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 Six Months Ended June 26, 1999
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)
(516) 293-0750
(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 July 20, 1999, the Registrant had 3,382,500 shares of its Common
Stock, $0.001 par value, issued and outstanding.
INTERNATIONAL SMART SOURCING, INC.
FORM 10-QSB
JUNE 26, 1999
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 4-5
Item 2 - Management's Discussion and Analysis or
Plan of Operation 6-7
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 10
SIGNATURE 11
Exhibits 12
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INTERNATIONAL SMART SOURCING, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
JUNE 26, 1999
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash $4,039,434
Accounts Receivable 437,139
Accounts Receivable - Related Party 532,233
Inventory 786,054
Prepaid Expenses 136,593
TOTAL CURRENT ASSETS 5,931,453
---------
Property and Equipment (net) 664,032
Goodwill 1,651,254
License Agreement 474,998
Other Assets 68,578
-----------
TOTAL ASSETS $8,790,315
============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts Payable and Accrued Expenses $405,169
Current portion of long term debt 1,242,582
Current portion of obligations under capital lease 62,086
---------
TOTAL CURRENT LIABILITIES 1,709,837
Long term debt 421,270
Obligations under capital lease 82,380
----------
TOTAL LIABILITIES $2,213,487
-----------
STOCKHOLDERS' EQUITY
Common Stock, $0.001 par value, authorized 10,000,000
shares, issued and outstanding 3,382,500 3,383
Additional Paid-in Capital 6,909,134
Deficit (335,689)
---------
TOTAL STOCKHOLDERS' EQUITY 6,576,828
----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $8,790,315
============
See Notes to Financial Statements
1
INTERNATIONAL SMART SOURCING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
THREE MONTHS ENDED SIX MONTHS ENDED
June 26, 1999 June 27, 1998 June 26, 1999 June 27, 1998
NET SALES $1,119,176 $1,509,063 $2,452,367 $2,947,506
---------- --------- --------- ---------
COST OF GOODS SOLD 777,627 970,320 1,650,215 1,871,952
--------- --------- --------- ---------
GROSS PROFIT 341,549 538,743 802,152 1,075,554
OPERATING EXPENSES
Selling and Shipping 115,092 114,489 219,841 251,335
General and Administrative 619,878 276,635 1,009,521 572,599
-------- --------- --------- ---------
TOTAL OPERATING EXPENSES 734,970 391,124 1,229,362 823,934
-------- --------- --------- ---------
INCOME (LOSS) BEFORE INTEREST INCOME AND EXPENSE (393,421) 147,619 (427,210) 251,620
INTEREST & OTHER INCOME 69,586 0 69,586 0
INTEREST EXPENSE 53,863 49,789 111,580 100,043
-------- -------- -------- --------
NET INCOME (LOSS) (377,698) 97,830 (469,204) 151,577
=========== =========== ========== =========
NET INCOME (LOSS) PER SHARE - BASIC $ (0.13) $ 0.07 $ (0.19) $ 0.10
========== =========== ========== =========
AND ASSUMING DILUTION
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 2,917,225 1,500,000 2,431,100 1,500,000
=========== =========== ========== ==========
See Notes to Financial Statements
2
INTERNATIONAL SMART SOURCING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
FOR THE SIX MONTHS ENDED
June 26, 1999 June 27, 1998
Cash Flows from Operating Activities
Net Income (Loss) ($469,204) $151,577
---------- --------
Adjustments to Reconcile Net Income (Loss) to Net Cash
used in operating activities:
Depreciation 140,983 129,309
Amortization 111,900 0
Changes in Assets and Liabilities:
Decrease in Accounts Receivable 74,383 101,141
Decrease in Accounts Receivable from Related Parties 102,828 0
(Increase) Decrease in Inventory (1,054) (43,906)
(Increase) Decrease in Prepaid Expenses 26,962 (56,545)
(Increase) Decrease in Other Assets 5,242 (474,574)
Increase (Decrease) In Accounts Payable and Accrued Expenses (568,519) 172,357
---------- ---------
Total Adjustments (107,275) (172,218)
---------- ---------
Cash Used in Operating Activities (576,479) (20,641)
---------- ---------
Cash Flows from Investing Activities:
Expenditures for Property and Equipment (212,295) (110,049)
--------- ---------
Net Cash Used in Investing Activities (212,295) (110,049)
--------- ---------
Cash Flows from Financing Activities:
Net Proceeds from Issuance of Stock 5,116,908 0
Distributions 0 (45,000)
Proceeds from Loans 231,080 159,000
Payments on Loans (535,926) (175,297)
---------- ---------
Net Cash Provided By (Used) in Financing Activities 4,812,062 (61,297)
---------- ---------
Net Increase (Decrease) in Cash 4,023,288 (191,987)
Cash - Beginning of Period 16,146 351,740
---------- ---------
Cash - End of Period $4,039,434 $159,753
============== ==============
See Notes to Financial Statements
3
INTERNATIONAL SMART SOURCING, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 26, 1999
(Unaudited)
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 for the year ended December 26, 1998 included in the
Company's registration statement on Form SB-2.
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 June 26, 1999 and the results of operations
and cash flows for the six - month periods ended June 26, 1999 and June
27, 1998 have been included.
The results of operations for the three and six-month period ended June
26, 1999, are not necessarily indicative of the results to be expected
for the full year ended December 26, 1999. Certain prior year amounts
have been reclassified to conform with the current year's presentation.
INITIAL PUBLIC OFFERING
On April 23, 1999 the Company offered for sale to the public 1,250,000
shares of its common stock at $4.50 per share and 1,250,000 redeemable
common stock purchase warrants at $0.10 to purchase one share of common
stock at $5 per share. The Company received approximately $4,300,000 of
net proceeds from the initial public offering.
On June 10, 1999 the Underwriter exercised its option to purchase
187,500 additional shares of the Company's common stock and 187,500
redeemable common stock purchase warrants on the same terms and
conditions as set forth above, solely for the purpose of covering
over-allotments, if any. The Company received approximately $750,000 of
net proceeds from this transaction.
4
1 NOTES PAYABLE OFFICERS
During the second quarter of 1999, the Officers' were repaid $455,000
from the proceeds of the offering. These repayments represent short-term loans
made to the Company prior to the Offering.
5
Item 2. Management's Discussion and Analysis or Plan of Operations
General
International Smart Sourcing, Inc. (together with its wholly-owned subsidiaries
Electronic Hardware Corp. and Compact Disc Packaging Corp. the "Company") was
formed for the purpose of developing or acquiring domestically manufactured
injection molded plastic products or assemblies, redesigning the products to
improve function and appearance and by using its relationships with vendors in
China, to manufacture the products offshore in order to deliver them at lower
prices and improved profit margins. Electronic Hardware Corporation ("EHC"), the
Company's principal subsidiary, has over 28 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. (CDP), a wholly-owned
subsidiary, 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 and six months ended June 26, 1999 compared to the three and six
months ended June 27, 1998
Net Sales
Net Sales for the three and six-month periods ended June 26, 1999 were $
1,119,176 and
$ 2,452,367, respectively, as compared to net sales of $ 1,509,063 and
$ 2,947,506, respectively, for the three and six-month periods ended June 27,
1998. The decrease of $ 389,887 or 26% for the three-month period and $ 495,139
or 17% for the six-month period were attributed to generally lower industry
bookings and a major customer extending deliveries on purchase orders until
their inventory is reduced.
Gross Profits
The Company realized an overall gross profit margin percentage for the three and
six-month periods ended June 26, 1999 of 31 % and 33 %, respectively, which
represents a decrease from the 36 % experienced during the three and six-months
ended June 27, 1998. This decrease can be attributed to the increased sales of
molded plastic components which have a lower gross profit than products which
are molded and have value-added operations.
6
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the three and six-months ended
June 26, 1999 were $ 734,970 and $ 1,229,362, respectively, as compared to
$391,124 and $ 823,934 respectively for the three and six-month period ended
June 27, 1998. The increase of $ 343,846 or 88 % for the three month period
and $405,428 or 49% for the six- month period are primarily attributable
to $109,000 used for promotional activities for CDP, $48,000 for legal and
accounting fees, $30,000 for CDP reimbursement of expenses incurred in obtaining
a patent, $19,000 for travel to China to review and support the manufacturing
and engineering facilities, $17,000 in costs associated with being a public
company, $11,000 in consulting for selecting and qualifying manufacturers in
China, $8,000 on new office staff to support ISSI and CDP and $5,000 on
Directors and Officers Insurance. Additionally, there was an increase in
engineering consulting fees for new products designed by EHC to compliment the
knob line.
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 increased to $ 4,039,434 on June 26, 1999 from $ 16,146 on
December 26, 1998. Cash flow used in operating activities was $ 576,479 for the
six months ended June 26, 1999 on a net loss of $ 469,204. The decrease in
accounts receivable is the result of decreased volume of business. Working
capital was used to reduce accounts payable to an acceptable level.
Cash used in investing activities for the six months ended June 26, 1999 and
June 27, 1998 was
$ 212,295 and $ 110,049 respectively, which consisted of cash for the purchase
of tooling, molds, machinery and equipment.
Net cash provided by financing activities for the six months ended June 26, 1999
was $ 4,812,062 Cash of $ 231,080 was provided from borrowings on available
credit lines, which was offset by principal payments on loans of $ 535,926.
On April 23, 1999 the Company offered for sale to the public 1,250,000 shares of
its common stock at $ 4.50 per share and 1,250,000 redeemable common stock
purchase warrants at $0.10 to purchase one share of common stock at $ 5.00 per
share. The Company received approximately $ 4,300,000 of net proceeds from the
initial public offering. Additionally, on June 10, 1999 the Underwriter
exercised it's over allotment option in full to purchase 187,500 additional
shares of the Company's common stock and 187,500 redeemable common stock
purchase warrants. The Company received approximately $ 750,000 of net proceeds
from this transaction. Combined net proceeds to the Company from the initial
public offering and over allotment totaled approximately $ 5,050,000.
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
The Company completed its initial public offering pursuant to a Registration
Statement on Form SB-2 Registration No. 333-48701, declared effective on April
23, 1999. The Company issued 1,250,000 shares of common stock at a price of $
4.50 per share and 1,250,000 redeemable common stock purchase warrants at a
price of $.10 per warrant. The net proceeds of the initial public offering to
the Company after expenses was approximately $ 4,300,000. On June 10, 1999, the
underwriters in the initial public offering exercised their over-allotment
option to purchase additional shares of common stock and redeemable common
stock purchase warrants, with net proceeds to the Company of approximately
$ 750,000.Combined net proceeds from the initial public offering and over
allotment transaction totaled approximately $ 5,050,000 (the "Net Proceeds").
During the period ending June 26, 1999 the Company used an aggregate of $
1,785,385 of net proceeds of which $ 642,500 was used for repayment of debt, $
466,660 was used for cost related to the initial public offering, $ 224,252 was
used for working capital, $ 138,857 was used for tooling, $ 114,868 was used for
sales and marketing, $ 75,000 was used for Federal Income taxes, $ 60,000 was
used for research and development, $ 43,200 was used for CDP licensing
agreements and cost associated with CDP, $ 14,048 was used for travel to China
and $ 6,000 was used on facilities and equipment.
8
Item 5. Other Information
Year 2000 Computer System Compliance
In March of this year the Company replaced all computer hardware and software
with a system that the Company believes is Year 2000 compliant. All payroll and
time keeping systems are maintained by ADP Payroll Services and are certified
Year 2000 compliant. The Company has received written verification from its
system vendors that systems such as alarms, telephones and sprinklers are Year
2000 compliant. The Company's product is mechanical in nature and does not
contain any embedded computer technology.
The year 2000 readiness of certain major suppliers and customers of the Company
is unclear. While the Company believes that its own systems are year 2000
compliant, if a significant number of the Company's suppliers and customers were
to experience business disruptions as a result of their lack of year 2000
readiness, their problems could have a material adverse effect on the financial
position and results of operations of the Company.
Agreement by and between EHC and U.S. Government Defense Supply Center
Philadelphia
EHC has been awarded a significant contract with the U. S. Government Defense
Supply Center Philadelphia (DSCP). The Company estimates that the full value of
the contract can be as much as $ 15,000,000 over the course of a potential five-
year period, with full benefits expected to begin accruing in the year 2000.
The Award of the contract by DSCP will transfer the current Government
responsibility to the Company for supplying Knobs, Dials and pointers ( Federal
Stock Class 5355) under an indefinite quantity contract for a base period of one
year, with four one year options on behalf of DSCP. This contract positions the
Company as the major supplier of Federal Stock Class 5355 for all U.S.
Government ordering activities worldwide. The contract also gives the Company
full responsibility as the only U.S. Government Inventory Stocking Point for
this class.
9
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
Exhibit 99(i) Agreement by and between
EHC and U.S. Government
Defense Supply Center
Philadelphia
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended June 26,
1999.
10
27 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.
August 9, 1999 /s/ Andrew Franzone
Date Andrew Franzone
Chief Executive Officer
August 9, 1999 /s/ Steven Sgammato
Date Steven Sgammato
Chief Financial Officer
11