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 29, 2002
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 1, 2002, the Registrant had 3,760,934 shares of its Common Stock,
$0.001 par value, issued and outstanding.
INTERNATIONAL SMART SOURCING, INC. AND SUBSIDIARIES
FORM 10-QSB
MARCH 29, 2002
INDEX
Page
Number
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements (Unaudited)
Consolidated Balance Sheet 1
Consolidated Statements of Operations 2
Consolidated Statements of Cash Flows 3
Notes to Consolidated Financial Statements 4 - 5
Item 2 - Management's Discussion and Analysis or
Plan of Operation 6 - 10
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings 11
Item 2 - Changes in Securities and Use of Proceeds 11
Item 3 - Defaults upon Senior Securities 11 - 12
Item 4 - Submission of Matters to a Vote of
Security Holders 12
Item 5 - Other Information 12
Item 6 - Exhibits and reports on Form 8-K 12
SIGNATURE 13
INTERNATIONAL SMART SOURCING, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(Unaudited)
March 29, 2002
ASSETS
CURRENT ASSETS:
Cash $ 167,943
Accounts receivable - net of allowance for
doubtful accounts of $15,000 784,129
Note receivable-related party 51,665
Inventories 1,391,722
Prepaid expenses and other current assets 336,033
--------------
TOTAL CURRENT ASSETS 2,731,492
Property and equipment - net 587,026
Note receivable-related party 95,811
Other assets 120,346
--------------
$ 3,534,675
==============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 1,364,960
Deferred revenue 53,851
Line of credit 800,324
Current portion of long tem debt
(including $37,682 to officer/shareholders) 120,881
Current portion of obligations under capital leases 64,067
--------------
TOTAL CURRENT LIABILITIES 2,404,083
Long term debt (including $112,384 to officer/shareholders) 273,206
Obligations under capital leases 78,134
--------------
TOTAL LIABILITIES 2,755,423
--------------
CONTINGENCY
STOCKHOLDERS' EQUITY:
Common Stock, $0.001 par value, 10,000,000 shares authorized,
issued and outstanding 3,760,934 3,761
Additional paid-in capital 7,971,928
Accumulated deficit (7,196,437)
--------------
TOTAL STOCKHOLDERS' EQUITY 779,252
--------------
$ 3,534,675
==============
See notes to consolidated financial statements.
1
INTERNATIONAL SMART SOURCING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended
-------------------------------------------
March 29, March 30,
2002 2001
------------------- --------------------
NET SALES $ 2,313,363 $ 2,145,966
COST OF GOODS SOLD 1,593,188 1,448,495
------------------- --------------------
GROSS PROFIT 720,175 697,471
------------------- --------------------
OPERATING EXPENSES
Selling and shipping 222,976 283,856
General and administrative 738,743 702,521
------------------- --------------------
TOTAL OPERATING EXPENSES 961,719 986,377
------------------- --------------------
LOSS FROM OPERATIONS (241,544) (288,906)
Interest and other income 2,063 4,314
Interest and other expenses (20,100) (18,741)
------------------- --------------------
NET LOSS $ (259,581) $ (303,333)
=================== ====================
NET LOSS PER SHARE - BASIC AND DILUTED $ (0.07) $ (0.08)
=================== ====================
WEIGHTED AVERAGE COMMON SHARES 3,760,934 3,725,934
=================== ====================
See notes to consolidated financial statements.
2
INTERNATIONAL SMART SOURCING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
--------------------------------------
March 29, March 30,
2002 2001
---------------- ------------------
Cash flows from operating activities:
Net loss $ (259,581)$ (303,333)
---------------- ------------------
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation 45,575 63,848
Amortization 6,555 942
Changes in assets and liabilities:
Accounts receivable (7,729) 152,565
Receivable from related party - (16,929)
Inventories (152,101) 23,200
Prepaid expenses and other current assets 112,131 36,835
Other assets (40,832) 17,146
Accounts payable and accrued expenses 216,743 (38,521)
Due to related party - 17,416
Deferred revenue (147,781) (3,714)
---------------- ------------------
Total adjustments 32,561 252,788
---------------- ------------------
Net cash used in operating activities (227,020) (50,545)
---------------- ------------------
Cash flows from investing activities:
Note receivable from related parties 8,217 -
Expenditures for property and equipment (8,748) (18,497)
---------------- ------------------
Net cash used in investing activities: (531) (18,497)
---------------- ------------------
Cash flows from financing activities:
Capital lease repayments (11,368) (22,546)
Proceeds from borrowings 288,516 109,000
Principal payments and repayment of loans (28,132) (30,723)
---------------- ------------------
Net cash provided by financing activities 249,016 55,731
---------------- ------------------
Increase (decrease) in cash 21,465 (13,311)
Cash - beginning of year 146,478 188,213
---------------- ------------------
Cash - end of period $ 167,943 $ 174,902
================ ==================
See notes to consolidated financial statements.
3
INTERNATIONAL SMART SOURCING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 29, 2002
(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. 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 28, 2001.
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 29, 2002 and the results
of operations and cash flows for the three month periods ended March
29, 2002 and March 30, 2001 have been included.
The results of operations for the three month periods ended March 29,
2002, are not necessarily indicative of the results to be expected for
the full year ended December 27, 2002.
The accompanying financial statements have been prepared assuming that
the Company will continue as a going concern. The Company has suffered
recurring losses and is not in compliance with their credit line's
minimum tangible net worth covenant. These conditions raise substantial
doubt about the Company's ability to continue as a going concern.
Management's plans with respect to this matter include, raising
additional funds through equity or debt financing and ultimately
achieving profitable operations. The Company is in discussions with the
bank to amend the minimum tangible net worth requirement. The
accompanying financial statements do not include any adjustments that
might be necessary should the Company be unable to continue as a going
concern.
2. CONTINGENCY
The Company has been named as a defendant in an employment
discrimination action which it believes is without merit, and is
vigorously defending itself against such matter. Consequently, no
provision for this matter has been made as of March 29, 2002.
4
3. SEGMENT AND GEOGRAPHIC INFORMATION
The Company views its operations as principally two segments, the
manufacturing and assembly of injection molded plastic components and
outsourcing of injection molded plastic components and their
assemblies. The segments share a common workforce and office
headquarters, which preclude an allocation of all overhead components.
Overhead items that are specifically identifiable to a particular
segment are applied to such segment. The Company's segment information
for the three months ended March 29, 2002 and March 30, 2001 are as
follows:
Manufacturing Corporate
and and
Assembly Outsourcing Other Consolidated
---------------- -------------- ---------------- ----------------
Three Months ended March 29, 2002
Sales to unaffiliated customers $ 1,789,896 $ 521,967 $ 1,500 $ 2,313,363
Segment assets 2,440,838 990,248 103,589 3,534,675
Segment income (loss) $ 29,392 $ (199,790) $ (89,183) $ (259,581)
Manufacturing Corporate
and And
Assembly Outsourcing Other Consolidated
---------------- -------------- ------------- ----------------
Three Months ended March 30, 2001
Sales to unaffiliated customers $ 1,658,548 $ 486,464 $ 954 $ 2,145,966
Segment assets 2,267,093 1,495,864 455,508 4,218,465
Segment income (loss) $ 128,718 $ (326,249) $ (105,802) $ (303,333)
5
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
GENERAL
The Company
International Smart Sourcing, Inc. was organized as a holding company for its
three wholly-owned subsidiaries (collectively, "ISS" or the Company):
o International Plastic Technologies, Inc. (IPT) which does business as
International Smart Sourcing
o Electronic Hardware Corp. (EHC) and
o Compact Disc Packaging Corp. (CDP).
The Company was originally formed in 1970 as EHC, a New York corporation, and
was reorganized as of December 24, 1998 as a Delaware holding company for its
two wholly owned subsidiaries, EHC and CDP. As part of the Reorganization, the
stockholders of each of the subsidiaries exchanged the following percentage
ownership in the respective subsidiaries for the percentage of shares of the
Company: David Kassel exchanged 33% of EHC and 90% of CDP for 46.3% of the
Company; Andrew Franzone exchanged 33% of EHC for 25.7% of the Company; Harry
Goodman exchanged 33% of EHC for 25.7% of the Company; and David Cowan exchanged
10% of CDP for 2.3% of the Company. On May 7, 1999, IPT, a Delaware Corporation
was formed.
We maintain our principal executive offices at 320 Broad Hollow Road,
Farmingdale, New York 11735. Our telephone number is (631) 293-0750 and our
Internet address is http://www.smart-sourcing.com.
International Plastic Technologies (IPT)
At IPT, we specialize in assisting companies reduce their cost of manufacturing
by outsourcing work to China. Through our offices in the United States and
China, IPT has put in place the system necessary to simplify the transition of
moving work to China. IPT's product specialization includes:
o tooling
o injection molding and secondary operations
o castings
o mechanical assemblies
o electromechanical assemblies
o metal stampings
IPT generated revenue of $521,967 for the three months ended March 29, 2002.
IPT has established an office in Shanghai, with engineering, quality, production
control and administrative personnel who provide:
6
o project management
o source selection
o engineering coordination
o quality assurance
o logistics
o cost reduction.
There are thirty-eight manufacturers in China presently providing products for
our customers. We believe that our service provides our customers with
significant competitive advantages. Savings for customers range from fifteen
percent to as much as seventy-five percent. The more labor intensive the
product, the more savings realized. Due to the low cost of tooling the
customer's return on investment is improved, and its overhead costs are reduced.
Electronic Hardware Corporation (EHC)
Our EHC subsidiary has over 30 years of experience in the design, marketing and
manufacture of injection molded plastic components used in industrial, consumer,
and military products. We also offer secondary operations on our molded
products. Services such as hand painting, pad printing, hot stamping and
engraving are provided at a customer's request. These marking systems can be
used on most materials and varying contours. EHC generated revenue of $1,789,896
for the three months ended March 29, 2002.
EHC meets a full range of its customers' needs by maintaining early and total
involvement, from the design and development to the ultimate manufacture and
packaging of the product. When a custom-made product is initially requested,
experienced EHC application engineers assist the customer during the concept
design stage, which we consider critical to the success of the manufacturing
process. During this stage, EHC application engineers draw upon our experience,
expertise and technological innovation to assist customers in reducing costs,
meeting accelerated market schedules and ensuring high quality workmanship.
Our Farmingdale, New York facility was certified in January 2001, for the
International Quality Standard ("ISO") 9002, a manufacturing certification
required by European companies and looked upon favorably throughout the world.
ISO 9002 requires us to meet certain stringent requirements established in
Europe to ensure that the facility's manufacturing processes, equipment, and
associated quality control systems will satisfy specific customer requirements.
We believe that obtaining ISO 9002 certification will benefit EHC in the plastic
manufacturing market, both nationally and internationally.
7
We believe that our consolidated manufacturing approach results in high quality,
on-time delivery, competitive pricing, and a loyal customer base. Additionally,
we believe that it has created a cost-effective workplace by decreasing
inventory costs. Our "pull" (also known as "JIT," which stands for Just-in-Time)
system is designed to introduce raw materials and components at the time
necessary to fulfill customer orders. This system eliminates costs associated
with the storage and handling of large amounts of inventory. We believe that it
also accounts for a timelier rate of delivery. The "pull" system depends on
long-term relationships with suppliers. We believe that due to our strong
relationships with suppliers and our well-trained workforce, the system will
continue to provide efficient and prompt delivery.
Over the past year EHC has increased its sales by 23% due to aggressive
marketing efforts and to the success of the current government contract. EHC
received an Award from the United States government based on this contract, for
"Innovative Business Performer of the Year Award for Small Business" in 2000.
Based on the success of the government contract, we believe that we have put in
place the necessary infrastructure to provide superior service to the government
not only on this contract but on other contracts the government might look to
place in 2002. This same infrastructure will also provide the Company's
commercial knob business with many advantages in our ability to provide superior
service. The Company anticipates a user-friendly website which will allow
customers to order directly and obtain stock and delivery information on the web
by the third quarter of the year.
Compact Disc Packaging Corp. (CDP)
Our CDP subsidiary is currently inactive. It generated revenue of $1,500 for the
three months ended March 29, 2002. Its business is the manufacturing, marketing
and sale of a compact disc packaging system.
RESULTS OF OPERATIONS
For the three months ended March 29, 2002 compared to the three months ended
March 30, 2000.
NET SALES
Net sales for the three month-period ended March 29, 2002 were $2,313,363
compared to sales of $2,145,966 and for the three-month period ended March 30,
2001. The increase of $167,397 or 8% was attributed to the continuation of the
contract with the Defense Supply Center in Philadelphia (DSCP), and completion
of tooling orders.
8
GROSS PROFITS
The Company realized an overall gross profit margin percentage for the
three-month period ended March 29, 2002 of 31.13%, as compared to 32.50%
experienced during the three month period ended March 30, 2001. This decrease of
1.37%, can be attributed to the increase in sales of tooling. Orders for tooling
are typically followed by productions orders. Tooling generally has a lower
gross profit then product manufactured from tooling.
OPERATING EXPENSES
Selling and Shipping
Selling and shipping expenses for the three-months ended March 29, 2002 were
$222,976 as compared to $283,856 for the three-months ended March 30, 2002.
The decrease of $60,880 or 21% for the period is primarily attributable to a
decrease in consulting fees.
General, and Administrative Expenses
General and administrative expenses for the three months ended March 29, 2002
were $738,743 as compared to $702,521 for the three months ended March 30, 2002.
The increase of $36,222 or 5% for the period is primarily attributable to an
increase in insurance costs of approximately $8,000, an increase in rent expense
of $13,700 and an increase in professional fees of approximately $14,500.
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 flows generated internally from
operations. When cash flows have been insufficient to meet the Company's cash
needs, the Company has supplemented its cash needs with bank borrowings and long
term equipment financing. The Company's cash increased to $167,943 on March 29,
2002 from $146,478 on December 28, 2001.
Cash flow used in operating activities was $227,020 for the three-months ended
March 29, 2002 on a net loss of $259,581. The minimal increase in accounts
receivable is the result of controlled collection efforts. The increase in
inventory is the result of the Company's buildup of inventory to respond to
increased government orders and shipments. The decrease in prepaid expenses and
other current assets, is a result of the expensing of deposits on materials and
molds associated with tooling and production orders that were completed during
the three months ended March 29, 2002. Net cash used in investing activities for
the three-month period March 29, 2002 was $531, this consisted of $8,748 in cash
for the purchase of tooling, molds, machinery and equipment, and collections of
$8,217 in cash from notes receivable from related parties.
9
Net cash provided by financing activities for the three-month period ended March
29, 2002 was $249,016. Cash of $288,516 was provided from the bank line of
credit. Cash of $28,132 was used to make principal payments on loans and the
bank credit line and $11,368 to make capital lease repayments.
In April 2001, we closed on a revolving line of credit agreement with a bank
that provides for a maximum borrowing of up to $1,500,000, subject to certain
conditions, at an interest rate of prime plus 1.75%. The loan is secured by
substantially all the assets of the company and is unconditionally guaranteed by
three officers/shareholders, each limited to $250,000. The agreement provides
that, among the other requirements, we maintain a tangible net worth of at least
$1,750,000 from the date of the agreement to and including December 30, 2001 and
$2,000,000 through April 2003, when the outstanding balance is due.
At December 28, 2001 and March 29, 2002, the Company was below the minimum
tangible net worth amount required in its covenant with the bank which
constitutes a breach of the credit agreement. The Company and the bank are
currently in discussions to amend the minimum tangible net worth covenant to the
credit agreement. The amendment, when executed, would have the effect of curing
the breach of the tangible net worth covenant for the last quarter of fiscal
year 2001 and the first quarter of fiscal year 2002 and establishing a new
tangible net worth covenant for the balance of fiscal year 2002. There is no
assurance that the Company will be able to satisfactorily negotiate an amendment
to the credit agreement with the bank. In the event that the Company is unable
to do so, there can be no assurance that the Company will be able to find other
sources of credit or working capital in which event operations of the Company
would have to be limited.
The auditors' report on the Company's financial statements, in our annual Form
10-KSB, included an explanatory paragraph about the Company's ability to
continue as a going concern. The Company expects that it will require a minimum
of $550,000 to fund its operations and meet its debt service obligation for the
fiscal year ended December 27, 2002. As of May 1, 2002, the Company has
approximately $190,000 of availability on its credit line. In addition,
management is seeking to raise additional funds through additional debt and/or
equity financing, although there is no assurance it will be successful in
securing such financing. If the Company is not successful, the Company may need
to make certain reductions in its operations to maximize its available cash
resources until additional funds can be raised.
CAUTIONARY FACTORS REGARDING FUTURE OPERATING RESULTS
This report contains forward-looking statements within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act
of 1934. 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.
10
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company has been brought as a defendant in an employment discrimination
action before the Division of Human Rights of the State of New York. The Company
is vigorously defending this action.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None
ITEM 3. BANK DEBT
In April, 2001, we, through our subsidiary EHC, entered into a credit agreement
with the Connecticut Bank of Commerce to provide up to $1.5 million dollars in a
revolving credit line for EHC's working capital purposes and to allow EHC to
repay monies owed to approved affiliates. EHC is barred from obtaining loans
under the revolving credit line if the aggregate amount of the loans exceeds a
formula specified in the credit agreement. All monies loaned under the credit
line are to be paid in full in April, 2003. Interest on the monies loaned is due
in monthly installments at the rate of 1 3/4 % per annum above Connecticut Bank
of Commerce's prime commercial lending rate (6.5% at March 29, 2002).
The credit agreement will terminate in April, 2003, or earlier upon an event of
default. However, the credit agreement may be renewed for periods of time up to
one year after April, 2003, unless a party to the agreement notifies the other
party that it does not wish to renew the agreement. The loan is secured by
almost all of our assets and the obligations due under such loan are guaranteed
(to the extent set forth in executed guarantee agreements) by ISS, IPT, and CDP.
The loan is also guaranteed by Andrew Franzone, Harry Goodman and David L.
Kassel, each guarantee limited to $250,000.
The credit agreement requires us to provide the bank with financial reports and
statements. The agreement provides that, among other requirements, we maintain a
tangible net worth of at least $1,750,000 from the date of the agreement to and
including December 30, 2001 and $2,000,000 through April 2003, when the
outstanding balance is due. The credit agreement contains a formula, based on
our accounts receivable that determines the portion of the $1.5 million dollars
which we may borrow at any time. At March 29, 2002 based on this formula we were
permitted to borrow up to approximately $800,000. The balance outstanding on the
line of credit at March 29, 2002 amounted to $800,324.
At March 29, 2002 and December 28, 2001, the Company was below the minimum
tangible net worth amount required in its covenant with the bank which
constitutes a breach of the credit agreement. The Company and the bank are
currently in discussions to amend the minimum tangible net worth covenant to the
credit agreement. he amendment, when executed, would have the effect of curing
11
the breach of the tangible net worth covenant for the last quarter of fiscal
year 2001 and the first quarter of fiscal year 2002 and establishing a new
tangible net worth covenant for the balance of fiscal year 2002. There is no
assurance that the Company will be able to satisfactorily negotiate an amendment
to the credit agreement with the bank. In the event that the Company is unable
to do so, there can be no assurance that the Company will be able to find other
sources of credit or working capital in which event operations of the Company
would have to be limited.
We and all of our subsidiaries are barred from taking on additional debt
except for the following:
o debt to the Connecticut Bank of Commerce;
o trade payables in the ordinary course of business;
o debt covered under the terms of a Debt Subordination Agreement with the
Connecticut Bank of Commerce;
o debt covered under the terms of an Intercreditor Agreement among the Long
Island Development Company and the Connecticut Bank of Commerce; and
o debt under a loan or equipment lease for the sole purpose of acquiring
machinery and equipment not to exceed $50,000 in the aggregate during each
fiscal year.
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
Exhibits:
None
Reports on 8-K:
No reports were filed on Form 8K during the quarter ended March 29,
2002.
12
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 ___ , 2002 /S/David Kassel
--------------------------------
- ------------ David Kassel
Date Chairman and Chief Executive Officer
May ___ , 2002 /S/Arthur Myers
--------------------------------
- ------------ Arthur Myers
Date Chief Financial Officer
13