shares of Common Stock or 46.1
percent of the then outstanding Common Stock. The DSC percentage includes the
15,991,000 shares of Common Stock (approximately 14.2 percent) that DSC intends
to subsequently transfer to NAFIN. As a result, DSC and Hemisphere will be in a
position to determine the outcome for the election of directors and thereby
control the Company. The change in control is expected to occur during the
fourth quarter of 1997. At such time, approximately 115,592,487 shares of Common
Stock will be issued and outstanding.
The Company intends to call a special meeting of the stockholders after the
conversion of the DSC and Hemisphere Notes to elect three to five directors, one
of which will be designated by Hemisphere, one of which will be designated by
the Company, and the remainder will be designated by DSC.
ITEM 13: EXHIBITS AND REPORTS ON FORM 8-K
(a) 1. INDEX TO FINANCIAL STATEMENTS
PAGE
----
INTERNATIONAL REALTY GROUP - CONSOLIDATED FINANCIAL STATEMENTS
Independent auditors' report 1
Consolidated balance sheet 2
Consolidated statements of operations 3
Consolidated statements of shareholders' equity 4
Consolidated statements of cash flows 5-6
Summary of significant accounting policies 7-9
Notes to consolidated financial statements 10-12
2. EXHIBITS
3.1 Articles of Incorporation of the Company, as filed with the
Secretary of State of the State of Delaware on April 13, 1970.
Incorporated herein by reference to Exhibit (b)1. to the
Company's May 5, 1992 Form 8.
3.2 The Bylaws of the Company, as filed with the Secretary of
State of the State of Delaware on April 13, 1970. Incorporated
herein by reference to Exhibit (b)1. to the Company's May 5,
1992 Form 8.
3.3 Agreement of Merger between Silverado Mining, Inc. and Bosco
Resources, Corp., dated April 15, 1970 as filed with the
Secretary of State of the State of Delaware on April 13, 1970.
Incorporated herein by reference to Exhibit (b)3. to the
Company's May 5, 1992 Form 8.
3.4 Articles of Amendment and Restatement of the Articles of
Incorporation of the Company, as filed with the Secretary of
State of the State of Delaware on December 15, 1986.
Incorporated herein by reference to Exhibit (b)5. to the
Company's May 5, 1992 Form 8.
14
<PAGE> 16
3.5 Articles of Amendment and Restatement of the Articles of
Incorporation of the Company, as filed with the Secretary of
State of the State of Delaware on August 10, 1989.
Incorporated herein by reference to Exhibit (b)6. to the
Company's May 5, 1992 Form 8.
10.1 Agreement of Acquisition between Bosco Resources, Inc. and
Appraisal Group, Inc. Incorporated herein by reference to
Exhibit (b)4. to the May 5, 1992 Form 8.
10.2 Employment Agreement, dated January 1, 1992 between Jack
Birnholz and the Company. Incorporated herein by reference to
Exhibit (b)7. to the May 5, 1992 Form 8.*
10.3 Employment Agreement, dated January 1, 1992 between M.
Goldstein and the Company. Incorporated herein by reference to
Exhibit (b)8. to the May 5, 1992 Form 8.*
10.4 Employment Agreement, dated March 1, 1993 and modified
December 31, 1994 between Richard M. Bradbury and the Company,
incorporated herein by reference to the exhibits in the 1994
Form 10-KSB, dated May 31, 1995.*
10.5 Amended and Restated Agreement, dated as of August 19, 1996,
between the Company, DSC S.A. de C.V. and Hemisphere
Developments, Limited, incorporated herein by reference to the
exhibit in the Company's Amendment No. 2 (Two) Current Report
on Form 8-K, as filed with the Commission on November 26,
1997.
10.6 Convertible Note, dated as of August 19, 1996, in favor of
DSC, S.A. de C.V., incorporated herein by reference to the
exhibit in the Company's Amendment No. 2 (Two) Current Report
on Form 8-K, as filed with the Commission on November 26,
1997.
10.7 Convertible Note, dated as of August 19, 1996, in favor of
Hemisphere Developments, Limited, incorporated herein by
reference to the exhibit in the Company's Amendment No. 2
(Two) Current Report on Form 8-K, as filed with the Commission
on November 26, 1997.
21.1 The following table sets forth, as of December 31, 1995 the
name of each subsidiary of the Company's percentage ownership
and each jurisdiction of incorporation of the subsidiary:
15
<PAGE> 17
<TABLE>
<CAPTION>
STATE OR
DATE OF COUNTRY OF
NAME OF SUBSIDIARY OWNERSHIP INCORPORATION INCORPORATION
- ------------------ --------- ------------- -------------
<S> <C> <C> <C>
U.S. Companies:
- ---------------
The Appraisal Group, Inc. 100 August 21, 1974 Florida
U.S. Properties Investment & Auction, Inc. 100 March 31, 1987 Florida
Appraisal Group Int'l., Inc. 100 July 7, 1989 Florida
Stragix Int'l., Inc. 100 April 1, 1990 Florida
IRG Financial Services, Inc. 100 June 15, 1992 Florida
Foreign Companies
- -----------------
Centro de Promociones Guerrero S.A. de C.V. 100 March 13, 1989 Mexico
Appraisal Group Int'l., Rt. 75 June 6, 1990 Hungary
Cluster Inmobiliaria de Ixtapa, S.A. de C.V. 75 July 24, 1991 Mexico
Caye Bokel Limited 100 January 27, 1995 Belize
Newland Corp. 100 December 12, 1995 Marshall Islands
Nueva Tierra, S.A. de C.V. 30 October 6, 1995 Mexico
Hacienda del Franco, A.P. 81.13 January 10, 1996 Mexico
Villas del Carbon A.P. 79.08 January 19, 1996 Mexico
Bahia de Cortes A.P. 77.89 February 7, 1996 Mexico
</TABLE>
27.1 Financial Data Schedule
*Denotes a management contract or compensatory plan or arrangement.
(b) REPORTS ON FORM 8-K
The Company filed with the Securities and Exchange Commission
the following report on Form 8-K during the last quarter of
the period covered by this Report.
September 5, 1996 Consummation of the share exchange
transaction between the Company, DSC S.A. de C.V. and
Hemisphere Developments, Limited as of August 19, 1996.
September 25, 1996 Changes in Registrant's Certifying
Accountant, as of April 30, 1994.
October 25, 1996 Form 8-K/A-1 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.
16
<PAGE> 18
SIGNATURES
IN ACCORDANCE WITH SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934,
THE COMPANY HAS DULY CAUSED THIS ANNUAL REPORT ON FORM 10-KSB TO BE SIGNED ON
ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
INTERNATIONAL REALTY GROUP, INC.
By: /s/ RICHARD M. BRADBURY
----------------------------------
Richard M. Bradbury, President
and Director
(Principal Executive and Financial
Officer)
Date: December 2, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Company and in
the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ BERNARDO DOMINGUEZ C.
- -------------------------
Bernardo Dominguez C. Chairman of the Board of Directors December 2, 1997
/s/ RICHARD M. BRADBURY
- -----------------------
Richard M. Bradbury President and Director December 2, 1997
(Principal Executive and Financial
Officer)
/s/ ALTON B. HOLLIS
- -------------------
Alton B. Hollis Director December 2, 1997
</TABLE>
17
<PAGE> 19
INTERNATIONAL REALTY GROUP, INC. AND SUBSIDIARIES
INDEPENDENT AUDITORS' REPORT
AND
CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996 AND 1995
<PAGE> 20
INTERNATIONAL REALTY GROUP, INC. AND SUBSIDIARIES
YEARS ENDED DECEMBER 31, 1996 AND 1995
CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Independent auditors' report 1
Consolidated financial statements:
Consolidated balance sheets 2
Consolidated statements of operations 3
Consolidated statements of shareholders' equity 4
Consolidated statements of cash flows 5 - 6
Summary of significant accounting policies 7 - 9
Notes to consolidated financial statements 10 - 21
</TABLE>
<PAGE> 21
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, 1996 and 1995, 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 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 provide a reasonable basis for our opinion.
In our opinion, based on our audit, the 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, 1996 and 1995, 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 & DeSanctis, P.A.
North Miami Beach, Florida
September 26, 1997
<PAGE> 22
INTERNATIONAL REALTY GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
ASSETS LIABILITIES AND SHAREHOLDERS' EQUITY
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Real estate, at cost: Liabilities:
Property held for future Mortgage and notes
development $ 10,556,100 $ 9,939,500 payable $ 1,215,400 $ 764,200
------------- ------------- ------------- -----------
Receivables: Accounts payable 344,600 261,200
Due from controlling
shareholder 2,230,200 1,658,400
Accrued and other liabilities 804,300 520,700
------------- -----------
Accounts receivable,
net of allowance for
doubtful collections
of $13,800 at
December 31, 1996. 320,500 221,500 Total current liabilities 2,364,300 1,546,100
------------- ------------- ------------- -----------
2,550,700 1,879,900
Minority interest 1,341,800 1,358,100
------------- -----------
Cash and equivalents 7,600 19,500
Shareholders' equity:
Furniture, equipment, Common stock, $.001 par; authorized
and improvements 170,100 205,900 10,000,000 shares; issued 9,954,187 shares
in 1997 and 8,954,187 shares in 1996 10,000 9,000
Excess of cost over
estimated fair value
of net assets acquired 123,200 140,800
Capital in excess of par 4,917,400 4,695,300
Other assets 26,000 589,800
Convertible notes, convertible into
105,638,300 shares of common stock 9,707,400 9,490,900
Cumulative translation adjustment (216,900) (203,500)
Accumulated deficit (4,674,800) (4,105,000)
------------- -----------
9,743,100 9,886,700
Less shares of common stock held
in treasury, at cost 15,500 15,500
------------- -----------
9,727,600 9,871,200
------------- ------------- ------------- -----------
$ 13,433,700 $ 12,775,400 $ 13,433,700 $12,775,400
============= ============= ============= ===========
</TABLE>
Read the accompanying summary of significant accounting policies and notes to
consolidated financial statements, both of which are an integral
of this consolidated financial statement.
2
<PAGE> 23
INTERNATIONAL REALTY GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1996 AND 1995
1996 1995
----------- -----------
Revenues:
Revenues from services provided $ 604,000 $ 1,129,400
----------- -----------
Operating expenses:
Amortization and depreciation 56,600 87,800
Direct 403,500 620,800
Payroll and related benefits 233,400 415,700
Selling, general and administrative 412,500 378,400
----------- -----------
1,106,000 1,502,700
----------- -----------
Loss before other income (expense), minority
interest and provision for
income taxes (benefit) (502,000) (373,300)
Other income (expense):
Interest income 61,100 7,126,900
Interest expense (128,000) (9,399,700)
Gain on sale of securities 112,200 --
Gains (losses) on exchange rate fluctuations (110,400) 1,458,500
Other expenses 3,200 (51,500)
----------- -----------
Loss before minority interest and provision
for income taxes (benefit) (563,900) (1,239,100)
Minority interest in loss of subsidiaries 25,000 250,700
----------- -----------
Loss before provision for income taxes (benefit) (538,900) (988,400)
Provision for income taxes (benefit) 30,900 (13,300)
----------- -----------
Net loss $ (569,800) $ (975,100)
=========== ===========
Loss per share of common share: $ (0.06) $ (0.10)
=========== ===========
Weighted average common shares outstanding 9,954,187 9,324,395
=========== ===========
Read the accompanying summary of significant accounting policies and notes to
consolidated financial statements, both of which are an integral
of this consolidated financial statement.
3
<PAGE> 24
INTERNATIONAL REALTY GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
Common Stock Capital in Cumulative Treasury Stock
------------------ Excess of Convertible Translation Accumulated -----------------
Total Shares Amount Par Note Adjustment Deficit Shares Amount
---------- --------- ------- ----------- ---------- --------- ----------- ------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, beginning $ 301,900 7,898,112 $ 7,900 $ 597,000 $ -- $(184,100) $ (103,400) 17,500 $(15,500)
Pooling of interests with
DSC related group 9,599,100 -- -- 12,625,600 -- -- (3,026,500) -- --
---------- --------- ------- ----------- ---------- --------- ----------- ------ --------
Balance begining, as stated 9,901,000 7,898,112 7,900 13,222,600 -- (184,100) (3,129,900) 17,500 (15,500)
Year ended December 31, 1995:
Effect of currency
fluctuations on
net assets of
foreign subsidiaries (19,400) (19,400)
Portion of contributed
assets associated
with convertible note -- (9,490,900) 9,490,900
Gain on sale of related
parties 507,200 507,200
Common stock issued
in exchange for land,
compensation and
cancellations of
long-term debt 457,500 1,056,075 1,100 456,400
Net loss (975,100) (975,100)
---------- --------- ------- ----------- ---------- --------- ----------- ------ --------
Balance, December 31, 1995 9,871,200 8,954,187 9,000 4,695,300 9,490,900 (203,500) (4,105,000) 17,500 (15,500)
Year ended December 31, 1996
Effect of currency
fluctuations on net
assets of foreign
subsidiaries (13,400) (13,400)
Common stock issued
to combining group -- 1,000,000 1,000 90,900 (91,900)
Change in net assets
associated with
convertible note -- (308,400) 308,400
Notes contributed by
controlling shareholder 123,200 123,200
Cash contributions and
cancellation of note by
controlling shareholder 237,500 237,500
Assumption of net assets
in formation of
participating
associations 46,400 46,400
Share of additional
contributions into
participating
associations by
controlling shareholder 32,500 32,500
Net loss (569,800) (569,800)
---------- --------- ------- ----------- ---------- ---------- ------------ ------ ---------
Balance, ending $9,727,600 9,954,187 $10,000 $ 4,917,400 $9,707,400 $(216,900) $(4,674,800) 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
of this consolidated financial statement.
4
<PAGE> 25
INTERNATIONAL REALTY GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
------------------------- ---------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Sources of cash:
Clients and other $ 1,089,200 $ 1,230,400
Interest 72,400 $ 1,161,600 102,700 $ 1,333,100
------------ --------------
Uses of cash:
Cash paid to:
Direct costs 320,100 656,900
Operating 389,900 389,400
Payroll and related benefits 140,500 244,300
Interest 3,500 108,600
Income taxes 28,900 882,900 3,200 1,402,400
------------ ----------- -------------- -----------
Cash provided by (used-in) operating activities 278,700 (69,300)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Source of cash:
Sales of securities - 1,818,100
Controlling shareholder 279,800 6,950,600 8,768,700
--------------
Uses of cash:
Acquisition of equipment 7,700 21,500
Real estate 6,900 700
Acquisition costs - 43,900
Controlling shareholder 515,100 529,700 1,844,500 1,910,600
------------ ----------- -------------- -----------
Cash provided by (used-in) investing activities (249,900) 6,858,100
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Sources of cash:
Long-term debt 62,500
Shareholders loans 26,700 89,200
--------------
Use of cash:
Payment of:
Long-term debt 21,000 6,873,000
----------- -----------
Cash (used in) financing activities (21,000) (6,783,800)
----------- -----------
EFFECT OF EXCHANGE RATES ON CASH AND EQUIVALENTS (19,700) (19,400)
----------- -----------
DECREASE IN CASH AND EQUIVALENTS (11,900) (14,400)
CASH AND EQUIVALENTS, BEGINNING 19,500 33,900
----------- -----------
CASH AND EQUIVALENTS, ENDING $ 7,600 $ 19,500
=========== ===========
</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.
5
<PAGE> 26
INTERNATIONAL REALTY GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
Reconciliation of net loss to cash provided
by (used-in) operating activities:
Net loss $ (569,800) $ (975,100)
------------ ------------
Adjustments to reconcile net loss to cash
provided by (used-in) operating activities:
(Gains) losses due to exchange rate fluctuations 110,400 (1,458,500)
(Gain) on sale of securities (112,200) -
Recognition of acquisition costs previously
capitalized 43,900 -
Amortization and depreciation 56,600 87,800
Minority interest in loss of subsidiaries (25,000) (250,700)
Common stock issued as compensation - 32,100
Bad debt 53,800 73,300
Changes in assets and liabilities:
Accounts receivable (6,600) 128,700
Other assets 446,800 (60,100)
Accounts payable 4,200 (113,800)
Accrued and other liabilities 276,600 2,467,000
------------ ------------
Total adjustments 848,500 905,800
------------ ------------
Cash provided by (used-in) operating activities $ 278,700 $ (69,300)
============ ============
Supplemental schedule of non-cash activities:
Operating activities:
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
Net assets contributed by
participating associations 46,400 -
------------ ------------
$ 46,400 $ 446,700
============ ============
Financing activities:
Common stock issued in exchange for
cancellation of long-term debt $ - $ 23,100
Common stock and convertible note issued in
exchange for net assets received in combination 308,400 9,490,900
------------ ------------
$ 308,400 $ 9,514,000
============ ============
</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.
6
<PAGE> 27
INTERNATIONAL REALTY GROUP, INC AND SUBSIDIARIES
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
YEARS ENDED DECEMBER 31, 1996 AND 1995
RECLASSIFICATION OF FINANCIAL STATEMENT PRESENTATION:
The Company has changed its balance sheet presentation to a non-classified
balance sheet due to the change from principally the service industry to
principally real estate holdings and made other reclassifications (see note
2). Balances for the year ended December 31, 1995 have been reclassified
where appropriate to conform to the December 31, 1996 financial statement
presentation. Accordingly, the consolidated financial statements have been
restated to include the accounts of the companies transferred by DSC and
Hemisphere at historical costs.
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.
PRINCIPLES OF CONSOLIDATION:
The consolidated financial statements include the accounts of International
Realty Group, Inc. and all subsidiaries. All significant inter-company
balances and transactions have been eliminated in consolidation.
REAL ESTATE HELD FOR FUTURE DEVELOPMENT:
Real estate held for future development consists of undeveloped and partially
developed land and is carried at the lower of cost or net realizable value.
Construction costs, including interest charges are capitalized while the
project is under development. No substantial construction has occurred in
1995 or 1996 and interest has not been capitalized since construction ceased.
FAIR VALUE OF FINANCIAL INSTRUMENTS:
The carrying amounts of cash and equivalents, accounts receivable, accounts
payable and accrued liabilities approximate their fair values because of the
short duration of these instruments.
IMPAIRMENT OF LONG-LIVED ASSETS:
Long-lived assets and certain identifiable intangibles held and used by the
Company are reviewed for possible impairment whenever events or circumstances
indicate the carrying amount of an asset may not be recoverable. Adoption of
this new standard did not have an impact on the Company's financial position
or results of operations.
7
<PAGE> 28
INTERNATIONAL REALTY GROUP, INC AND SUBSIDIARIES
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
YEARS ENDED DECEMBER 31, 1996 AND 1995
REVENUE RECOGNITION:
All operating revenues are generated from appraisal operations. 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 in other
assets. Billings in excess of costs and estimated earnings on uncompleted
contracts are reported in accrued and other liabilities. Provisions for
estimated losses are recorded when management determines that a loss on the
contract is probable. Substantially all service contracts have been short
term.
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:
All assets and liabilities of Hungarian operations are translated into United
States dollars at period-end exchange rates with the resulting translation
adjustment recorded in accumulated translation adjustment in shareholder's
equity. The functional currency of the Mexican companies is the U.S. Dollar.
Therefore, all peso denominated transactions represent foreign currency
transactions. Foreign currency transaction gains and losses are included in
determining net income. All foreign currency transaction gains or losses in
1995 and 1996 were attributable to the Mexican operations.
The Hungarian exchange rate used for the years ended December 31, 1996 and
1995 was HUF$176.25 and HUF$139.81, respectively. The Mexican exchange rate
used for the years ended December 31, 1996 and 1995 was MNP$7.87 and
MNP$7.74, respectively.
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:
Estimated Useful Lives
(in years)
-----------------------
Furniture and equipment 10 years
Leasehold improvements 10 years
Library 7 years
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.
8
<PAGE> 29
INTERNATIONAL REALTY GROUP, INC AND SUBSIDIARIES
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
YEARS ENDED DECEMBER 31, 1996 AND 1995
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.
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.
STOCK BASED COMPENSATION:
The Financial Accounting Standards Board recently issued Statement of
Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock Based
Compensation". This new standard encourages, but does not require, companies
to recognized compensation expense for grants of stock, stock options and
other equity instruments based on a fair value method of accounting.
Companies that do not choose to adopt the new expense recognition rules of
SFAS No. 123 will continue to apply the existing accounting rules contained
in Accounting Principles Board Opinion (APB) No. 25, but will be required to
provide pro forma disclosures of the compensation expense determined under
the fair value provisions of SFAS No. 123, if material. APB No. 25 requires
no recognition of compensation expense for the stock based compensation
arrangements provided by the Company.
The Company is required to adopt either the recognition or the disclosure
provisions of SFAS No. 123 by no later than January 1, 1997. The Company
expects to continue to follow the accounting provision of APB No. 25 for
stock based compensation and to furnish the pro forma disclosures required
under SFAS No. 123, if material.
9
<PAGE> 30
INTERNATIONAL REALTY GROUP, INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996 AND 1995
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's
operations consist of providing commercial real estate and business
valuations and appraisals in the United States and Hungary and land
development primarily in Mexico. The Company will be developing its
Mexican properties into various resort and commercial developments.
Once developed, they will engage in its marketing of resort hotel
lodging, timeshare interests, and other ancillary real estate
activities. The Company is in the preliminary stages of seeking
financing to commence development projects. No development of the
properties located in Mexico will occur until after the conversion of
the notes issued to DSC and Hemisphere, which notes are collateralized
by the properties located in Mexico.
The Company's subsidiaries and percentage owned are as follows:
STATE OR
PERCENTAGE COUNTRY DATE OF
COMPANY OWNED ORGANIZED ORGANIZATION
------- ----- --------- ------------
U.S. Companies:
Appraisal Group, Inc. (The) 100% Florida August 21, 1974
U.S. Property Investment and
Auction, Inc. 100% Florida March 31, 1987
Appraisal Group International, Inc. 100% Florida July 7, 1989
Stragix International, Inc. 100% Florida April 1, 1990
IRG Financial Services, Inc. 100% Florida June 15, 1992
Foreign Companies:
Centro de Promociones Guerrero,
S.A. de C.V 100% Mexico March 13, 1989
Appraisal Group International, RT 75% Hungary June 6, 1990
Clusters Inmobiliaria de Ixtapa,
S.A. de C.V 75% Mexico July 24, 1991
Caye Bokel, Limited 100% Belize January 27, 1995
Hacienda de Franco, Asociacion
en Participacion 81.13% Mexico January 10, 1996
Villa del Carbon, Asociacion en
Participacion 79.08% Mexico January 19, 1996
Bahia de Cortez, Asociacion en
Participacion 77.89% Mexico February 7, 1996
Newland Corporation 100% Marshall December 12, 1995
Islands
Nueva Tierra, S.A. de C.V 100% Mexico October 6, 1995
10
<PAGE> 31
INTERNATIONAL REALTY GROUP, INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996 AND 1995
2. REVERSE ACQUISITION:
Pursuant to an Amended and Restated Agreement ("Agreement") dated
August 19, 1996, (the "Closing Date"), by and among International
Realty Group, Inc. ("IRG") and DSC, S.A. de C.V. ("DSC"), and
Hemisphere Development Limited ("Hemisphere"), IRG was acquired by DSC
through a Reverse Acquisition with DSC designated as the acquiror.
Pursuant to the terms and conditions of the Agreement, DSC transferred
its 75% interest in Clusters Inmobiliaria de Ixtapa, S.A. de C.V.
("Clusters Ixtapa"), its 100% interest in Centro de Promociones
Guerrero, S.A. de C.V. ("Centro"), its 30% interest in Nueva Tierra,
S.A. de C.V. ("Nueva Tierra"), a Promissory Note ("Cluster's Note") in
the amount of $5,628,426, and cash totaling $300,000 to IRG. Hemisphere
transferred its 100% interest in Newland Corporation ("Newland"), which
holds the remaining 70% of Nueva Tierra. Nueva Tierra has interests in
three participating associations in Mexico, which are under the
management control of DSC. DSC and Hemisphere transferred net assets
totaling $9,799,300 in exchange for an aggregate of 1,000,000 shares of
Common Stock, a note to DSC in the principal amount of $4,858,828,
which is convertible into 52,875,030 shares of Common Stock and a note
to Hemisphere in the principal amount of $4,848,558, which is
convertible into 52,763,270 shares of Common Stock.
The Reverse Acquisition has been accounted for in a manner similar to
the pooling of interests method in accordance with Accounting
Principles Board Opinion No. 16, Accounting for Business Combinations,
since it represents an exchange of entities under common control.
Accordingly, the consolidated financial statements have been restated
to include the accounts of the companies transferred by DSC and
Hemisphere at historical costs.
Net sales and net income of the separate companies for the periods
preceding the acquisitions were as follows:
<TABLE>
<CAPTION>
International DSC/Hemisphere
Realty Group Combined Combined
------------ -------- --------
<S> <C> <C> <C>
Six months ended
June 30, 1996 (unaudited):
Revenues, net $ 309,800 $ - $ 309,800
Net loss 152,800 22,100 174,900
Year ended December 31, 1995:
Revenues, net 1,129,400 - 1,129,400
Net loss 359,800 615,300 975,100
</TABLE>
No intercompany transactions existed between the companies during the
periods presented and no adjustments were necessary to conform the
accounting policies of the two companies. Costs associated with
consummating the reverse acquisition are estimated to total $186,000
incurred as of December 31, 1996 which has been charged to operations.
11
<PAGE> 32
INTERNATIONAL REALTY GROUP, INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996 AND 1995
3. CONCENTRATIONS 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. No additional credit risk is
believed inherent in the Company's receivables.
A significant portion of the Company's revenues consist of fees to
major customers on credit. Net revenues in 1996 and 1995 to major
customers are as follows:
<TABLE>
<CAPTION>
1996 1995
----- ----
Amount Percentage Amount Percentage
------ ---------- ------ ----------
<S> <C> <C> <C> <C>
Domestic:
Customer A $ 34,900 10.5% $ 106,600 19.0%
======= ===== ========= =====
Foreign:
Customer A $180,500 66.4% $ 552,600 80.0%
======== ===== ========= =====
</TABLE>
Domestic customers are primarily commercial entities. Foreign customer
is Hungarian governmental agencies.
12
<PAGE> 33
INTERNATIONAL REALTY GROUP, INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996 AND 1995
4. LAND HELD FOR FUTURE DEVELOPMENT:
<TABLE>
<CAPTION>
LOCATION ACREAGE 1996 1995
-------- ------- ---- ----
<S> <C> <C> <C>
Ixtapa, Mexico 26 $ 9,054,900 $ 9,054,900
Acapulco, Mexico 8 403,600 403,600
Caye Bokel, Belize 87 456,400 449,400
Guanajuato, Mexico 236 547,200 --
Jilotepec, Mexico 24 43,100 --
La Paz, Mexico 3,451 19,300 --
La Grange, Texas 1 31,600 31,600
------------ -----------
$ 10,556,100 $ 9,939,500
============ ===========
</TABLE>
Improvements totaling $649,000 are included in the cost of land. Land
with costs totaling $950,000 is pledged as collateral on notes payable
totaling $1,098,000 as of December 31, 1996.
5. DETAILS OF FINANCIAL STATEMENT COMPONENTS:
<TABLE>
<CAPTION>
<S> <C> <C>
Furniture, equipment and improvements:
Furniture and equipment $ 164,300 $ 164,600
Leasehold improvements 14,300 12,400
Library 207,600 207,600
------------ -----------
386,200 384,600
Less accumulated deprecation
and amortization 216,100 178,700
------------ -----------
$ 170,100 $ 205,900
============ ===========
Other assets:
Acquisition costs $ -- $ 43,900
Cost and earnings in excess of billings 15,700 --
Income and VAT tax receivable -- 460,000
Deferred taxes -- 16,200
Other 10,300 69,700
------------ -----------
$ 26,000 $ 589,800
============ ===========
</TABLE>
13
<PAGE> 34
INTERNATIONAL REALTY GROUP, INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996 AND 1995
5. DETAILS OF FINANCIAL STATEMENT COMPONENTS (CONTINUED):
1996 1995
---- ----
Accrued liabilities:
Payroll and payroll taxes $ 468,800 $ 375,900
Interest 125,500 1,000
Foreign taxes, other than on income 11,600 13,600
Billings in excess of costs and earnings 33,200 7,700
Shareholder loans 58,000 26,700
Other 107,200 95,800
--------- ---------
$ 804,300 $ 520,700
========= =========
6. MORTGAGE AND NOTES PAYABLE:
Note payable, 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, bank, collateralized
by land, restructured in 1996, to
non-interest bearing, due
on March 31, 1998. 632,200 625,800
Mortgage note, bank, collateralized
by land, interest at 4.5% per
annum, over the inflation rate
index of Mexico, due in 2007. 465,800 --
Note payable, related party,
unsecured, interest at 7.25%,
due on demand. 68,400 89,400
---------- ---------
$1,215,400 $ 764,200
========== =========
14
<PAGE> 35
INTERNATIONAL REALTY GROUP, INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996 AND 1995
6. MORTGAGE AND NOTES PAYABLE (CONTINUED):
In 1996, the Company had a debt restructuring involving a modification of
terms. The interest rate changed from 6% over the Average Bank Deposit
Rate in Mexico to a non-interest bearing note. No gain or loss was
recognized.
Maturities of long-term debt subsequent to December 31, 1996 are as
follows:
Years ending
December 31, Amount
------------ ------
1997 $ 126,200
1998 677,900
1999 45,700
2000 45,700
2001 45,700
2002 and thereafter 274,200
----------
$1,215,400
==========
7. INCOME TAXES:
Components of the net deferred tax liability as reflected on the
Company's consolidated balance sheets are as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Deferred tax assets:
Accounts payable $ 49,300 $ 45,900
Accrued liabilities 175,100 134,700
Net operating loss carryforwards 413,500 395,100
----------- ----------
637,900 575,700
Less valuation allowance (624,300) (484,200)
----------- ----------
13,600 91,500
Deferred tax liabilities:
Accounts receivable (13,600) (75,300)
----------- ----------
Deferred taxes, Net $ -- $ 16,200
=========== ==========
</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, 1996 and 1995, are as follows:
Current payable (receivable):
Federal $ 14,700 $ 2,900
Foreign -- --
Deferred:
Federal -- --
Foreign 16,200 (16,200)
--------- ---------
$ 30,900 $ (13,300)
========= =========
15
<PAGE> 36
INTERNATIONAL REALTY GROUP, INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996 AND 1995
7. INCOME TAXES (CONTINUED):
The income tax benefit for the years ended December 31, 1996 and 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:
1996 1995
---- ----
Provision at statutory rate $ (183,200) $ (336,100)
Foreign taxes 16,200 (13,300)
Utilization of operating loss
carrybacks/carryforwards 92,500 --
Valuation allowance 140,100 336,100
Other differences (34,700) --
----------- ----------
$ 30,900 $ (13,300)
=========== ==========
At December 31, 1996, the Company had available federal and foreign net
operating loss carryforwards of approximately $1,216,200 which will
generally expire between 2001 and 2011.
The Company has not provided for federal income taxes on approximately
$9,200 of undistributed earnings of its foreign subsidiaries which have
been reinvested in their operations. If these earnings were
distributed, net operating loss carryforwards and foreign tax credits
available under current law would eliminate the resulting federal
income tax liability.
8. LOSS PER SHARE:
Loss per share of common stock was computed by dividing net loss by the
weighted average number of shares of common stock. Shares issued in
1996 are considered outstanding for all of 1996. 1995 weighted average
shares has been adjusted accordingly since operations include results
of combined companies. The number of shares used in the computation of
loss per share of common stock during 1996 and 1995 were 9,954,187 and
9,324,395, respectively. Had the convertible note been converted into
common stock, the net loss per share in 1996 and 1995 would be ($.01)
and (.01), respectively.
16
<PAGE> 37
INTERNATIONAL REALTY GROUP, INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996 AND 1995
9. TRANSACTIONS WITH RELATED PARTY:
In 1995, 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 securities of other
Hungarian corporations. The fair values of the securities were based on
the estimated fair value of AGI RT compared to the net equity of the
companies in the exchange of securities. The securities, included in
other assets at December 31, 1995, were sold to third parties in 1996
at a gain of $112,200.
In 1995, the Company had two employment agreements with shareholders
controlling approximately sixty-three (63%) of Company common stock.
The agreements provided for employment terms through 1995 with minimum
annual compensation and bonuses if declared by the Board of Directors.
One of those agreements was extended through 1997. The Company accrued
compensation expense totaling $100,000 and $204,000 in 1996 and 1995,
respectively. No bonuses were declared in 1996 or 1995.
In 1994, the Company acquired common stock from two related parties. In
1995, these securities were sold to related parties for a gain of
$570,200. The gain was recorded as a capital contribution.
10. COMMITMENTS:
The Company leases office facilities under an operating lease expiring
October 31, 1997. Future minimum lease payments under this agreement
are $21,000 and month to month thereafter.
During 1994, the Mexican peso was permitted to float against the U.S.
Dollar and other currencies. As a result, the peso devalued from
$3.4662 pesos/dollars to approximately $3.9413 pesos/dollars. It is not
possible to determine what effect the devaluation will have upon future
pricing or costs; however, it is management's opinion that the
devaluation will not have a material adverse effect upon the Company's
future operations.
17
<PAGE> 38
INTERNATIONAL REALTY GROUP, INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996 AND 1995
11. STOCK OPTIONS AND AWARDS:
In 1993, the Company entered into an employment agreement with a key
employee. The agreement called for 300,000 shares to be issued in
100,000 increments between 1993 and 1995. The agreement also granted
the employee an option to purchase 700,000 shares at the current market
value price at the grant date of $.205 per share. In 1994, the
agreement was amended to award the employee 300,000 shares and reduce
the number of options from 700,000 to 400,000 and modify the option
terms. 200,000 options became exercisable in 1995, which were
exercised, and 200,000 options in 1996 at fifty percent (50%) of the
average trading prices per share for the month of February, 1996.
The Company awarded eligible employees 32,575 shares of stock in 1995
and awarded the Board of Directors, some of whom are officers, 8,500
shares of stock. Amounts charged against current earnings was $32,100.
Stock option/award activity under the Agreement is as follows:
1996 1995
---- ----
Number of option shares:
Outstanding, beginning $ 200,000 $ 400,000
Add (deduct):
Granted/awarded -- 41,075
Exercised -- (241,075)
----------- ----------
Outstanding, ending 200,000 200,000
=========== ==========
Option price range
Granted $ -- $ .001
Exercised -- .001
----------- ----------
Outstanding, ending $ -- $ .001
=========== ==========
18
<PAGE> 39
INTERNATIONAL REALTY GROUP, INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996 AND 1995
12. TRUST ASSETS:
AGI RT maintains cash (1996, $15,600; 1995, $678,900) 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 operations in 1995 as other deductions.
13. SUPPLEMENTAL INFORMATION:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Charged to:
Direct:
Consulting, appraisal $ 351,900 $ 526,000
Reports, film and
other 51,600 94,800
---------- ----------
$ 403,500 $ 620,800
========== ==========
Selling, general and
administrative:
Utilities $ 30,700 $ 42,500
Bad Debts 53,800 73,300
Rent 38,000 55,400
Insurance 4,500 6,500
Office 26,500 48,600
Professional 156,600 71,600
Selling 40,800 23,100
Other 61,600 57,400
---------- ----------
$ 412,500 $ 378,400
========== ==========
</TABLE>
19
<PAGE> 40
INTERNATIONAL REALTY GROUP, INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996 AND 1995
14. BUSINESS SEGMENT:
Information about the Company's operations in different geographic
areas for the years ended December 31, 1996 and 1995 is as follows:
<TABLE>
<CAPTION>
Consolidated United
Total States Mexico Hungary
----- ------ ------ -------
<S> <C> <C> <C> <C>
Net revenues:
1996 $ 604,000 $ 331,500 $ -- $ 272,500
1995 1,129,400 561,400 -- 568,000
Loss from
continuing operations
before other deductions,
income taxes and
minority interest:
1996 (502,000) (467,100) -- (34,900)
1995 (373,300) (307,300) -- (66,000)
Identifiable assets:
1996 12,847,700 323,000 12,194,700 330,000
1995 12,719,700 467,200 12,053,500 199,000
Capital expenditures:
1996 14,600 14,600 -- --
1995 37,200 15,900 -- 21,300
Depreciation and amortization:
1996 56,600 52,100 -- 4,500
1995 87,800 82,900 -- 4,900
</TABLE>
Income (loss) from continuing operations is revenue less operating
expenses. In determining income (loss) from continuing operations, the
following items have not been included:
a) Other Income (Expenses)
b) Income taxes
c) Minority interest
Identifiable assets are those assets that are identified with the
operations in each geographic area.
20
<PAGE> 41
INTERNATIONAL REALTY GROUP, INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996 AND 1995
15. SELECTED QUARTERLY FINANCIAL SUMMARY (UNAUDITED):
For the years ended December 31:
<TABLE>
<CAPTION>
First Second Third Fourth
----- ------ ----- ------
<S> <C> <C> <C> <C>
1996:
Revenues $ 162,200 $ 204,000 $ 89,900 $ 147,900
Operating expenses 269,700 216,600 380,700 239,000
--------- ----------- ---------- ---------
Loss before other
income (expense)
and taxes (107,500) (12,600) (290,800) (91,100)
Other income
(expense) including
minority interest (101,500) (21,500) 18,900 67,200
Provision for income
taxes (benefit) 16,200 16,200 -0- (1,500)
--------- ----------- ---------- ---------
Net loss $(225,200) $ (50,300) $ (271,900) $ (22,400)
========= =========== ========== =========
Net loss per common
share $ (.02) $ (.01) $ (.03) $ -0-
========= =========== ========== =========
1995:
Revenues $ 266,600 $ 311,600 $ 399,300 $ 151,900
Operating expenses 396,100 438,500 247,000 421,100
--------- ----------- ---------- ---------
Income (loss) before
other income (expense)
and taxes (129,500) (126,900) 152,300 (269,200)
Other income
(expense) including
minority interest 352,100 (1,159,500) (443,100) 635,400
Provision for income
taxes (benefit) 2,400 (15,700)
--------- ----------- ---------- ---------
Net income (loss) $ 222,600 $(1,286,400) $ (293,200) $ 381,900
========= =========== ========== =========
Net income (loss) per
common share $ .03 $ (.14) $ (.03) $ .04
========= =========== ========== =========
</TABLE>
21
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
INTERNATIONAL REALTY GROUP, INC. AND SUBSIDIARIES CONSOLIDATED FINANCIAL
STATEMENTS DECEMBER 31, 1996 AND 1995 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 7,600
<SECURITIES> 0
<RECEIVABLES> 320,500
<ALLOWANCES> 0
<INVENTORY> 10,556,100
<CURRENT-ASSETS> 0
<PP&E> 386,200
<DEPRECIATION> 216,100
<TOTAL-ASSETS> 13,433,700
<CURRENT-LIABILITIES> 1,149,200
<BONDS> 1,215,400
0
0
<COMMON> 10,000
<OTHER-SE> 9,717,600
<TOTAL-LIABILITY-AND-EQUITY> 13,433,700
<SALES> 0
<TOTAL-REVENUES> 780,500
<CGS> 0
<TOTAL-COSTS> 1,106,000
<OTHER-EXPENSES> 110,400
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 128,000
<INCOME-PRETAX> (538,900)
<INCOME-TAX> 30,900
<INCOME-CONTINUING> (569,800)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (569,800)
<EPS-PRIMARY> (.06)
<EPS-DILUTED> 0
<FN>
Inventory consists of Real Estate, at cost currently held for future
development.
</FN>
</TABLE>
