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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, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File NO. 0-20180
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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
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Securities registered under Section 12(b) of the Exchange Act: None.
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Securities registered under Section 12(g) of the Exchange Act: Common Stock par value $.001.
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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 [X].
Revenues for the most recent fiscal year were $ 792,800.
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, 1997 is
approximately 3,532,313.
As of September 1, 1998, there were 9,954,313 shares of the registrant's common
stock outstanding.
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TABLE OF CONTENTS
PART I PAGE
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
ITEM 5. Market for Common Equity and Related Stockholder Matters 6
ITEM 6. Management's Discussion & Analysis 7
ITEM 7. Financial Statements 10
ITEM 8. Changes in and Disagreements with Accountants on Accounting 10
and Financial Disclosure
PART III
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 11
ITEM 12. Certain Relationships and Related Transactions 12
ITEM 13. Exhibits and Reports on Form 8-K 14
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PART I:
ITEM 1: DESCRIPTION OF BUSINESS
INTERNATIONAL REALTY GROUP, INC.,( the "Company") was incorporated in the State
of Delaware on April 13, 1970. Its principle offices are located at 111 NW 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 89% and 11% respectively, of total
Company revenue in 1997. Domestic operations are performed through Appraisal
Group International, Inc. and foreign operations are performed through
Appraisal Group International, Rt.
APPRAISAL GROUP INTERNATIONAL, INC.
Appraisal Group International, Inc. ("AGII"), organized on July 7, 1989, and
its predecessor Appraisal Group, Inc. organized on August 21, 1974, is an
appraisal and valuation company, specializing in commercial and residential
real estate, machinery and equipment valuation services.
Real estate appraisals are performed on a domestic and international level,
including engagements in Mexico, China, Lithuania, Estonia, Panama, and
Hungary. An estimated 75% percent of appraisal revenue is derived from projects
in the United States and 25% 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 and review appraisals to fully serve its clients. During 1997,
AGII performed over 2,100 single-family and review appraisals in 16 states for
over 150 local and national 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 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 International, Inc. consists of independent
contractors who accept assignments
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PART I: CONTINUED.
ITEM 1: DESCRIPTION OF BUSINESS, CONTINUED.
pursuant to negotiated fee arrangements. All appraisers must be licensed and
certified real estate appraisers, pursuant to applicable law. In addition to
the appraisers in the Miami office, the company 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 60
separate companies on behalf of the court. The complete liquidation process for
an individual company takes approximately two years, after which the Company
may be awarded a fee of approximately 3% of the net collected proceeds.
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,
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PART I: CONTINUED.
ITEM 1: DESCRIPTION OF BUSINESS, CONTINUED.
however, they may lack the expertise to perform complex commercial appraisals
and accept assignments on an international basis as the Company does.
LAND DEVELOPMENT
Pursuant to the Company's transaction with DSC and Hemisphere (the
"Transaction"), the Company acquired interests in five parcels of vacant or
partially developed land, totaling 3,745 acres, located in Mexico. See "Item
12--Certain Relations and Related Transactions" and "Item 2--Description of
Properties". The Company believes that each of the Company's properties is
suitable for future development as either a resort, residential or commercial
property. Since the properties located in Mexico secure the Company's
obligations under the DSC and Hemisphere Notes, 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
fourth quarter of 1998.) Any development of the Company is contingent upon the
Company obtaining necessary financing and a review of the applicable market
conditions of the time of financing. Potential sources of financing include
mortgage financing from financial institutions located in the United States or
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 4 administrative and 12 staff appraisers in
its domestic operations, and 6 administrative and staff appraisers in its
foreign operations. In addition, the Company retains 68 independent licensed
appraisers to perform professional services in their local market regularly and
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.
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PART I: CONTINUED.
ITEM 2: DESCRIPTION OF PROPERTY, CONTINUED.
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 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. 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 development of 14
commercial lots and 124 residential lots in two years with an additional
investment in infrastructure of $3,800,000. 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 developed lot will be
marketed to local builder/developers for construction of townhomes, villas or
commercial use for sale to the general public. The property is subject to a
non-interest-bearing mortgage held by the Company in the approximate amount of
$5,625,000. Pursuant to the Transaction, the Company acquired from DSC the
$5,625,000 debt obligation of Clusters Ixtapa on August 19, 1996, the closing
date of the Transaction.
Centro de Promociones Guerrero, S. A. de C. V., a company formed under the laws
of Mexico on March 13, 1989, owns land located in Acapulco, Mexico, known as
Campo de Tiro. The eight-acre, partially developed property is being held for
future development, and is subject to a mortgage (including accrued interest)
in the approximately amount of $618,600 as of December 31, 1997.
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.
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.
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
(including accrued interest) in the amount of $664,300 as of December 31, 1997.
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.
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PART I: CONTINUED.
ITEM 2: DESCRIPTION OF PROPERTY, CONTINUED.
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 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.
REAL ESTATE INVESTMENT POLICY
The Company has in the past and may in the future hold property for investment
purposes and/or future development. 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 stockholder 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
stockholders, 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
The Company is neither a defendant nor a plaintiff in any legal proceedings.
Certain of its operating subsidiaries are plaintiffs in collection matters,
which the Company does not consider material, and is in the normal course of
business.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
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". For the past several years, there has been an extremely limited market
for the Common Stock. For the two-year period ended December 31, 1997, there
were fewer than ten sales reported by the OTC Bulletin Board at prices ranging
from a low of $.01 to a high of $.24. The total volume of such sales was
approximately 168,373 shares. Since January 1, 1996, the low and high bid of
the Common Stock has been $.03125 and the low and high ask has been $1.00.
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PART II: CONTINUED.
ITEM 5: MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS: CONTINUED
The Company has not declared any cash dividends during 1997. As of December 31,
1997, there were 894 holders of record of Common Stock, with 9,954,313 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
The following discussion and analysis covers any material changes in financial
condition since December 31, 1996 and any material changes in the results of
operations for the 12 months ended December 31 1997, as compared to the same
period in 1996. As discussed herein, the Company consummated a Transaction with
DSC and Hemisphere. (See Item 12 "Certain Relationships and Related
Transactions".) Accordingly, the consolidated financial statements include the
accounts of the companies acquired. This discussion and analysis should be read
in conjunction with the audited financial statements, contained elsewhere
herein.
RESULTS OF OPERATIONS:
REAL ESTATE CONSULTING SERVICES:
REVENUE derived from consulting services for the year 1997 increased
31% to $792,800 in 1997 from $604,000 in 1996. Revenue from foreign operations
decreased to $86,300 in 1997 from $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 increased 113%
to $706,500 in 1997 from $331,500 in 1996.
OPERATING EXPENSES for the year 1997 decreased 15% from $1,089,000 in
1996 to $922,700 in 1997. SELLING, GENERAL AND OVERHEAD OPERATING EXPENSES for
the year 1996 were $395,500 versus $214,900 for the comparable period in 1997.
Included in this expense category for 1996 are Transaction expenses associated
with the 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
increased from $403,500 in 1996 to $447,700 in 1997. The increase in direct
expenses follows the increase in domestic revenue for the period. PAYROLL AND
RELATED BENEFITS decreased from $233,400 in 1996 compared to $203,100 in 1997.
AMORTIZATION and DEPRECIATION expenses were consistent between the periods.
OTHER INCOME AND EXPENSES: The majority of interest expense ($243,900 of the
$379,300) for the year 1997 (compared to $86,100 of $179,400 in 1996) is
attributable to the Convertible Notes issued in conjunction with the
Transaction at closing. Of the balance, $135,400 in 1997 and $93,300 in 1996 is
attributable to mortgage interest expense for the Company's properties in
Mexico ($123,000 in 1997 and $91,100 in 1996) and domestic and foreign
operations. Gain or (losses) for exchange rate fluctuations $32,100 in 1996,
compared to ($19,600) in 1997 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: MANAGEMENT'S DISCUSSION AND ANALYSIS, CONTINUED.
LAND DEVELOPMENT: The Company has acquired interests in five properties located
in Mexico, pursuant to the Transaction with DSC and Hemisphere dated as of
August 19, 1996. 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 certain
notes issued to DSC and Hemisphere, the Company does not plan to undertake any
development of such properties until after such notes have been converted.
While no assurances can be given, the Company expects that the conversion of
these notes (convertible into an aggregate of 105,638,300 shares of the
Company's Common Stock) will occur in the fourth 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, Europe or
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.
There was no income or expense directly attributable to land development
operations during the year ended December 31, 1997.
As a result of the above, the Company had a consolidated loss of $463,900 in
1997 compared to a loss of $534,900 for the comparable 1996 period. The
majority of such loss during the current period is attributable to accrued
interest expense of $379,300. Domestic operations performed by AGII had an
operating profit during the current period of $93,500 compared to an operating
loss of $37,300 for the comparable period in 1996. Foreign operations had a net
operating loss of $23,100 during the current period, compared to a loss of
$54,400 in the comparable 1996 period.
LIQUIDITY AND CAPITAL RESOURCES:
CASH FLOW FROM OPERATIONS. The Company incurred for year-end December 31, 1997
a net loss of $463,900 with a deficient cash flow from operating activities of
$121,100 compared to a deficient cash flow from operating activities of
$140,100 in 1996. Cash flows from investment activity, including sale of
securities provided $157,100 in 1997 compared to a loss of $14,700 in 1996.
Cash flow from financing activity, including capital contributions, receipt of
shareholder receivables provided $75,800 in 1997 compared to $160,600 in 1996.
Accounts receivable decreased from $2,501,700 in 1996 to $2,138,500 as of
December 31, 1997. Cash and equivalents increased from $7,600 in 1996 to
$107,200 as of December 31, 1997. Pursuant to the Transaction agreement, DSC
agreed to make a $300,000 capital contribution to the Company, which was
included in the Convertible Notes as of the closing date. As of December 31,
1997, $295,025 of such capital contribution has been made to the Company. The
balance of $4,975 of said advances have been made to the Company as of the date
hereof.
LIABILITIES AND LONG-TERM DEBT. At December 31, 1997, the Company's liabilities
totaled $7,350,000 compared to $7,112,600 in 1996. Of the long-term debt,
mortgages and notes payable totaled $1,123,500 which includes $1,064,300 to
Mexican financial institutions, $10,700 attributable to foreign operations,
and $48,500 attributable to domestic operations. Accounts payable was $230,100,
a decrease of $114,500 from 1996. Accrued and other liabilities were $965,600
including (i) $537,000 of accrued salaries, and related taxes, (ii) $210,900 of
interest and $151,100 of other accruals for the Mexican companies acquired in
the Transaction, (iii) shareholder loans of $48,300, and other short-term debt.
The
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PART II. CONTINUED
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS, CONTINUED.
Convertible Note was $5,030,800 including $329,900 of accrued interest.
CURRENCY RISK. The Company is subject to risk in changes of foreign exchange
rates for its subsidiaries that use a foreign currency as their functional
currency, or for assets or liabilities which are foreign currency denominated
and are translated to U.S. dollars at each reporting period. The Company has
made quarterly currency translation adjustments (totaling $234,300 over an
eight-year period) for its foreign operations, recognized as a component of
shareholder's deficiency. When a foreign entity operates in a highly
inflationary economy, the Company uses the U.S. dollar as the functional
currency, rather than the local currency. Effective September 30, 1996 the
Company considers Mexico to operate in a highly inflationary economy. The
Company has not engaged in the purchase of forward contracts, or other hedging
techniques, to manage such foreign exchange risk to protect against earnings
and cash flow volatility resulting from changes in foreign exchange rates.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
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.
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PART II. CONTINUED
ITEM 7 FINANCIAL STATEMENTS
YEAR 2000 COMPLIANCE:
The Year 2000 issue is the result of computer programs being written using two
(2) digits rather than the four (4) digits to define the year. Any of the
Company's computer programs that have date-sensitive software may recognize a
date using "00" as the year 1900 rather than 2000. This problem could force
computers to either shut down or provide incorrect data or information. The
Company utilizes generic software programs developed, maintained and upgraded
by independent computer software providers. In response to the Year 2000 issue,
management is of the opinion that the providers of these software programs will
resolve the date sensitive issue so that all critical systems will be in
compliance prior to the Year 2000. The Company does not anticipate any material
adverse impact on its business.
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.
PART III.
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 37 Chairman of the Board of Directors 1996
Richard Bradbury 54 Director, President & Chief Financial Officer 1993
Pablo Macedo 67 Secretary 1996
Alton Hollis 71 Director 1986
</TABLE>
Pursuant to the 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, Hollis
and Macedo
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".
10
<PAGE> 12
PART III. CONTINUED
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS, CONTINUED
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 Chairman of DSC from
1992 to present. From 1984 to 1992, he was Chief Executive Officer of
Promociones Turisticas Banamex, S.A. de C.V.
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 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.
To the Company's knowledge, based solely on a review of the copies of such
reports furnished to the company, and written representations that no other
reports were required, all executive officers, directors and persons who own
more than 10% of the Company's Common Stock complied with the 16(a) filing
requirements in 1997.
ITEM 10: EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table provides information concerning the compensation paid to
persons who served as the Company's chief executive officer during the 1997
fiscal year and other executive officers of the Company who received salary and
bonus in excess of $100,000 for the 1997 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 1997 100,000(1) 0 0 0 0 0 0
------ ---------- -------- ------- ------------- -------- ---------- -------
1996 100,000(2) 0 0 0 0 0 0
------ ---------- -------- ------- ------------- -------- ---------- -------
1995 100,000(3) 0 0 2,500 0 0 0
- ------------------------ ------ ---------- -------- ------- ------------- -------- ---------- -------
</TABLE>
NOTES:
(1) Includes accrued and deferred salary of $75,500.
(2) Includes accrued and deferred salary of $93,250.
(3) Includes accrued and deferred salary of $91,900. 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
11
<PAGE> 13
PART III. CONTINUED
ITEM 10. EXECUTIVE COMPENSATION, CONTINUED
DIRECTORS COMPENSATION: Members of the Board of Directors are entitled to
receive 500 Shares of Common Stock for each meeting attended. During 1997, 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.
<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 9,954,313 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 "Item 12 Certain Relationships and Related
Transactions". 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 1996 and 1997, except
the following:
The Board of Directors of Appraisal Group International, RT (AGII Rt.) with the
concurrence of its parent on June 30, 1995, authorized the exchange of twenty
five percent (25%) of AGII Rt.
12
<PAGE> 14
PART III. CONTINUED.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, CONTINUED.
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 transaction ("Transaction") with DSC, S.A. de C.V.
("DSC") and Hemisphere Developments Limited ("Hemisphere") on August 19, 1996
(the "Closing Date"). Pursuant to the terms of the Amended and Restated
Agreement between the parties as of August 19, 1996, the Company acquired the
following assets from DSC and Hemisphere as of the Closing Date: (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".
The Assets acquired and liabilities assumed by the Company in the Transaction
have been recorded at a net asset value of $4,745,400, which is the estimated
fair value of the 1,000,000 shares of Common Stock and Notes (as described
below) issued by the Company in the Transaction. See "Footnote 2" to the
Financial Statements contained herein. The Common Stock is not actively traded.
See "Item 5, Market for Common Equity and Related Stockholder Matters."
Accordingly, in order to determine the fair value of the Common Stock, the
Company had a valuation performed by an independent third party valuation firm
specializing in business and financial valuation. Such valuation firm concluded
the fair market value of the Common Stock as of August 19, 1996 was $.0445 per
share for restricted shares and $.0607 per share for unrestricted shares. As a
result of the restricted nature of the shares issued in the Transaction
(including the shares underlying the Notes), the Company has utilized the
$.0445 per share value for purposes of the Transaction. Investors should note,
however, that such valuation is as of August 19, 1996 and does not give any
effect to developments occurring after such date or future operating
contributions of the Assets acquired in the Transaction.
In exchange for the Assets, the Company issued to DSC on the Closing Date
485,930 shares of the Company's Common Stock, at $0.0445 per share or $21,600
and a Convertible Promissory Note (the "DSC Note") in the principal amount of
$2,352,900 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, at
$0.0445 per share or $22,900, and a Convertible Promissory Note in the
principal amount of $2,348,000 convertible into 52,763,270 shares of Common
Stock. As a result of the $.0445 established fair value of the Common Stock as
of the Closing Date, the principal amounts of DSC Note and Hemisphere Note
(collectively, the "Notes") have, by mutual agreement of the parties, been
reduced from previously stated principal amounts of $4,858,828 and $4,848,558
respectively. The Notes bear interest at a rate of 5% per year.
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
13
<PAGE> 15
PART III. CONTINUED
ITEM 12: CONTINUED.
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 1998.
The DSC and Hemisphere Notes are secured by the Assets and matures on February
1, 1999.
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 December 31, 1997, and the remainder as of the date hereof. The amount of
such advances has 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 Notes, 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" or Section 4(2) thereof. 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.
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 1998. 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 from three to five
directors. One of these directors will be designated by Hemisphere, one will be
designated by the Company, and the remainder will be designated by DSC.
ITEM 13: EXHIBITS AND REPORTS ON FORM 8-K
<TABLE>
<CAPTION>
(A) 1. INDEX TO FINANCIAL STATEMENTS PAGE
<S> <C>
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 7-10
Notes to consolidated financial statements 11-21
</TABLE>
14
<PAGE> 16
PART III. CONTINUED
ITEM 13: CONTINUED.
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.
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 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 Current Report on
Form 8-K, as filed with the Commission on November 26, 1997.
15
<PAGE> 17
PART III. CONTINUED
ITEM 13: CONTINUED.
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
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:
<TABLE>
<CAPTION>
DATE OF STATE OR COUNTRY
NAME OF SUBSIDIARY OWNERSHIP INCORPORATION OF INCORPORATION
- ------------------ --------- --------------- ----------------
U.S. COMPANIES:
- ---------------
<S> <C> <C> <C>
The Appraisal Group, Inc. 100 August 21, 1974 Florida
U.S. Properties Investment & Auction, Inc. 100 March 31, 1987 Florida
Appraisal Group 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 (for SEC purposes only).
* denotes a management contract or compensatory plan or arrangement.
(b) REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the last quarter of 1997.
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
(Principal Executive and Financial
Officer)
Date: October 20, 1998
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 October 20, 1998
Directors
/s/ Richard M. Bradbury
- -------------------------
Richard M. Bradbury Director and President October 20, 1998
(Principal Executive and
Financial Officer)
/s/ Alton B. Hollis
- -------------------------
Alton B. Hollis Director October 20, 1998
</TABLE>
17
<PAGE> 19
INTERNATIONAL REALTY GROUP, INC. AND SUBSIDIARIES
INDEPENDENT AUDITORS' REPORT
AND
CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997 AND 1996
<PAGE> 20
INTERNATIONAL REALTY GROUP, INC. AND SUBSIDIARIES
YEARS ENDED DECEMBER 31, 1997 AND 1996
CONTENTS
PAGE
Independent auditors' report 1
Consolidated financial statements:
Consolidated balance sheets 2
Consolidated statements of operations 3
Consolidated statements of shareholders' deficiency 4
Consolidated statements of cash flows 5 - 6
Summary of significant accounting policies 7 - 10
Notes to consolidated financial statements 11 - 21
<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, 1997 and 1996, and the
related consolidated statements of operations, shareholders' deficiency 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, 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, 1997 and 1996, 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 and DeSanctis, P.A.
April 24, 1998, except for Notes 2 and 8, as to
which the date is September 15, 1998.
North Miami Beach, Florida
<PAGE> 22
INTERNATIONAL REALTY GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
ASSETS LIABILITIES AND SHAREHOLDERS' DEFICIENCY
1997 1996 1997 1996
------------ ------------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Real estate, at cost: Liabilities:
Property held for future development $5,502,200 $5,502,200 Mortgage and
----------- ------------
notes payable $1,123,500 $1,176,600
Receivables: Accounts payable 230,100 344,600
Due from shareholder 2,023,700 2,181,200
Accrued and other
liabilities 965,600 804,400
Accounts receivable, less allowance
for doubtful collections (1997, $14,000; Convertible notes,
1996, $13,800) with accrued interest 5,030,800 4,787,000
---------- ----------
114,800 320,500 Total liabilities 7,350,000 7,112,600
------------ ------------- ---------- ----------
2,138,500 2,501,700 Minority interest 1,306,300 1,341,800
---------- ----------
Cash and equivalents 107,200 7,600 Shareholders' deficiency:
Common stock, $.001 par;
authorized 10,000,000
Furniture, equipment, and improvements 134,100 170,100 shares; issued 9,954,315
in 1997 and 9,954,187
shares in 1996. 10,000 10,000
Excess of cost over estimated fair value
of net assets acquired 105,600 123,200 Capital in excess of par 1,139,000 1,096,900
Other assets 105,900 26,000 Cummulative translation
adjustment (234,300) (216,900)
Accumulated deficit (1,462,000) (998,100)
---------- ----------
(547,300) (108,100)
Less shares of common stock
held in treasury, at cost 15,500 15,500
---------- ----------
(562,800) (123,600)
----------- ------------ ---------- ----------
$8,093,500 $8,330,800 $8,093,500 $8,330,800
=========== ============ ========== ==========
</TABLE>
READ THE ACCOMPANYING SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
AND NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, BOTH OF WHICH ARE AN INTEGRAL
PART OF THIS CONSOLIDATED FINANCIAL STATEMENT.
2
<PAGE> 23
INTERNATIONAL REALTY GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1997 AND 1996
1997 1996
----------- -----------
Revenues:
Revenues from services provided $ 792,800 $ 604,000
----------- -----------
Operating expenses:
Amortization and depreciation 57,000 56,600
Direct 447,700 403,500
Payroll and related benefits 203,100 233,400
Selling, general and administrative 214,900 395,500
----------- -----------
922,700 1,089,000
----------- -----------
Loss before other income (expense), minority
interest and provision for income taxes (129,900) (485,000)
Other income (expense):
Interest income 900 3,900
Interest expense (379,300) (179,400)
Gain on sale of securities -- 112,200
Gains (losses) on exchange rate fluctuations (19,600) 32,100
Other income 17,900 3,200
----------- -----------
Loss before minority interest and provision
for income taxes (510,000) (513,000)
Minority interest in loss (income) of subsidiaries 44,500 (7,200)
----------- -----------
Loss before provision for income taxes (465,500) (520,200)
Provision for income taxes (benefit) (1,600) 14,700
----------- -----------
Net loss $ (463,900) $ (534,900)
=========== ===========
Loss per share of common stock: $ (0.05) $ (0.06)
=========== ===========
Weighted average common shares outstanding 9,954,313 9,204,188
=========== ===========
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.
3
<PAGE> 24
INTERNATIONAL REALTY GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' DEFICIENCY
YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
COMMON STOCK CAPITAL IN CUMMULATIVE TREASURY STOCK
-------------------- EXCESS OF TRANSLATION ACCUMULATED -----------------
TOTAL SHARES AMOUNT PAR ADJUSTMENT DEFICIT SHARES AMOUNT
---------- --------- -------- ----------- ----------- ------------ ------ ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, BEGINNING $ 380,200 8,954,187 $ 9,000 $ 1,053,400 $ (203,500) $ (463,200) 17,500 $ (15,500)
ADD (DEDUCT):
YEAR ENDED DECEMBER 31, 1996:
Effect of currency
fluctuations on net
assets of foreign
subsidiary (13,400) (13,400)
Common shares issued as
part of acquisition
(principally land) 44,500 1,000,000 1,000 43,500
Net loss (534,900) (534,900)
---------- --------- -------- ----------- ---------- ------------ ------ ---------
BALANCE, DECEMBER 31, 1996 (123,600) 9,954,187 10,000 1,096,900 (216,900) (998,100) 17,500 (15,500)
ADD (DEDUCT):
YEAR ENDED DECEMBER 31, 1997:
Common stock issued 126
Additional capital
contributions in
foreign subsidiary 42,100 42,100
Effect of currency
fluctuations on net
assets of foreign
subsidiary (17,400) (17,400)
Net loss (463,900) (463,900)
---------- --------- -------- ----------- ---------- ------------ ------ ---------
BALANCE, ENDING $ (562,800) 9,954,313 $ 10,000 $ 1,139,000 $ (234,300) $ (1,462,000) 17,500 $ (15,500)
========== ========= ======== =========== ========== ============ ====== =========
</TABLE>
READ THE ACCOMPANYING SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
AND NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, BOTH OF WHICH ARE AN INTEGRAL
PART OF THIS CONSOLIDATED FINANCIAL STATEMENT.
4
<PAGE> 25
INTERNATIONAL REALTY GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
-------------------------- -------------------------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Sources of cash:
Clients and other $ 887,900 $ 645,000
Interest 900 $ 888,800 15,200 $ 660,200
----------- -----------
Uses of cash:
Cash paid to:
Direct costs 599,400 322,700
Operating 221,900 321,800
Payroll and related benefits 128,300 140,500
Interest 60,300 3,500
Income taxes -- 1,009,900 11,800 800,300
----------- ----------- ----------- -----------
Cash used-in operating activities (121,100) (140,100)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Source of cash:
Collection of proceeds from prior year
sale of securities 163,400 --
Uses of cash:
Acquisition of equipment 6,300 7,700
Real estate -- 6,300 7,000 14,700
----------- ----------- ----------- -----------
Cash provided by (used-in) investing activities 157,100 (14,700)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Sources of cash:
Proceeds from:
Common stock and convertible note -- 150,400
Capital contribution 42,100 --
Shareholder 100,000 142,100 31,200 181,600
----------- -----------
Use of cash:
Payment of:
Shareholder loans 9,700 --
Long-term debt 56,600 66,300 21,000 21,000
----------- ----------- ----------- -----------
Cash provided by financing activities 75,800 160,600
----------- -----------
EFFECT OF EXCHANGE RATES ON CASH AND EQUIVALENTS (12,200) (17,600)
----------- -----------
INCREASE (DECREASE) IN CASH AND EQUIVALENTS 99,600 (11,800)
CASH AND EQUIVALENTS, BEGINNING 7,600 19,400
----------- -----------
CASH AND EQUIVALENTS, ENDING $ 107,200 $ 7,600
=========== ===========
</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, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
RECONCILIATION OF NET LOSS TO CASH
(USED-IN) OPERATING ACTIVITIES:
NET LOSS $ (463,900) $ (534,900)
----------- -----------
ADJUSTMENTS TO RECONCILE NET LOSS TO CASH
(USED-IN) OPERATING ACTIVITIES:
Gains due to exchange rate fluctuations (19,600) (32,100)
Gain on sale of securities -- (112,200)
Loss on disposal of equipment 1,100 --
Amortization of note payable discount 31,000 10,200
Recognition of acquisition costs previously capitalized -- 43,900
Amortization and depreciation 57,000 56,600
Minority interest in income of subsidiaries (44,500) 7,200
Bad debt 25,400 53,800
CHANGES IN ASSETS AND LIABILITIES:
Accounts receivable 76,100 10,600
Other assets (35,300) 41,700
Accounts payable (114,500) 80,800
Accrued and other liabilities 366,100 234,300
----------- -----------
Total adjustments 342,800 394,800
----------- -----------
CASH USED-IN OPERATING ACTIVITIES $ (121,100) $ (140,100)
=========== ===========
SUPPLEMENTAL SCHEDULE OF NON-CASH ACTIVITIES:
Financing activities:
Convertible note and common stock issued in exchange
for real property and other assets and liabilities assumed $ 4,745,700
Less cash received 150,400
-----------
$ 4,595,300
===========
</TABLE>
READ THE ACCOMPANYING SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
AND NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, BOTH OF WHICH ARE AN INTEGRAL
PART OF THIS CONSOLIDATED FINANCIAL STATEMENT.
6
<PAGE> 27
INTERNATIONAL REALTY GROUP, INC AND SUBSIDIARIES
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
YEARS ENDED DECEMBER 31, 1997 AND 1996
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. Certain amounts included in the financial statements are estimated
based on currently available information and management's judgment as to the
outcome of future conditions and circumstances. Changes in the status of
certain facts or circumstances could result in material changes to the
estimates used in the preparation of the financial statements and actual
results could differ from the estimates and assumptions. Every effort is made
to ensure the integrity of such estimates.
Those estimates that are considered significant to the accompanying
consolidated financial statements include the per share value used in the
acquisition of land and other assets less liabilities assumed.
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.
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. This policy
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, 1997 AND 1996
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.
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 construction occurred in 1997 or 1996;
therefore, no interest has been capitalized in 1997 or 1996.
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:
Local currency is the functional currencies for the Company's foreign
subsidiaries. Assets and liabilities are translated using the exchange rates
in effect at the balance sheet date. Income and expenses are translated at
the average exchange rates during the year. Translation adjustments are
reported as a separate component of shareholders' deficiency.
When a foreign entity operates in a highly inflationary economy, the Company
uses the U.S. dollar as the functional currency rather than the local
currency. Effective September 30, 1996, the Company considers its Mexico
operations to operate in a highly inflationary economy, therefore, the
Company translates nonmonetary assets and liabilities and related expenses
into U.S. dollars at historical exchange rates. The Company translates all
other income statement amounts using average exchange rates for the period.
Monetary assets and liabilities are translated as end-of-period exchange
rates, and any gains or losses are reported in income.
8
<PAGE> 29
INTERNATIONAL REALTY GROUP, INC AND SUBSIDIARIES
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
YEARS ENDED DECEMBER 31, 1997 AND 1996
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 3 years
Repairs and maintenance are charged to operations as incurred, and
expenditures for significant betterments and renewals are capitalized.
The cost of fixed assets retired or sold, together with the related
accumulated depreciation, are removed from the appropriate asset and
depreciation accounts, and the resulting gain or loss is included in net
earnings.
EXCESS OF COST OVER ESTIMATED FAIR VALUE OF NET ASSETS ACQUIRED:
The excess of cost over estimated fair value of net assets acquired is being
amortized by the straight-line method over the estimated useful life of ten
(10) years.
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 Company applies the intrinsic value method for accounting for stock based
compensation described by Accounting Principles Bound Opinion No. 25,
"Accounting for Stock Issued to Employees." Had the Company applied the fair
value method described by the Statement of Financial Accounting Standards
Board (SFAS) No. 123, "Accounting for Stock-Based Compensation," it would
report the effect of compensation expense for stock based compensation as
pro-forma effects on income and earnings per share, if material.
9
<PAGE> 30
INTERNATIONAL REALTY GROUP, INC AND SUBSIDIARIES
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
YEARS ENDED DECEMBER 31, 1997 AND 1996
RECENT ACCOUNTING PRONOUNCEMENTS:
The Statement of Financial Accounting Standards Board (SFAS) No. 130,
"Reporting Comprehensive Income," was issued by the Financial Accounting
Standards Board (FASB) in June 1997. This Statement establishes standards for
the reporting and display of comprehensive income and its components.
Comprehensive income includes net income and all changes in an enterprise's
other comprehensive income including, among other things, foreign currency
translation adjustments, and unrealized gains and losses on certain
investments in debt and equity securities. Also in June 1997, the FASB issued
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information." This Statement establishes standards for reporting information
about operating segments in annual financial statements, and requires that an
enterprise report selected information about operating segments in interim
reports issued to shareholders. Both of these Statements are effective for
fiscal periods beginning after December 15, 1997. The Company does not expect
the adoption of these statements to have a material impact on its financial
condition or results of operations.
10
<PAGE> 31
INTERNATIONAL REALTY GROUP, INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997 AND 1996
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 and residential real estate,
machinery and equipment valuations and appraisals in the United States
and Hungary and land held for development primarily in Mexico. The
Company will be developing its Mexican properties into various resort
and commercial developments. Once developed, they will engage in the
marketing of resort hotel lodging, timeshare interests, and other
ancillary real estate activities. No development of the properties
located in Mexico will occur until after the conversion of the
convertible notes issued to DSC and Hemisphere, which are collateralized
by the properties located in Mexico.
The Company intends to amend its Certificate of Incorporation with the
State of Delaware to increase the number of authorized shares from
10,000,000 to 450,000,000 common shares at $ .001 par.
2. TRANSACTION WITH DSC AND HEMISPHERE:
Pursuant to an Amended and Restated Agreement dated August 19, 1996, the
Company consummated a transaction (Transaction) with DSC, S.A. de C.V.
(DSC) and Hemisphere Development Limited (Hemisphere). In the
transaction, the Company principally acquired five (5) parcels of land
amounting to approximately 3,745 acres , other assets and assumed
liabilities of DSC and Hemisphere in exchange for 1,000,000 shares of
common stock with a fair value $.0445 per share and convertible notes
(Notes) with a face value of $4,700,900. The estimated fair value of the
assets acquired and liabilities assumed is as follows:
Assets acquired:
Land $5,014,200
Receivable due from DSC 2,110,500
Cash 317,800
Other assets 33,000
----------
7,475,500
----------
Liabilities assumed, including minority interest:
Mortgages 1,094,100
Accounts payable and accrued liabilities 323,300
Minority interest in net assets 1,312,700
----------
2,730,100
----------
Total assets acquired less liabilities assumed $4,745,400
==========
The assets and liabilities have been recorded at a net asset value of
$4,745,400, which is the estimated fair value of the Notes and common
stock issued at the date of the Transaction. Receivable due from DSC,
cash and other assets were recorded at their stated amounts.
11
<PAGE> 32
INTERNATIONAL REALTY GROUP, INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997 AND 1996
2. TRANSACTION WITH DSC AND HEMISPHERE (CONTINUED):
Liabilities were recorded at their present value. Minority interest
represents the portion of undivided net assets not acquired.
The acquisition price of the land and other assets less the liabilities
assumed in the Transaction was determined based upon the estimated fair
value of the common stock (using the restricted share value of $ 0.0445
per share) at the date of the Transaction. Since the common stock of the
Company is not actively traded, the Company had a valuation performed by
an independent firm. The valuation firm specializes in business and
financial valuations. The firm determined a fair market value on a
minority interest basis. The valuation concluded that the fair market
values per share of the common equity of International Realty Group on a
minority interest basis as of August 19, 1996, immediately before the
Transaction were as follows:
Unrestricted shares $ 0.0607
Restricted shares 0.0445
After the Transaction, the fair market values were:
Unrestricted shares $ 0.0617
Restricted shares 0.0480
The Post-Transaction fair market values include the assets and
liabilities assumed, which for valuation purposes are based on the
amounts recorded in the accompanying consolidated financial statements.
The valuation report does not take into consideration any effect on value
resulting from future development or future operating contributions of
the assets acquired in the Transaction.
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 and to date have been within
management's expectation.
12
<PAGE> 33
INTERNATIONAL REALTY GROUP, INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997 AND 1996
3. CONCENTRATIONS OF CREDIT RISK (CONTINUED):
A significant portion of the Company's revenues consists of fees to
major customers on credit. Net revenues in 1997 and 1996 to major
customers are as follows:
1997 1996
----- ----
AMOUNT PERCENTAGE AMOUNT PERCENTAGE
------ ---------- ------ ----------
Domestic:
Customer A $ 196,000 28.0% $ 34,900 10.5%
=========== ====== =========== ======
Foreign:
Customer A $ 73,400 85.0% $ 180,500 66.4%
=========== ====== =========== ======
Domestic customers are primarily commercial entities. Foreign customer
is Hungarian governmental agencies.
4. LAND HELD FOR FUTURE DEVELOPMENT:
LOCATION ACREAGE 1997 1996
-------- ------- ---- ----
Ixtapa, Mexico 26 $4,509,600 $4,509,600
Acapulco, Mexico 8 201,000 201,000
Caye Bokel, Belize 87 456,400 456,400
Guanajuato, Mexico 236 272,500 272,500
Jilotepec, Mexico 24 21,500 21,500
La Paz, Mexico 3,451 9,600 9,600
La Grange, Texas 1 31,600 31,600
---------- ----------
$5,502,200 $5,502,200
========== ==========
Improvements amounting to $649,000 are included in the cost of land. All
land in Mexico is collateralized to the convertible notes and to the
note and mortgage payable amounting to $ 1,064,300.
13
<PAGE> 34
INTERNATIONAL REALTY GROUP, INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997 AND 1996
5. DETAILS OF FINANCIAL STATEMENT COMPONENTS:
FURNITURE, EQUIPMENT AND IMPROVEMENTS: 1997 1996
---- ----
Furniture and equipment $ 86,800 $ 164,300
Leasehold improvements 1,900 14,300
Library 207,800 207,600
------------- ------------
296,500 386,200
Less accumulated depreciation
and amortization 162,400 216,100
------------- ------------
$ 134,100 $ 170,100
============= ============
ACCRUED AND OTHER LIABILITIES:
Payroll and payroll taxes $ 537,000 $ 468,800
Interest 210,900 125,600
Foreign taxes, other than on income 10,700 11,600
Billings in excess of costs and earnings 7,600 33,200
Shareholder loans 48,300 58,000
Other 151,100 107,200
------------ ------------
$ 965,600 $ 804,400
============ ===========
6. DUE FROM SHAREHOLDER:
Amounts due from shareholder (DSC) were acquired through the Transaction
described in Note 2 and are due on demand. Amounts due from DSC are
pledged as collateral on the convertible notes and collection is
expected to occur subsequent to the conversion of the convertible notes.
7. 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
Note payable, unsecured,
interest at 7.0% per annum,
payable monthly through
February 2001. 48,500 -
14
<PAGE> 35
INTERNATIONAL REALTY GROUP, INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997 AND 1996
7. MORTGAGE AND NOTES PAYABLE (CONTINUED): 1997 1996
---- ----
Note payable, face amount of $618,600,
bank, collateralized by land,
non-interest bearing, due March 31, 1999
(less unamortized discount based on
an imputed rate of 5% of $7,900 and
$38,800 as of December 31, 1997 and
1996, respectively.) 610,700 593,400
Mortgage note, bank, collateralized
by land, interest at 4.5% per
annum, over the inflation rate
index of Mexico, due in 2007. 453,600 465,800
Note payable, related party,
unsecured, interest at 7.25%,
due on demand. 10,700 68,400
---------- ----------
$1,123,500 $1,176,600
========== ==========
Maturities of long-term debt subsequent to December 31, 1997 are as
follows:
Years ending
December 31, Amount
------------ ------
1998 $ 634,900
1999 15,900
2000 17,200
2001 1,900
2002 --
2003 and thereafter 453,600
-----------
$1,123,500
==========
8. CONVERTIBLE NOTES:
Convertible notes (Notes) with a face value of $4,700,900 accrue
interest at 5% per year, mature on February 1, 1999 and are
collateralized by the assets acquired less liabilities assumed in the
transaction described in Note 2. Accrued interest of $ 329,900 and $
86,100 has been combined with the principal balance of the convertible
note as of December 31, 1997 and 1996, respectively.
The Notes are convertible into 105,638,300 shares of common stock (using
the restricted share value of $ 0.0445 per share). Conversion will occur
when the Company has a sufficient number of authorized shares to issue
to the Note holders. If conversion does not occur by the maturity date,
the net assets would revert back to the Note holders. The Company
believes the Notes will be converted into the stated number of shares of
common stock before the maturity date or it will be able to obtain
extensions from the Note holders.
15
<PAGE> 36
INTERNATIONAL REALTY GROUP, INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997 AND 1996
8. CONVERTIBLE NOTES (CONTINUED):
The following pro forma information is provided to reflect the effect of
the conversion on shareholders' equity as if it had occurred on December
31, 1997:
<TABLE>
<CAPTION>
Pro-Forma
As originally Pro-Forma December 31,
Reported Adjustment 1997
------------- ----------- -----------
<S> <C> <C> <C>
Shareholders' equity (Deficiency):
Common stock $ 10,000 $ 105,600 $ 115,600
Capital in excess of par 1,139,000 4,595,300 5,734,300
Cumulative translation adjustment (234,300) -- (234,300)
Accumulated deficit (1,462,000) -- (1,462,000)
----------- ----------- -----------
(547,300) 4,700,900 4,153,600
Less treasury stock, at cost 15,500 -- 15,500
----------- ----------- -----------
$ (562,800) $ 4,700,900 $ 4,138,100
=========== =========== ===========
</TABLE>
9. INCOME TAXES:
Components of the net deferred tax liability as reflected on the
Company's consolidated balance sheets are as follows:
1997 1996
--------- ---------
Deferred tax assets:
Accounts payable $ 33,000 $ 50,800
Accrued liabilities 190,600 180,200
Net operating loss
carryforward 119,100 95,700
--------- ---------
342,700 326,700
Less valuation allowance (295,900) (298,800)
--------- ---------
46,800 27,900
--------- ---------
Deferred tax liabilities:
Accounts receivable (27,100) (14,000)
Prepaid expense (5,100) (5,400)
Depreciation (14,600) (8,500)
--------- ---------
(46,800) (27,900)
--------- ---------
Deferred taxes, Net $ -- $
========= =========
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, 1997 and 1996, consist of current Federal taxes
payable (receivable) of ($1,600) and $14,700, respectively.
16
<PAGE> 37
INTERNATIONAL REALTY GROUP, INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997 AND 1996
9. INCOME TAXES (CONTINUED):
The income tax benefit for the years ended December 31, 1997 and 1996,
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
(loss) before provision for income taxes as follows:
Provision at statutory rate (benefit) $(162,400) $(187,200)
Effective state income tax (benefit) (16,600) (19,100)
Non-deductible:
Interest on convertible note 76,900 37,200
Other non-deductible items 101,800 (9,700)
Utilization of operating loss
carrybacks/carryforwards 1,600 92,500
Valuation allowance (benefit) (2,900) 101,000
--------- ---------
$ (1,600) $ 14,700
========= =========
At December 31, 1997, the Company had available federal net operating
loss carryforwards of approximately $ 340,300, which will generally
expire between 2001 and 2012.
The Company has not provided for federal income taxes on undistributed
earnings of its foreign subsidiaries which have been reinvested in their
operations. If these earnings were distributed, net operating loss
carryforwards and foreign tax credits available under current law would
eliminate the resulting federal income tax liability.
10. LOSS PER SHARE:
Loss per share of common stock was computed by dividing net loss by the
weighted average number of shares of common stock. The number of shares
used in the computation of loss per share of common stock during 1997
and 1996 were 9,954,313 and 9,204,188, respectively.
11. 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 a
Hungarian corporation. The fair value of the securities was $34,700 at
the date of exchange. The securities, included in other assets at
December 31, 1995, were sold to an unrelated third party in 1996 at a
gain of $112,200, which has been included in gain on sale of securities.
Proceeds from the sale were received in 1997.
17
<PAGE> 38
INTERNATIONAL REALTY GROUP, INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997 AND 1996
11. TRANSACTIONS WITH RELATED PARTY (CONTINUED):
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 1998. The Company charged
operations $100,000 in each year in accordance with the employment
agreements. No bonuses were declared in 1997 or 1996.
12. 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 and were exercised. The remaining
200,000 options became exercisable in 1996 at fifty percent (50%) of the
average trading prices per share for the month of February 1996. Due to
the lack of authorized shares, the options have not been exercised. It
is anticipated that when the authorized shares are increased the options
would then be exercised.
Stock option/award activity under the Agreement is as follows:
1997 1996
------------ ------------
Number of option shares:
Outstanding, beginning 200,000 200,000
Add (deduct):
Granted/awarded -- --
Exercised -- --
------------ ------------
Outstanding, ending 200,000 200,000
============ ============
Option price range:
Outstanding, beginning $ .015 $ .015
Granted -- --
Exercised -- --
------------ ------------
Outstanding, ending $ .015 $ .015
============ ============
18
<PAGE> 39
INTERNATIONAL REALTY GROUP, INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997 AND 1996
13. YEAR 2000 COMPLIANCE:
The Year 2000 issue is the result of computer programs being written
using two (2) digits rather than the four (4) digits to define the year.
Any of the Company's computer programs that have date-sensitive software
may recognize a date using "00" as the year 1900 rather than 2000. This
problem could force computers to either shut down or provide incorrect
data or information. The Company utilizes generic software programs
developed, maintained and upgraded by independent computer software
providers. In response to the Year 2000 issue, management is of the
opinion that the providers of these software programs will resolve the
date sensitive issue so that all critical systems will be in compliance
prior to the Year 2000. The Company does not anticipate any material
adverse impact on its business.
14. TRUST ASSETS:
AGI RT maintains cash (1996, $15,600) 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. There were no
trust funds in 1997.
15. SUPPLEMENTAL INFORMATION:
1997 1996
---- ----
Charged to:
Direct:
Consulting, appraisal $378,100 $351,900
Reports, film and other 69,600 51,600
-------- --------
$447,700 $403,500
======== ========
Selling, general and administrative:
Utilities $ 19,100 $ 30,700
Bad Debts 25,400 53,800
Rent 26,300 38,000
Insurance 4,900 4,500
Office 28,700 26,500
Professional 66,800 156,600
Selling 10,400 40,800
Other 33,300 44,600
-------- --------
$214,900 $395,500
======== ========
19
<PAGE> 40
INTERNATIONAL REALTY GROUP, INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997 AND 1996
16. BUSINESS SEGMENT:
Information about the Company's operations in different geographic areas
for the years ended December 31, 1997 and 1996 is as follows:
<TABLE>
<CAPTION>
Consolidated United
Total States Mexico Hungary
------------ ------ ------ -------
<S> <C> <C> <C> <C>
Net Revenues:
1997 $ 792,800 $ 706,500 $ -- $ 86,300
1996 604,000 331,500 -- 272,500
Loss from
continuing operations
before other deductions,
income taxes and
minority interest:
1997 (129,900) ( 79,800) -- (50,100)
1996 (485,000) (450,100) -- (34,900)
Identifiable assets:
1997 8,093,500 734,200 7,077,100 282,200
1996 8,330,800 323,000 7,677,800 330,000
Capital expenditures:
1997 6,300 3,900 -- 2,400
1996 14,600 14,600 -- --
Depreciation and amortization:
1997 57,000 51,300 -- 5,700
1996 56,600 52,100 -- 4,500
</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, 1997 AND 1996
17. SELECTED QUARTERLY FINANCIAL SUMMARY (UNAUDITED): For the years ended
December 31:
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
------ ------ ----- ------
<S> <C> <C> <C> <C>
1997:
Revenues $ 177,100 $ 222,200 $ 179,700 $ 213,800
Operating expenses 198,100 226,900 214,900 282,800
--------- --------- --------- ---------
Loss before
other income (expense)
and taxes (21,000) (4,700) (35,200) (69,000)
Other income
(expense) including
minority interest (95,400) (81,800) (76,300) (82,100)
Provision for income
taxes (benefit) -- -- -- (1,600)
--------- --------- --------- ---------
Net loss $(116,400) $ (86,500) $(111,500) $(149,500)
========= ========= ========= =========
Net loss per
common share $ (.01) $ (.01) $ (.01) $ (.02)
========= ========= ========= =========
1996:
Revenues $ 162,200 $ 204,000 $ 89,900 $ 147,900
Operating expenses 255,500 213,800 380,700 239,000
--------- --------- --------- ---------
Loss before other
income (expense)
and taxes (93,300) (9,800) (290,800) (91,100)
Other income
(expense)including
minority interest (1,300) (8,300) (18,300) (7,300)
Provision for income
taxes (benefit) -- 16,200 -- (1,500)
--------- --------- --------- ---------
Net loss $ (94,600) (34,300) $(309,100) $ (96,900)
========= ========= ========= =========
Net loss per
common share $ (.01) $ -- $ (.04) $ (.01)
========= ========= ========= =========
</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 DATED DECEMBER 31, 1996 AND 1997 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 107,200
<SECURITIES> 0
<RECEIVABLES> 2,138,500
<ALLOWANCES> 0
<INVENTORY> 5,502,200<F1>
<CURRENT-ASSETS> 0
<PP&E> 134,100
<DEPRECIATION> 0
<TOTAL-ASSETS> 8,093,500
<CURRENT-LIABILITIES> 1,195,700
<BONDS> 6,154,300
0
0
<COMMON> 10,000
<OTHER-SE> (562,800)
<TOTAL-LIABILITY-AND-EQUITY> 8,093,500
<SALES> 0
<TOTAL-REVENUES> 792,800
<CGS> 0
<TOTAL-COSTS> 922,700
<OTHER-EXPENSES> 36,600
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 379,300
<INCOME-PRETAX> (465,500)
<INCOME-TAX> (1,600)
<INCOME-CONTINUING> (463,900)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (463,900)
<EPS-PRIMARY> (.05)
<EPS-DILUTED> 0
<FN>
<F1>Inventory consists of real estate currently held for future development.
</FN>
</TABLE>
