<PAGE> 1
FORM 10-QSB
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
------------------- -----------------------
Commission File Number 0-20180
INTERNATIONAL REALTY GROUP, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
Delaware 62-1277260
-------- ----------
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
</TABLE>
111 Northwest 183rd Street, Suite 350, Miami, Florida 33169
- -------------------------------------------------------------------------------
(Address of principal executive office) (Zip Code)
305-944-8811
------------
(Registrant's telephone number, including area code)
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
----- -----
The number of shares outstanding of each of Issuer's classes of common equity
as of Sept. 9, 1996.
<TABLE>
<S> <C>
CLASS NUMBER OF SHARES OUTSTANDING
Common Stock, par value $.001 9,954,250
</TABLE>
Transitional Small Business Disclosure Format yes no X
----- ------
1
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL INFORMATION
CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
1. BALANCE SHEET AS OF JUNE 30, 1996 AND JUNE 30, 1995 3
2. STATEMENTS OF OPERATIONS FOR THE THREE MONTHS AND SIX
MONTHS ENDED JUNE 30, 1996 AND JUNE 30, 1995 4
3. STATEMENT OF CASH FLOWS FOR THE SIX MONTHS ENDED
JUNE 30, 1996 AND JUNE 30, 1995 5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR
PLAN OF OPERATIONS 8
PART II: OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 16
</TABLE>
2
<PAGE> 3
PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL INFORMATION
CONSOLIDATED FINANCIAL STATEMENTS
INTERNATIONAL REALTY GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET - JUNE 30, 1996
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
JUNE 30, 1996 JUNE 30, 1995
------------- -------------
<S> <C> <C>
CURRENT ASSETS:
CASH AND EQUIVALENTS $ 17,800 $100,400
ACCOUNTS RECEIVABLE, DEEMED COLLECTIBLE 147,200 336,800
INCOME TAX REFUND 0 3,200
OTHER CURRENT ASSETS 90,300 15,500
---------- --------
TOTAL CURRENT ASSETS 255,300 455,900
LAND HELD FOR INVESTMENT 485,300 33,500
MARKETABLE SECURITIES AVAILABLE FOR SALE 34,700 0
FURNITURE, EQUIPMENT AND IMPROVEMENTS 196,700 195,700
NOTE RECEIVABLE 0 45,000
EXCESS OF COST OVER FAIR VALUE OF NET
ASSETS ACQUIRED 132,000 135,400
OTHER ASSETS 7,900 54,600
---------- --------
$1,111,800 $920,100
========== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
JUNE 30, 1996 JUNE 30, 1995
------------- -------------
CURRENT LIABILITIES:
NOTES PAYABLE $ 197,100 $139,100
CURRENT PORTION OF LONG-TERM DEBT 6,000 54,000
ACCOUNTS PAYABLE 129,300 290,600
ACCRUED LIABILITIES 444,200 320,500
BILLINGS IN EXCESS OF COSTS AND ESTIMATE 3,800 0
SHAREHOLDERS LOANS 37,000 0
INCOME TAXES 200 1,000
---------- --------
TOTAL CURRENT LIABILITIES 817,500 805,200
---------- --------
LONG TERM DEBT, LESS CURRENT PORTION 39,500 49,000
---------- --------
MINORITY INTEREST 32,400 0
---------- --------
SHAREHOLDERS' EQUITY:
COMMON STOCK, $.001 PAR; AUTHORIZED 10,000,000
SHARES; 8,954,187 COMMON SHARES ISSUE 9,000 8,400
CAPITAL IN EXCESS OF PAR 1,053,400 597,000
CUMULATIVE TRANSLATION ADJUSTMENT (208,600) (194,000)
DEFICIT (616,000) (330,000)
---------- --------
237,800 81,400
LESS SHARES OF COMMON STOCK HELD IN TREASURY,
AT COST 15,500 15,500
---------- --------
222,300 65,900
---------- --------
$1,111,800 $920,100
========== ========
</TABLE>
READ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3
<PAGE> 4
INTERNATIONAL REALTY GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
________________________________________________________________________________
<TABLE>
<CAPTION>
3 MONTHS ENDED 3 MONTHS ENDED 6 MONTHS ENDED 6 MONTHS ENDED
JUNE 30, 1995 JUNE 30, 1996 JUNE 30, 1995 JUNE 30, 1996
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
REVENUES $ 335,300 $ 147,600 $ 625,600 $ 309,800
---------- --------- ---------- ---------
OPERATING EXPENSES:
AMORTIZATION AND DEPRECIATION 17,300 13,000 43,300 27,400
BAD DEBTS 0 0 46,400 24,200
DIRECT 169,900 49,900 315,000 162,000
INTEREST 22,300 900 23,900 4,400
PAYROLL AND RELATED BENEFITS 155,300 79,400 245,900 147,000
RENT 13,200 11,500 28,000 22,000
SELLING, GENERAL & ADMINISTRATIVE 84,000 51,800 157,200 77,400
---------- --------- ---------- ---------
462,000 206,500 859,700 465,400
---------- --------- ---------- ---------
LOSS BEFORE MINORITY INTEREST (126,700) (58,900) (234,100) (155,600)
MINORITY INTEREST 0 (600) 0 (2,900)
---------- --------- ---------- ---------
NET LOSS $ (126,700) (58,300) $ (234,100) $(152,700)
========== ========= ========== =========
NET LOSS PER SHARE OF COMMON STOCK (.02) (.01) (.03) (.02)
========== ========= ========== =========
WEIGHTED AVERAGE SHARES OF COMMON 8,098,112 8,954,187 8,215,239 8,954,187
STOCK
========== ========= ========== =========
</TABLE>
(READ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS)
4
<PAGE> 5
INTERNATIONAL REALTY GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
________________________________________________________________________________
<TABLE>
<CAPTION>
6 MONTHS ENDED 6 MONTHS ENDED
JUNE 30, 1995 JUNE 30, 1996
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
SOURCES OF CASH:
CLIENTS AND OTHER $561,200 354,300
INTEREST 86,200 1,700
-------- -------
$647,400 356,000
-------- -------
USES OF CASH:
CASH PAID FOR:
DIRECT COSTS 195,400 167,600
OPERATING 170,100 119,200
PAYROLL AND RELATED BENEFITS 168,600 99,600
INTEREST 23,900 4,400
INCOME TAXES 2,500
-------- -------
560,500 390,800
-------- -------
CASH PROVIDED BY(USED IN) OPERATING
ACTIVITIES $ 86,900 $(34,800)
CASH FLOWS FROM INVESTING ACTIVITIES:
ACQUISITION OF:
FURNITURE & EQUIPMENT 5,600 9,300
INVESTMENT IN REAL ESTATE 4,300
-------
INCREASE IN OTHER ASSETS 9,900
--------
CASH USED-IN INVESTING ACTIVITIES (15,500) (13,600)
CASH FLOWS FROM FINANCING ACTIVITIES:
SOURCES OF CASH:
PROCEEDS FROM:
NOTE PAYABLE 41,400 67,500
SALE OF COMMON STOCK 500
SHAREHOLDERS LOANS 20,200
-------- -------
41,900 87,700
-------- -------
USES OF CASH:
PAYMENT OF:
NOTE PAYABLE 66,300 22,300
SHAREHOLDERS LOANS 10,000
LONG-TERM DEBT 3,500
-------- -------
6,300 35.800
-------- -------
CASH PROVIDED BY (USED IN) FINANCING
ACTIVITIES (24,400) 51,900
-------- ---------
EFFECT OF EXCHANGE RATES ON CASH AND
EQUIVALENTS (9,900) (5,100)
-------- ---------
INCREASE (DECREASE) IN CASH AND
EQUIVALENTS 67,100 (1,600)
CASH AND EQUIVALENTS, BEGINNING 33,300 19,400
-------- ---------
CASH AND EQUIVALENTS, ENDING 100,400 17,800
======== =========
</TABLE>
5
<PAGE> 6
INTERNATIONAL REALTY GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS (CONTINUED)
(UNAUDITED)
________________________________________________________________________________
<TABLE>
<CAPTION>
6 MONTHS ENDED 6 MONTHS ENDED
JUNE 30, 1995 JUNE 30, 1996
<S> <C> <C> <C> <C>
RECONCILIATION OF NET LOSS TO CASH FLOWS
PROVIDED BY OPERATING ACTIVITIES:
NET LOSS $(226,600) $(152,800)
ADJUSTMENTS TO RECONCILE NET LOSS TO
CASH FLOWS PROVIDED BY OPR ACTIVITIES:
AMORTIZATION AND DEPRECIATION $ 35,800 27,400
MINORITY INTEREST (2,800)
ALLOWANCE FOR DOUBTFUL ACCOUNTS 61,700
CHANGES IN ASSETS & LIABILITIES:
ACCOUNTS RECEIVABLE 21,800 74,300
OTHER CURRENT ASSETS 8,000 (19,600)
ACCOUNTS PAYABLE: 119,600 (5,600)
ACCRUED LIABILITIES 69,100 48,000
BILLINGS IN EXCESS OF COSTS (3,900)
INCOME TAXES (2,500) 200
------- -------
NET ADJUSTMENTS 313,500 118,000
------- ---------
CASH FLOWS PROVIDED BY (USED IN) OPERATING
ACTIVITIES $86,900 $ (34,800)
======= =========
</TABLE>
READ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6
<PAGE> 7
INTERNATIONAL REALTY GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 1996
(UNAUDITED)
The consolidated financial statements of the Company included herein have been
prepared, without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission. Although certain information normally
included in financial statements prepared in accordance with generally accepted
accounting principles has been condensed or omitted, the Company believes that
the disclosures are adequate to make the information presented herein not
misleading. It is suggested that these consolidated financial statements be
read in conjunction with the financial statements and the notes thereto
included in the Annual Report on Form 10-KSB of the Company for its fiscal year
ended December 31, 1995.
The foregoing financial information reflects all adjustments which are, in the
opinion of management, of a normal recurring nature and necessary for a fair
presentation. The interim results are not necessarily indicative of the
results which may be expected for a full year.
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF ACCOUNTING:
International Realty Group, Inc. prepares its financial statements in
accordance with generally accepted accounting principles. This basis of
accounting involves the application of accrual accounting; consequently,
revenues and gains are recognized when earned, and expenses and losses
are recognized when incurred. Financial statement items are recorded at
historical cost and often involve the utilization of estimates.
Consequently, financial statement items do not necessarily represent
current values.
PRINCIPLES OF CONSOLIDATION:
The consolidated financial statements include the accounts of
International Realty Group, Inc. and all material subsidiaries (the
Company). All significant intercompany balances and transactions have
been eliminated in consolidation.
REVENUE RECOGNITION:
Service revenues are recognized on the percentage of completion method of
accounting. Percentage of completion is determined by reference to the
extent of contract performance, future performance and costs incurred.
Costs and estimated earnings in excess of billings on uncompleted
contracts are reported as unbilled receivables. Billings in excess of
costs and estimated earnings on uncompleted contracts are reported as
deferred revenues. Contracts in process are reviewed quarterly and
revenues are adjusted in current accounting periods based on revisions.
Substantially all service contracts have been short term.
EXCESS OF COST OVER FAIR VALUE OF NET ASSETS ACQUIRED:
The cost of an acquired business in excess of the market value of
tangible assets and liabilities acquired, is being amortized by the
straight-line method over the estimated useful life of ten (10) years.
The Company evaluates the amortization period of intangibles on an
ongoing basis in light of changes in any business conditions and events
or circumstances that may indicate the potential impairment of the
intangible asset. The Company evaluates the historical and projected
operating performance of acquired businesses, specific industry trends
and general economic conditions to assess whether the remaining estimated
useful life may warrant revision or that the factors, events or
circumstances indicate that the value is impaired, the Company will
provide for the decline in that period.
7
<PAGE> 8
2. ORGANIZATION AND BUSINESS
INTERNATIONAL REALTY GROUP, INC., together with its consolidated subsidiaries
(the "Company"), currently is a provider of real estate consulting services. The
Company's operations provide appraisal, valuation and other real estate and
business consulting services on an international basis.
The Company was incorporated in Delaware on April 13, 1970 and operated under
the name Bosco Resources Corporation until June 10, 1973, when it ceased
operations after its assets were nationalized without compensation by the
Libyan Government. The Company remained inactive until December 15, 1986 when
it acquired all of the outstanding shares of APPRAISAL GROUP, INC. in exchange
for 4,150,000 shares of common stock (after a 1 for 8 reverse split) and
changed its name to APPRAISAL GROUP INTERNATIONAL INC. Subsequently, on August
10, 1989, the Company's name was changed to INTERNATIONAL REALTY GROUP, INC.
Subsidiaries of the Company are as follows:
<TABLE>
<CAPTION>
NAME OF SUBSIDIARY OWNERSHIP DATE OF STATE OF COUNTRY OF
- ------------------ --------- ------- -------------------
INCORPORATION INCORPORATION
------------- -------------
<S> <C> <C> <C>
The Appraisal Group, Inc. 100 August 21, 1974 Florida
U.S. Properties Investment
& Auction, Inc. 100 March 31, 1987 Florida
Appraisal Group Int'l., Inc. 100 July 7, 1989 Florida
Stragix Int'l., Inc. 100 April 1, 1990 Florida
Appraisal Group Int'l., Rt. 75 June 6, 1990 Hungary
IRG Financial Services, Inc. 100 June 15, 1992 Florida
Caye Bokel Limited 100 January 27, 1995 Belize
</TABLE>
3. LIQUIDITY AND STRATEGIC PLANNING
Refer to Item 2, Management's Discussion & Analysis or Plan of Operations
- Liquidity and Capital Resources, contained herein.
4. TRUST ASSETS
The foreign subsidiary maintains cash held in a fiduciary or agency
capacity for certain of its customers and is not included in the
accompanying consolidated balance sheet. The trust funds represent funds
for companies being liquidated under court supervision. As of June 30,
1996, the Company had on deposit $623,406 of such funds.
ITEM 2. MANAGEMENT'S DISCUSSION & ANALYSIS OR PLAN OF OPERATION.
RESULTS OF OPERATIONS:
THREE MONTHS ENDED JUNE 30, 1996 COMPARED TO THREE MONTHS ENDED JUNE 30, 1995.
Total revenues declined for the three months ended June 30, 1996 to $147,600
from $335,300 for the same period in 1995, a decrease of approximately
$187,700. The Company's domestic valuation operation Appraisal Group, Inc.
(AGI) based in Miami, Florida and foreign operation, Appraisal Group
International Rt. (AGI RT.) based in Budapest, Hungary accounted for the
Company's revenues. AGI had revenues of $110,000 for the period compared to
$127,500 for the same period in 1995, and AGI RT. had revenues of $30,500 for
the period as compared to $207,800 for the same period in 1995. The $177,300
decrease in revenues for foreign operations for the quarterly period impacted
the Company's overall revenues for this period.
8
<PAGE> 9
Total operating expenses for the three months ended June 30, 1996 were
$206,500, compared to $462,000 for 1995, a decrease of $255,500, or 55%. Of
the total operating expenses, $173,500 is attributed to domestic operations and
$33,000 to foreign operations.
Selling, General and Administrative Expenses for the three months ended June
30, 1996 were $51,800 compared to $84,000 for the same period in 1995, a
decrease of $32,200. Amortization, Depreciation and Rent expenses were
consistent for the same period in 1995 as compared to 1996. Interest expense
for the period decreased from $22,300 in 1995 to $900 in 1996. This decrease
is attributable to foreign operations.
Direct expenses for the three months ended June 30, 1996 including the
production of appraisal reports, appraisers' fees, travel, reproduction,
photography and all related expenses was with $50,000 compared to $169,900 in
1995, an decrease of $119,900. Since the majority of the Company's
professionals are independent contractors, this decrease in direct expenses is
in line with the overall sales decrease reported for the period. Payroll and
related benefits expense for the three month period ended June 30, 1996 were
$79,500, compared to $155,300 for the same period in 1995, a decrease of
$75,800.
SIX MONTHS ENDED JUNE 30, 1996 COMPARED TO SIX MONTHS ENDED JUNE 30, 1995.
Total revenues for the six month period ended June 30, 1996 totaled $309,800
compared to $625,600 for the comparable 1995 six month period, a decrease of
$315,800, or approximately 50%. Domestic operations had total revenue for the
period of $185,300 compared to $295,300 for the comparable 1995 period, a 37%
decrease, and foreign operations based in Budapest, Hungary had total revenue
of $117,300 compared to $332,600, a 65% decrease for the comparable 1995
period. The decrease in revenues for foreign operations is a direct result of
a decrease in consulting assignments awarded to AGI RT. by its primary client,
the Hungarian government, for privatization activities. Management continues
to explore other government and private sector areas to market its consulting
services, as well as exploring other business activities in the region.
Total Operating expenses for the six months ended June 30, 1996 were $465,500
compared to $859,700 for the comparable 1995 period, a decrease of $394,200,
or 46%. Foreign operations accounted for $128,700 or 28% of operating expenses
for the period.
Selling, General and Administrative expenses for the six months ended June 30,
1996 were $77,400 compared to $157,200 for the same period in 1995 a decrease
of $77,800. Bad debt expense for the period was $24,200 compared to $46,400
for the comparable 1995 period. The Company's policy is to recognize bad debt
in the period in which it occurs and to institute collection proceedings for
such bad debt. Amortization and Depreciation expense for the six months ended
June 30, 1996 decreased from $46,300 in 1995 to $17,300 in 1996. Rent expense
decreased from $28,000 to $23,000 in 1996. Interest expense decreased from
$23,900 in 1995, to $4,400 in 1996; this decrease was attributable to reduced
borrowings by the foreign operation.
Direct expenses for the six months ended June 30, 1996 including the production
of appraisal reports, appraisers' fees, travel, reproduction, photography and
all related expenses decreased from $315,00 in 1995 to $162,000 in 1996, a
decrease of $153,000 or 49%. Such decrease corresponds with the overall
decrease in consulting assignments for the period and the utilization of the
Company's independent contractors. Of direct expenses for the period, foreign
operations accounted for 46%.
9
<PAGE> 10
Payroll and related benefits expense for the six month period ended June 30,
1996 were $147,000 versus $245,900 for the same period in 1995, a decrease of
$98,900. In addition, to enhance the Company's cash flow, $49,000 of salary
and related expenses was accrued and deferred during this period.
The current six month period generated a pre-tax loss, before minority interest
of ($155,600) compared to a pre-tax loss of ($234,100) for the same 1995
period.
LIQUIDITY AND CAPITAL RESOURCES:
Growth Strategy. The Company believes that substantial shareholder value can
be created with the acquisition of real estate development and other income
producing assets. Such acquisitions will produce a broader asset and income
base for the Company.
In conjunction with this growth strategy, the Company has acquired from DSC
S.A. de C.V. and Hemisphere Developments Limited certain developmental real
property. The properties acquired are located in major Mexican resort
areas including Acapulco, Ixtapa, Baja California Sur as well as several
mid-sized cities in Mexico. The properties consist of six land tracts totaling
4,100 acres which the Company intends to develop for resort, residential or
commercial use.
As part of the DSC and Hemisphere acquisition, the Company acquired assets of
$89,180,000, principally real property but including notes and accounts
receivable totaling $2,210,000, and assumed liabilities including minority
interests of $26,604,000. Included in liabilities acquired are mortgages and
notes payable of approximately $2,941,000 plus accrued interest of $1,846,000.
See "Subsequent Events" contained herein.
The Company intends to implement a development plan for each of the properties
acquired to determine the total cost for development, the timing for each
development, and the most suitable financing for the particular development.
Until such time as the Company is able to identify an appropriate funding
source for a particular project, the Company intends to hold such property for
investment purposes and will utilize its current resources for working capital,
including debt service obligations. Such resources shall include its cash
flow from current operations and the accounts receivable currently due the
Company from all sources, including those acquired in the transaction with DSC
and Hemisphere. In addition to its own resources, the Company intends,
although it has no understandings or agreements at this time, to explore
financing for project development from outside sources, including bank
financing, the private placement of the Company's securities, a public
offering of the Company's securities, or joint venture arrangements with other
developers.
While the Company has no current understandings or agreements, it intends to
pursue the acquisition of income-producing assets to enhance and complement the
assets acquired.
Cash Flow From Operations. The Company incurred for the six months ended June
30, 1996 a net loss of $152,800 with a deficit cash flow from operations of
$34,800 compared to a net loss of $234,100 while maintaining a positive cash
flow from operations of $86,900 for the comparable period in 1995.
Working Capital. The Company's current liabilities exceed its current assets
by approximately $562,200. This excess in current liabilities consists
principally of related party liabilities. This
10
<PAGE> 11
liability consists of accrued officer's salaries amounting to approximately
$415,000, shareholder loans of $37,000, and advances from DSC in conjunction
with the DSC and Hemisjphere Transaction amounting to $130,000. The elimination
of the related party current liability totaling $582,000 would eliminate the
working capital deficiency and current assets would exceed current liabilities
by approximately $19,800. The Company has limited external financing sources at
this time and has relied principally on internal financing provided by its
executive officers. External working capital has been provided to the Company's
foreign operations through bank borrowings and to domestic operations in
conjunction with the transaction with DSC.
Long-Term Debt. At June 30, 1996, notes payable totaled $197,000 which
consisted of $67,000 unsecured, used for the operations of the foreign
subsidiary and $130,000 due to DSC. DSC has loaned the Company $130,000 as of
June 30, 1996 to reimburse the Company for expenses incurred in conjunction
with the Transaction, approximately $75,000, and working capital for the
Company, approximately $55,000. The loans are collaterized by the Company's
account receivable, are non interest bearing and were re-paid on August 19,
1996 at the Closing of the DSC and Hemisphere transaction (See "Subsequent
Events" contained herein. Long-Term Debt consists of $39,500 plus its current
portion to a related party.
Currency Risk. The Company's operating entities are not subject to direct
currency conversion risks. The Company's primary operating entities provide
consulting services to their clients in their own geographic locations. All
consulting services performed by APPRAISAL GROUP, INC. based in Miami, Florida
are reported and paid in U.S. dollars. Services provided by APPRAISAL GROUP
INTERNATIONAL, RT. based in Hungary are reported in and paid in Hungarian
forint. For reporting purposes foreign operations are converted from Hungarian
forints (HUF) to U.S. dollars at the end of each reporting period. The
conversion rate of the HUF on June 30, 1995 and 1996 was 125.84 HUF and 153.05
HUF respectively. The Company does not employ any hedging techniques due to the
fact the cost to employ them outweighs any potential benefits.. From its
formation in June 6, 1990 to June 30, 1995 and June 30, 1996, the Company has
reduced its investment in its foreign subsidiary and as part of shareholder
equity recognized currency fluctuation losses of <$194,000> and <$208,600>
respectively.
SUBSEQUENT EVENTS
GENERAL
On August 19, 1996, the Company consummated the proposed share exchange
transaction with (i) DSC, S.A. de C.V. ("DSC"), a company organized under the
laws of Mexico; and (ii) Hemisphere Developments Limited ("Hemisphere"), a
company organized under the laws of the Isle of Man. As more fully described
below, the share exchange transactions with DSC and Hemisphere will result in a
change in the control of the Company that is expected to occur during the
fourth quarter of 1996.
DSC TRANSACTION
Pursuant to the share exchange with DSC (the "DSC Transaction"), the Company
acquired the following assets as of August 19, 1996 (the "Closing Date"): (I)
DSC's 100 percent interest in Centro de Promociones Guerrero S.A. de C.V.; (ii)
DSC's 75 percent interest in Clusters Inmobiliaria de Ixtapa, S.A. de C.V.
("Clusters Ixtapa"); (iii) a promissory note ("Clusters Note") in the
principal amount of $5,625,000 from Clusters Ixtapa; and (iv) DSC's 30 percent
interest
11
<PAGE> 12
in Nueva Tierra. Such assets acquired by the Company are collectively
referred to herein as the "DSC Assets".
In exchange for the DSC Assets, the Company issued to DSC on the Closing Date
485,930 shares of the Company's common stock, par value $.001 per share (the
"Common Stock") and a Convertible Promissory Note (the "DSC Note") in the
principal amount of $29,673,658. The DSC Note is convertible into 37,945,854
shares of Common Stock.
The Company has the right to force the conversion of the DSC Note after the
Company's Certificate of Incorporation has been amended to increase the number
of authorized shares of Common Stock from 10,000,000 to 450,000,000. The
increase in the authorized Common Stock will be approved by written consent
executed by two stockholders of the Company, Jack Birnholz and Richard
Bradbury, who jointly control a majority of the Common Stock of the Company.
In accordance with the regulations of the Securities and Exchange Commission
(the "Commission"). the Company intends to distribute an Information Statement
to stockholders describing the stockholder action to increase the authorized
Common Stock. See below under the caption "Information Statement". The
Company anticipates that the authorized Common Stock will be increased and the
DSC Note converted to Common Stock during the fourth quarter of 1996. In the
event that the DSC Note is not converted prior to December 31, 1996, the DSC
Note becomes immediately payable together with interest at a rate of five
percent per year. The DSC Note is secured by the DSC Assets.
The DSC Transaction was consummated pursuant to the Second Amendment to
Agreement, between the Company and DSC, dated July 31, 1996. The Second
Amendment to Agreement modified and supplemented the First Amendment to
Agreement, dated February 7, 1996, as described in the Company's Current Report
on Form 8-K, dated February 28, 1996. The Second Amendment to Agreement
modified and supplemented the original Agreement between the parties, dated
October 6, 1995, as described in the Company's Current Report on Form 8-K,
dated October 18, 1995. The Second Amendment, the First Amendment and the
original Agreement are collectively referred to herein as the "DSC Agreement".
The original Agreement and the First Amendment contemplated the acquisition by
the Company of Tropical Club Ixtapa S.A. de C.V., Impulsora Turistica de
Occidente, S.A. de C.V., Tropical Club Isla Mujeres S.A. de C.V., Promocaribe,
S.A. de C.V., DSC Casa Blanca, S.A. de C.V., and Pez Maya, S.A. de C.V.. The
Company decided not to acquire such companies in the DSC Transaction because
such companies and their assets are presently the subject of debt-related legal
proceedings in Mexico. To the extent that in the future the Company is able to
negotiate a restructuring of such debt with the banks and other debt holders,
the Company may in the future consider acquiring such companies through a share
exchange transaction or otherwise. Neither the Company, nor DSC, however, is
presently involved in any such negotiations or has any understanding, agreement
or arrangement with any with any such banks or debt holders for the debt
restructuring or settlement of such debt.
In addition to the DSC Assets, the DSC Agreement also provides for the
acquisition by the Company of DSC's 12.3 percent interest in Malecon S.A. de
C.V. and DSC's 30 percent interest in Corporacion Inmobiliaria del Norte, S.A.
de C.V. The acquisition of such interests by the Company is subject to the
waiver of a right of first refusal by the majority stockholders of the
respective companies and the clarification of any pledges of such minority
interests to banks or other financial institutions. In the event that the
Company proceeds with the acquisition of such assets, the Company will issue to
DSC a convertible note (on terms similar to the DSC Note) in the principal
aggregate amount of $2,600,855.
12
<PAGE> 13
Pursuant to the DSC Agreement, DSC has loaned approximately $170,000 to the
Company. Approximately $105,000 of the proceeds of such loans have been used
by the Company for costs incurred in connection with the DSC Transaction and
the balance has been used for working capital purposes Such loans were repaid
by the Company on the Closing Date through the reduction of account receivables
due from DSC to the companies acquired. After the Closing Date, DSC has made
advances in the approximate amount of $25,000 and may in the future make
additional advances to the Company that will likewise be repaid through the
reduction of such accounts receivables.
The shares of Common Stock issued to DSC on the Closing Date and upon
conversion of the DSC Note have and will be issued by the Company in reliance
on the exemption from registration under the Securities Act of 1933 provided by
Regulation S. The DSC Agreement provides that the shares of Common Stock
issued to DSC will be afforded certain demand and piggyback registration
rights.
Pursuant to the DSC Agreement, John Day, Geoffrey Bell and Jack Birnholz
resigned from the Company's Board of Directors on the Closing Date and the
remaining members of the Board--Richard Bradbury and Alton Hollis--appointed
Bernardo Dominguez C. (the President of DSC) to fill a vacancy on the Company's
Board of Directors.
As required by the DSC Agreement, Messrs. Bradbury and Birnholz executed a
proxy agreement on the Closing Date, pursuant to which DSC may vote the Common
Stock held by such persons in order to effectuate the transactions contemplated
by the DSC Agreement. The proxy agreement terminates upon the earlier of the
Company's authorization to increase the Common Stock or December 31, 1996.
For purposes of the DSC and Hemisphere Transactions, the Common Stock has been
valued at $.782 per share, based upon an agreed upon value of the Company and
its subsidiaries of $7,000,000, divided by the 8,954,187 issued and outstanding
shares of Common Stock. The agreed upon value of the Company is based upon the
value of the Company's present operations ($1,500,000) and the Company's land
on Caye Bokel, Belize (approximately $5,500,000, predicated on a land residual
approach, assuming a 250 unit destination resort).
DSC ASSETS
The DSC Assets consist of: (i) 100 percent equity interest in Centro de
Promociones Guerraro S.A. de C.V.; (ii) 75 percent equity interest in Clusters
Ixtapa; (iii) a note receivable in the principal amount of $5,625,000; and
(iv) DSC's 30 percent interest in Nueva Tierra. For information regarding
Nueva Tierra, see below under the caption "Hemisphere / Nueva Tierra Assets".
Centro de Promociones Guerraro S.A. de C.V. is a company formed under the laws
of Mexico which owns land located in Acapulco, Mexico. The eight-acre,
partially developed property is being held for investment or future development
and is subject to a mortgage in the approximate amount of $659,508. The
Company believes that all necessary licenses, permits, and governmental
approvals have been obtained for the construction of residential housing on
such property.
Clusters Ixtapa is a company formed under the laws of Mexico which owns land in
Ixtapa on the Pacific coast of Mexico in the state of Guerrero. The 26-acre
property is being held for investment or future development. Clusters Ixtapa
has received loans in the principal amount of $23,007,000 (the "NAFIN Debt from
its lender, National Financiera, S.N.C. Bank ("NAFIN").
13
<PAGE> 14
On December 29, 1995, Clusters Ixtapa, DSC and NAFIN entered into a
restructuring plan with respect to the NAFIN Debt. Pursuant to this plan, DSC
has assumed the NAFIN Debt in exchange for Clusters Ixtapa's payment of
approximately $15,341,000 and DSC's payment of the difference. Such payment by
DSC, as well as the repayment of certain other debt of DSC to NAFIN, will be
made by the transfer from DSC to NAFIN of approximately 15,991,000 shares of the
Company's Common Stock upon the conversion of the DSC Note. Pursuant to the DSC
Transaction, the Company acquired from DSC a $5,625,000 debt obligation of
Clusters Ixtapa on the Closing Date.
The DSC Assets have been valued at $30,053,655 for purposes of the DSC
Transaction. Based upon the $.782 per share value of the Common Stock, the
Company will issue an aggregate 37,945,854 shares of Common Stock as
consideration for the DSC Assets
HEMISPHERE TRANSACTION
Simultaneously with the DSC Transaction, the Company consummated a share
exchange transaction ("Hemisphere Transaction") with Hemisphere, a real estate
investment business. Pursuant to the Hemisphere Transaction, the Company
acquired from Hemisphere on the Closing Date all of the common stock of Newland
Corporation ("Newland"), a Marshall Isles company, which owns 70 percent of the
common stock of Nueva Tierra. As a result of the Hemisphere Transaction and
the DSC Transaction, the Company owns 100 percent of the stock of Nueva Tierra.
As more fully described below, Nueva Tierra owns a majority interest and is
the general partner of four real estate Participating Associations, a form of
limited partnership in Mexico: (I) Villas Del Carbon; (ii) Barra del Tordo;
(iii) Hacienda del Franco; and (iv) Bahia de Cortes.
In exchange for the 70 percent interest in Nueva Tierra, the Company issued
514,070 shares of Common Stock to Hemisphere on the Closing Date and a
convertible note (the "Hemisphere Note") in the principal amount of
$32,120,440. The Hemisphere Note is identical in form to the DSC Note and is
convertible into an aggregate of 41,074,732 shares of Common Stock. The shares
of Common Stock issued to Hemisphere on the Closing Date and upon conversion of
the Hemisphere Note have and will be issued by the Company in reliance on the
exemption from registration under the Securities Act of 1933 provided by
Regulation S. The Hemisphere Agreement provides that such shares of Common
Stock will be afforded certain demand and piggyback registration rights.
The Hemisphere Transaction was consummated pursuant to the Amendment to
Agreement between the Company and Hemisphere, dated July 31, 1996. The
Amendment to Agreement modified and supplemented the original Agreement with
Hemisphere dated February 7, 1996, as described in the Company's Current Report
on Form 8-K, dated February 28, 1996. The original Agreement with Hemisphere
also contemplated the acquisition of Las Arboledas, Ensenada Blanca, Playas de
Brisa Mar, and El Quelele, which Participating Association the Company has
elected not to acquire in the Hemisphere Transaction as a result of the
completion of the Company's due diligence review of the transaction.
HEMISPHERE/NUEVA TIERRA ASSETS
Nueva Tierra, all of the stock of which the Company has acquired in the DSC and
Hemisphere Transactions, has a majority interest in four real estate projects
in Mexico, as set forth below.
Villas del Carbon is a residential development located in Villa del Carbon,
State of Mexico in which Nueva Tierra has a 79 percent interest. The 25-acre
property is partially developed and
14
<PAGE> 15
presently has a clubhouse, roads and utility lines to the property boundary.
Development plans call for development of 180 home sites for sale to builders or
individuals who wish to construct weekend country houses. Prior to the sale of
home sites, development plans call for construction of electric lines water
supply, storm water drain pipes and street lighting to each of the individual
lots. The preliminary estimate to complete this project is approximately
$1,700,000 in four stages. The first stage would require Nueva Tierra to obtain
financing of $400,000. This property is not subject to any mortgage.
Barra del Tordo is a resort development project located in Barra del Tordo in
the state of Tamaulipas, Mexico, in which Nueva Tierra has a 79 percent
interest. The property consists of approximately 670 acres of land, including
3.5 kilometers of beachfront property facing the Gulf of Mexico. At present,
construction of 24 condominiums is approximately 80 percent complete. Roads,
sewers, waterlines and utilities have been constructed for these condominiums.
Nueva Tierra had planned to complete the initial 24 condominiums at some point
in the future when market conditions are appropriate; accordingly the project
is being held for investment or future development. The property is subject to
a mortgage in the amount of $3,490,298.
Hacienda del Franco is a residential development project located near Silao in
the State of Guanajuato, in which Nueva Tierra has an 81 percent interest. The
property consists of approximately 260 acres of land and includes a traditional
colonial style hacienda. Roads on the property have been graded and there are
utilities, sewers and water pipes on the property, which is being held for
investment or possible development centered around the hacienda. The property
is subject to a mortgage in the amount of $511,227.
Bahia de Cortes is a resort development project located in Baja California near
La Paz, in which Nueva Tierra has a 78 percent interest. The property consists
of approximately 3,080 acres of land including over five kilometers of
beachfront property The property is not subject to any mortgage.
INFORMATION STATEMENT
Pursuant to the terms of the DSC and Hemisphere Agreements, the Company has
agreed to diligently prepare an Information Statement describing this
transaction and amend its Certificate of Incorporation to increase the number
of authorized shares of Common Stock from its current level of 10,000,000
shares to 450,000,000 shares. Messrs. Birnholz and Bradbury, who jointly
control more than a majority of the issued and outstanding Common Stock, have
informed the Company that they will execute a written stockholder consent
approving such amendment to the Certificate of Incorporation.
In accordance with regulations of the Commission, the Company will submit an
Information Statement containing, among other things, information describing
the DSC and Hemisphere Transactions including a description of the properties
acquired by the Company as well as the Amendment to the Certificate of
Incorporation to be approved by the written consent of two stockholders. After
the staff of the Commission has completed its review of the Information
Statement, the Company will mail a copy of the Information Statement to each
stockholder. The Company intends to amend its Certificate of Incorporation
with the State of Delaware as soon as possible after the expiration of the
twenty day period following the mailing of the Information Statement to
stockholders.
15
<PAGE> 16
CHANGE IN CONTROL OF COMPANY
A change in control of the Company will occur upon the conversion of the DSC
and Hemisphere Notes. At such time, DSC will own approximately 25 percent,
Hemisphere will own approximately 47 percent, and NAFIN will own approximately
18 percent of the then outstanding Common Stock. As a result, any two of these
companies acting in concert will be in a position to determine the outcome for
the election of directors and thereby control the Company. The change of
control is expected to occur during the fourth quarter of 1996. At such time
approximately 88,974,773 shares of Common Stock will be issued and outstanding.
The Company intends to call a special meeting of the stockholders after the
conversion of the DSC and Hemisphere Notes to elect three to five directors,
proposed by DSC. The DSC Agreement provides that Mr. Bradbury will enter into
an employment agreement with the Company on terms similar to his present
employment agreement with the Company.
PART II: OTHER INFORMATION
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
A. Exhibits
27.1 Financial Data Schedule (For SEC purposes only)
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Company has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
INTERNATIONAL REALTY GROUP, INC.
--------------------------------
(REGISTRANT)
DATE: SEPTEMBER 12, 1996 /S/ RICHARD M. BRADBURY
-------------------------------
RICHARD M. BRADBURY,
PRESIDENT, AND
CHIEF FINANCIAL OFFICER
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
INTERNATIONAL REALTY GROUP, INC. FINANCIAL STATEMENTS FOR THE QUARTERLY PERIOD
ENDED JUNE 30, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<EXCHANGE-RATE> 1
<CASH> 17,800
<SECURITIES> 34,700
<RECEIVABLES> 147,200
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 255,300
<PP&E> 376,985
<DEPRECIATION> (196,686)
<TOTAL-ASSETS> 1,111,800
<CURRENT-LIABILITIES> 817,500
<BONDS> 39,500
0
0
<COMMON> 9,000
<OTHER-SE> 245,800
<TOTAL-LIABILITY-AND-EQUITY> 1,111,800
<SALES> 0
<TOTAL-REVENUES> 309,800
<CGS> 0
<TOTAL-COSTS> 465,400
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 24,200
<INTEREST-EXPENSE> 4,400
<INCOME-PRETAX> (155,600)
<INCOME-TAX> 0
<INCOME-CONTINUING> (152,700)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (152,700)
<EPS-PRIMARY> (.02)
<EPS-DILUTED> 0
</TABLE>
