<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 SEPTEMBER 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)
DELAWARE 62-1277260
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
111 NORTHWEST 183RD STREET, SUITE 518, MIAMI, FLORIDA 33169
- --------------------------------------------------------------------------------
(Address of principal executive office) (Zip Code)
305-944-8811
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(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 November 1, 1997.
COMMON STOCK, PAR VALUE $.001 9,954,313
----------------------------- ----------------
Title of Class Number of Shares
Transitional Small Business Disclosure Format yes no X
----- -----
<PAGE> 2
PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INTERNATIONAL REALTY GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1996
(UNAUDITED, NOTE 1)
<TABLE>
<S> <C> <C>
ASSETS
REAL ESTATE, AT COST:
PROPERTY HELD FOR FUTURE DEVELOPMENT (NOTE 3) $10,551,600
RECEIVABLES:
DUE FROM CONTROLLING SHAREHOLDER 2,326,100
ACCOUNTS RECEIVABLE, DEEMED FULLY COLLECTIBLE 210,000
-----------
2,536,100
CASH AND CASH EQUIVALENTS 43,600
FURNITURE, EQUIPMENT, AND IMPROVEMENTS 179,800
EXCESS OF COST OVER ESTIMATED FAIR VALUE OF
NET ASSETS ACQUIRED 127,600
OTHER ASSETS 24,300
-----------
TOTAL $13,463,000
===========
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
MORTGAGES AND NOTES PAYABLE (NOTE 4) $ 1,239,600
ACCOUNTS PAYABLE 345,100
ACCRUED AND OTHER LIABILITIES 792,100
-----------
$ 2,376,800
MINORITY INTEREST 1,373,800
SHAREHOLDERS' EQUITY:
COMMON STOCK, $.001 PAR; AUTHORIZED 10,000,000
SHARES; 9,954,250 Shares Issued at 9/30/96 10,000
CAPITAL IN EXCESS OF PAR 4,912,000
CONVERTIBLE NOTES (NOTE 5) 9,707,300
CUMULATIVE TRANSLATION ADJUSTMENT (248,800)
ACCUMULATED DEFICIT (4,652,600)
-----------
9,727,900
LESS SHARES OF COMMON STOCK HELD IN TREASURY,
AT COST 15,500
-----------
TOTAL SHAREHOLDERS' EQUITY 9,712,400
-----------
TOTAL $13,463,000
===========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
1
<PAGE> 3
PART I: FINANCIAL INFORMATION, CONTINUED
ITEM 1. FINANCIAL STATEMENTS, CONTINUED:
INTERNATIONAL REALTY GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
(UNAUDITED, NOTE 1)
<TABLE>
<CAPTION>
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THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
----------- ----------- ----------- -----------
1996 1995 1996 1995
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
REVENUES:
REVENUES FROM SERVICES PROVIDED $ 89,900 $ 397,000 $ 456,100 $ 975,100
----------- ----------- ----------- -----------
OPERATING EXPENSES:
AMORTIZATION AND DEPRECIATION 15,500 17,700 42,900 61,000
DIRECT 147,800 75,300 309,800 390,300
PAYROLL AND RELATED BENEFITS 54,700 94,400 201,700 340,300
SELLING, GENERAL & ADMINISTRATIVE 162,700 59,600 312,500 290,000
----------- ----------- ----------- -----------
380,700 247,000 866,900 1,081,600
----------- ----------- ----------- -----------
INCOME (LOSS) BEFORE OTHER INCOME
(EXPENSE), MINORITY INTEREST &
PROVISION FOR INCOME TAXES (BENEFIT) (290,800) 149,900 (410,900) (106,600)
OTHER INCOME (EXPENSE)
INTEREST INCOME 2,000 1,519,700 59,200 5,341,800
INTEREST EXPENSE (30,800) (2,314,200) (95,400) (8,053,900)
GAIN (LOSS) ON EXCHANGE RATE FLUCTUATIONS 64,400 212,100 (78,100) 1,018,300
OTHER EXPENSES -- -- -- (200)
----------- ----------- ----------- -----------
LOSS BEFORE MINORITY INTEREST &
PROVISION FOR INCOME TAXES (BENEFIT) (255.100) (432,400) (525,100) (1,800,600)
MINORITY INTEREST IN INCOME (LOSS) OF
SUBSIDIARIES 16,800 (141,600) (10,200) (446,200)
----------- ----------- ----------- -----------
LOSS BEFORE PROVISION FOR INCOME TAXES
(271,900) (290,800) (514,900) (1,354,500)
PROVISION FOR INCOME TAXES -- 2,400 32,400 2,400
----------- ----------- ----------- -----------
NET LOSS (271,900) (293,200) (547,300) (1,356,900)
=========== =========== =========== ===========
LOSS PER COMMON SHARE $ (0.03) $ (0.03) $ (0.05) $ (0.14)
=========== =========== =========== ===========
WEIGHTED AVERAGE SHARES OF COMMON STOCK 9,954,187 9,954,187 9,954,187 9,954,187
=========== =========== =========== ===========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
2
<PAGE> 4
PART I: FINANCIAL INFORMATION, CONTINUED
ITEM 1. FINANCIAL STATEMENTS, CONTINUED:
INTERNATIONAL REALTY GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1996
(UNAUDITED, NOTE 1)
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<TABLE>
<CAPTION>
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
SOURCES OF CASH:
CLIENTS AND OTHER $ 972,700
INTEREST 59,200
-----------
1,031,900
-----------
USES OF CASH:
CASH PAID FOR:
DIRECT COSTS 253,900
OPERATING 294,000
PAYROLL AND RELATED BENEFITS 119,600
TAXES 28,900
INTEREST 3,500
-----------
699,900
-----------
CASH PROVIDED BY OPERATING ACTIVITIES $ 332,000
CASH FLOWS FROM INVESTING ACTIVITIES:
ACQUISITION OF:
EQUIPMENT 3,600
REAL ESTATE 7,400
-----------
CASH USED IN INVESTING ACTIVITIES (11,000)
CASH FLOWS FROM FINANCING ACTIVITIES:
SOURCES OF CASH:
CASH RECEIVED FROM AFFILIATE 264,500
-----------
USES OF CASH:
PAYMENT OF:
NOTES PAYABLE 21,000
DUE FROM AFFILIATE 515,100
-----------
536,100
-----------
CASH USED IN FINANCING ACTIVITIES (271,600)
EFFECT OF EXCHANGE RATES ON CASH AND
CASH EQUIVALENTS (25,300)
-----------
INCREASE IN CASH AND CASH EQUIVALENTS 24,100
CASH AND EQUIVALENTS, BEGINNING 19,500
-----------
CASH AND EQUIVALENTS, ENDING $ 43,600
===========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
3
<PAGE> 5
PART I: FINANCIAL INFORMATION, CONTINUED
ITEM 1. FINANCIAL STATEMENTS, CONTINUED:
INTERNATIONAL REALTY GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS (CONTINUED)
NINE MONTHS ENDED SEPTEMBER 30, 1996
(UNAUDITED, NOTE 1)
<TABLE>
<CAPTION>
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<S> <C> <C>
RECONCILIATION OF NET LOSS TO CASH FLOWS
PROVIDED BY OPERATING ACTIVITIES:
NET LOSS $(547,300)
---------
ADJUSTMENTS TO RECONCILE NET LOSS TO
CASH PROVIDED BY OPERATING ACTIVITIES:
AMORTIZATION AND DEPRECIATION $ 42,900
MINORITY INTEREST (10,200)
CURRENCY FLUCTUATION 78,100
CHANGES IN ASSETS & LIABILITIES:
ACCOUNTS RECEIVABLE 11,500
OTHER ASSETS 515,100
ACCOUNTS PAYABLE: 83,900
ACCRUED LIABILITIES AND OTHER 158,300
---------
TOTAL ADJUSTMENTS 879,600
---------
CASH PROVIDED BY OPERATING ACTIVITIES $ 332,300
=========
SUPPLEMENTAL SCHEDULE OF NON-CASH ACTIVITIES:
INVESTING ACTIVITIES:
NET ASSETS CONTRIBUTED BY PARTICIPATING
ASSOCIATIONS $ 46,400
=========
FINANCING ACTIVITIES:
COMMON STOCK AND CONVERTIBLE NOTE ISSUED IN
EXCHANGE FOR NET ASSETS RECEIVED IN COMBINATION $ 308,400
=========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
4
<PAGE> 6
PART I: FINANCIAL INFORMATION, CONTINUED
ITEM 1. FINANCIAL STATEMENTS, CONTINUED:
INTERNATIONAL REALTY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 1996
(1) PRINCIPLES OF STATEMENT PRESENTATION
The unaudited consolidated financial statements include all adjustments which
are necessary, in the opinion of management, to fairly reflect the Company's
financial position and results of operations. All such adjustments are of a
normal recurring nature. The statements have been prepared using the accounting
policies described in the Company's 1995 Audited Financial Statements contained
in the Company's Form 10-KSB for the year ended December 31, 1995.
The Company has changed its balance sheet presentation to a non-classified
balance sheet due to the change from principally the service industry to
principally real estate holdings and made other reclassifications (See Note 2).
Such change in presentation has no effect on operations. Balances for the three
and nine months ended September 30, 1996 have been reclassified where
appropriate to conform to the comparable 1995 period's financial statement
presentation.
(2) MERGER AND RELATED MATTERS
The Company consummated a share exchange transaction ("Transaction") with DSC,
S.A. de C.V. ("DSC") and Hemisphere Developments Limited ("Hemisphere") on
August 19, 1996 (the "Closing Date"). The Transaction has been accounted for in
a manner similar to a pooling of interest. The assets acquired by the Company as
described below were accounted for at historical cost.
Pursuant to the terms of the Amended and Restated Agreement entered into between
the parties as of August 19, 1996, the Company acquired the following assets
from DSC and Hemisphere as of August 19, 1996; (i) DSC's 100 percent interest in
Centro de Promociones Guerrero S.A. de C.V. ("Centro"); (ii) DSC's 75 percent
interest in Clusters Inmobiliaria de Ixtapa, S.A. de C.V. ("Clusters Ixtapa");
(iii) a promissory note ("Clusters Note") in the principal amount of $5,628,426
of Clusters Ixtapa; (iv) DSC's 30 percent interest in Nueva Tierra, S.A. de C.V.
("Nueva Tierra"); and (v) Hemisphere's 100 percent interest in Newland
Corporation, which, in turn, holds a 70 percent interest in Nueva Tierra. Nueva
Tierra owns a majority interest and is the general partner of the following real
estate Asociacion en Participacion ("Participating Associations"), a form of
limited partnership in Mexico: (x) Villas Del Carbon; (y) Hacienda del Franco;
and (z) Bahia de Cortes. The assets acquired by the Company are collectively
referred to herein as the "Assets". For additional information regarding the
Assets, see "Assets Acquired".
In exchange for the Assets, the Company issued to DSC on the Closing Date
485,930 shares of the Company's Common Stock and a Convertible Promissory Note
(the "DSC Note") in the principal amount of $4,858,828 convertible into
52,875,030 shares of the Common Stock. The Company issued to Hemisphere on the
Closing Date 514,070 shares of Common Stock and a Convertible Promissory Note
("Hemisphere Note") in the principal amount of $4,848,558 convertible into
52,763,270 shares of Common Stock.
The Company may force the conversion of the DSC and Hemisphere Note after the
Company's Certificate of Incorporation has been amended to increase the number
of authorized shares of Common Stock from 10,000,000 to 450,000,000. The Company
intends to amend its Certificate of Incorporation with the State of Delaware as
soon as possible after the expiration of the twenty day period following the
5
<PAGE> 7
PART I: FINANCIAL INFORMATION, CONTINUED
ITEM 1. FINANCIAL STATEMENTS, CONTINUED:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED), CONTINUED
mailing of an Information Statement to stockholders. The Company anticipates
that, at the earliest, the authorized Common Stock will be increased and the DSC
and Hemisphere Notes converted to Common Stock during the fourth quarter of
1997. The DSC and Hemisphere Notes are secured by the Assets and matures on
January 1, 1998.
The Amended and Restated Agreement provides that DSC will make $300,000 in
working capital advances to the Company. DSC made approximately $195,000 of such
advances to the Company as of the Closing Date. The amount of such advances have
been added to the amount of the capital contributed to the Company in
Transaction.
The shares of Common Stock issued to DSC and Hemisphere on the Closing Date and
upon conversion of the DSC and Hemisphere Note have and will be issued by the
Company in reliance on the exemption from registration under the Securities Act
of 1933 provided by Regulation S. The Agreement provides that the shares of
Common Stock issued to DSC will be afforded certain demand and piggyback
registration rights.
On the Closing Date, John Day, Geoffrey Bell and Jack Birnholz resigned from the
Company's Board of Directors and the remaining members of the Board -- Richard
Bradbury and Alton Hollis -- appointed Bernardo Dominguez C. (the President of
DSC) to fill a vacancy on the Company's Board of Directors. Pablo Macedo was
elected Secretary of the Company on the Closing Date.
A change in control of the Company will occur upon the conversion of the DSC and
Hemisphere Notes. At such time, DSC will own approximately 53,360,960 shares of
Common Stock or 46.2 percent of the then outstanding shares of Common Stock, and
Hemisphere will own approximately 53,277,340 shares of Common Stock or 46.1
percent of the then outstanding Common Stock. The DSC percentage includes the
15,991,000 shares of Common Stock (approximately 14.2 percent) that DSC intends
to subsequently transfer to NAFIN. As a result, DSC and Hemisphere will be in a
position to determine the outcome for the election of directors and thereby
control the Company. The change in control is expected to occur during the
fourth quarter of 1997. At such time, approximately 115,592,487 shares of Common
Stock will be issued and outstanding.
The Company intends to call a special meeting of the stockholders after the
conversion of the DSC and Hemisphere Notes to elect three to five directors, one
of which will be designated by Hemisphere, one of which will be designated by
the Company, and the remainder will be designated by DSC.
ASSETS ACQUIRED
The Assets acquired consist of the following companies and real estate holdings:
Centro, 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 approximate amount of $632,200 as
of September 30, 1996.
Clusters Ixtapa, a company formed under the laws of Mexico on July 24, 1991,
owns land in Ixtapa on the Pacific coast of Mexico in the state of Guerrero. The
26-acre property is being held for 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"). On December 29, 1995, Clusters
Ixtapa, DSC and
6
<PAGE> 8
PART I: FINANCIAL INFORMATION, CONTINUED
ITEM 1. FINANCIAL INFORMATION, CONTINUED:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED), CONTINUED
NAFIN entered into a restructuring plan with respect to the NAFIN Debt. The
Company is not a party to the DSC and NAFIN restructuring plan. Pursuant to the
restructuring 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. DSC has advised the Company it intends to repay such amount, as well
as certain other debt of DSC to NAFIN, through 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 its 75% interest and a $5,628,426 debt obligation of Clusters
Ixtapa on the Closing Date.
Nueva Tierra, all of the stock of which the Company has acquired in the DSC and
Hemisphere Transactions, has a.majority interest in three real estate projects
in Mexico, as set forth below.
Villas del Carbon, a Participating Association formed under the laws of Mexico
on January 19, 1996, owns a residential development located in Villa del Carbon,
State of Mexico in which Nueva Tierra has a 79.1 percent interest. The 25-acre
property, which is presently being held by the Company for 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 any mortgage.
Hacienda del Franco, a Participating Association formed under the laws of Mexico
on January 10, 1996, owns a residential development project located near Silao
in the State of Guanajuato, in which Nueva Tierra has an 81.1 percent interest.
The property consists of approximately 260 acres of land and includes a
traditional colonial style hacienda. The property is being held for future
development or possible development centered around the hacienda. The property
is subject to a mortgage in the amount of $465,900, as of September 30, 1996.
Bahia de Cortes, a Participating Association formed under the laws of Mexico on
February 7, 1996, owns a resort development project located in Baja California
near La Paz, in which Nueva Tierra has a 78.1 percent interest. The property,
which is being held for future development, consists of approximately 3,080
acres of land including over five kilometers of beachfront property The property
is not subject to any mortgage.
The Company's pro forma consolidated results of operations for the nine months
ended September 30, 1996 and 1995, assumes the merger of DSC and Hemisphere
occurred on January 1, 1995, and are summarized as follows.
<TABLE>
<CAPTION>
INTERNATIONAL REALTY DSC/HEMISPHERE
GROUP, INC. COMBINED (1) COMBINED
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<S> <C> <C> <C>
Nine months ended
September 30, 1995 (unaudited):
Revenues, net $ 975,100 $ -- $ 975,100
Net Loss 89,600 1,267,300 1,356,900
</TABLE>
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(1) Net of Minority Interest
7
<PAGE> 9
PART I: FINANCIAL INFORMATION, CONTINUED
ITEM 1. FINANCIAL INFORMATION, CONTINUED:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED), CONTINUED
No intercompany transactions existed between the companies during the periods
presented and no adjustments were necessary to conform the accounting policies
of the two companies. Costs associated with consummating the combination
amounted to $110,000.
The pro forma revenues and earnings summarized above are not necessarily
indicative of the results that would have occurred if the acquisition had been
consummated on September 30, 1995 or of future results of operations of the
combined companies.
(3) LAND HELD FOR FUTURE DEVELOPMENT
Location Acreage 1996
-------- ------- ----
Ixtapa, Mexico 26 $ 9,054,900
Acapulco, Mexico 8 403,600
Caye Bokel, Belize 87 456,500
Guanajuato, Mexico 236 547,200
Jilotepec, Mexico 24 43,100
La Paz, Mexico 3,451 19,300
La Grange, Texas 1 31,600
-----------
$10,556,100
(4) MORTGAGE AND NOTES PAYABLE
Mortgages and Notes Payable at September 30, 1996 is summarized as follows:
Mortgage Note, bank $ 465,900
Note Payable, bank 637,200
----------
Total Payable to banks $1,098,100
Note Payable, unsecured 49,100
Note Payable, related party 38,400
Shareholder Loan 54,000
----------
$1,239,600
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(5) CONVERTIBLE NOTE
Convertible Notes issued at August 19, 1996 are summarized as follows:
$4,858,828 convertible into 52,875,030 shares
$4,848,558 convertible into 52,763,270 shares
---------- -------------------
$9,707,386 convertible into 105,638,300 shares
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS.
The following discussion and analysis covers any material changes in
financial condition since December 31, 1995 and any material changes in the
results of operations for the three and nine months ended September 30, 1996, as
compared to the same period in 1995. This discussion and analysis should be read
in conjunction with "Management's Discussion and Analysis or Plan of Operations"
included in the Company's Form 10-KSB December 31, 1995.
ORGANIZATION AND BUSINESS
GENERAL
The Company consummated a share exchange transaction on August 19, 1996
resulting in a reverse acquisition which has been accounted for in a manner
similar to a pooling of interests. Accordingly, the consolidated financial
statements have been retroactively restated to include the accounts of the
companies transferred by DSC and Hemisphere, at historical costs. See Note
2 to the Consolidated Financial Statements.
INTERNATIONAL REALTY GROUP, INC., together with its consolidated subsidiaries
(the "Company"), is a provider of commercial real estate and business valuations
and appraisals in the United States and
8
<PAGE> 10
PART I: FINANCIAL INFORMATION, CONTINUED
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS, CONTINUED:
Hungary and land development primarily in Mexico. The Company will be developing
its Mexican properties into various resort and commercial developments. Once
developed they will engage in the marketing and operation of its properties and
other ancillary real estate activities. The Company is in the preliminary stages
of seeking financing to commence development projects. No development of the
properties located in Mexico will occur until after the conversion of the notes
issued to DSC and Hemisphere, which notes are collateralized by the properties
located in Mexico.
The Company was incorporated in Delaware on April 13, 1970 and operated under
the name Bosco Resources Corporation until June 10, 1973, when it ceased
operations after its assets were nationalized without compensation by the Libyan
Government. The Company remained inactive until December 15, 1986 when it
acquired all of the outstanding shares of APPRAISAL GROUP, INC. in exchange for
4,150,000 shares of common stock (after a 1 for 8 reverse split) and changed its
name to APPRAISAL GROUP INTERNATIONAL INC. Subsequently, on August 10, 1989, the
Company's name was changed to INTERNATIONAL REALTY GROUP, INC. Its principle
offices are located at 111 N.W. 183 Street, Suite 518, Miami, Florida 33169. Its
telephone number is (305) 944-8811.
RESULTS OF OPERATIONS:
THREE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1995.
Revenues declined for the three months ended September 30, 1996 to $89,900 from
$397,000 for the same period in 1995, a decrease of approximately $307,100. 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. The
decrease in revenues for domestic operations was 75%, compared to the comparable
1995 quarterly period, and foreign operations experienced a 33% decline from the
comparable 1995 quarterly period.
Operating expenses for the three months ended September 30, 1996 were $380,700,
compared to $247,000 for 1995, an increase of $133,700. Of the total operating
expenses, 73% is attributed to domestic operations and 27% to foreign
operations. Selling, General and Administrative Expenses for the three months
ended September 30, 1996 were $162,700 compared to $59,600 for the same period
in 1995, an increase of $103,100. Included in this amount is approximately
$81,000 attributable to the expenses involved in the reverse acquisition with
DSC and Hemisphere. Included in the $81,000 of such expenses were $43,600
incurred in 1995 and recognized on the Closing date which occurred during this
period.
Direct expenses for the quarterly period including the production of appraisal
reports, appraisers' fees, travel, reproduction, photography and all related
expenses was $147,800 compared to $75,300 in 1995, an increase of 49%. Payroll
and related benefits expense for the quarterly period were $54,700, compared to
$94,400 for the same period in 1995, a decrease of 42%. Amortization,
Depreciation and Rent expenses were consistent for the same period in 1995 as
compared to 1996.
NINE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1995.
Revenue, which was derived from consulting services for the nine months ended
September 30, 1996, decreased 53% from $975,100 in 1995 to $456,100 in 1996.
Revenues from foreign operations decreased 45% from $362,600 in 1995 to $199,500
in 1996. The decrease in foreign revenue is attributed to the decrease in
consulting assignments from various Hungarian government agencies. Revenues from
domestic operations decreased 41% from $525,800 in 1995 to $243,100 in 1996. The
decrease in domestic revenue is attributable to a decline in the Company's
market penetration in commercial appraisal assignments.
9
<PAGE> 11
PART I: FINANCIAL INFORMATION, CONTINUED
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS, CONTINUED:
Operating Expenses for the nine months ended September 30, 1996 decreased 20%
from $1,081,600 in 1995 to $866,900 in 1996. SELLING, GENERAL AND OVERHEAD
OPERATING EXPENSES for the period 1996 were $312,500 versus $290,000 for the
comparable period in 1995. Included in this expense category for 1996 are
expenses associated with the reverse acquisition, amounting to approximately
$109,700. DIRECT expenses including the production of appraisal reports,
appraisers' fees, travel, reproduction, photography and all related expenses
decreased from $390,300 in 1995 to $309,800 in 1996. The decrease in direct
expenses follows the overall decline in revenue for the nine-month period.
PAYROLL AND RELATED BENEFITS decreased 44% to $201,700 in 1996 compared to
$340,300 in 1995. AMORTIZATION and DEPRECIATION expenses were consistent between
the periods. There were no operating expenses attributable to land development
activities during the period.
OTHER INCOME AND EXPENSES for the comparative periods were significantly
influenced by the inclusion of the results of operations of Clusters Ixtapa as a
result of the transaction with DSC and Hemisphere. Clusters Ixtapa had received
loans in the principal amount of $23,007,000 (the "NAFIN Debt") from its lender,
National Financiera, S.N.C. Bank ("NAFIN"). On December 29, 1995, Clusters
Ixtapa, DSC and NAFIN entered into a restructuring plan with respect to the
NAFIN Debt, to which the Company was not a party. Pursuant to the restructuring
plan, DSC assumed the NAFIN Debt in exchange for Clusters Ixtapa's payment of
approximately $15,341,000 and DSC's payment of the difference. DSC has advised
the Company it intends to repay such difference, as well as certain other debt
of DSC to NAFIN, through the transfer from DSC to NAFIN of approximately
15,991,000 shares of the Company's Common Stock upon the conversion of the DSC
Note. Subsequently, pursuant to the DSC Transaction, the Company acquired from
DSC a $5,628,426 debt obligation of Clusters Ixtapa on the Closing Date. See
Note 2, contained herein.
The majority of interest income ($5,275,500 of the $5,341,800) for the
nine-months ended 1995 (compared to $59,200 for the comparable period in 1996,
is attributable to the funds on deposit with NAFIN on behalf of Clusters Ixtapa.
The majority of interest expense ($7,993,100 of the $8,053,900) for the nine
months ended 1995 as compared to $95,400 for the comparable period in 1996 is
attributable to Clusters Ixtapa. There was a gain for exchange rate fluctuations
of $1,018,300 in 1995, compared to a loss of $78,100 in 1996 attributable to
Mexican operations.
LIQUIDITY AND CAPITAL RESOURCES:
For the nine months ended September 30, 1996, the Company and its subsidiaries
reported net losses of $547,300 compared to $1,356,900 for the comparable 1995
period. Revenues from the Company's core business (appraisals) have decreased
over the past few years. The Company is taking action to re-focus its appraisal
marketing efforts and explore other areas of valuation to stabilize and then
increase its appraisal volume.
CASH FLOW FROM OPERATIONS. The Company incurred for nine months ended September
30, 1996 a net loss of $547,300, while maintaining a positive cash flow from
operations of $332,300.
WORKING CAPITAL. The Company's current assets consist of Receivables and Cash
Equivalents which total approximately $2,579,700 exceeding its current
liabilities consisting of Accounts Payable and Accrued Liabilities of $1,137,200
by approximately $1,438,500. Included in accrued liabilities are accrued
officer's salaries amounting to approximately $437,600 and shareholder loans of
approximately $43,500. During 1995 the Company entered into a share exchange
transaction with DSC and Hemisphere, which was closed on August 19, 1996.
Pursuant to a restated and amended agreement, DSC agreed to advance $300,000 of
working capital to the Company. As of September 30, 1996
10
<PAGE> 12
PART I: FINANCIAL INFORMATION, CONTINUED
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS, CONTINUED:
$195,025 of such advances had been made to the Company and were included in the
convertible note as of the Closing date.
LONG-TERM DEBT. As of September 30, 1996, Long-Term debt totaled
$1,239,600 compared to $764,200 at December 31, 1995. The increase in long-term
debt reflected the acquisition of Newland Corporation on the Closing date, and
the assumption of approximately $550,600 of debt. Of the long-term debt,
mortgages payable secured by the underlying real estate, payable to Mexican
financial institutions totaled $1,098,000. Unsecured debt attributable to the
Company's operating subsidiaries totaled $117,400 of which $68,400 is
attributable to foreign operations and $49,000 to domestic operations.
LAND DEVELOPMENT: Pursuant to the Company's reverse merger transaction with DSC,
S.A. de C.V. ("DSC") and Hemisphere Developments Limited ("Hemisphere"), the
Company acquired interests in five properties located in Mexico. The Company
believes that each of the Mexican properties is suitable for future development
as either a resort, residential or commercial property. Since the properties
secure the Company's obligations under the convertible notes issued to DSC and
Hemisphere in the aggregate amount of $9,707,386 ("Notes"). The Company does not
plan to undertake any development of such properties until after the Notes have
been converted. While no assurances can be given, the Company expects that the
conversion of the Notes (convertible into an aggregate of 105,638,300 shares of
the Company's Common Stock) will occur in the first quarter of 1998. The Company
has no interest obligations under the Notes. 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 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.
CURRENCY RISK. The Company's operating entities are not subject to direct
currency conversion risks. The Company's primary operating entities provide
consulting services to their clients in their own geographic locations. All
consulting services performed by APPRAISAL GROUP, INC. based in Miami, Florida
are reported and paid in U.S. dollars. All assets and liabilities of Hungarian
operations are translated into U.S. dollars at period-end exchange rates with
the resulting translation adjustment recorded in accumulated translation
adjustment in shareholder's equity. The Company does not employ any hedging
techniques against the Hungarian forint. From its formation on September 6, 1990
to September 30, 1996, the Company has, as part of shareholders equity,
recognized currency fluctuation losses of $248,800.
The functional currency of the Mexican companies is the U.S. dollar. Therefore,
all peso denominated transactions represent foreign currency transactions.
Foreign currency transaction gains and losses are included in determining net
income. All foreign currency transaction gains or losses in 1995 or 1996 were
attributable to the Mexican operations.
The Hungarian exchange rate used for the nine months ended September 30, 1996
and 1995 were HUF 154.7 and HUF 139.81, respectively. The Mexican exchange rate
used for the nine months ended September 30, 1996 and 1995 was MNP 7.5374 and
MNP 6.55, respectively.
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
11
<PAGE> 13
PART I: FINANCIAL INFORMATION, CONTINUED
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS, CONTINUED:
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.
PART II: OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS
None
ITEM 2: CHANGES IN SECURITIES
None
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5: OTHER INFORMATION
None
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
A. Exhibits
27.1 Financial Data Schedule (For SEC purposes only)
99.1 Letter from Hixson, Marin, Powell & DeSanctis, P.A.
B. Reports on Form 8-K
- - The Company filed with the Securities and Exchange Commission the
following report on Form 8-K during the last quarter of the period
covered by this Report.
- - September 5, 1996 Consummation of the share exchange transaction
between the Company, DSC S.A. de C.V. and Hemisphere Developments,
Limited as of August 19, 1996.
- - September 25, 1996 Changes in Registrant's Certifying Accountant, as of
April 30, 1996.
12
<PAGE> 14
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: DECEMBER 8, 1997
/s/ RICHARD M. BRADBURY,
--------------------------------
RICHARD M. BRADBURY,
PRESIDENT, AND
CHIEF FINANCIAL OFFICER
13
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 43,600
<SECURITIES> 0
<RECEIVABLES> 210,000
<ALLOWANCES> 0
<INVENTORY> 10,551,600<F1>
<CURRENT-ASSETS> 0
<PP&E> 387,700
<DEPRECIATION> 207,700
<TOTAL-ASSETS> 13,463,000
<CURRENT-LIABILITIES> 1,137,200
<BONDS> 1,239,600
0
0
<COMMON> 10,000
<OTHER-SE> 9,702,400
<TOTAL-LIABILITY-AND-EQUITY> 13,463,000
<SALES> 0
<TOTAL-REVENUES> 515,300
<CGS> 0
<TOTAL-COSTS> 866,900
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 95,400
<INCOME-PRETAX> (514,900)
<INCOME-TAX> 32,400
<INCOME-CONTINUING> (547,300)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (547,300)
<EPS-PRIMARY> (.05)
<EPS-DILUTED> 0
<FN>
<F1>INVENTORY CONSISTS OF REAL ESTATE, AT COST CURRENTLY HELD FOR FUTURE
DEVELOPMENT.
</FN>
</TABLE>
<PAGE> 1
Exhibit 99.1
December 17, 1997
Mr. Richard Bradbury, President
International Realty Group, Inc.
111 NW 183rd Street
Miami FL 33169
Dear Mr. Bradbury:
Pursuant to Regulation S-B, under the Securities Act of 1933 and the Securities
and Exchange Act of 1934, item 310(2)(v), material accounting changes, this will
inform you that effective for the quarter ending September 30, 1996 and
retroactive to preceding periods the following accounting changes have occurred
in your consolidated financial statements:
1. The presentation format of the consolidated balance sheet has
changed from classified to non-classified due to the change
from principally the service industry to principally the real
estate industry.
2. Due to the acquisition of August 19, 1996, which has been
treated in a manner similar to a pooling of interest the
consolidated financial statements of the Company have been
restated for the current quarter and all preceding quarters as
a result of this transaction.
The changes made to the financial statement presentation (which is not an
accounting change) is the presentation utilized by the real estate industry,
which is preferable. The effect of the pooling of interest had a material effect
to the prior period financial statements. As a result of the pooling, net loss
for the year ended December 31, 1995 increased $615,300 or $.06 per share as a
result of the transaction.
Very truly yours,
/s/ Raymond F. Marin
- --------------------
Raymond F. Marin
RFM:nm
