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.
<PAGE>
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
<PAGE>
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
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<TABLE>
<CAPTION>
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
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
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
============ ============ ============ ============
</TABLE>
See Notes to Consolidated Financial Statements
2
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<TABLE>
<CAPTION>
INTERNATIONAL SMART SOURCING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
FOR THE NINE MONTHS ENDED
Sept. 25, 1999 Sept. 26, 1998
-------------- --------------
<S> <C> <C>
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
========== ==========
</TABLE>
See Notes to Consolidated Financial Statements
3
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
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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
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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
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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.
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
AGREEMENT
THIS AGREEMENT (THE "AGREEMENT"), ENTERED INTO AS OF THIS 7TH day of
July, 1999, by and between International Smart Sourcing, Inc., a Delaware
corporation with its principal place of business at 320 Broad Hollow Road,
Farmingdale, New York 11735 (the "Company"), and Azurel Ltd., a Delaware
corporation with its principal place of business at 509 Madison Avenue, New
York, New York 10022 (together with its subsidiaries and affiliates, "Azurel").
WHEREAS, Azurel desires to engage the Company to be the exclusive
supplier of any and all products imported to the United States by or on behalf
of Azurel (the "Imported Products"), and the Company desires to be the exclusive
supplier of such Imported Products.
NOW, THEREFORE, in consideration of the mutual agreements and covenants
obtained herein and for other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, it is mutually agreed by and among
the Parties as follows:
1. TERM.
The term of this Agreement shall commence as of the date first
written above and shall end on December 31, 2003 (said period is hereinafter
referred to as the "Term").
2. SERVICES.
(a) The Company agrees to provide the Imported Products to
Azurel, and Azurel agrees to purchase the Imported Products exclusively from the
Company during the Term of this Agreement.
(b) In the event that any tooling is required in connection
with the manufacture and supply of the Imported Products (the "Tooling"), Azurel
will participate in the design and pay all expenses associated with the design
and production of such Tooling. The Tooling will be the property of Azurel and
will be used only for the manufacture of the Imported Products, their components
or other goods manufactured for Azurel by the Company, its subsidiaries and
affiliates.
1
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3. DELIVERY AND PAYMENT.
(a) The Company shall deliver promptly to Azurel, or such
third party designee as Azurel shall specify to the Company in writing, all
Imported Products to be provided by the Company hereunder.
(b) Azurel shall pay to the Company, prior to production, the
cost of any materials required in connection with the manufacture of the
Imported Products, and shall pay for all finished Imported Products in full upon
delivery by the Company F.O.B. any United States port of entry.
4. WARRANTIES.
(a) The Company warrants that, when delivered in accordance
with this Agreement, the Imported Products will conform to: (i) any affirmation
of fact or promise made by the Company that specifically relates to the Imported
Products delivered; (ii) any description of the Imported Products provided by
the Company prior to the delivery thereof; and (iii) any sample or model
exhibited by the Company prior to delivery as a true sample or model of the
Imported Products to be delivered.
(b) With the exception of any promissory note executed in
accordance with paragraph 6(a) below and the Warrants, as hereinafter defined,
this Agreement is intended to be the complete and exclusive statement of the
understanding between the parties with respect to the subject matter hereof. The
Company makes no warranties, express or implied, other than those specifically
stated herein.
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(c) THE COMPANY AND AZUREL AGREE THAT ANY AND ALL IMPLIED
WARRANTIES ARE HEREBY EXCLUDED. THE COMPANY IN NO WAY WARRANTS THE
MERCHANTABILITY OF THE IMPORTED PRODUCTS OR ANY COMPONENT PART THEREOF, OR THEIR
FITNESS FOR THE PARTICULAR PURPOSE FOR WHICH THEY WERE INTENDED.
5. EXCLUSIVITY.
During the Term of this Agreement, the Company shall supply
the Imported Products exclusively to Azurel, and Azurel shall purchase
exclusively from the Company all of Azurel's Imported Product requirements. The
Company shall not provide the Imported Products to and Azurel shall not purchase
the Imported Products from any other party during the Term. However, nothing
contained herein shall be construed as to restrict the Company from providing
other products and services, similar in nature to those to be contemplated by
this Agreement, to third parties not competitive in Azurel's market.
6. COVENANTS OF THE PARTIES.
(A) LOAN TO AZUREL. The Company will advance to Azurel,
immediately upon execution of the Agreement and upon dates agreed to by Azurel
and the Company, up to the sum of $500,000 to be used by Azurel to pay for
purchases of the Imported Products from the current suppliers of Azurel (the
"Credit"). Each advance of the Credit will be evidenced by a NonNegotiable
Promissory Note on the terms and in the form attached hereto as Exhibit A.
(B) GRANT OF WARRANTS. Azurel will deliver to the Company,
immediately upon execution of the Agreement, a duly executed Warrant Certificate
registered in the name of the Company, giving the Company the right to purchase
100,000 shares of common stock of Azurel
3
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registered under the Securities Act of 1933, as amended, at the purchase price
of $1.50 per share, until the expiration of the Warrant on December 31, 2004
(the "Warrants").
(C) INSURANCE. Azurel shall maintain in full force and effect,
throughout the Term, adequate products liability insurance coverage for the
Imported Products.
7. REMEDIES.
(a) If Azurel fails to make payment for goods delivered or
services rendered as provided in Section 3 of this Agreement, the Company shall
have, in addition to any remedy or remedies set forth below, the right to
rescind and cancel this contract or, at its option, to defer further deliveries
until all goods delivered have been paid for.
(b) In addition to the remedies set forth in paragraph (a)
above, if Azurel breaches, or threatens to commit a breach of, any of the
provisions contained herein, the Company shall have the following rights and
remedies (upon compliance with any necessary prerequisites imposed by law for
the availability of such remedies), each of the rights and remedies being
independent of the other and severally enforceable, and all of the rights and
remedies being in addition to, and not in lieu of, any other rights and remedies
available to the Company at law or in equity. The termination of the Term of
this Agreement as specified herein shall not terminate any liability arising out
of conduct prior to the actual date of termination:
(i) The right and remedy to have the Agreement
specifically enforced by any court having equity jurisdiction, including,
without limitation, the right to have restraining orders and injunctions
(preliminary, mandatory, temporary and permanent) entered against Azurel
preventing violations of such provisions, threatened or actual, and whether or
not then continuing,
4
<PAGE>
it being acknowledged and agreed that any such breach will cause irreparable
injury to the Company and that money damages will not provide an adequate remedy
to the Company;
(ii) The right and remedy to require Azurel to
account for and pay over to the Company all compensation, profits, monies,
accruals, increments or other benefits derived or received by it primarily as
the result of any transactions constituting a breach of the Agreement. Azurel
shall promptly account for and pay over such sums to the Company; and
(iii) The right and remedy to declare repayment of
the Credit immediately due and payable.
8. TERMINATION OF THE AGREEMENT.
This Agreement shall terminate upon expiration of the Term,
unless sooner terminated by a written instrument signed by both the Company and
Azurel.
9. ARBITRATION.
Any controversy or claim arising out of, or relating to this
Agreement, or its breach, shall be settled by arbitration in accordance with the
then governing rules of the American Arbitration Association in the City of New
York. Judgment upon the award rendered may be entered and enforced in any court
of competent jurisdiction.
10. WAIVERS AND AMENDMENTS.
This Agreement and any of the terms contained herein may not
be amended, superseded, canceled, renewed, extended or waived, except by a
written instrument signed by the parties or, in the case of a waiver, by the
party waiving compliance. No delay on the part of any party in exercising any
right, power or privilege hereunder shall operate as a waiver thereof, nor shall
any waiver on the part of any party of any such right, power or privilege,
preclude any other or
5
<PAGE>
further exercise thereof or the exercise of any other such right, power or
privilege. The failure of either party to insist upon performance of any terms
or conditions of the Agreement shall not be construed as a waiver of future
performance of any such term, covenant or condition, and the obligations of
either party with respect thereto shall continue in full force and effect.
11. GOVERNING LAW.
This Agreement shall be governed by and construed in
accordance with the laws of the State of New York, without regard to the
principles of conflicts of laws.
12. NO PARTNERSHIP OR AGENCY.
It is expressly agreed that the parties to this Agreement are
not partners, joint venturers, principals or agents to each other. The Company
is an independent contractor and Azurel may not in any way control the manner in
which the Company performs its obligations under this Agreement.
13. ASSIGNMENT.
This Agreement, and the Parties' rights and obligations
hereunder, may not be assigned by either Party except upon the prior written
consent of the other Party. Any purported assignment in violation hereof shall
be null and void.
14. ENTIRE AGREEMENT.
This Agreement, and any supplement or amendment hereto and any
agreements, instruments or documents delivered or to be delivered in connection
herewith, constitute the entire agreement and understanding between the Company
and Azurel concerning the subject matter hereof and thereof. As such, this
Agreement supersedes the certain untitled Agreement entered into by the Parties
on July 7, 1999, as well as all other prior or contemporaneous agreements,
understandings, negotiations and discussions, representations, warranties,
commitments, offers, contracts, whether written or oral, all of which are merged
into this Agreement. The Company and Azurel agree that neither party shall be
bound by anything not expressed herein, nor shall this Agreement be modified
orally.
6
<PAGE>
15. COUNTERPARTS.
This Agreement may be executed by the parties hereto in
separate counterparts, each of which when so executed and delivered shall be
deemed an original, but all such counterparts together shall constitute one and
the same instrument.
IN WITNESS WHEREOF, this Agreement has been duly executed and
delivered by the parties hereto as of the date first written above.
International Smart Sourcing, Inc.
BY:
Andrew Franzone, President
Azurel Ltd.
BY:
Name:
Title:
7
<PAGE>
EXHIBIT A
AZUREL LTD.
NON-NEGOTIABLE PROMISSORY NOTE
$_______ ______, 1999
New York, New York
FOR VALUE RECEIVED, the undersigned, AZUREL LTD., a Delaware corporation
("Azurel"), promises to pay to the order of INTERNATIONAL SMART SOURCING, INC.,
or assigns (the "Holder"), the principal amount of
_______________________________ Dollars ($_______), together with interest from
the date of this Note on the unpaid principal outstanding under this Note at a
rate of eight percent (8%) per annum.
SCHEDULE OF PAYMENTS. The principal amount outstanding hereunder shall be
due and payable in four (4) equal installments as postmarked on October 15,
1999, October 25, 1999, November 5, 1999 and November 15, 1999 (each of such
dates, a "Payment Date"). All accrued, unpaid interest on the then outstanding
principal amount hereunder shall be paid on each Payment Date.
PAYMENT. Payments and any prepayments hereunder shall be made to the
Holder by mail addressed to the Holder at 320 Broad Hollow Road, Farmingdale,
New York 11735, or such other address as the Holder may hereafter specify in
writing. Final payment in full of all outstanding principal of, and accrued
unpaid interest on, this Note shall be made at the Principal Office of the
Holder upon presentation and surrender of this Note.
PREPAYMENTS. The undersigned may voluntarily prepay this Note, in whole or
in part, at any time without penalty or premium.
DEFAULT. In the event that Azurel defaults on its obligations under this
Note as a result of its failure to make any required payment as and when the
same becomes due hereunder (an "Event of Default"), interest shall accrue on all
outstanding principal and accrued interest at a default interest rate of twenty
percent (20%) per annum until such time as all outstanding amounts have been
paid and satisfied in full by Azurel.
ACCELERATION. Upon the occurrence of an Event of Default, the Holder shall
be entitled to declare this Note immediately due and payable, together with any
accrued interest and default interest owing at such time.
WAIVERS. No delay by the Holder in the exercise of any right or remedy
shall operate as a waiver of that right or remedy. No single or partial exercise
by the Holder of any right or remedy shall preclude any other or future exercise
of that right or remedy or the exercise of any other right or remedy. No waiver
by the Holder or any default or of any provision of this Note shall be effective
unless in writing and signed by the Holder. No waiver of any right or remedy on
one occasional shall be a waiver of that right or remedy on any future occasion.
The undersigned and every endorser and guarantor of this Note waive demand
for payment, presentment, notice of dishonor, and protest of this Note and
consent to any extension or postponement of time of its payment, to any
substitution, exchange, or release of all or any part of any security, if any,
given to secure this Note, to the addition of any party to this Note, and to the
release, discharge, waiver, modification, or suspension of any rights and
remedies against any person who may be liable for the indebtedness evidenced by
this Note.
8
<PAGE>
COLLECTION COSTS. Azurel will pay all costs and expenses of collection,
including reasonable attorneys' fees, incurred or paid by the Holder in
enforcing this Note or the obligations evidenced hereby, to the extent permitted
by applicable law.
APPLICABLE LAW. This Note and the rights and obligations of the parties
under it shall be governed by and interpreted in accordance with the laws of the
State of New York, without giving effect to principles of conflicts of laws. If
any provision of this Note is held to be invalid or unenforceable by a court of
competent jurisdiction, the other provisions of this Note shall remain in full
force and effect.
IN WITNESS WHEREOF, this Note has been duly executed and delivered by
Azurel as of the date first written above.
AZUREL LTD.
BY:
NAME:
TITLE:
AGREED AND ACCEPTED
this ___ day of ____, 1999
INTERNATIONAL SMART SOURCING, INC.
BY:
NAME:
TITLE:
9
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<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-26-1999
<PERIOD-START> DEC-26-1998
<PERIOD-END> SEP-25-1999
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<RECEIVABLES> 780,212
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<INVENTORY> 814,827
<CURRENT-ASSETS> 4,936,096
<PP&E> 5,041,917
<DEPRECIATION> 4,483,137
<TOTAL-ASSETS> 7,862,612
<CURRENT-LIABILITIES> 720,247
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<TOTAL-LIABILITY-AND-EQUITY> 7,862,612
<SALES> 3,747,300
<TOTAL-REVENUES> 3,894,724
<CGS> 2,577,192
<TOTAL-COSTS> 2,577,192
<OTHER-EXPENSES> 2,070,314
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<INTEREST-EXPENSE> 160,483
<INCOME-PRETAX> (960,605)
<INCOME-TAX> 0
<INCOME-CONTINUING> (960,605)
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