UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Three Months Ended March 31, 2000
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: 001-14753
INTERNATIONAL SMART SOURCING, INC.
(Exact Name of Small Business Issuer as specified in its charter)
Delaware 11-3423157
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
320 Broad Hollow Road
Farmingdale, NY 11735
(Address of principal executive offices)
(631) 293-4650
(Issuer's telephone number)
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 X NO _____
As of May 2, 2000, the Registrant had 3,195,000 shares of its Common Stock,
$0.001 par value, issued and outstanding.
INTERNATIONAL SMART SOURCING, INC.
FORM 10-QSB
MARCH 31, 2000
INDEX
Page
Number
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
Consolidated Balance Sheet 1
Consolidated Statements of Operations 2
Consolidated Statements of Cash Flows 3
Notes to Financial Statements 4
Item 2 - Management's Discussion and Analysis or
Plan of Operation 5-7
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings 8
Item 2 - Changes in Securities and Use of Proceeds 8
Item 5 - Other Information 9
Item 6 - Exhibits and reports on Form 8-K 9
SIGNATURE 10
ITEM 1. FINANCIAL STATEMENTS
INTERNATIONAL SMART SOURCING, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
MARCH 31, 2000
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash in Banks $318,931
Cash - Restricted 1,000,000
Accounts Receivable 770,043
Notes Receivable - Related Party 43,757
Inventory 909,476
Prepaid Expenses 245,425
-----------
TOTAL CURRENT ASSETS 3,287,632
-----------
Property and Equipment (net) 782,910
Goodwill 1,520,903
License Agreement 437,499
Notes Receivable - (including accrued interest of 28,037) 528,037
Notes Receivable - Related Party 198,988
Other Assets 310,119
-----------
TOTAL ASSETS $ 7,066,088
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts Payable and Accrued Expenses $880,155
Current portion of long term debt 716,850
Current portion of obligations under capital lease 80,170
-----------
TOTAL CURRENT LIABILITIES 1,677,175
Long term debt 591,776
Obligations under capital lease 122,218
-----------
TOTAL LIABILITIES 2,391,169
-----------
STOCKHOLDERS' EQUITY
Common Stock, $0.001 par value, authorized 10,000,000
shares, issued and outstanding 3,382,50 3,383
Additional Paid-in Capital 6,852,204
Deficit (2,180,668)
-----------
TOTAL STOCKHOLDERS' EQUITY 4,674,919
-----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $7,066,088
===========
See Notes to Consolidated Financial Statements
1
INTERNATIONAL SMART SOURCING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED
March 31, 2000 March 27, 1999
-------------- --------------
(Unaudited)
NET SALES $1,710,159 $1,333,191
COST OF GOODS SOLD 1,072,906 872,588
---------- ----------
GROSS PROFIT 637,253 460,603
OPERATING EXPENSES
Selling and Shipping 327,713 104,749
General and Administrative 654,530 389,643
---------- ----------
TOTAL OPERATING EXPENSES 982,243 494,392
LOSS FROM OPERATIONS (344,990) (33,789)
INTEREST INCOME 34,699 0
INTEREST EXPENSE 39,360 57,717
---------- ----------
NET LOSS ($349,651) ($91,506)
========== ==========
NET LOSS PER SHARE - BASIC AND DILUTED ($0.10) ($0.05)
========== ==========
WEIGHTED AVERAGE COMMON SHARES 3,382,500 1,945,000
========== ==========
See Notes to Consolidated Financial Statements
2
INTERNATIONAL SMART SOURCING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED
MARCH 31, 2000 MARCH 27, 1999
-------------- --------------
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES
- ------------------------------------
NET LOSS $ (349,651) $ (91,506)
--------- --------
Adjustments to Reconcile Net Income (Loss) to Net Cash
provided by operating activities:
Depreciation 50,425 72,170
Amortization 73,831 55,950
Changes in assets and liabilities:
(Increase) Decrease in Accounts Receivable (191,720) 25,192
(Increase) Decrease in Notes Receivable from Related Parties (11,284) 47,374
(Increase) Decrease in Inventory (122,145) 19,793
Decrease in Prepaid Expenses 52,836 9,740
Decrease in Other Assets 11,966 8,118
(Decrease) in Accounts Payable and Accrued Expenses (47,433) (41,603)
-------- ---------
Total Adjustments (183,524) 196,734
--------- ---------
Net Cash (Used In) Provided By Operating Activities (533,175) 105,228
--------- -------
Cash Flows from Investing Activities:
Expenditures for Property and Equipment (184,113) (68,470)
--------- --------
Net cash used in Investing Activities (184,113) (68,470)
--------- --------
Cash Flows from Financing Activities:
Deferred Offering Costs - (45,838)
Proceeds from Loans 100,620 185,000
Payments on Loans (56,666) (105,620)
-------- ---------
Net Cash Provided by (used in) Financing Activities 43,954 33,542
------- ---------
Net Increase (Decrease) in Cash (673,334) 70,300
Cash - Beginning of Period 1,992,265 16,146
---------- --------
Cash - End of Period $1,318,931 $86,446
=========== ========
See Notes to Consolidated Financial Statements
3
INTERNATIONAL SMART SOURCING, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 2000
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles
for interim financial statements and with the instructions to Form
10-QSB and Article 10 of Regulation S-X. Accordingly, they do not
include all of the information and disclosures required for annual
financial statements. These financial statements should be read in
conjunction with the consolidated financial statements and related
footnotes included in the Company's annual report on form 10-KSB for
the year ended December 31,1999.
In the opinion of the Company's management, all adjustments (consisting
of normal recurring accruals) necessary to present fairly the Company's
financial position as of March 31, 2000 and the results of operations
and cash flows for the three month periods ended March 31, 2000 and
March 27, 1999 have been included.
The results of operations for the three-month period ended March 31,
2000, are not necessarily indicative of the results to be expected for
the full year ended December 29, 2000.
2. BANK DEBT
In December 1999, the Company acquired bank financing from European
American Bank (EAB). The financing agreement includes a demand note of
$1,250,000 and a term loan of $500,000. With the proceeds of the loans
the $1,000,000 revolving line of credit with Republic National Bank
was paid in full leaving $250,000 available to be drawn down on the
demand note. The term loan was not drawn upon at that time. As of
March 31, 2000 the company owes appoximately $990,000 on the demand
note and has not drawn any funds on the term note.
The loan are secured by accounts receivable, inventory, equipment and
a $1,000,000 certificate of deposit that is restricted from use until
the Company earns $100,000 year-to-date net profit. In addition, there
is a maximum leverage and minimum capital base requirement. The
minimum capital base was not met. On March 30, 2000 EAB issued a
waiver for the minimum capital base requirement and amended such
requirement to $2,000,000. However, EAB has prohibited the Company
from drawing any additional funds from the lines of credit until
further review.
4
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
GENERAL
International Smart Sourcing, Inc. was organized as a holding company for its
wholly-owned subsidiaries Electronic Hardware Corp. (EHC) and Compact Disc
Packaging Corp. (CDP) and International Plastic Technologies, Inc. (IPT)
(collectively, the "Company").
IPT specializes in assisting small to mid-size companies substantially reduce
their cost of manufacturing by outsourcing work to China. Through its offices
in the United States and China, IPT has put in place the infrastructure
necessary to simplify the transition of moving work to China. The services
provided include project management, source selection, engineering coordination,
quality assurance, logistics and cost reduction. The Company's product
specialization includes tooling, injection molding and secondary operations,
castings, mechanical assemblies, electromechanical assemblies and metal
stampings
Electronic Hardware Corporation, the Company's principal subsidiary, has over 29
years of experience in the design, marketing and manufacture of injection molded
plastic components used in industrial, consumer and military products. The
Company believes that its long-term experience in the manufacture and assembly
of injection molded plastic components, coupled with direct access to
manufacturing facilities in China, will enable the Company to provide improved
products at lower prices with improved profit margins.
The Company, through Compact Disc Packaging Corp. has entered into an exclusive
international licensing agreement to manufacture, market, sell and sub-license
the Pull Pack (TM), a proprietary Disc packaging system. The Pull Pack (TM) is a
redesigned " Jewel Box", the packaging currently used for Compact Discs, CD-ROMs
and DVD.
RESULTS OF OPERATIONS
For the three months ended March 31, 2000 compared to the three months ended
March 27, 1999.
NET SALES
Net sales increased $ 376,968, or 28 %, to $ 1,710,159 for the three months
ended March 31, 2000 from $ 1,333,191 for the three months ended March 27, 1999.
The increase in sales was attributed to the commencement of the contract with
the Defense Supply Center in Philadelphia (DSCP) and an increase in volume by
IPT.
5
GROSS PROFITS
The Company realized an overall gross profit margin percentage for the three
months ended March 31, 2000 of 37 %, which represents an increase from the 35 %
experienced during the three months ended March 27, 1999. This increase can be
attributed to the increase in sales related to the contract with DSCP. The
products sold to DSCP are generally more complex products with more value added
operations than molded plastic components and generate a higher gross profit
margin.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased $ 487,851, or 99%, to
$982,243 for the three months ended March 31, 2000 from $ 494,392 for the three
months ended March 27, 1999. The increase can be attributed to an increase in
office salaries to support the additional engineering consultants and employees
hired to facilitate the new business with the Company's manufacturing
relationship located in China. In addition, sales and marketing personnel were
hired to promote the Company and try to acquire new business.
LIQUIDITY AND CAPITAL RESOURCES
The Company's liquidity needs arise from working capital requirements, capital
expenditures, and principal and interest payments. Historically, the Company's
primary source of liquidity has been cash flow generated internally from
operations, supplemented by bank borrowings and long term equipment financing.
The Company's cash decreased to $ 1,318,931 on March 31, 2000 from $1,992,265 on
December 31, 1999. In December of 1999, the Company acquired bank financing from
European American Bank (EAB). The financing agreement includes a demand note of
$1,250,000 and a term loan of $ 500,000. The loan is secured by accounts
receivable, inventory and a $ 1,000,000 certificate of deposit, which is
restricted from use until the Company earns $100,000 year-to-date net profit. In
addition, there is a maximum leverage and minimum capital base requirement. The
minimum capital base was not met. On March 30, 2000, EAB issued a waiver for the
minimum capital base requirement and amended such requirement to $ 2,000,000.
However, EAB prohibited the Company from drawing any additional funds from the
lines of credit until further review.
The company will require additional cash to maintain the existing operations
through the 4th Quarter and is in the process of negotiating additional lines of
credit. The Company is confident, with no assurance, that additional funding
will be secured.
Cash flow used in operating activities was $ 533,175 for the three months ended
March 31, 2000 on a net loss of $ 349,651. The increase in accounts receivable
and increase in accounts payable were the result of an increase volume of
business.
Cash used in investing activities for the three months ended March 31, 2000 and
March 27, 1999 was $ 184,113 and $ 68,470, respectively, which consisted of cash
for the purchase of tooling, molds, machinery and equipment.
6
Net cash provided by financing activity for the three months ended March 31,
2000 was $ 43,954. Cash of $ 100,620 was provided from borrowings on available
credit lines, which was offset by principal payments on loans of $ 56,666.
CAUTIONARY FACTORS REGARDING FUTURE OPERATING RESULTS
The matters discussed in this form 10-QSB other than historical material are
forward-looking statements. Any such forward-looking statements are based on
current expectations of future events and are subject to risks and uncertainties
which could cause actual results to vary materially from those indicated. Actual
results could differ due to a number of factors, including negative developments
relating to unforeseen order cancellations or push outs, the company's strategic
relationships, the impact of intense competition and changes in our industry.
The Company assumes no obligation to update any forward-looking statements as a
result of new information or future events or developments.
7
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On or about April 20, 1999 a former non-officer employee of the Company filed a
complaint against EHC with the Division of Human Rights of the State of New York
("Division") charging violation of the Americans with Disabilities Act covering
disabilities relating to employment. The Company is vigorously defending this
action and believes, with no assurance, that it has a meritorious defense.
Although the ultimate outcome of the action cannot be determined at this time,
the Company does not believe that the outcome will have a material adverse
effect on the Company's financial position or overall trends in results of
operations.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Since the Initial Public Offering on April 23, 1999 through the three-months
ending, March 31, 2000 the Company used an aggregate of $4,608,794 of proceeds
of which $642,500 was used for repayment of debt. This amount represents a
material change from the $382,500 allocated to repayment of debt in the Use of
Proceeds section of the Company's registration statement on Form SB-2, filed
with the Securities and Exchange Commission on April 23, 1999, and is the result
of an additional $260,000 of loans made to the Company by the stockholders.
$227,103 was used for repayment of a bank loan to Republic National Bank of New
York, $739,890 was used for costs related to the initial public offering,
$700,209, was used for working capital, $ 361,288 was used for tooling, $645,838
was used for inventory purchases and staffing, $296,711 was used for sales and
marketing, $108,365 was used for costs associated with being a public company,
$75,000 was used for Federal Income Taxes, $87,745 was used for research and
development, $43,200 was used for CDP licensing agreements and cost associated
with CDP, $84,048 was used for travel to China and $6,000 was used on facilities
and equipment. Additionally, $500,000 was loaned to Azurel Ltd. for short-term
material financing at an annual interest rate of 8% in connection with the
execution of an exclusive supply agreement between the Company and Azurel Ltd.
8
ITEM 5. OTHER INFORMATION
EXCLUSIVE SUPPLY AGREEMENT BETWEEN THE COMPANY AND AZUREL LTD.
The Company entered into an exclusive supply agreement with Azurel Ltd. (Azurel)
dated July 7, 1999 ("the Agreement"). Pursuant to the Agreement, the Company
loaned $500,000 to Azurel in exchange for the exclusive right to supply Azurel
with any and all products imported by or on behalf of Azurel. In addition, the
Company received warrants, expiring December 31, 2004, to purchase 100,000
shares of Azurel common stock at a purchase price of $ 1.50 per share. The
Company has not received any orders through May 2, 2000.
On December 23, 1999, the terms of the loan agreement were extended allowing
principal payments to begin on January 15, 2000. In consideration for extending
the principal payments, the Company received an additional 50,000 warrants to
purchase shares of Azurel Ltd. Common stock at an exercise price of $ 1.50 per
share. Interest continues to accrue at 8 % per year on all unpaid balances. As
of the date of this filing, no principal or interest payments have been made.
The note is past due and no repayments have been made. The Company is in the
process of negotiating new repayment terms.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) The following exhibits are filed as part of this report:
Exhibit Description
------- -----------
27 Financial Data Schedule
b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended
March 31, 2000.
9
SIGNATURES
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, thereunto duly authorized.
INTERNATIONAL SMART SOURCING, INC.
MAY 15, 2000 /S/Andrew Franzone
--------------------------------
- ------------ Andrew Franzone
Date Chief Executive Officer
MAY 15, 2000 /S/Steven Sgammato
--------------------------------
- ------------ Steven Sgammato
Date Chief Financial Officer
10