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 Nine Months Ended September 25, 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) 293-4650
(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 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
SEPTEMBER 25, 1999
INDEX
Page
NUMBER
PART I - FINANCIAL INFORMATION
Item 1 - Consolidated Financial Statements:
Balance Sheet .................................................. 1
Statements of Operations ....................................... 2
Statements of Cash Flows ....................................... 3
Notes to Financial Statements .................................. 4-5
Item 2 - Management's Discussion and Analysis or
Plan of Operation .............................................. 6-8
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings ................................................ 9
Item 2 - Changes in Securities and Use of Proceeds ........................ 9
Item 5 - Other Information ................................................ 10
Item 6 - Exhibits and Reports on Form 8-K ................................. 11
SIGNATURES ................................................................ 12
EXHIBIT ................................................................... 13
ITEM 1. FINANCIAL STATEMENTS
INTERNATIONAL SMART SOURCING, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
SEPTEMBER 25, 1999
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash ................................................ $ 2,658,925
Accounts Receivable ................................. 780,212
Inventory ........................................... 814,827
Notes Receivable .................................... 507,259
Prepaid Expenses .................................... 174,873
-----------
TOTAL CURRENT ASSETS ................................ 4,936,096
Property and Equipment (net) ............................... 558,780
Goodwill - Net ............................................. 1,607,805
License Agreement - Net .................................... 462,497
Other Assets ............................................... 297,434
-----------
TOTAL ASSETS ........................................ $ 7,862,612
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts Payable and Accrued Expenses ............... $ 433,439
Current portion of long term debt ................... 229,946
Current portion of obligations under capital lease .. 56,862
-----------
TOTAL CURRENT LIABILITIES ........................... 720,247
Long trem debt ...................................... 1,169,317
Obligations under capital lease ..................... 69,413
-----------
TOTAL LIABILITIES ................................... 1,958,977
-----------
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 .......................... 6,727,343
Deficit ............................................. (827,091)
-----------
TOTAL STOCKHOLDERS' EQUITY .......................... 5,903,635
-----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY .......... $ 7,862,612
===========
See Notes to Consolidated Financial Statements
1
INTERNATIONAL SMART SOURCING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
THREE MONTHS ENDED NINE MONTHS ENDED
Sept. 25, 1999 Sept. 26, 1998 Sept. 25, 1999 Sept. 26, 1998
------------ ------------ ------------ ------------
NET SALES ......................... $ 1,294,933 $ 1,559,489 $ 3,747,300 $ 4,506,995
------------ ------------ ------------ ------------
COST OF GOODS SOLD ................ 926,977 1,037,124 2,577,192 2,909,076
------------ ------------ ------------ ------------
GROSS PROFIT ...................... 367,956 522,365 1,170,108 1,597,919
------------ ------------ ------------ ------------
OPERATING EXPENSES
Selling and Shipping ........ 425,583 221,626 645,424 472,961
General and Administrative .. 462,709 271,578 1,472,230 844,177
------------ ------------ ------------ ------------
TOTAL OPERATING EXPENSES .......... 888,292 493,204 2,117,654 1,317,138
------------ ------------ ------------ ------------
INCOME (LOSS) FROM OPERATIONS ..... (520,336) 29,161 (947,546) 280,781
INTEREST .......................... 77,662 0 147,424 0
INTEREST EXPENSE .................. 48,903 53,166 160,483 153,209
NET INCOME (LOSS) BEFORE TAXES .... (491,577) (24,005) (960,605) 127,572
PROVISION FOR INCOME TAXES ........ 0 0 0 80,000
NET INCOME (LOSS) ................. ($ 491,577) ($ 24,005) ($ 960,605) $ 47,572
------------ ------------ ------------ ------------
NET INCOME (LOSS) PER SHARE - BASIC ($ 0.15) ($ 0.02) ($ 0.35) $ 0.03
------------ ------------ ------------ ------------
WEIGHTED AVERAGE COMMON SHARES .... 3,382,500 1,500,000 2,741,100 1,500,000
============ ============ ============ ============
See Notes to Consolidated Financial Statements
2
INTERNATIONAL SMART SOURCING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
FOR THE NINE MONTHS ENDED
Sept. 25, 1999 Sept. 26, 1998
-------------- --------------
Cash Flows from Operating Activities
Net Income (Loss) .......................................... ($ 960,605) $ 47,572
---------- ----------
Adjustments to Reconcile Net Income (Loss) to Net Cash
provided by operating activities:
Depreciation ............................................... 215,033 199,059
Amortization ............................................... 167,850 0
Non-cash compensation related to issuance of stock options . 47,340 0
Changes in Assets and Liabilities:
Decrease in Accounts Receivable ............................ (268,690) (251,262)
Decrease in Accounts Receivable from Related Parties ....... 635,061 0
(Increase) Decrease in Inventory ........................... (29,827) (37,853)
(Increase) Decrease in Prepaid Expenses .................... (65,242) (27,253)
(Increase) in Interest Receivable .......................... (7,259) 0
(Increase) Decrease in Other Assets ........................ (223,614) (50,471)
Increase (Decrease) In Accounts Payable and Accrued Expenses (540,249) 133,649
---------- ----------
Total Adjustments .......................... (69,597) (34,131)
---------- ----------
Net Cash Provided By (Used in) Operating Activities ............. (1,030,202) 13,441
---------- ----------
Cash Flows from Investing Activities:
Expenditures for Property and Equipment .................... (174,868) (157,774)
---------- ----------
Cash Used in Investing Activities ............................... (174,868) (157,774)
---------- ----------
Cash Flows from Financing Activities:
Increase in Due from Officers and affiliated companies ..... 0 150,000
Distributions .............................................. 0 (45,000)
Net Proceeds from Issuance of Stock ........................ 5,112,936 (321,759)
Notes Receivable ........................................... (500,000) 0
Proceeds from Loans ........................................ 231,080 269,000
Payments on Loans .......................................... (996,167) (237,718)
---------- ----------
Net Cash Provided (Used) in Financing Activities ................. 3,847,849 (185,477)
---------- ----------
Net Increase (Decrease) in Cash .................................. 2,642,779 (329,810)
Cash - Beginning of Period ....................................... 16,146 351,740
---------- ----------
Cash - End of Period ............................................. $ 2,658,925 $ 21,930
========== ==========
See Notes to Consolidated Financial Statements
3
INTERNATIONAL SMART SOURCING, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 25, 1999
(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 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 September 25, 1999 and the results of
operations and cash flows for the nine month periods ended September
25, 1999 and September 26, 1998 have been included.
The results of operations for the three and nine-month period ended
September 25, 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.
2. 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
3. NOTES PAYABLE OFFICERS
During the second quarter of 1999, the Officers' were repaid $ 642,500
from the proceeds of the offering. These repayments represent
short-term loans made to the Company prior to the Offering.
4. EMPLOYEE STOCK OPTIONS
On August 5,1999 the Company approved the granting of stock options to
employees and key consultants. The Company granted various employees
the option to purchase an aggregate of 103,000 shares at $ 4.00 per
share with the expiration date of five years from the date of issuance.
Such stock options fully vest two years from the date of issuance. This
transaction resulted in a non-cash charge to operations of $18,540.
On the same date, the Company also issued key consultants the option to
purchase an aggregate of 18,000 shares at an exercise price of $ 4.00
per share with the same terms as the employees. This transaction
resulted in the Company incurring a non-cash charge to operations of
$ 28,800.
In addition, the Company issued 40,000 stock options to certain
members of the Board of Directors all of which fully vest two years
from the date of issuance. Twenty five thousand of the options issued
to Directors are exercisable at $ 4.50 per share and the remainder are
exercisable at $ 4.00 per share.
5. NOTE RECEIVABLE
In connection with the execution of an agreement giving the Company
the exclusive right to supply Azurel Ltd. ("Azurel") with any products
imported on behalf of Azurel, the Company issued three notes to Azurel
in the aggregate amount of $ 500,000 for short term financing at an
interest rate of 8 % per annum.
The notes required that principal and interest be repaid in four
installments as follows:
October 15, 1999: $ 133,905, October 25, 1999: $ 125,833, November 05,
1999: $ 125,611, November 15, 1999: $ 125,278.
In addition, the Company received a warrant to purchase 100,000 shares
of common stock of Azurel at $ 1.50 per share with such warrants
expiring on December 31, 2004.
As of the date of this filing payment has not been received and the
agreement is currently being renegotiated.
6. NEW SUBSIDIARY
The Company formed International Plastic Technologies, Inc. ("IPT"), a
new subsidiary on May 7,1999. IPT 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.
5
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
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"). International Plastic Technologies was formed on
May 7, 1999 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, 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. 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 nine-months ended September 25, 1999 compared to the three and
nine-months ended September 26, 1998
NET SALES
Net sales for the three and nine-month periods ended September 25, 1999 were
$1,294,933 and $ 3,747,300, respectively, as compared to net sales of
$1,559,489 and $ 4,506,995, respectively, for the three and nine-month periods
ended Septembet 26, 1998. The decrease of $ 264,556 or 17 % for the three-month
period and $ 759,695 or 17 % for the nine-month period were attributed to
generally lower industry bookings and a major customer extending deliveries on
purchase orders until their inventory is reduced. Additionally, the government
has delayed placing purchase orders in the third quarter, pending the fourth
quarter commencement of the new contract with the U.S. government Defense Supply
Center Philadelphia which was awarded to EHC in the second Quarter of 1999.
GROSS PROFITS
The Company realized an overall gross profit margin percentage for the three and
nine-month periods ended September 25, 1999 of 28 % and 31 %, respectively,
which represents a decrease from the 33 % and 35 % experienced during the three
and nine-months ended September 26, 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
The increase in selling, general and administrative expenses for the three and
nine-months ended September 25, 1999 as compared to the comparable periods in
1998 includes startup costs associated with setting up sales, marketing and
operational departments and systems to support future business. Such departments
consist of personnel, computer hardware and software, office space and
furniture.
Selling, general and administrative expenses for the three and nine-months ended
September 25, 1999 were $ 888,292 and $ 2,117,654, respectively, as compared to
$ 493,204 AND $ 1,317,138 respectively, for the three and nine-month period
ended September 26, 1998. The increase of $ 395,088 or 80 % for the three-month
period and $ 800,516 or 61 % for the nine-month period are primarily
attributable to a $ 139,000 used for promotional activities for CDP, $ 124,000
for legal and accounting fees, $ 43,000 for CDP reimbursement of expenses
incurred in obtaining a patent $ 67,000 for travel to China to review and
support the manufacturing and engineering facilities and trade shows for IPT and
CDP, $ 85,000 in costs associated with being a public company, $ 33,000 in
consulting for selecting and qualifying manufacturers in China, $ 18,000 on new
office staff to the Company's new business, $ 47,000 in engineering consulting
fees for new products designed by EHC to compliment the knob line. In addition,
there was a non-cash charge to operations of $ 47,000 related to the issuance of
stock options.
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 equipement financing.
The Company's cash increased to $ 2,658,925 on September 25, 1999 from $ 16,146
on December 26, 1998.
Cash flow used in operating activities was $ 1,030,202 for the nine-months ended
September 25, 1999 on a net loss of $ 960,605. 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 nine months ended September 25, 1999
and September 26, 1998 was $ 174,868 and $ 157,774 respectively, which consisted
of cash for the purchase of tooling, molds, machinery and equipment.
Net cash provided by financing activities for the nine months ended September
25, 1999 was $ 3,847,849 and resulted from the following:
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.
7
In addition, cash of $ 231,080 was provided from borrowings on available credit
lines. Cash of $ 996,167 WAS USED TO MAKE principal payments on loans and cash
of $ 500,000 was used for loans made to another entity.
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.
8
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 nine-months ending September 25, 1999 the Company used an aggregate
of $ 3,260,321 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 regestration
statement on form SB-S2, filed with the Securities 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, $ 245,362, was used for working capital, $ 271,288 was
used for tooling, $ 186,185 was used to inventory purchases and staffing,
$117,380 was used for sales and marketing, $84,665 was used for costs associated
with being a public company, $ 75,000 was used for Federal Income taxes,
$81,700 was used for research and development, $ 43,200 was used for CDP
licensing agreements and cost associated with CDP, $ 40,048 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.
9
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.
EXCLUSIVE SUPPLY AGREEMENT BETWEEN THE COMPANY AND AZUREL LTD.
The Company entered into an exclusive supply agreement with 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 a
warrant, expiring December 31, 2004, to purchase 100,000 shares of Azurel common
stock at a purchase price of $ 1.50 per share.
10
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) THE FOLLOWING EXHIBITS ARE FILED AS PART OF THIS REPORT:
EXHIBIT DESCRIPTION
10 Exclusive Supply Agreement between the Company and Azurel Ltd.
27 Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended September
25, 1999.
11
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.
Date NOVEMBER 9, 1999 /S/ ANDREW FRANZONE
ANDREW FRANZONE
Chief Executive Officer
Date NOVEMBER 9, 1999 /S/ STEVEN SGAMMATO
Steven Sgammato
Chief Financial Officer
12