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 PERIOD ENDED SEPTEMBER 26, 2003
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.
(Formerly ChinaB2Bsourcing.com, Inc. and Subsidiaries)
(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 November 3, 2003, the Registrant had 3,777,384 shares of its Common Stock,
$0.001 par value, issued and outstanding.
INTERNATIONAL SMART SOURCING, INC. AND SUBSIDIARIES
(FORMERLY CHINAB2BSOURCING.COM, INC. AND SUBSIDIARIES)
FORM 10-QSB
SEPTEMBER 26, 2003
INDEX
Page
Number
------
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements (unaudited)
Condensed Consolidated Balance Sheet 1
Condensed Consolidated Statements of Operations 2
Condensed Consolidated Statements of Cash Flows 3
Notes to Condensed Consolidated Financial Statements 4-11
Item 2 - Management's Discussion and Analysis or
Plan of Operation 12-15
Item 3 - Controls and Procedures 16
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings 17
Item 2 - Changes in Securities and Use of Proceeds 17
Item 3 - Defaults upon Senior Securities 17
Item 4 - Submission of Matters to a Vote of Security Holders 17
Item 5 - Other Information 17
Item 6 - Exhibits and Reports on Form 8-K 17-18
SIGNATURES 19
CERTIFICATIONS
INTERNATIONAL SMART SOURCING, INC. AND SUBSIDIARIES
(FORMERLY CHINAB2BSOURCING.COM, INC. AND SUBSIDIARIES)
CONDENSED CONSOLIDATED BALANCE SHEET
(UNAUDITED)
SEPTEMBER 26, 2003
ASSETS
------
CURRENT ASSETS:
Cash $ 450,191
Accounts receivable - net of allowance for
doubtful accounts of $12,536 1,122,484
Inventories, net 1,695,569
Prepaid expenses and other current assets 209,365
-----------
TOTAL CURRENT ASSETS 3,477,609
Property and equipment - net 366,047
Investments available for sale 84,142
-----------
TOTAL ASSETS $ 3,927,798
===========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 1,014,191
Deferred revenue 51,985
Line of credit 621,867
Current portion of long tem debt (including $86,053 to officers/shareholders) 161,782
Current portion of obligations under capital leases 30,738
-----------
TOTAL CURRENT LIABILITIES 1,880,563
Long term debt (including $182,875 to officer/shareholders) - less current portion 260,112
Obligations under capital leases - less current portion 32,856
-----------
TOTAL LIABILITIES 2,173,531
-----------
SHAREHOLDERS' EQUITY:
Preferred Stock, $0.001 par value, 1,000,000 shares authorized,
no shares issued or outstanding --
Common Stock, $0.001 par value, 10,000,000 shares authorized,
3,777,384 issued and outstanding 3,777
Additional paid-in capital 8,045,937
Accumulated deficit (6,295,447)
-----------
TOTAL SHAREHOLDERS' EQUITY 1,754,267
-----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 3,927,798
===========
See notes to condensed consolidated financial statements.
1
INTERNATIONAL SMART SOURCING, INC. AND SUBSIDIARIES
(FORMERLY CHINAB2BSOURCING.COM, INC. AND SUBSIDIARIES)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Quarter Ended Three Quarters Ended
--------------------------- ----------------------------
September 26, September 27, September 26, September 27,
2003 2002 2003 2002
------------ ------------ ------------ -------------
NET SALES $ 2,935,867 $ 2,644,996 $ 9,340,600 $ 7,587,618
COST OF GOODS SOLD 1,667,592 1,749,159 5,529,052 5,167,557
----------- ----------- ----------- -----------
GROSS PROFIT 1,268,275 895,837 3,811,548 2,420,061
----------- ----------- ----------- -----------
OPERATING EXPENSES
Selling and shipping 274,332 179,111 674,069 612,821
General and administrative 802,534 673,407 2,250,765 2,061,431
----------- ----------- ----------- -----------
TOTAL OPERATING EXPENSES 1,076,866 852,518 2,924,834 2,674,252
----------- ----------- ----------- -----------
INCOME (LOSS) FROM OPERATIONS 191,409 43,319 886,714 (254,191)
Interest and other income 22,388 110,742 33,563 113,813
Gain on extinguishment of debt 100,000 -- 100,000 --
Interest and other expenses (60,323) (45,711) (134,591) (126,945)
----------- ----------- ----------- -----------
NET INCOME (LOSS) $ 253,474 $ 108,350 $ 885,686 $ (267,323)
=========== =========== =========== ===========
Earnings (loss) per share of of common stock:
BASIC:
Income (loss) per share $ 0.07 $ 0.03 $ 0.23 $ (0.07)
=========== =========== =========== ===========
Weighted average number of shares of common stock
outstanding 3,777,384 3,760,934 3,777,384 3,760,934
=========== =========== =========== ===========
DILUTED:
Income (loss) per share $ 0.06 $ 0.03 $ 0.22 $ (0.07)
=========== =========== =========== ===========
Weighted average number of shares of common stock and
common stock equivalents outstanding 3,971,110 3,764,487 3,967,241 3,760,934
=========== =========== =========== ===========
See notes to condensed consolidated financial statements.
2
INTERNATIONAL SMART SOURCING, INC. AND SUBSIDIARIES
(FORMERLY CHINAB2BSOURCING.COM, INC. AND SUBSIDIARIES)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Quarters Ended
-----------------------------
September 26, September 27,
2003 2002
------------ -------------
Cash flows from operating activities:
Net income (loss) $ 885,686 $(267,323)
--------- ---------
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation 136,044 152,250
Amortization 7,433 --
Inventory Reserve 108,000 --
Securities received in settlement of note and interest receivable -- (84,142)
Gain on extinguishment of debt (100,000) --
Changes in operating assets and liabilities:
Accounts receivable (25,606) (230,357)
Inventories (332,187) (320,444)
Prepaid expenses and other current assets 44,589 323,770
Other assets -- (112,729)
Accounts payable and accrued expenses (229,262) 203,778
Deferred revenue 14,842 (125,104)
--------- ---------
Total adjustments (376,147) (192,978)
--------- ---------
Net cash provided by (used in) operating activities 509,539 (460,301)
--------- ---------
Cash flows from investing activities:
Note receivable from related parties -- 155,693
Expenditures for property and equipment (35,338) (20,912)
--------- ---------
Net cash (used in) provided by investing activities: (35,338) 134,781
--------- ---------
Cash flows from financing activities:
Capital lease repayments (31,000) (52,240)
Pay down of old line of credit (902,773) --
Initial draw down of new line of credit 902,773 --
Net (payments) proceeds from line of credit (307,076) 471,020
Principal payments of loans (142,661) (92,477)
--------- ---------
Net cash (used in) provided by financing activities (480,737) 326,303
--------- ---------
Net (decrease) increase in cash (6,536) 783
Cash - beginning of period 456,727 146,478
--------- ---------
Cash - end of period $ 450,191 $ 147,261
========= =========
See notes to condensed consolidated financial statements.
3
INTERNATIONAL SMART SOURCING, INC. AND SUBSIDIARIES
(FORMERLY CHINAB2BSOURCING.COM, INC. AND SUBSIDIARIES)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIOD ENDED SEPTEMBER 26, 2003
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with accounting principles generally accepted
in the United States of America for interim unaudited condensed
consolidated 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 unaudited condensed
consolidated financial statements should be read in conjunction with the
consolidated financial statements and related footnotes included in the
International Smart Sourcing, Inc. and Subsidiaries' (the "Company") annual
report on Form 10-KSB for the year ended December 27, 2002.
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 26, 2003 and the results of operations
and cash flows for the periods shown have been included.
The results of operations for the periods ended September 26, 2003, are not
necessarily indicative of the results to be expected for the full year
ending December 26, 2003.
2. SIGNIFICANT ACCOUNTING POLICIES
Definition of Fiscal Year
The Company maintains its books on a 53/52 week fiscal year ending on the
last Friday of the month.
The "Quarter ended September 26, 2003" represents the period from June 28,
2003 to September 26, 2003 and the "Three Quarters ended September 26,
2003" represents the period from December 28, 2002 to September 26, 2003.
The "Quarter ended September 27, 2002" represents the period from June 29,
2002 to September 27, 2002 and the "Three Quarters ended September 27,
2002" represents the period from December 29, 2001 to September 27, 2002.
4
Recent Accounting Pronouncements
- In April 2003, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 149,
"Amendment of Statement No.133 on Derivative Instruments and Hedging
Activities." SFAS No. 149 amends and clarifies financial accounting
and reporting for derivative instruments, including certain derivative
instruments embedded in other contracts and for hedging activities
under SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities". Except for the provisions of SFAS No. 149 that relate to
SFAS No. 133 implementation issues that are effective for fiscal
quarters beginning prior to June 15, 2003, SFAS No.149 is effective
for contracts entered into or modified after June 30, 2003 and for
hedging relationships designated after June 30, 2003. The adoption of
SFAS No. 149 is not expected to have a material impact on the
Company's financial position, results of operations or cash flows.
- In May 2003, the FASB issued SFAS No. 150 "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and
Equity." SFAS No. 150 establishes standards for classification and
measurement in the statement of financial position of certain
financial instruments with characteristics of both liabilities and
equity. It requires classification of a financial instrument that is
within its scope as a liability (or an asset in some circumstances).
SFAS No. 150 is effective for financial instruments entered into or
modified after May 31, 2003, and otherwise is effective at the
beginning of the first interim period beginning after June 15, 2003.
Under the shareholders' agreement, dated April 22, 1999, amended July
1, 2003, the Company was required to redeem common shares of certain
shareholders of the Company. In September 2003, the Company further
amended the shareholders' agreement whereby the Company would not be
required to redeem common shares of certain shareholders of the
Company (see Note 8). Accordingly, the adoption of SFAS No. 150 did
not have a material impact on the Company's financial position,
results of operations or cash flows.
STOCK BASED COMPENSATION
As permitted under SFAS No. 148, "Accounting for Stock-Based Compensation -
Transition and Disclosure," which amended SFAS No. 123, "Accounting for
Stock-Based Compensation," the Company has elected to continue to follow the
intrinsic value method in accounting for its stock-based employee compensation
arrangements as defined by Accounting Principles Board Opinion ("APB") No. 25,
"Accounting for Stock Issued to Employees," and related interpretations
including FASB Interpretation No. 44, "Accounting for Certain Transactions
Involving Stock Compensation," an interpretation of APB No. 25. No stock-based
employee compensation cost is reflected in operations, as all options granted
have an exercise price equal to or above the market value of the underlying
common stock on the date of the grant.
5
The following table illustrates the effect on net income (loss) per share if the
Company had applied the fair value recognition provisions of SFAS No. 123 to
stock-based employee compensation:
Three Quarters Ended
----------------------------
September 26, September 27,
2003 2002
------------ ------------
Net income (loss) as reported $ 885,686 $ (267,323)
Less: total stock-based employee
compensation expense determined under fair
value method, net of related tax effects 355,769 204,882
----------- -----------
Pro Forma net income (loss) $ 529,917 $ (472,205)
=========== ===========
Net income (loss) per share:
Basic earnings per share as reported $ 0.23 $ (0.07)
Pro Forma basic earnings per share $ 0.14 $ (0.13)
Diluted earnings per share as reported $ 0.22 $ (0.07)
Pro Forma diluted earnings per share $ 0.13 $ (0.13)
Quarter Ended
----------------------------
September 26, September 27,
2003 2002
------------ ------------
Net income as reported $ 253,474 $ 108,350
Less: total stock-based employee compensation
expense determined under fair value method,
net of related tax effects 114,623 85,758
----------- -----------
Pro Forma net income $ 138,851 $ 22,592
=========== ===========
Net income per share:
Basic earnings per share as reported $ 0.07 $ 0.03
Pro Forma basic earnings per share $ 0.04 $ 0.01
Diluted earnings per share as reported $ 0.06 $ 0.03
Pro Forma diluted earnings per share $ 0.03 $ 0.01
6
3. CUSTOMERS
During the three quarters ended September 26, 2003 and September 27, 2002,
two customers accounted for approximately 59% and 7% and 50% and 8%,
respectively, of the Company's sales. During the quarters ended September
26, 2003 and September 27, 2002, two customers accounted for 61% and 4% and
51% and 10%, respectively, of the Company's sales. The United States
government accounted for approximately 59% and 50% of the Company's sales
for the three quarters ended September 26, 2003 and September 27, 2002,
respectively. The United States government accounted for approximately 35%
of the Company's outstanding accounts receivable as of September 26, 2003.
4. INVENTORIES
Inventories net, consist of the following at September 26, 2003:
Raw Materials $ 335,931
Work in Process 48,581
Finished Goods 1,419,057
-----------
1,803,569
Less: reserve for (108,000)
obsolescence
------------
$ 1,695,569
============
5. SELLING AND SHIPPING
The Company classifies shipping and handling costs as a component of
selling and shipping expenses. Shipping and handling costs were $353,708
and $319,827 for the three quarters ended September 26, 2003 and September
27, 2002, respectively. Shipping and handling costs were $103,956 and
$85,802 for the quarter ended September 26, 2003 and September 26, 2002,
respectively. The Company does not separately charge these costs to its
customers.
6. RELATED PARTY SALES
Sales during the three quarters ended September 26, 2003 and September 27,
2002 included $146,199 and $248,945, respectively to another company owned
by the three officers/shareholders of the Company. Gross profit on such
sales was $25,786 and $67,655 for the three quarters ended September 26,
2003 and September 27, 2002, respectively. Sales during the quarter ended
September 26, 2003 and September 27, 2002 included $54,000 and $51,976,
respectively, to another company owned by the three officers/shareholders
of the Company. Gross profit on such sales was $855 and $16,630,
7
respectively. The lower gross profits on sales in the third quarter results
from a one time allowance to the customer which will extend through
December 31, 2003 for costs incurred in the relocation of molds and
associated production from the customer's facility to the Company's
facility. Accounts receivable from the related company was $104,522 at
September 26, 2003.
The Company leases the premises in Farmingdale, N.Y. from another company
owned by two of the officers/shareholders of the Company. Rent expense for
the three quarters ended September 26, 2003 and September 27, 2002 was
$136,764 and $129,195, respectively. Rent expense for the quarter ended
September 26, 2003 and September 27, 2002 was $45,588 and $43,065,
respectively.
7. LINE OF CREDIT
In April 2001, the Company entered into a revolving line of credit
agreement with a bank that provided for a maximum borrowing of up to
$1,500,000, subject to certain conditions, at an annual interest rate of
prime plus 1.75%. The loan was secured by substantially all assets of the
Company and an aggregate of $750,000 which was unconditionally guaranteed
by three officers/shareholders, each limited to $250,000.
The bank that provided the Company with the above credit facility was
closed by the Connecticut Banking Department on June 27, 2002, with the
F.D.I.C. assuming receivership of the failed bank.
On June 24, 2003, the Company entered into an agreement with the F.D.I.C.
to settle the loan at a discounted amount of $897,150 plus accrued
interest. The Company repaid $902,773 on July 30, 2003, which resulted in a
gain on extinguishment of debt of $100,000. The Company received written
confirmation of its release and discharge from any further obligation to
the F.D.I.C.
On July 29, 2003, the Company closed on a Revolving Line of Credit ("the
line") with People's Bank with a maximum borrowing of up to $1,500,000.
Under the revolving line agreement the Company is required to meet certain
financial covenants. The line matures May 31, 2004 and bears annual
interest at the Bank's prime rate (4% at September 26, 2003) plus one
percent (1%), payable monthly. The lines availability will vary based on
eligibility of accounts receivable and inventory. The loan is secured by
substantially all assets of the Company and $750,000 which is
unconditionally guaranteed by the three officers/shareholders, each limited
to $250,000.
8. SHAREHOLDERS' EQUITY
In September 2003 the shareholders' agreement dated April 22, 1999 was
further amended to remove the requirement of the Company to redeem common
shares of certain shareholders of the Company upon the shareholder's death.
8
9. SEGMENT AND GEOGRAPHIC INFORMATION
The Company views its operations as principally two segments. The first is
distribution and manufacturing of plastic components. The second is
outsourcing of manufacturing. 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 quarters ended September 26, 2003 and September
27, 2002 is as follows:
Distribution Corporate
and and
Manufacturing Outsourcing Other Consolidated
------------- ----------- ----------- ------------
Three Quarters ended September 26, 2003
Net Sales $ 7,648,348 $ 1,692,252 $ -- $ 9,340,600
Cost of Goods Sold 4,473,415 1,055,637 -- 5,529,052
----------- ----------- ----------- -----------
Gross Profit $ 3,174,933 $ 636,615 $ -- $ 3,811,548
=========== =========== =========== ===========
Gross Profit % 41.5% 37.6% -- 40.8%
Segment Assets 2,886,430 853,967 187,401 3,927,798
Segment Net Income (Loss) $ 1,490,842 $ (440,340) $ (164,816) $ 885,686
Distribution Corporate
and and
Manufacturing Outsourcing Other Consolidated
------------- ----------- ----------- ------------
Three Quarters ended September 27, 2002
Net Sales $ 6,029,926 $ 1,556,192 $ 1,500 $ 7,587,618
Cost of Goods Sold 4,004,842 1,162,619 96 5,167,557
----------- ----------- ----------- -----------
Gross Profit $ 2,025,084 $ 393,573 $ 1,404 $ 2,420,061
=========== =========== =========== ===========
Gross Profit % 33.6% 25.3% 93.6% 31.9%
Segment Assets 2,542,972 922,936 180,009 3,645,917
Segment Net Income (Loss) $ 220,456 $ (472,633) $ (15,146) $ (267,323)
The Company's segment information for the quarters ended September 26, 2003
and September 27, 2002 are as follows:
Distribution Corporate
and and
Manufacturing Outsourcing Other Consolidated
------------- ----------- ----------- ------------
Quarter ended September 26, 2003
Net Sales $ 2,419,026 $ 516,841 $ -- $ 2,935,867
Cost of Goods Sold 1,357,601 309,991 -- 1,667,592
----------- ----------- ----------- -----------
Gross Profit $ 1,061,425 $ 206,850 $ -- $ 1,268,275
=========== =========== =========== ===========
Gross Profit % 43.9% 40.0% -- 43.2%
Segment Net Income (Loss) $ 565,894 $ (218,768) $ (93,652) $ 253,474
9
Distribution Corporate
and and
Manufacturing Outsourcing Other Consolidated
------------- ----------- ----------- ------------
Quarter ended September 27, 2002
Net Sales $ 2,064,319 $ 580,677 $ -- 2,644,996
Cost of Goods Sold 1,348,635 400,524 0 1,749,159
----------- ----------- ----------- -----------
Gross Profit $ 715,684 $ 180,153 $ 0 $ 895,837
=========== =========== =========== ===========
Gross Profit % 34.7% 31.0% 0.0% 33.9%
Segment Net Income (Loss) $ 115,566 $ (65,465) $ 58,249 $ 108,350
10. INCOME TAXES
The Company has a net operating loss carryforward for tax purposes totaling
approximately $5,843,000 at September 26, 2003 expiring between the years
2011 through 2023. Tax benefits from the utilization of net operating loss
carryforwards will be recorded at such time and to such extent, they are
assured beyond a reasonable doubt. As such, the resulting estimated
deferred tax assets of approximately $2,372,000 as of September 26, 2003,
have been offset by a corresponding valuation allowance. The Company
utilized approximately $928,000 of their net operating loss during the
three quarters ended September 26, 2003.
11. EARNINGS (LOSS) PER SHARE
Basic earnings (loss) per share ("EPS") is determined by dividing net
income (loss) for the period by the weighted average number of common
shares outstanding during the same period. Diluted EPS reflects the
potential dilution that could occur if securities or other contracts to
issue common stock were exercised or converted into common stock or
resulted in the issuance of common stock which would then share in the
earnings of the Company. For the quarter and three quarters ended September
26, 2003 the Company had approximately 403,500 stock options and 376,833
and 8,333 stock options and warrants, respectively, that were not included
in the dilutive earnings per share calculation because the exercise price
of these items were greater than the average market price of the common
stock for the period. For the three quarters ended September 27, 2002 all
stock options and warrants were antidilutive. For the quarter ended
September 27, 2002 the Company had approximately 998,500 and 74,781 stock
options and warrants, respectively, that were not included in the dilutive
earnings per share calculation because the exercise price of these items
were greater than the average market price of the common stock for the
period.
10
The following table sets forth the components used in the computation of basic
and diluted earnings (loss) per share:
Three Quarters Ended
-----------------------------
September 26, September 27,
2003 2002
------------ ------------
Numerator:
Net income (loss) $ 885,686 $ (267,323)
=========== ===========
Denominator:
Weighted average shares 3,777,384 3,760,934
----------- -----------
Effect of dilutive securities:
Employee stock options 178,765 --
Stock warrants 11,182 --
----------- -----------
189,947 --
----------- -----------
Denominator for diluted earnings per
Share-adjusted weighted average
shares after assumed conversions 3,967,331 3,760,934
=========== ===========
Quarter Ended
-----------------------------
September 26, September 27,
2003 2002
------------ ------------
Numerator:
Net income $ 253,474 $ 108,350
=========== ===========
Denominator:
Weighted average shares 3,777,384 3,760,934
----------- -----------
Effect of dilutive securities:
Employee stock options 182,216 3,553
Stock warrants 11,510 --
----------- -----------
193,726 3,553
----------- -----------
Denominator for diluted earnings per
Share-adjusted weighted average
shares after assumed conversions 3,971,110 3,764,487
=========== ===========
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
Electronic Hardware Corporation ("EHC") is a subsidiary that has over 30 years
of experience in the design, marketing and manufacture of injection molded
plastic components used in industrial, consumer, and military products. It also
offers secondary operations on our molded products. Services such as hand
painting, pad printing, hot stamping and engraving are provided at a customer's
request. EHC represents the Company's manufacturing and distribution segment.
International Plastic Technologies ("IPT") specializes in assisting companies in
reducing their cost of manufacturing by outsourcing 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 tooling, injection molding and secondary operations,
castings, mechanical, assemblies, electronic manufacturing services and metal
stampings. IPT represents the Company's outsourcing segment.
Compact Disc Packaging Corp. ("CDP") is currently inactive. Its business is the
manufacturing, marketing and sale of a compact disc packaging system.
RESULTS OF OPERATIONS
For the three quarters ended September 26, 2003 compared to the three quarters
ended September 27, 2002.
NET SALES
Net consolidated sales for the three quarters ended September 26, 2003 were
$9,340,600 compared to sales of $7,587,618 for the three quarters ended
September 27, 2002. The increase of $1,752,982 or 23.1% was attributed to an
increase of orders through the EHC contract with the Defense Supply Center in
Philadelphia ("DSCP"), as well as an increase in commercial, non-military
products and an increase of sales for IPT. Net sales for EHC for the three
quarters ended September 26, 2003 were $7,648,348 compared to sales of
$6,029,926 for the same three quarters ended September 27, 2003. IPT had sales
of $1,692,252 for the three quarters ended September 27, 2003 compared to sales
of $1,556,192 for the same three quarters ended September 27, 2002.
GROSS PROFITS
The Company realized an overall gross profit margin percentage for the three
quarters ended September 26, 2003 of 40.8%, as compared to 31.9% experienced
during the three quarters ended September 27, 2002. This increase of 8.9%, can
be attributed to more commercial, non-military product being manufactured in
China for our subsidiary EHC. The lower cost of manufacturing the products in
China has increased EHC gross profits. EHC had a gross profit of 41.5% for the
three quarters ended September 26, 2003 compared to 33.6% for the same three
quarters ended September 27, 2002. IPT had a gross profit of 37.6% for the three
quarters ended
12
September 26, 2003 compared to 25.3% for the same three quarters ended September
27, 2002. The increase in gross profit for IPT is due to cost reductions
provided by our Import/Export agent in China as well as a reduction in
commissions paid. IPT has also been able to achieve better pricing from its
vendors thus increasing its gross profit.
OPERATING EXPENSES
Selling and Shipping
Selling and shipping expenses for the three quarters ended September 26, 2003
were $674,069 as compared to $612,821 for the three quarters ended September 27,
2002. The increase of $61,248 or 9.9% for the period is primarily attributable
to an increase in staff and travel expenses. EHC's shipping and selling expenses
for the three quarters ended September 26, 2003 were $473,271 compared to
$394,671 for the three quarters ended September 27, 2002. The increase was due
to staff transferred into the shipping department to handle the increased volume
of shipments. IPT's selling and shipping expenses for the three quarters ended
September 26, 2003 were $169,348 compared to $209,124 for the same three
quarters ended September 27, 2002. The reduction was due to cutting consulting
costs.
General, and Administrative Expenses
General and administrative expenses for the three quarters ended September 26,
2003 were $2,250,765 as compared to $2,061,431 for the three quarters ended
September 27, 2002. The increase of $189,334 or 9.2% for the period is primarily
attributable to an increase in staff and office expenses. EHC's general and
administrative expenses for the three quarters ended September 26, 2003 were
$1,121,347 compared to $1,183,309 for the three quarters ended September 27,
2002. Although there was an overall increase in staff expenses, the reduction in
EHC was due to a decrease in staff. IPT's general and administrative expenses
for the three quarters ended September 26, 2003 were $875,829 compared to
$653,051 for the three quarters ended September 27, 2002. The increase was
attributed to increased staff expenses, health insurance as well as an increase
in professional fees.
RESULTS OF OPERATIONS
For the quarter ended September 26, 2003 compared to the quarter ended September
27, 2002.
NET SALES
Net consolidated sales for the quarter ended September 26, 2003 were $2,935,867
compared to sales of $2,644,996 for the quarter ended September 27, 2002. The
increase of $290,871 or 10.9% was attributed to an increase of orders through
the EHC contract with the DSCP, as well as an increase in commercial,
non-military products. Net sales for EHC for the quarter ended September 26,
2003 were $2,419,026 compared to sales of $2,064,319 for the same quarter ended
September 27, 2002. IPT had sales of $516,841 for the quarter ended September
26, 2003 compared to sales of $580,677 for the same quarter ended September 27,
2002.
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GROSS PROFITS
The Company realized an overall gross profit margin percentage for the quarter
ended September 26, 2003 of 43.2%, as compared to 33.9% experienced during the
quarter ended September 27, 2002. This increase of 9.3%, can be attributed to
more commercial, non-military product being manufactured in China for our
subsidiary EHC. The lower cost of manufacturing the products in China has
increased EHC gross profits. EHC had a gross profit of 43.9% for the quarter
ended September 26, 2003 compared to 34.7% for the same quarter ended September
27, 2002. IPT had a gross profit of 40.0% for the quarter ended September 26,
2003 compared to 31.0% for the same quarter ended September 27, 2002. The
increase in gross profit for IPT is due to cost reductions provided by our
Import/Export agent in China, a reduction in commissions paid and through better
pricing from its vendors.
OPERATING EXPENSES
Selling and Shipping
Selling and shipping expenses for the quarter ended September 26, 2003 were
$274,332 as compared to $179,111 for the quarter ended September 27, 2002. The
increase of $95,221 or 53.2% for the period is primarily attributable to an
increase in consulting fees and advertising expenses as well as staff being
transferred into the shipping department to handle the increased volume in
shipments. EHC's shipping and selling expenses for the quarter ended September
26, 2003 were $172,083 compared to $133,455 for the quarter ended September 27,
2002. The increase was due to staff transferred into the shipping department.
IPT's selling and shipping expenses for the quarter ended September 26, 2003
were $73,848 compared to $47,756 for the same quarter ended September 27, 2002.
The increase was due to an increase in travel and automobile expenses.
General, and Administrative Expenses
General and administrative expenses for the quarter ended September 26, 2003
were $802,534 as compared to $673,407 for the quarter ended September 27, 2002.
The increase of $129,127 or 19.2% for the period is primarily attributable to an
increase in staff and professional fees. EHC's general and administrative
expenses for the quarter ended September 26, 2003 were $369,852 compared to
$417,362 for the quarter ended September 27, 2002. Although there was an overall
increase, the reduction in EHC was due to a decrease in staff. IPT's general and
administrative expenses for the quarter ended September 26, 2003 were $323,982
compared to $199,231 for the quarter ended September 27, 2002. The increase was
attributed to increased staff expenses as well as an increase in health
insurance.
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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. The Company's cash decreased to $450,191 on September 26, 2003 from
$456,727 on December 27, 2002.
Cash flow provided by operating activities was $509,539 for the three quarters
ended September 26, 2003 on net income of $885,686. The increase in accounts
receivable is the result of increased sales to the DSCP. The net increase in
inventory results from the combination of a reserve of approximately $108,000 of
obsolete inventory and a build up of government products. The decrease in
prepaid expenses and other current assets is a result of the expensing of
deposits placed and costs associated with tooling and production orders in
process that were completed at September 26, 2003. Cash used in investing
activities for the three quarters ended September 26, 2003 was $35,338, which
consisted of cash for the purchase of computer equipment.
Net cash used in financing activities for the three quarters ended September 26,
2003 was $480,737. Cash of $ 142,611 was used to make principal payments on
loans payable and $31,000 was used to make capital lease repayments.
The bank that provided the Company with its credit facility was closed by the
Connecticut Banking Department on June 27, 2002, with the F.D.I.C. assuming
receivership of the failed bank.
On June 24, 2003, the Company entered into an agreement with the F.D.I.C. to
settle the loan at a discounted amount of $897,150 plus accrued interest. The
Company repaid $902,773 on July 30, 2003, which resulted in a gain on
extinguishment of debt of $100,000. The Company received written confirmation of
its release and discharge from any further obligation to the F.D.I.C.
On July 29, 2003, the Company closed on a Revolving Line of Credit ("the line")
with People's Bank with a maximum amount of borrowing of up to $1,500,000. Under
the revolving line agreement the Company will be required to meet certain
financial covenants. The line matures May 31, 2004 and bears annual interest at
the Bank's prime rate plus one percent (1%), payable monthly. The lines
availability will vary based on eligibility of accounts receivable and
inventory.
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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.
ITEM 3. Controls and Procedures
As of the end of the period covered by this report, based on an evaluation of
the Company's disclosure controls and procedures (as defined in Rules 13a-15(e)
and 15d-15(e) under the Securities Exchange Act of 1934), the Chief Executive
Officer and Chief Financial Officers of the Company have concluded that the
Company's disclosure controls and procedures are effective to ensure that
information required to be disclosed by the Company in its Exchange Act reports
is recorded, processed, summarized and reported within the applicable time
periods specified by the SEC's rules and forms.
There were no significant changes in the Company's internal controls or in any
other factors that could significantly affect those controls subsequent to the
date of the most recent evaluation of the Company's internal controls by the
Company, including any corrective actions with regard to any significant
deficiencies or material weaknesses.
16
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
NONE
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
NONE
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
NONE
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
NONE
ITEM 5. OTHER INFORMATION
On September 22, 2003, the Company engaged the services of Marcum & Kliegman LLP
as its independent accountant to audit financial statements for the year ending
December 26, 2003. The Company had previously engaged the services of MKLLP to
review the interim financial statements of the Company in connection with the
filing of Form 10Q-SB for the quarters ended March 28, 2003 and June 27, 2003.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibits:
99.1 Amendment No. 3 to the International Smart Sourcing, Inc.
Stockholders' Agreement
31 Rule 13a - 14(a)/15d - 14(a) Certification, as adopted
pursuant to Section 302 of the Sarbanes Oxley Act of 2002
32 Rule 13a - 14(a)/15d - 14(a) Certification, as adopted
pursuant to Section 302 of the Sarbanes Oxley Act of 2002
17
33 Certification of the Chief Executive Officer and Chief
Financial Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes Oxley Act of
2002
Reports on 8-K:
The Company filed one report on Form 8K during the quarter ended September
26, 2003 on the following date:
- October 8, 2003
The company engaged the services of Marcum & Kleigman LLP as its
independent accountants to audit the financial statements for the year
ended December 26, 2003.
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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.
November 10, 2003 /S/David Kassel
- ----------------- ---------------------------
Date David Kassel
Chairman and Chief Executive Officer
November 10, 2003 /S/David Hale
- ----------------- --------------------------------
Date David Hale
Acting Chief Financial Officer
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