U.S. Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-QSB/A-1
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1996
-----------------------
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE
ACT
For the transition period from to
--------------- ---------------
Commission File Number 0-20922
------------
INTERNATIONAL STANDARDS GROUP, LIMITED
- --------------------------------------------------------------------------------
(Exact name of small business issuer as specified in its charter)
Delaware 75-2274730
- ----------------------------------- ---------------------------------------
(State or jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
3200 North Military Trail, Suite 300, Boca Raton, Florida 33431
- --------------------------------------------------------------------------------
(Address of principal executive offices)
(407) 997-5880
-------------------------------
(Issuer's telephone number)
3200 North Military Trail, Suite 210, Boca Raton, Florida 33431
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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 in the past 90 days. Yes X No
--- ---
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Check whether the registrant filed all documents and reports required to
be filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution
of securities under a plan confirmed by a court. Yes No
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date: 40,135,556 shares as of July
31, 1996.
<PAGE>
INTERNATIONAL STANDARDS GROUP, LIMITED
INDEX
PART I. FINANCIAL INFORMATION
- ------- ---------------------
Item 1. Financial Statements (unaudited)
Consolidated Balance Sheets -- June 30, 1996 and
September 30, 1995
Consolidated Statements of Operations -- Three
Months Ended June 30, 1996 and 1995
Consolidated Statements of Operations -- Nine
Months Ended June 30, 1996 and 1995
Consolidated Statements of Cash Flows -- Nine
Months Ended June 30, 1996 and 1995
Notes to Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
PART II. OTHER INFORMATION
- -------- -----------------
Item 1. Legal Proceedings
Item 5. Other Information
Item 6. Financial Statements, Pro Forma Financial
Information and Exhibits
2
<PAGE>
INTERNATIONAL STANDARDS GROUP, LIMITED
--------------------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
ASSETS
------
June 30, 1996 Sept. 30, 1995
------------- --------------
(Unaudited)
CURRENT ASSETS:
Cash and cash equivalents $ 1,390,255 $ 672,651
Cash - in trust 523,948 458,192
Accounts receivable, net 9,007,726 150,726
Subscriptions receivable 6,945,074 --
Advances to employees
and stockholders 252,352 50,374
Prepaid expenses and
other current assets 2,502,510 87,090
----------- -----------
Total current assets 20,621,865 1,419,033
----------- -----------
FURNITURE AND EQUIPMENT, net of
accumulated depreciation of
$1,821,718 (unaudited) and
$323,988, respectively 4,722,118 976,002
----------- -----------
OTHER ASSETS:
Land and building held for
resale, net of accumulated
depreciation of $695,285
(unaudited) and $601,266,
respectively 3,513,386 3,602,405
Intangible assets, (primarily
goodwill) net of accumulated
amortization of $1,597,080
(unaudited) and $1,041,346,
respectively 51,434,825 1,081,695
Other 66,156 41,547
----------- -----------
55,014,367 4,725,647
----------- -----------
Total assets $80,358,350 $ 7,120,682
=========== ===========
See accompanying notes to financial statements.
3
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INTERNATIONAL STANDARDS GROUP, LIMITED
--------------------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
June 30, 1996 Sept. 30, 1995
------------- --------------
(Unaudited)
CURRENT LIABILITIES:
Notes payable and current
portion of long-term debt $ 5,554,508 $ 1,546,325
Accounts payable 8,280,219 817,864
Accrued expenses 633,218 764,615
Accrued litigation settlement 700,000 --
Due to stockholders 121,686 600,940
Credit arising from equity
transaction 1,500,000 1,500,000
------------ ------------
Total current liabilities 16,789,631 5,229,744
------------ ------------
LONG-TERM DEBT 3,180,930 810,436
------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $.00001 par
value, 10,000,000 shares
authorized, 2,223,001 shares
issued and outstanding 73,263,010 1,050,001
Common Stock, $.00001 par value,
100,000,000 shares authorized,
39,535,556 shares (unaudited)
and 18,273,128 shares issued,
respectively 395 183
Additional paid-in capital 10,311,126 18,866,595
Accumulated deficit (22,446,742) (18,096,277)
Treasury stock at cost,
839,200 shares (740,000) (740,000)
------------ ------------
60,387,789 1,080,502
------------ ------------
Total liabilities and
stockholders' equity $ 80,358,350 $ 7,120,682
============ ============
See accompanying notes to financial statements.
4
<PAGE>
INTERNATIONAL STANDARDS GROUP, LIMITED
--------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
For the Three Months
Ended June 30,
1996 1995
------------ ------------
(Unaudited)
REVENUES:
Telecommunications $ 2,315,133 $ --
Real estate brokerage fees 1,266,789 877,645
Audit fees 264,244 206,031
------------ ------------
3,846,166 1,083,676
------------ ------------
COST OF SALES:
Telecommunications 1,778,802 --
Real estate commissions 1,178,572 642,332
Direct audit expenses 166,488 150,399
------------ ------------
3,123,862 792,731
------------ ------------
GROSS PROFIT 722,304 290,945
------------ ------------
OPERATING EXPENSES:
Selling, general and
administrative 2,448,154 1,050,199
Depreciation and amortization 296,802 132,862
------------ ------------
2,744,956 1,183,061
------------ ------------
Loss from operations (2,022,652) (892,116)
------------ ------------
OTHER INCOME (EXPENSE):
Rental income 68,586 60,553
Rental expenses, including
depreciation of $21,082 for
1996 and $31,254 in 1995 (49,651) (78,988)
Interest expense (119,589) (108,072)
Interest income 3,715 2,608
Other income (expense) (4,714) (4,817)
------------ ------------
Total other expense (101,653) (128,716)
------------ ------------
Net loss $ (2,124,305) $ (1,020,832)
============ ============
NET LOSS PER COMMON SHARE $ (.07) $ (.06)
============ ============
NUMBER OF SHARES USED
IN COMPUTATION 29,245,730 16,120,937
============ ============
See accompanying notes to financial statements
5
<PAGE>
INTERNATIONAL STANDARDS GROUP, LIMITED
--------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
For the Nine Months
Ended June 30,
1996 1995
------------ ------------
(Unaudited)
REVENUES:
Telecommunications, net $ 2,315,133 $ --
Real estate fees $ 3,732,360 $ 2,293,301
Audit fees 688,488 641,951
------------ ------------
6,735,981 2,935,252
------------ ------------
COST OF SALES:
Telecommunications 1,778,802 --
Real estate commissions 3,253,552 1,838,178
Direct audit expenses 501,218 473,340
------------ ------------
5,533,572 2,311,518
------------ ------------
GROSS PROFIT 1,202,409 623,734
------------ ------------
OPERATING EXPENSES:
Selling, general and
administrative 4,756,001 2,641,145
Depreciation and amortization 506,635 395,941
------------ ------------
5,262,636 3,037,086
------------ ------------
Loss from operations (4,060,227) (2,413,352)
------------ ------------
OTHER INCOME (EXPENSE):
Rental income 217,506 181,325
Rental expenses, including
depreciation of $94,019 for
1996 and $93,765 in 1995 (263,300) (236,274)
Interest expense (250,061) (209,562)
Interest income 3,962 7,862
Other income 1,655 (3,886)
------------ ------------
Total other expense (290,238) (260,535)
------------ ------------
Net loss $ (4,350,465) $ (2,673,887)
============ ============
NET LOSS PER COMMON SHARE $ (.19) $ (.17)
============ ============
NUMBER OF SHARES USED
IN COMPUTATION 22,986,167 15,661,263
============ ============
See accompanying notes to financial statements
6
<PAGE>
INTERNATIONAL STANDARDS GROUP, LIMITED
--------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
For the Nine Months
Ended June 30,
1996 1995
------------ ------------
(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (4,350,465) $ (2,673,887)
Adjustments to reconcile net loss to net
cash used in operating activities
Depreciation and amortization 600,654 522,817
Interest expense added to long term debt -- 56,250
Issuance of common stock to employees
and shareholders 14,500 6,500
Interest accrued on amounts due stockholders 31,617 --
Common stock issued for consulting fees 312,973 179,879
(Increase) decrease in accounts receivable (798,994) 1,749
(Increase) decrease in advances to
employees and shareholders (63,658) (9,685)
(Increase) in prepaid expenses and
other current assets (909,766) (131,990)
(Increase) decrease in other assets 58,614 (8,667)
(Increase) decrease in stock subscrip-
tion receivable -- 1,500,000
(Decrease) increase in accounts payable
and accrued expense (1,548,487) (257,891)
------------ ------------
Net cash provided by (used in)
operating activities (6,653,012) (814,925)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (418,724) (92,804)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from notes payable -- 740,000
Payments of amounts due to stockholders (765,677) (186,741)
Payments of notes payable and
long-term debt (1,727,519) (239,204)
Preferred stock dividends paid (43,800) (43,800)
Net proceeds from issuance of
preferred stock 10,270,517 392,500
------------ ------------
Net cash (used in) provided
by financing activities 7,733,521 662,755
------------ ------------
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 661,785 (244,974)
CASH RECEIVED IN ACQUISITION OF TWT 121,575 --
CASH AND CASH EQUIVALENTS,
beginning of period 1,130,843 935,055
------------ ------------
CASH AND CASH EQUIVALENTS,
end of period $ 1,914,203 $ 690,081
============ ============
NON-CASH TRANSACTIONS:
Issuance of common stock in exchange
for prepaid expenses $ 1,141,843 $ 316,521
Issuance of preferred stock in exchange
for a Stock Subscription Receivable 6,945,074 6,725
Issuance of common stock for capital
expenditures -- 66,000
Mortgage note issued in connection
with capital expenditures -- 520,000
============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid $ 206,677 $ 238,842
============ ============
See accompanying notes to financial statements
7
<PAGE>
INTERNATIONAL STANDARDS GROUP, LIMITED
--------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
(UNAUDITED)
June 30, 1996
(1) GENERAL:
-------
The interim June 30, 1996 and 1995 unaudited financial statements, in the
opinion of management, include all adjustments (consisting of only normal
recurring accruals) considered necessary for a fair presentation of financial
position as of such date and earnings and cash flows for the periods then ended.
Operating results for the nine-month period ended June 30, 1996 are not
necessarily indicative of the results that may be expected for the year ended
September 30, 1996.
On December 21, 1995, International Standards Group, Limited ("ISG" or the
"Company") and Global RE., LTD consummated a stock purchase and exchange
agreement, (the "Agreement") subject to certain due diligence procedures to be
completed on behalf of the Company pursuant to which the Company acquired all
the common stock of American Indemnity Company Limited ("AIC") in exchange for
233,333 shares of the Company's newly authorized Series G Voting Convertible
Preferred Stock (the "Preferred Stock") and options to purchase a total of
10,000,000 shares of Common Stock of the Company. On April 6, 1996, the purchase
and exchange agreement was closed out of escrow, and 35,000,000 restricted
shares of ISG's Common Stock were issued in conversion of the preferred stock.
On June 11, 1996, ISG, Global RE., Ltd., and AIC entered into an agreement
pursuant to which ISG exchanged with Global RE., Ltd. its capital stock interest
in AIC in return for the Company's securities previously received by Global RE.,
Ltd. as part of the acquisition of AIC by the Company in December 1995. In
addition, the parties agreed to exchange reciprocal options to purchase
3,000,000 shares of common stock of each other in addition to certain
supplemental rights. At June 30, 1996, the Company had cancelled these
previously outstanding shares.
(2) ACQUISITION:
-----------
On May 28, 1996, the Company entered into an Agreement and Plan of
Reorganization for the acquisition of all of the outstanding capital stock of
Total National Telecommunications, Inc. (d/b/a/ Total World Telecom) ("TWT").
Pursuant to the terms of the stock exchange, the shareholders of TWT received
shares of newly created Series M and Series N preferred stock of the Company
8
<PAGE>
which are convertible into 29,750,000 shares of Common Stock of the Company. The
Series M and Series N Preferred Stock, established pursuant to the exchange,
carry a cumulative dividend of 2.7% per month of the stated value of the
preferred stock which the Company is required to pay until such time as the
Company's Registration Statement (after which the former TWT shareholders have
agreed not to sell more than 5% of their shares per month) relating to resale of
certain of the shares of Common Stock underlying the Series of Preferred Stock
is registered under the Securities Act of 1933. The Agreement and Plan of
Reorganization was consummated on June 12, 1996, at which time the Company had
agreed to advance $5,000,000 for the working capital needs of TWT.
TWT, which was organized in October 1991, is based in Houston, Texas. The
Company is a Tier II switch-based interexchange carrier which utilizes
state-of-the-art digital and fiber optic facilities, including vie Siemens
Stromberg-Carlson DCO tandem switches located in New York, Chicago, Los Angeles,
Atlanta and Houston. In addition, TWT has deployed SS7 signaling throughout its
network in order to assure prompt, clear connections at a competitive price. The
Company's Operations Command Center is also in Houston. The Company through
long-term contracts provides origination and termination long distance services
to Tier III and Tier IV switchless resellers. TWT's management team, consisting
of Donald Booth, Steve Reemts and Larry Ashworth, will remain with TWT and will
continue to occupy senior principal positions with the Company.
In addition the Company issued 35,000 shares of Series O Preferred Stock
for employee compensation for past service costs which are convertible into
3,500,000 shares of Common Stock of the Company. Employee compensation at the
quoted market ($1.38 per share) was charged to the pre-acquisition operations of
TWT. The Company also issued Series P Preferred Stock representing shares issued
in connection with future services. These shares are convertible into Common
Stock of the Company and have been recorded at the quoted market value of common
shares. Certain consultants received 250,000 shares of Series Q Preferred Stock
which are convertible into 25,000,000 shares of Common Stock of the Company.
Such shares have been valued at the fair market value and have been charged to
the cost of the acquisition. The Series O, Series P and Series Q Preferred Stock
have no registration rights.
(3) UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION:
--------------------------------------------------
The following unaudited pro forma information as of the nine months ended
June 30, 1996 and the year ended September 30, 1995 have been prepared to
reflect the acquisition of TWT as if it had occurred on October 1, 1994. The
acquisition has been accounted for utilizing the purchase method in accordance
with APB #16, and accordingly, all assets and liabilities are reflected at their
9
<PAGE>
historical cost basis. The excess of cost over net assets acquired ($50,677,867)
has been applied to Goodwill which is being amortized over a 20-year period. The
pro forma financial information set forth below is unaudited and not necessarily
indicative of the results that would actually have occurred if the transactions
had been consummated as of that date or the results which may be obtained in the
future.
PRO FORMA INFORMATION
Nine Months
Ended Year Ended
June 30, 1996 Sept. 30, 1995
------------- --------------
Net revenues $44,823,980 $31,328,628
Net loss (8,818,537) (7,748,490)
Net loss per common share (1) $ (.53) $ (.57)
(1) The net loss per common share gives effect to the preferred stock
dividends for the Series M and Series N in each of the periods. The
calculation of net loss per common share does not give effect for the
conversion of preferred shares to common as such conversion would be
anti-dilutive.
(4) INDUSTRY SEGMENTS:
-----------------
In 1996 and 1995, the Company operated in three business and two business
segments, respectively: (1) auditing services to assist credit unions and their
supervisory committees in performing comprehensive internal and regulatory
compliance audits; (2) real estate brokerage services which also provide
mortgage organization and title services; and (3) telecommunications industry,
providing origination and termination long distance services to Tier III and
Tier IV switchless resellers through long-term contracts.
Income (loss) from operations is total revenue less operating expenses. On
determining operating profit for industry segments, the following items have not
been considered: general corporate expenses and interest expense. Identifiable
assets by segment are those assets that are used in the Company's operations
within that industry. General corporate assets consist principally of land and
building and intangible assets.
10
<PAGE>
INDUSTRY SEGMENTS
Nine Months Ended
June 30,
----------------------
1996 1995
---- ----
Sales:
Telecommunications $ 2,315,133 $ --
Audit services 688,488 641,951
Real estate brokerage 3,732,360 2,293,301
------------ ------------
$ 6,735,981 2,935,252
============ ============
Income (Loss) from Operations:
Telecommunications $ 26,854 $ --
Audit services (147,585) (79,826)
Real estate brokerage (762,841) (595,116)
------------ ------------
(883,572) (674,942)
Other income 223,123 189,187
Other expenses (513,361) (449,722)
General corporate expenses (3,176,655) (1,738,410)
------------ ------------
Loss before income taxes
as reported on the accom-
panying income statement $ (4,350,465) $ (2,673,887)
============ ============
Identifiable Assets:
Telecommunications $ 13,767,483 $ --
Audit services 195,808 151,688
Real estate brokerage 3,253,747 2,433,233
------------ ------------
17,217,038 2,584,921
General corporate assets 63,141,312 5,189,815
------------ ------------
Total assets as reported
in the accompanying
balance sheet $ 80,358,350 $ 7,774,736
============ ============
(5) FINANCIAL CONDITION:
-------------------
Since inception, the Company has incurred substantial losses, and as of
June 30, 1996, has an accumulated deficit of $22,536,588. The Company, through
its wholly-owned subsidiary Financial Standards Group, Inc. ("FSGI"), commenced
revenue producing operations in October 1991. The Company's working capital
requirements to date have been satisfied through cash on hand, proceeds from
private placements, certain loans from private individuals and private
financings with a limited number of non-resident institutional investors
conducted pursuant to Regulation S of the federal securities laws.
The foregoing matters and uncertainties raise substantial doubt about the
Company's ability to continue as a going concern. The Company is currently
11
<PAGE>
negotiating with several alternative financing sources in order to secure
sufficient funding to support its contemplated expansions and acquisitions.
While the Company believes that it will have the opportunity to attain
additional financial support, no assurances can be provided that the Company
will be able to secure sufficient funding in order to complete its financial
program or achieve its strategic plans.
(6) LEGAL PROCEEDINGS:
-----------------
On February 2, 1995, the Company was named as defendant in a lawsuit
brought in Supreme Court of the State of New York for the County of New York in
a case styled MORGAN STANLEY & CO. INCORPORATED V. INTERNATIONAL STANDARDS
GROUP, INC. [sic] (Index No. 102772/95). The Plaintiff, one of the largest and
most preeminent investment banking and financial services firms in the world,
was seeking to recover purported damages, or, in the alternative, was seeking
rescission relative to its purchase from the Company of certain counterfeit
bonds sold to the Plaintiff by the Company following affirmation by the
Plaintiff that such bonds had been authenticated by the Plaintiff. The Plaintiff
sought judgment against the Company for an amount in excess of $3,870,000,
together with costs, predicated on counts of breach of warranty, breach of
contract, unjust enrichment and mistake of fact.
The Company believes that the Plaintiff initiated litigation as a
preemptive or prophylactic action once it had determined that it was unprepared
to satisfy the Company's claim for damages resulting from the conduct and course
of actions undertaken by the Plaintiff. The Company had been prepared to
initiate such litigation in the absence of an amicable settlement by the
Plaintiff, and accordingly, the Company is prepared to rigorously assert its
claims for the recovery of damages sustained as a result of the actions by the
Plaintiff.
Thereafter, the Company initiated litigation against Morgan Stanley & Co.,
Incorporated ("Morgan Stanley"), Virginia de Cristoforo, Robert Isbitts,
Administracion de Seguros, S.A. ("de Seguros"), Consorcio de Seguros Polaris,
S.A. and Michael E. Zapetis in the United States District Court for the Southern
District of Florida (Case No. 95-0590). The suit, which names Morgan Stanley,
certain former executives of Morgan Stanley, de Seguros and certain of its
agents claims federal and state securities law and common law fraud, negligence
and other breaches by the parties in connection with the issuance of invalid
Bearer Bank Bonds purportedly issued by the Banco Central de Venezuela in
consideration for the acquisition of a controlling interest in the Company by de
Seguros which subsequently was rescinded by the Company. As a result of the
failure by Morgan Stanley to fulfill its responsibility to the Company to verify
12
<PAGE>
the authenticity of the Bearer Bank Bonds, the Company experienced substantial
damages to its interests and to those of its stockholders.
On December 4, 1995, Morgan Stanley agreed to dismiss without prejudice
its complaint against the Company previously filed in New York Supreme Court.
The litigation pending between the parties in the United States District Court,
Southern District of Florida (INTERNATIONAL STANDARDS GROUP, LIMITED AND JOSEPH
L. LENTS VS. MORGAN STANLEY & COMPANY, INCORPORATED, VIRGINIA DE CRISTOFORO,
ROBERT ISBITTS, ADMINISTRACION DE SEGUROS, S.A., CONSORCIO DE SEGUROS POLARIS,
S.A. AND MICHAEL E. ZAPETIS) is proceeding and various pre-trial discovery is
being undertaken. As indicated above, the Company had consummated a Stock
Purchase and Exchange Agreement with Global Re., Ltd. which was closed out of
escrow on April 6, 1996. Pursuant to the terms of such agreement, a settlement
agreement has been entered into whereby the Company and Mr. Lents agreed to
dismiss with prejudice their claims against Consorcio de Seguros Polaris, S.A.
and Mr. Zapetis and the parties exchanged general releases. Trial is set to
begin in December 1996, with mediation to take place 60 days prior.
In April 1996, the Public Utilities Commission of California (the
"Commission") filed an order instituting investigation into the operations of
TWT. The investigation relates to (i) the licensing and tariffing of business in
California under the name Heartline Communications, Inc. ("HCI"), (ii)
allegations that HCI conducted intrastate utility operations without holding a
certificate from the Commission, and (iii) allegations that TWT and HCI
participated in the switching of customers to the services of TWT and HCI
without the customer's permission. A final ruling by the commission and any
penalties to be imposed, if any, is pending. Penalties may involve a restriction
in TWT's activity in the State of California and/or a monetary fine(s). The
Company has estimated a $700,000 liability in connection with this matter. There
can be no assurance that this will be settled for this amount and whether or not
TWT may have offsets. The liability was reflected in the pre-acquisition balance
sheet.
In June 1996, the Federal Communications Commission ("FCC") issued a
Notice of Apparent Liability for Forfeiture ("NAL") against HCI for $200,000.
The forfeiture action is based on the investigation of five complaints in which
TWT is alleged to have changed the primary interexchange carriers designated by
the complainants without their authorization. TWT plans to file a formal
response to the FCC's NAL by August 1996, as well as initiate settlement
discussions with the FCC. The amount of the ultimate resolution of this matter
cannot be reasonably estimated.
13
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Three Months Ended June 30, 1996 Compared to Three Months Ended June 30, 1995
- -----------------------------------------------------------------------------
Revenue
-------
Three Months Ended June 30,
---------------------------
1996 1995
---- ----
Telecommunications(1) $ 2,315,133 $ -
Real Estate 1,266,789 877,645
Auditing Services 264,244 206,031
----------- -----------
Total Revenue $ 3,846,166 $ 1,083,676
=========== ===========
Gross Profit
------------
Three Months Ended June 30,
---------------------------
1996 1995
---- ----
Telecommunications(1) $ 536,331 $ -
Real Estate 88,217 235,313
Auditing Services 97,756 55,632
----------- -----------
Total Gross Profit $ 722,304 $ 290,945
=========== ===========
Selling, General and
Administration Expenses
-----------------------
Three Months Ended June 30,
---------------------------
1996 1995
---- ----
Telecommunications(1) $ 509,477 $ -
Real Estate 431,353 226,225
Auditing Services 152,049 81,831
Corporate 1,652,077 875,005
----------- -----------
Total S, G & A Expenses $ 2,744,956 $ 1,183,061
=========== ===========
Net Income (Loss)
from Operations
---------------
Three Months Ended June 30,
---------------------------
1996 1995
---- ----
Telecommunications(1) $ 26,854 $ -
Real Estate (343,136) 9,088
Auditing Services (54,293) (26,199)
Corporate (1,652,077) (875,005)
------------ ------------
Total Net Income (Loss) from Ops $(2,022,652) $ (892,116)
============ ============
14
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Net Loss
--------
Three Months Ended June 30,
---------------------------
1996 1995
---- ----
Telecommunications(1) $ 30,501 $ -
Real Estate (343,255) (122,232)
Auditing Services (54,293) (26,183)
Corporate (1,757,258) (872,417)
------------ ------------
Total Net Income (Loss) $(2,124,305) $(1,020,832)
============ ============
(1) Since the acquisition of TWT was completed on June 12, 1996,
the financial data presented for Telecommunications represents
18 days of operations and may not be indicative of the results
that may be expected for a comparable three-month period.
For the three months ended June 30, 1996, the Company had total
consolidated revenue of $3,846,166 in contrast to $1,083,676 for the three
months ended June 30, 1995, an increase of 255%. The primary reason for the
increase in revenues was due to the acquisition of TWT as well as the expansion
of MRL. The Company's consolidated net loss for the three months ended June 30,
1996 was $2,124,305 as compared to $1,020,832 at June 30, 1995, an increase of
108%. Included in the quarter ended June 30, 1996 were a $1,757,258 loss from
ISG corporate and a $343,255 loss from the RESN subsidiary, which was primarily
due to the opening of its new real estate offices and a developing
advertising/marketing division.
For the three months ended June 30, 1996, the Company had a gross profit
of $722,304 compared to $290,945 for the three months ended June 30, 1995. This
increase (148%) was attributable to the June 12, 1996 acquisition of TWT. For
the three months ended June 30, 1996, the Company had a loss from operations of
$2,022,652 as compared to a loss from operations for the three months ended June
30, 1995 of $892,116, an increase of $1,130,536.
During the three months ended June 30, 1996, the Company had rental income
from its Mount Vernon Distribution Center facility of $68,586 as compared to
rental income during the same period in 1995 totalling $60,553, an increase of
$8,033. This is due to several new tenants, as well as increased space being
utilized by current tenants. For the three months ended June 30, 1996, the
Company had interest expense of $119,589 as compared to $108,072 for the three
months ended June 30, 1995, due to some short-term financing.
15
<PAGE>
Nine Months Ended June 30, 1996 Compared to Nine Months Ended June 30, 1995
- ---------------------------------------------------------------------------
Revenue
-------
Nine Months Ended June 30,
--------------------------
1996 1995
---- ----
Telecommunications(1) $ 2,315,133 $ -
Real Estate 3,732,360 2,293,301
Auditing Services 688,488 641,951
----------- -----------
Total Revenue $ 6,735,981 $ 2,935,252
=========== ===========
Gross Profit
------------
Nine Months Ended June 30,
--------------------------
1996 1995
---- ----
Telecommunications(1) $ 536,331 $ -
Real Estate 478,808 455,123
Auditing Services 187,270 168,611
----------- -----------
Total Gross Profit $ 1,202,409 $ 623,734
=========== ===========
Selling, General and
Administration Expenses
-----------------------
Nine Months Ended June 30,
--------------------------
1996 1995
---- ----
Telecommunications(1) $ 509,477 $ -
Real Estate 1,241,649 1,050,239
Auditing Services 334,855 248,438
Corporate 3,176,655 1,738,409
----------- -----------
Total S, G & A Expenses $ 5,262,636 $ 3,037,086
=========== ===========
Net Income (Loss)
from Operations
---------------
Nine Months Ended June 30,
--------------------------
1996 1995
---- ----
Telecommunications(1) $ 26,854 $ -
Real Estate (762,841) (595,116)
Auditing Services (147,585) (79,826)
Corporate (3,176,655) (1,738,410)
------------ ------------
Total Net Income (Loss) from Ops $(4,060,227) $(2,413,352)
============ ============
16
<PAGE>
Net Loss
--------
Nine Months Ended June 30,
--------------------------
1996 1995
---- ----
Telecommunications(1) $ 30,501 $ -
Real Estate (762,920) (863,510)
Auditing Services (143,845) (79,810)
Corporate (3,474,201) (1,730,567)
------------ ------------
Total Net Loss $(4,350,465) $(2,673,887)
============ ============
(1) Since the acquisition of TWT was completed on June 12, 1996,
the financial data presented for Telecommunications represents
18 days of operations and may not be indicative of the results
that may be expected for a comparable nine-month period.
For the nine months ended June 30, 1996, the Company had total
consolidated revenue of $6,735,981 in contrast to $2,935,252 for the nine months
ended June 30, 1995, an increase of 130%. The primary reason for the increase in
revenues was due to the acquisition of TWT as well as the expansion of MRL. The
Company's consolidated net loss for the nine months ended June 30, 1996 was
$4,350,465 as compared to $2,673,887 at June 30, 1995, an increase of 63%.
Included in the nine months ending June 30, 1996 were a $3,474,201 loss from ISG
corporate and a $769,920 loss from the RESN subsidiary, which was primarily
due to the opening of its new real estate offices and a developing
advertising/marketing division. TWT realized a $30,501 profit for the period
June 13, 1996 through June 30, 1996.
For the nine months ended June 30, 1996, the Company had a gross profit of
$1,202,409 compared to $623,734 for the nine months ended June 30, 1995. This
increase was attributable to the aforementioned acquisition of TWT as well as
the expansion of the real estate operations. For the nine months ended June 30,
1996, the Company had a loss from operations of $4,060,227 compared to a loss
from operations for the nine months ended June 30, 1995 of $2,413,352, an
increase of 68%.
During the nine months ended June 30, 1996, the Company had rental income
from its Mount Vernon Distribution Center facility of $217,506 as compared to
rental income during the same period in 1995 totalling $181,325, an increase of
20%. This is due to several new tenants, as well as increased space being
utilized by current tenants. For the nine months ended June 30, 1996, the
Company had interest expense of $250,061 as compared to $209,562 for the nine
months ended June 30, 1995, due to short-term financing.
17
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1996, the Company had operating cash on hand of $1,390,255 as
compared to operating cash on hand at June 30, 1995 of $138,336. At June 30,
1996, the Company had a working capital ratio of current assets to current
liabilities of approximately 1.23. Long term debt outstanding of $3,180,930 at
June 30, 1996 consisted of the mortgage note payable to Bank One, Mansfield,
relating to the Mount Vernon Distribution Center, a wrap-around mortgage
relating to the purchase of an office condominium in Boca Raton, Florida, and
long term lease commitments from its TWT subsidiary.
The Company's FSGI subsidiary began the performance of comprehensive or
internal regulatory compliance auditing services in 1991. They currently have
operations in Kentucky, Michigan, Hawaii, California, Indiana, Ohio and Florida.
Specialized services include fraud auditing and bond claims documentation, and
specialized training has been provided to staff members. For the quarter ended
June 30, 1996, most branch offices of FSGI have operated at a profit with the
major portion of its losses attributable to the corporate overhead in the
Florida office, which has a limited amount of revenue to offset its expenses.
The Company's real estate subsidiaries have experienced significant growth
during the prior 12 months. Membership Realty currently has six offices open,
five of which are in Broward County and one in Palm Beach County. They serve
approximately 150 real estate associates who generate in excess of $16 million
in sales volume on a monthly basis. The Company expects to open additional
offices during the next 12 months or to acquire companies currently located in
the targeted expansion areas of Dade, western Broward and Palm Beach Counties.
Membership Realty commenced operations in May 1992 as a full service real
estate brokerage firm that recruits established real estate agents by passing
through 100% in commissions earned by its member sales agents. Membership Realty
provides its members with various administrative support services, facilities
and products, while affording its members with complete flexibility to establish
their own marketing programs, commission structure and the level of support
services required to enhance their productivity. Membership Realty is expanding
its operations to provide such members with additional service programs and
income opportunities through establishment and development of mortgage
origination services, as well as other real estate related services.
Unlike traditionally structured real estate brokerage firms, MRL will pay
out 100% of all earned commissions to the more experienced initiating sales
18
<PAGE>
agents. In return, these member sales agents pay a monthly membership fee based
on the extent of facilities utilized and a transaction fee as a reimbursement to
the Company for certain indirect overhead charges incurred. MRL has also
established other graduated commission bases for the less experienced agents and
provides additional support and training.
The Company continues to own and operate the Mount Vernon Distribution
Center, a commercial warehouse in Mount Vernon, Ohio which consists of 660,551
square feet of industrial manufacturing warehousing facilities on a 61-acre
site. The property is comprised of an assemblage of five main buildings, and as
of June 30, 1996, was approximately 35% leased and included various major
corporate tenants. Current leases for such facility extend between July 1996 and
February 2001, most with renewable options. The current monthly rentals
aggregate approximately $26,000, which at the present time represents a negative
cash flow to the Company of approximately $2,800 per month. The Company is
obligated on a mortgage note payable to Bank One, Mansfield bearing interest at
10% per annum. Monthly payments of principal and interest are $9,659, and the
balance at June 30, 1996 is $494,243.
The Company is now considering whether to continue listing the property
for sale or to actively market its leasing capabilities. Currently, major
improvements have been completed, including the demolition of some outer
structures. The addition of a paved parking area, as well as painting and
general cleanup are expected to be completed within the next few months. The
Company believes that the facility continues to represent a source of additional
financing if required for any reason.
On December 21, 1995, the Company and Global RE., Ltd. ("Global")
consummated a stock purchase and exchange agreement, (the "Agreement") subject
to certain due diligence having been completed on behalf of the Company pursuant
to which the Company acquired all the common stock of American Indemnity Company
Limited ("AIC") in exchange for 233,333 shares of the Company's newly authorized
Series G Voting Convertible Preferred Stock (the "Preferred Stock"). On April 6,
1996, the purchase and exchange agreement was closed out of escrow, and
35,000,000 restricted shares of ISG's Common Stock were issued in conversion of
the preferred stock. In addition, the Company issued options to purchase
5,000,000 shares of the Company's Common Stock exercisable through November 1,
2000 at an exercise price of $4.00 per share and options to purchase an
additional 5,000,000 shares of the Company's Common Stock exercisable through
November 1, 2000 at $5.00 per share.
At the time of acquisition, the Company was led to believe that AIC's
primary asset consisted of certificates of deposit in Banco National De Costa
19
<PAGE>
Rica totalling $40,000,000 and equity of approximately $35,000,000. The Company
had received as a condition to closing an audit report from an outside
independent auditor which listed as the primary assets of AIC certificates of
deposit of Banco National de Costa Rica in the stated amount of $40,000,000.
However, a subsequent finalized audit report disclosed that these certificates
of deposit were drawn on the Cooperativa de Ahorra y Credito Gatun, RL, and were
held for safe keeping at the Banco National de Costa Rica. On June 11, 1996,
ISG, Global, and AIC entered into an agreement pursuant to which ISG exchanged
with Global its capital stock interest in AIC in return for the Company's
securities previously received by Global as part of the acquisition of AIC by
the Company in December 1995. At June 30, 1996, the Company had cancelled these
previously outstanding shares.
In addition, in consideration for agreeing to the exchange, the Company
received from Global the right to receive in the future a distribution equal to
10% of the net income of Global for each annual period commencing with the year
ended 1997 through the year ended 1999. The interest in the net income of Global
is to be calculated on an annual basis and not on a cumulative basis, and the
calculation of net income is not to give effect to the payment of the net income
percentage of the Company as an expense. In addition, the Company issued options
to purchase 2,000,000 shares of the Company's Common Stock at an exercise price
of $1.375 and Options to purchase 1,000,000 shares of Common Stock at an
exercise price of $2.50 exercisable for a three-year and four-year period,
respectively. Concomitantly, the Company will be entitled to receive Options to
purchase 2,000,000 shares and Options to purchase 1,000,000 shares of a
publicly-traded company into which AIC will be placed or merged at a price of
110% of the closing price with respect to the 2,000,000 Options and 200% of the
closing price with respect to 1,000,000 Options on the date that AIC is placed
or merged into such public entity.
On June 12, 1996, the Company completed the acquisition of TWT. Under the
terms of the agreement, ISG acquired all of the outstanding capital stock of
TWT, and in exchange, the shareholders of TWT received shares of ISG newly
created series of preferred stock of the Company which are convertible into
shares of Common Stock of the Company based upon fulfillment of certain
financial criteria established by the Company and TWT and the price of the
Company's stock at the time of conversion. The Series M and Series N Preferred
Stock established pursuant to the exchange carry a cumulative dividend of 2.7%
of the stated value of the preferred stock which the Company is required to pay
until such time as the Company's Registration Statement relating to the resale
of certain of the shares of Common Stock underlying these series of Preferred
Stock is registered under the Securities Act of 1933. The Company also agreed to
advance TWT $5,000,000 for its working capital needs.
20
<PAGE>
TWT, based in Houston, Texas, was organized in October 1991 and is a Tier
II switch-based interexchange carrier which utilizes state-of-the-art digital
and fiber optic facilities, including five Siemens Stromberg-Carlton DCO tandem
switches located in New York, Chicago, Los Angeles, Atlanta, and Houston. In
addition, TWT has deployed SS7 signaling throughout its network in order to
assure prompt, clear connections at a competitive price. The Company's
Operations Command Center is also located in Houston. TWT, through long-term
contracts, provides origination and termination of long distance services to
Tier III and Tier IV, switchless resellers.
TWT has average net revenues of over $5 million per month and anticipates
significant expansion during the next 12 months through internal growth as well
as possible acquisitions. TWT recognizes that the telecom industry is becoming
more competitive and that it must implement a broad business strategy which must
maintain the current business structure of the company as the basis for any
future growth. To this end, TWT has formulated a strategy that focuses on the
major areas of the telecom industry, the niche markets in which it has been
involved, and the development of new product lines for future implementation and
marketing. In an effort to expand the business, TWT has analyzed its current
roster of customers and plans to provide these customers with new product
platforms for their marketing departments. The Company has designed a new
marketing program and will target companies which are not currently using the
services of TWT in an effort to obtain new business.
TWT recognizes that it must establish new switches in strategic locations
for future growth and the enhancement of its profit margins on current business.
The company has identified several target locations, including the Miami,
Seattle, and Denver areas as well as the Eastern Seaboard. The MIS and network
management departments have been given the criteria for establishing a priority
on the new locations based on current minutes of traffic and other key facts
currently available. In addition, the new Vice President of Marketing has a
significant presence in the international markets, and he plans to aggressively
market TWT's services to some of these countries once the additional switches
are in place in the Miami and Seattle areas.
During the quarter ended June 30, 1996, ISG received $3,768,266
representing partial net proceeds from the sale of 897,435 shares of its Common
Stock and 1,300,000 shares of its Series K Preferred Stock. Subsequent to the
end of the quarter, additional proceeds of $6,944,855 were received. These funds
21
<PAGE>
were available to fund the working capital needs of ISG and its real estate
subsidiaries, as well as to provide the $5,000,000 loan to TWT for its expansion
and working capital. It is anticipated that TWT could become cash flow positive
in the final quarter of fiscal 1996 and will be able to fund their growth and
working capital through their own operations and/or lines of credit. At June 30,
1996 the Company had operating cash on hand of $1,390,255 to support the working
capital requirements of the Company and its real estate subsidiaries.
The Company's working capital requirements during the nine months ended
June 30, 1996 were satisfied through cash on hand, and the proceeds from
separate private financings with a certain limited number of non-resident
institutional investors conducted pursuant to Regulation S under the federal
securities laws. Inasmuch as present operations of the Company's subsidiaries
are not expected to generate sufficient cash flow to support expansion or offset
combined operations, ISG will need to obtain additional financial resources in
order to accomplish its strategic plan. While the Company believes that it will
have the opportunity to attain such financial support, no assurances can be
provided that the Company will be able to secure sufficient funding to satisfy
the Company's obligations over the next year in order to continue its
operations.
22
<PAGE>
PART II.
ITEM 1. LEGAL PROCEEDINGS
-----------------
Not applicable.
ITEM 5. OTHER INFORMATION
-----------------
Not applicable.
ITEM 6. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS
------------------------------------------------------------------
(a) Exhibits -- Financial Data Schedule (Electronic filing only)
(b) Reports on Form 8-K -- The Company filed a Form 8-K report dated May
28, 1996 (item 5 and item 7) and a Form 8-K Report dated June 11,
1996 (item 5 and item 7).
23
<PAGE>
SIGNATURE
---------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned as a duly authorized officer and as the chief financial officer of
the Registrant.
INTERNATIONAL STANDARDS
GROUP, LIMITED
(Registrant)
Date: August 21, 1996 By:/s/ Joseph L. Lents
----------------------------
Joseph L. Lents, President
and Chief Executive Officer
By:/s/ Loretta A. Murphy
----------------------------
Loretta A. Murphy
Vice President, Treasurer,
and Chief Financial and
Accounting Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF INTERNATIONAL STANDARDS GROUP, LIMITED FOR THE NINE
MONTHS ENDED ENDED JUNE 30, 1996, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-START> OCT-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 1,914,203
<SECURITIES> 0
<RECEIVABLES> 16,205,152
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 20,621,865
<PP&E> 6,543,836
<DEPRECIATION> (1,821,718)
<TOTAL-ASSETS> 80,358,350
<CURRENT-LIABILITIES> 16,789,631
<BONDS> 0
0
73,263,010
<COMMON> 395
<OTHER-SE> (12,875,616)
<TOTAL-LIABILITY-AND-EQUITY> 80,358,350
<SALES> 0
<TOTAL-REVENUES> 6,735,981
<CGS> 5,533,572
<TOTAL-COSTS> 5,262,636
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 250,061
<INCOME-PRETAX> (4,350,465)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,350,465)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,350,465)
<EPS-PRIMARY> (.19)
<EPS-DILUTED> (.19)
</TABLE>
