AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 13, 2000
REGISTRATION NO. 333-48701
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
POST-EFFECTIVE AMENDMENT NO. 1
TO
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
INTERNATIONAL SMART SOURCING, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
Delaware 3089 11-3423157
(State or other Jurisdiction (Primary Standard Industrial (I.R.S. EMPLOYER
of incorporation or Classification Code Number) Identification NO.)
organization)
INTERNATIONAL SMART SOURCING, INC.
320 BROAD HOLLOW ROAD
FARMINGDALE, NEW YORK 11735
(516) 293-0750
(ADDRESS AND TELEPHONE NUMBER OF PRINCIPAL EXECUTIVE OFFICES)
---------------
ANDREW FRANZONE, CHIEF EXECUTIVE OFFICER
INTERNATIONAL SMART SOURCING, INC.
320 BROAD HOLLOW ROAD
FARMINGDALE, NEW YORK 11735
(NAME, ADDRESS AND TELEPHONE NUMBER OF AGENT FOR SERVICE)
---------------
COPIES TO:
CARL SELDIN KOERNER, ESQ.
KOERNER SILBERBERG & WEINER, LLP
112 MADISON AVENUE
NEW YORK, NEW YORK 10016
TELEPHONE: (212) 689-4400
FACSIMILE: (212) 689-3077
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under THE
SECURITIES ACT OF 1933, CHECK THE FOLLOWING BOX. |X|
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same OFFERING. |_|
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. |_|
If delivery of the prospectus is expected to be made pursuant to Rule
434 under the Securities Act, please check the following BOX. |_|
---------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE
OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BE COME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
<PAGE>
EXPLANATORY NOTE
In connection with the exercise of the warrants and the issuance of the
common stock underlying such warrants of International Smart Sourcing, Inc.,
each registered with the Securities and Exchange Commission pursuant to a
Registration Statement on Form SB-2 declared effective by the Securities and
Exchange Commission on April 23, 1999, this Post-Effective Amendment No. 1 to
Form SB-2 is being filed with the Securities and Exchange Commission in order to
update information that is more than 16 months old and was included in the
prospectus filed more than 9 months ago, pursuant to Section 10(a)(3) of the
Securities Act of 1933, as amended. The remaining contents of the Registration
Statement on Form SB-2 ( File No. 333-48701) are incorporated herein by
reference.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OR PLAN OF OPERATION
The following discussion should be read in conjunction with the
historical financial statements, including the notes thereto, of the Company
included elsewhere herein.
GENERAL
International Smart Sourcing, Inc. was organized as a holding company for
its wholly- owned subsidiaries Electronic Hardware Corp. ("EHC") Compact Disc
Packaging Corp. ("CDP") and International Plastic Technologies, Inc. ("IPT")
(collectively, the "Company"). IPT was formed for the purpose of developing
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.
EHC, the Company's principal subsidiary, has over 28 years of
experience in the design, marketing and manufacture of injection molded plastic
components used in industrial, consumer, and military products. The Company
believes that its long-term experience in the manufacture and assembly of
injection molded plastic components, coupled with direct access to manufacturing
facilities in China, will enable the Company to provide improved products at
lower prices with improved profit margins.
The Company, through CDP. 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 year ended December 31, 1999 compared to the year ended
December 26, 1998:
NET SALES
Net Sales for the year ended December 31, 1999 were $ 4,919,095, as
compared to net sales of $5,883,001 for the year ended December 26, 1998. The
decrease of $963,906 or 16 % for the period was attributed to generally lower
industry bookings and a major customer extending deliveries on purchase orders
until their inventory is reduced. In addition, 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
year ended December 31, 1999 of 26 %, which represents a decrease from the 29 %
experienced during the year ended December 26, 1998. This decrease can be
attributed to the increased sales of molded plastic components that have a lower
gross profit than products that are molded and have value-added operations.
<PAGE>
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES
The increase in selling, general, and administrative expenses 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 year ended
December 31, 1999 were $ 3,306,930 as compared to $ 1,764,126, for the year
ended December 26, 1998. The increase of $ 1,542,804 or 87% for the period is
primarily attributable to $ 248,000 used for promotional activities for CDP,
$213,000 for legal and accounting fees, $ 43,000 for reimbursement of expenses
CDP incurred in obtaining a patent $ 56,000, for travel to China to review and
support the manufacturing and engineering facilities and trade shows for IPT and
CDP, $93,000 in costs associated with being a public company, $ 36,000 in
consulting for selecting and qualifying manufacturers in China, $ 59,000 on new
office staff to the Company's new business, and $ 63,000 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 $ 52,000 related to the
issuance of stock options.
RESULTS OF OPERATIONS
For the year ended December 26, 1998 compared to the year ended
December 27, 1997:
NET SALES
Net sales decreased $171,746 or 3% to $5,883,001 for the year ended
December 26, 1998 from $6,054,747 for the year ended December 27, 1997. The
decrease was attributable to the redesigning of a key customer's product and
generally slower industry booking.
GROSS PROFITS
The Company realized an overall gross margin percentage for the year
ended December 26, 1998 of 29%, which represents a decrease from 37% experienced
during the year ended December 27, 1997. The decrease in gross profit occurred
because of a chance in the product mix. In 1998, the Company relied more heavily
on molded products, which do not have secondary operations. These types of
products are different from the standard Product line, which do require
secondary operations such as assembly, machining, painting, printing and
finishing and consequently earn a higher profit.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses decreased $6,767 or less
than 1% to $1,764,126 for the year ended December 26, 1998 from $1,770,893 for
the year ended December 27, 1997.
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company's liquidity needs arise from working capital requirements,
capital expenditures, and principal and interest payments. Historically, the
Company's primary source of liquidity has been cash flow generated internally
from operations, supplemented by bank borrowings and long term equipment
financing. The Company's cash increased to $ 1,992,265 on December 31, 1999 from
$ 16,146 on December 26, 1998.
Cash flow used in operating activities was $ 1,596,687 for the year
ended December 31, 1999 on a net loss of $ 1,969,368. The increase in accounts
receivable is the result of tooling invoiced in December and collectable in the
following quarter. Working capital was used to reduce accounts payable to an
acceptable level. Cash used in investing activities for the year ended December
31, 1999 was $802,860, which consisted of cash for the purchase of tooling,
molds, machinery and equipment and a loan to Azurel Ltd with whom the Company
entered into an exclusive supply agreement. In October the Company converted
$253,000 of trade receivables from a related party to a 5 year Promissory note
paying principal and 8% annual interest on a monthly basis over 5 years. The
note is current through the date of this filing.
Net cash provided by financing activities for the year ended December
31, 1999 was $4,375,666. 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 purchases 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 $ 4,900,000.
Cash of $ 1,536,520 was provided from borrowings on available credit
lines. Cash of $2,329,748 was used to make principal payments on loans. In
December, the Company acquired bank financing from European American Bank (EAB).
The financing agreement includes a demand note of $1,250,000 and a term loan of
$500,000. The loan is secured by accounts receivable, inventory and a $1,000,000
certificate of deposit which is restricted from use until the Company earns
$100,000 year to date net profit. In addition, there is a maximum leverage and
minimum capital base requirement. The minimum capital base was not met. On March
30, 2000 EAB issued a wavier for the minimum capital base requirement and
amended such requirement to $2,000,000. However, EAB has prohibited the Company
from drawing any additional funds from the lines of credit until further review.
With the proceeds of the loans the $ 1,000,000, revolving line of credit with
Republic National Bank was paid in full.
YEAR 2000 COMPUTER SYSTEM COMPLIANCE
No problems were encountered with the Company's computer hardware or
software due to the Year 2000 issue.
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
<PAGE>
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 Ltd.
(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 warrants, expiring December 31, 2004, to purchase
100,000 shares of Azurel common stock at a purchase price of $ 1.50 per share.
The Company has not received any orders through March 26, 2000.
On December 23, 1999, the terms of the loan agreement were extended
allowing principal payments to begin on January 15, 2000. In consideration for
extending the principal payments, the Company received an additional 50,000
warrants to purchase shares of Azurel Ltd. Common stock at an exercise price of
$ 1.50 per share. Interest continues to accrue at 8 % per year on all unpaid
balances. As of the date of this filing, no principal or interest payments have
been made. The note is past due and no repayments have been made. The Company is
in the process of negotiating new repayment terms.
CAUTIONARY FACTORS REGARDING FUTURE OPERATING RESULTS
The matters discussed in this Post-Effective Amendment No. 1 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.
<PAGE>
Financial Statements
International Smart Sourcing, Inc.
Index to Consolidated Financial Statements
PAGE
Independent Auditors' Report F-1
Consolidated Balance Sheet F-2
Consolidated Statement of Operations F-3
Consolidated Statement of Changes in Stockholders Equity F-4
Consolidated Statement of Cash Flows F-5
Notes to Consolidated Financial Statements F-6 to F-15
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
International Smart Sourcing, Inc.
Farmingdale, New York
We have audited the accompanying consolidated balance sheet of International
Smart Sourcing, Inc. and Subsidiaries, as of December 31, 1999 and the related
consolidated statements of operations, stockholders' equity and cash flows for
the years ended December 31, 1999 and December 26, 1998. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatements. An audit includes examining on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, the
financial position of International Smart Sourcing, Inc. and Subsidiaries as of
December 31, 1999 and the results of their operations and their cash flows for
each of the years ended December 31, 1999 and December 26, 1998 in conformity
with generally accepted accounting principles.
/S/Feldman Sherb Horowitz & Co., P.C.
Feldman Sherb Horowitz & Co., P.C.
Certified Public Accountants
New York, New York
March 2, 2000
(March 30, 2000 with respect to
the last paragraph of Note 7)
F-1
<PAGE>
INTERNATIONAL SMART SOURCING, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1999
ASSETS
CURRENT ASSETS:
Cash ..................................................... $ 992,265
Cash - restricted............................................ 1,000,000
Accounts receivable - net of allowance for
doubtful accounts of $11,000 ............................ 578,323
Notes receivable ( including $42,894 from related party) .... 560,510
Inventories ................................................. 787,331
Prepaid expenses and other current assets ................... 298,261
------------
TOTAL CURRENT ASSETS ..................................... 4,216,690
Property and Equipment - net .................................... 667,052
Goodwill - net .................................................. 1,564,352
License agreement - net ......................................... 450,000
Note receivable-related party ................................... 210,256
Other assets .................................................... 310,817
------------
TOTAL ASSETS .......................................... $ 7,419,167
============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses ..................... $ 927,532
Current portion of long tem debt ............................ 714,479
Current portion of obligations under capital lease .......... 53,437
------------
TOTAL CURRENT LIABILITIES ................................ 1,695,448
Long tem debt ............................................... 644,832
Obligations under capital lease ............................. 54,312
------------
TOTAL LIABILITIES ........................................ 2,394,592
------------
STOCKHOLDERS' EQUITY:
Common Stock, $0.001 par value, 10,000,000 shares authorized,
issued and outstanding 3,382,500 ......................... 3,383
Additional paid-in capital .................................. 6,852,204
Accumulated deficit ......................................... (1,831,012)
------------
TOTAL STOCKHOLDERS' EQUITY ............................... 5,024,575
------------
$ 7,419,167
=============
See notes to consolidated financial statements.
F-2
<PAGE>
INTERNATIONAL SMART SOURCING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended
-------------------------------
December 31, December 26,
1999 1998
------------ ------------
NET SALES .......................... $ 4,919,095 $ 5,883,001
COST OF GOODS SOLD ................. 3,631,143 4,153,387
------------ ------------
GROSS PROFIT .................. 1,287,952 1,729,614
------------ ------------
OPERATING EXPENSES
Selling and shipping .......... 1,374,194 583,980
General and administrative .... 1,932,736 1,180,146
------------ ------------
TOTAL OPERATING EXPENSES ... 3,306,930 1,764,126
------------ ------------
LOSS FROM OPERATIONS ............... (2,018,978) (34,512)
Interest income ............... 180,793 --
Interest expense .............. (201,493) (190,074)
------------ ------------
NET LOSS BEFORE TAXES .............. (2,039,678) (224,586)
BENEFIT (PROVISION) FOR INCOME TAXES 70,310 (66,760)
------------ ------------
NET LOSS ........................... $ (1,969,368) $ (291,346)
============= ============
NET LOSS PER SHARE - BASIC ......... $ (0.68) $ (0.19)
============= ============
WEIGHTED AVERAGE COMMON SHARES ..... 2,913,000 1,502,472
============= ============
Net loss ........................... $ (291,346)
Pro forma income tax benefit ....... 98,000
------------
Pro forma net loss ................. $ (193,346)
============
Pro forma loss per share - basic ... $ (0.13)
============
Weighted average comon shares used . 1,502,472
============
See notes to consolidated financial statements.
F-3
<PAGE>
INTERNATIONAL SMART SOURCING, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
Common Stock Additional Retained
----------------------- Paid In Earnings
<S> <C> <C> <C> <C> <C>
Shares Amount Capital (Deficit) Total
--------- --------- ---------- --------- -----
Balance December 28, 1997 1,500,000 $ 1,500 $ 317,941 $ 131,403 $ 450,844
Net Loss - - - (291,346) (291,346)
Distributions - - - (114,900) (114,900)
Issuance of stock for acquisition of CDP 445,000 445 1,999,555 - 2,000,000
Termination of S Corporation - - (413,199) 413,199 -
---------- ---------- ----------- --------- ----------
Balance December 26, 1998 1,945,000 1,945 1,904,297 138,356 2,044,598
Net Loss - - - (1,969,368) (1,969,368)
Initial Public Offering 1,437,500 1,438 4,895,707 - 4,897,145
Issuance of stock options to consultants - - 52,200 - 52,200
=========== =========== =========== =========== ===========
Balance December 31, 1999 3,382,500 $ 3,383 $ 6,852,204 $ (1,831,012)$ 5,024,575
=========== =========== =========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
INTERNATIONAL SMART SOURCING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
Year Ended
-------------------------
December 31, December 26,
1999 1998
------------ -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(1,969,368) $ (291,346)
----------- ---------
Adjustments to reconcile net loss to net
cash (used in) provided by operating activities:
Depreciation 273,301 272,575
Amortization 223,800 -
Non-cash compensation related
to issuance of options 52,200 -
Changes in Assets and Liabilities:
Decrease (increase) in accounts receivable (66,801) 169,949
Decrease (increase) in accounts receivable from related parties 381,911 (635,061)
(Increase) decrease in inventories (2,331) 258,011
Increase in prepaid expenses and other current assets (188,630) (13,605)
(Increase) decrease in other assets (236,997) 38,537
(Decrease) increase in accounts payable and accrued expenses (63,772) 572,334
----------- -----------
Total adjustments 372,681 662,740
----------- -----------
Net cash (used in) provided by operating activities (1,596,687) 371,394
----------- -----------
Cash flows from investing activities:
Cash acquired in acquisition - 2,611
Expenditures for property and equipment (302,860) (242,080)
Loans to another company (500,000) -
----------- -----------
Net cash used in investing activities (802,860) (239,469)
----------- -----------
Cash flows from financing activities:
Deferred offering costs - (346,859)
Increase in due from related parties - (86,355)
Distributions - (114,900)
Net proceeds from initial public offering 5,244,004 -
Capital lease repayments (75,110) -
Proceeds from borrowings 1,536,520 320,000
Principal payments on loans (2,329,748) (239,405)
----------- -----------
Net cash provided by (used) in financing activities 4,375,666 (467,519)
----------- -----------
Net increase (decrease) in cash 1,976,119 (335,594)
Cash - beginning of period 16,146 351,740
----------- -----------
Cash - end of period $ 1,992,265 $ 16,146
=========== ===========
Supplemental disclosure of cash flow information:
Cash paid during the year for
Interest $ 170,757 $ 215,903
=========== ===========
Non-cash financing and investing activities:
Issuance of common stock for acquisition of subsidiary $ - $ 2,000,000
=========== ===========
Issuance of common stock options for services $ 52,200 $ -
=========== ===========
Purchase of equipment through capital leases payable $ 44,773 $ -
=========== ===========
See notes to consolidated financial statements.
F-5
</TABLE>
<PAGE>
INTERNATIONAL SMART SOURCING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS OF THE COMPANY
International Smart Sourcing, Inc. ("International") was incorporated
in February 1998 in Delaware as a holding company for the purpose of
acquiring the common stock of Electronic Hardware Corp. ("EHC") and
Compact Disc Packaging Corp. ("CDP") in contemplation of an initial
public offering of International's stock (the "Offering"), which was
completed in April 1999.
Under an agreement and plan of reorganization, dated December 24.1998,
International issued 1,500,000 shares of its stock for the stock of
EHC. After the reorganization, the shareholders of EHC owned the same
proportionate interest of International as was owned of EHC. EHC, a
company located in Farmingdale, New York, manufactures injection molded
plastic components used in consumer, industrial and military products
sold in the United States. Accordingly, the reorganization has been
accounted for as a combination of commonly controlled entities and the
accompanying financial statements presented herein present the
financial position and results of operations and cash flows of
International and EHC as if they had been combined for all periods
presented,
Under another agreement and plan of reorganization, dated December 24,
1998, International issued 445,000 shares of its stock for the stock of
CDP, a development stage enterprise which was incorporated in Delaware
on January 31, 1995 to manufacture and market a proprietary compact
disc packaging system. CDP was owned prior to its merger with the
Company by one of the shareholders of EHC and one other shareholder.
Such transaction is being accounted for under the purchase method of
accounting commencing on the date of the transaction.
Under such method of accounting, an acquiring corporation allocates the
cost of an acquired company to the assets acquired and liabilities
assumed on the basis of their fair value. The excess of the cost
acquired over the amounts assigned to identifiable assets less
liabilities assumed is recorded as goodwill. International based the
value of the shares issued for the acquisition of CDP on the proposed
initial public offering price of its shares and has substantiated such
cost and its allocation to identifiable assets, as per Accounting
Principles Board Opinion No.16. Accordingly, International allocated
$500,000 to license cost and $1,738,000 to goodwill.
The following unaudited pro-forma summary combines the consolidated
results of operations of International, EHC and CDP as if the
acquisition had occurred at the beginning of 1998, after giving effect
to certain adjustments, including amortization.
F-6
<PAGE>
Year Ended
December 26, 1998
(Unaudited)
Net sales $ 5,883,001
Net loss $ (492,072)
Net loss per common share $ (0.25)
The pro-forma results do not necessarily represent the results that
would have occurred if the acquisition had taken place on the basis
assumed above, nor are they indicative of the results of future
combined operations.
In May 1999, International formed International Plastic Technologies,
Inc. ("IPT") d/b/a International Smart Sourcing. This subsidiary was
created to offer services, to United States based companies
manufacturing in the plastic injection mold industry, in acquiring
molds and finished goods in the People's Republic of China.
Hereinafter, International, EHC, IPT and CDP are collectively referred
to as the "Company".
In April 1999 the Company consummated the Offering of 1,250,000 shares
of common stock at $4.50 per share and 1,250,000 redeemable warrants at
$0.10 per warrant to purchase one share of common stock at $5.00 per
share. The warrants are exercisable for a five-year period commencing
one year from the date of issuance. In June 1999 the underwriter
exercised their right to sell 187,500 shares of common stock as part of
an over-allotment as well as 187,500 redeemable warrants. Net proceeds
form the Offering and the subsequent over-allotment, after underwriting
commissions and other related fees, was approximately $4,900,000.
The Company agreed to retain the underwriter as a consultant for a
period of two years after the offering for a fee of $120,000, which was
paid upon the consummation of the Offering.
2. SIGNIFICANT ACCOUNTING POLICIES
(a) Fiscal Year - The Company operates on a "52-53 Week" reporting
year ending on the last Friday of the month.
(b) Use of Estimates -The preparation of financial statements in
conformity with generally accepted accounting principles
requires management to make estimates and assumptions that
effect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenue
and expenses during the reporting period. Actual results could
differ from those estimates.
F-7
<PAGE>
(c) Recognition of Revenue - Revenue is recognized upon completion
of the sale, which is when the goods are shipped to the
customer.
(d) Principles of Consolidation - The consolidated financial
statements include the accounts of the Company and its
subsidiaries. All material intercompany transactions have been
eliminated.
(e) INVENTORIES - INVENTORIES ARE STATED AT THE LOWER OF COST or
market. Cost is determined by the use of the first-in,
first-out method.
(f) DEPRECIATION AND AMORTIZATION - FIXED assets are depreciated
on the straight line basis over the estimated useful lives of
the related assets. Leasehold improvements are being amortized
on the straight line basis over the shorter of the estimated
useful life of the improvements, which is 10 years, or the
life of the lease.
(g) Income Taxes - Prior to December 24, 1998 EHC had made an
election to be treated as an S Corporation. Accordingly, under
such election, income taxes were paid by their shareholders on
the shareholders' proportionate share of income. International
was incorporated as a C corporation and, accordingly, taxes
have been provided on income generated by International in
1998. Pro forma income taxes have been calculated in 1998 as
if EHC was a C corporation for Federal and State income tax
purposes.
The Company recognizes deferred tax assets and liabilities
based on the difference between the financial statements'
carrying amount and the tax basis of the assets and
liabilities, using the effective tax rates in the years in
which the differences are expected to reverse. A valuation
allowance related to deferred tax assets is also recorded when
it is probable that some or all of the deferred tax assets
will not be realized.
(h) Basic Net Income and Pro Forma Per Share Net Income-Basic Net
income per share and pro forma income per share are computed
based on the weighted average number of common shares
outstanding during the period. Stock options have been
excluded as common stock equivalents in the diluted earnings
per share because their effect would be anti-dilutive.
(i) Accounting for Long-Lived Assets-The Company reviews
long-lived assets for impairment whenever circumstances and
situations change such that there is an indication that the
carrying amounts may not be recovered. At December 31, 1999,
the Company believes that there has been no impairment of its
long-lived assets.
(j) Goodwill-Goodwill resulting from the acquisition of CDP is
amortized on a straight-line basis over 10 years. The Company
periodically assesses the recoverability of the cost of its
goodwill based on a review of projected undiscounted cash
flows of CDP. These cash flows are prepared and reviewed by
management in connection with the Company's annual long range
planning process.
F8
<PAGE>
(k) License Fee-The license fee resulting from the acquisition
of CDP is amortized on a straight line basis over 10 years.
(l) Stock Based Compensation - The Company accounts for its stock
option plan under APB Opinion No. 25, "Accounting for Stock
Issued to Employee," ("APB 25"). The Company has also adopted
Statement of Accounting Standards No. 123, "Accounting for
Stock-Based Compensation," (SFAS 123) for disclosure purposes,
and has adopted the proforma disclosure requirements of SFAS
123.
(m) Concentration of credit risk - Financial instruments that
potentially subject the Company to significant concentrations
of credit risk consist of cash and trade receivables. At
times, the cash in any one bank may exceed the Federal Deposit
Insurance Corporations $100,000 limit. As of December 31, 1999
the Company had approximately $1,800,000 in excess of the
limit. The Company places its cash with high credit quality
financial institutions. In regards to trade receivables,
management believes the risk is relatively limited due to the
credit assessment of its customers.
3. INVENTORIES
Inventories consist of the following at December 31, 1999:
Raw Materials $ 56,811
Work in Process 80,140
Finished Goods 418,292
Components 232,088
----------------
$ 787,331
================
4. NOTES RECEIVABLE
In July and August 1999 the Company loaned to another company in which
it has an exclusive supply agreement, an aggregate of $500,000 at an
interest rate of 8% per annum. The Company received 150,000 warrants to
purchase the common stock of the company to which it issued these
loans. The original terms of the loan were to have the loan repaid by
November 15, 1999. The note is past due and no repayments have been
made. The borrower has requested and the Company has agreed to
negotiate new repayment terms. As of December 31, 1999 the outstanding
balance receivable is $517,616 including accrued interest.
F-9
<PAGE>
5. PROPERTY AND EQUIPMENT
Property and equipment are comprised of the following at December 31,
1999:
Life
-----------------
MACHINERY AND EQUIPMENT 5-10 YEARS $ 3,175,104
Tools, Dies and Molds 5-10 Years 1,618,824
Leasehold Improvements 10 Years 217,836
Office Furniture and Fixtures 5 Years 202,918
----------------
5,214,682
Less: accumulated depreciation and
amortization 4,547,630
----------------
$ 667,052
================
6. OBLIGATIONS UNDER CAPITAL LEASES
The Company leases certain equipment under various capital lease
arrangements expiring through February 2002:
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Current Long-
Portion Term
Portion Total
-------- --------- ---------
Total minimum lease payments $ 62,569 $ 64,403 $ 126,972
Less: Amounts representing interests 9,132 10,091 19,223
-------- -------- ---------
$ 53,437 $ 54,312 $ 107,749
========= ======== =========
</TABLE>
Future minimum lease payments are as follows:
2000 $ 53,437
2001 $ 48,214
2002 $ 6,098
7. LONG-TERM DEBT
In September 1999, the Company repaid its term loan to their former
primary commercial bank in the amount of $275,000, from the proceeds of
the Offering. In December 1999, the Company borrowed from their new
primary commercial bank $1,000,250 in the form of a line of credit and
$500,000 in the form of a term loan. The Company used these proceeds to
repay their prior commercial bank, which had extended a revolving line
of credit of $1,000,000. As of December 31, 1999 the Company owed their
new commercial bank $500,250 on their line of credit and $493,122 on
their term loan.In addition, the Company is required to maintain on
deposit with the bank a $1,000,000 certificate of deposit, which is
pledged as security for the loans until such time as the Company's
annual net income is $100,000 or greater.
F-10
<PAGE>
Long-term debt is comprised of the following at December 31, 1999:
<TABLE>
<CAPTION>
<S> <C>
(a) Term loan payable, bank, due December 2005, payable in monthly
installments of $10,382 of principal plus interest at prime plus 1/2 %
(9.01% at December 31, 1999). The loan is guaranteed by the Company's
three officers/shareholders and requires the Company to comply with
certain
covenants ............................................................ $ 493,122
(b) Line of credit,bank (available up to $1,250,000), payable upon demand,
bearing interest at prime plus 1/4 % (8.75% at December 31,
1999). The loan requires the Company to comply with certain covenants. 500,250
(c) Loan agreement payable in monthly installments of $2,903 of principal
and interest at 7% per annum due February 2007. The loan is guaranteed
by the Company's three officers/shareholders.......................... 195,857
(d) Various loans payable to officer/shareholders, all bearing interest at
10% per annum, payable in monthly installments ranging from $2,656 to
$4,664 including interest. The loans are due at various dates through
July 2001............................................................. 170,082
---------------
1,359,311
Less current maturities 714,479
----------------
$ 644,832
================
</TABLE>
Long term debt matures as follows:
2000 (including line of credit payable on demand).... $ 714,479
2001.................................................. 175,881
2002.................................................. 125,025
2003.................................................. 136,225
2004.................................................. 138,055
Thereafter............................................ 69,646
------------
$ 1,359,311
============
The loans are secured by substantially all the assets of the Company.
The Company estimates that the fair value of the above loans
approximates their carrying value.
The Company was in violation of one of its covenants which requires it
to maintain a capital base, as defined, of $3,400,000 at December 31,
1999. On March 30,2000, the bank has issued a waiver for such covenant
and amended the requirement to $2,000,000. However, the bank has
restricted the Company from any further borrowings on its line of
credit. Such restriction is subject to negotiation between the Company
and the bank.
F-11
<PAGE>
8. INCOME TAXES
The (provision) benefit for income taxes consists of the following:
Year ended
--------------------------------------
December 31, December 26,
1999 1998
------------------- ---------------
(Current Taxes) Benefit:
Federal $ 55,000 $ (61,000)
State 15,000 (6,000)
------------------- ----------------
$ 70,000 $ (67,000)
=================== ================
The (provision) benefit for income taxes differs from the amount
computed by applying the statutory federal income tax rate to income
before (provision) benefit for income taxes as follows.
Year ended
--------------------------------------
December 31, December 26,
1999 1998
------------------- ----------------
Income tax benefit(provision)computed
at the Federal statutory rate $ 693,000 $ 76,000
Deductionsfor which no benefit is
recognized (638,000) (137,000)
State income tax benefit(provision) 15,000 (6,000)
------------------ ---------------
Income tax benefit (provision) $ 70,000 $ (67,000)
================== ===============
The Company has a net operating loss carry forward for tax purposes
totaling approximately $1,500,000 at December 31, 1999 expiring in the
year 2017. The resulting tax deferred asset of approximately $ 510,000
has been offset by a corresponding valuation allowance.
9. RETIREMENT PLAN
The Company sponsors a 401(k) savings plan covering all non-union
employees who have attained the age of 21 and have completed 3 months
of service. Participants may contribute up to 15% of their annual
compensation, subject to certain limitations. In addition, the Company
may make contributions to the plan. During the years ended December 31,
1999 and December 26, 1998, the Company did not make any contributions
to the plan.
10. CASH GAIN SHARING PROGRAM
The Company's full time, non-union employees and other key company
employees receive additional compensation as determined by cash
profits, as defined, under the Cash Gain Sharing Program. For the years
ending December 31, 1999 and December 26, 1998 there was no additional
compensation earned.
F-12
<PAGE>
11. STOCK OPTION AND GRANT PLAN
In March 1998, the Company adopted the Stock Option and Grant Plan (the
"Plan") which provides for the aggregate grant of 300,000 shares of the
Company's common stock or options to purchase shares of common stock.
For disclosure purposes the fair value of each stock option granted is
estimated on the date of grant using the Black-Scholes option-pricing
model with the following weighted-average assumptions used for stock
options granted during the year ended December 31, 1999: (i) annual
dividends of $0.00, (ii) expected volatility of 81%, (iii) risk-free
interest rate of 5.7%, and (iv) option life of five years. The weighted
average fair value of the stock options granted for the year ended
December 31, 1999 was $2.90.
On August 5, 1999 the Company granted stock options to key employees
and consultants. The number of options issued in aggregate was 136,000
options with the right to purchase the Company's common stock, par
value $0.01 per share, for a purchase price of $4.00 per share. The
options vest on the second anniversary of the issue date and expire on
the fifth anniversary of the issue date. Of these options issued 33,000
were for consultants, for various services rendered during the year
ended December 31, 1999. The Company has recorded $52,200 in consulting
expenses related to these options. The remaining 103,000 options were
issued to employees of the Company. In accordance with SFAS No. 123, if
the Company recognized compensation cost in the current year for theses
options the pro forma net loss and net loss per share would be as
follows:
Net loss to shareholders
As reported $ (1,969,368)
Pro Forma $ (2,044,043)
Net loss per share:
As reported $ (0.67)
Pro Forma $ (0.70)
F-13
<PAGE>
The following table summarizes the options and warrants outstanding and
the related prices for the shares of the Company's common stock:
<TABLE>
<CAPTION>
Options Warrants
----------------------------------------------- ----------------------------------------------
----------- --- ------------- -- -------------- ------------ --- -----------
<S> <C> <C> <C> <C> <C> <C>
Price Per Number of Number of
Number of Share Range Shares Number of Price Per Shares
Shares Exercisable Shares Share Exercisable
----------- ------------- -------------- ------------ ----------- -------------
----------- ------------- -------------- ------------ -------------
Outstanding at
December 27, 1998 - - - - - -
Granted 161,000 $ 4.00 - 4.50 - 1,427,500 $ 5.00 -
-----------
=========== ============= ============== ============ =========== =============
Outstanding at
December 31, 1999 161,000 $ 4.00 - 4.50 - 1,427,500 $ 5.00 -
=========== ============= ============== ============ =========== =============
</TABLE>
12. KEY MAN LIFE INSURANCE
The Company is the beneficiary of a $500,000 life insurance policy on
the life of the President of the Company.
13. COLLECTIVE BARGAINING AGREEMENT
The Company's factory employees and factory supervisors are represented
by a collective bargaining agreement between Local 531, International
Brotherhood of Teamsters, AFL-CIO and the Company. Such agreement
expires in May 2001.
14. RELATED PARTY TRANSACTIONS
a. Sales during the years ended December 31, 1999 and December
26, 1998 included $631,000 and $1,227,000, respectively to an
affiliated company owned by three officer/stockholders of the
Company. Gross profit on such sales was approximately $125,000
and $363,000 for the years ended December 31, 1999 and
December 26, 1998, respectively. In September 1999, the
Company converted the outstanding accounts receivable of
$253,150 from the affiliate company into a term loan bearing
interest at 8% per annum, with monthly payments of principal
and interest of $5,133 commencing January 1, 2000 with a final
due date of January 1, 2005. Subsequent to the issuance of the
note, additional sales resulted in accounts receivable of
$42,894 from this affiliated company at December 31, 1999.
b. The Company leases its premises from a company owned by two of
the officer/stockholders of the Company at an annual rental of
$146,000. Such lease expires in December 2005. The mortgage on
the premises in the amount of $515,284 at December 31, 1999 is
guaranteed by the Company.
c. During the year ended December 26, 1998, the Company entered
into a consulting agreement with one of its
officer/stockholders. The Company executed a $150,000
promissory note due within 30 days after the effective date of
the Offering with interest at 6% per annum for such services.
This note was repaid in May 1999.
d. The Company subleased part of its premises to another company
owned by two of the officers/stockholders for an annual rent
of $2,300 in 1998. The sublease was terminated in January,
1999 and no rent was received in 1999.
e. In March 1998, the Company entered into employment agreements
with its three officer/stockholders for a period of 10 years
at an aggregate annual base salary of $325,000. Such agreement
provides for increases at the greater of 5% or the consumer
price index and an annual bonus to be determined by the Board
of Directors.
F14
<PAGE>
f. In March 1998, the Company entered into a ten year consulting
agreement with an individual who is also a director of the
Company in connection with the Company's plans to develop
manufacturing resources in the People's Republic of China
("China"). Such individual will be paid at an hourly rate as
mutually determined and agreed upon by the Company and THE
INDIVIDUAL, AND 1.5% OF THE NET COST OF ALL PRODUCTS
MANUFACTURED IN CHINA (AS DEFINED) UP TO $5,000,000 per year
and 1% of net costs in excess of $5,000,000. During the year
ended December 31, 1999 such individual also RECEIVED 25,000
OPTIONS TO PURCHASE SHARES OF COMMON STOCK AT $4.50 per share.
The options vest on the second anniversary of the effective
date of the issuance.
15. LICENSE AGREEMENT
In March 1998, the Company entered into an exclusive license agreement
with a corporation, which grants the Company the rights to manufacture
market and sell a compact disc packaging system. The Company shall pay
such corporation annual ROYALTIES OF 2% OF NET SALES AND 25% of other
fees, as defined, plus an initial fee of $30,000. The exclusive
provisions of the license agreement are subject to termination if
certain minimum royalty levels are not obtained or if the Company does
not obtain a $1,000,000 cash investment within 24 months of the
agreement. During the year ended December 31, 1999 the Company incurred
an expense of $30,000 in minimum royalty payments as per the agreement.
16. PREFERRED STOCK
The Board of Directors of the Company is authorized, without further
action of the stockholders of the Company, to issue up to 1,000,000
shares of Preferred Stock in one or more classes or series and to fix
the rights, preferences, privileges and restrictions thereof, including
dividend rights, conversion rights, voting rights, terms of redemption,
liquidation preferences, and the number of shares constituting any
series or the designation of such series.
17. STOCKHOLDERS' AGREEMENTS
In March 1998, the Company entered into an agreement with each of its
three officer/stockholders which provides that in the event of the
death of the stockholder within 24 months after the consummation of a
public offering of the Company's stock, the estate of the stockholder
can require the Company to repurchase 250,000 shares of the
stockholder's stock for $500,000. The repurchase of stock can only be
made though the use of insurance proceeds payable to the Company upon
the death of the stockholder.
18. OTHER
In April 1999, a former employee of the Company filed a complaint
against EHC with the New York State Division of Human Rights charging
violation of the Americans with Disabilities Act covering disabilities
relating to employment. The Company believes the complaint is without
merit and is vigorously contesting this matter, the ultimate outcome of
which cannot be determined at this time
F-15
<PAGE>
ITEM 27. LIST OF EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
*1. Form of Underwriting Agreement, as amended
*2.1 Agreement and Plan of Reorganization between International
Plastic Technologies, Inc. and CDP and Amendment No. I effective
as of December 24, 1998
*2.2 Agreement and Plan of Reorganization between International
Plastic Technologies, Inc. and EHC and Amendment No. I effective
as of December 24, 1998
*3.1 Certificate of Incorporation of International Plastic
Technologies, Inc. and Amendment to the Certificate of
Incorporation dated December 7, 1998
*3.2 By-Laws of International Plastic Technologies, Inc., as amended
*4.1 Form of Common Stock Certificate
*4.2 Form of Warrant Certificate
*4.3 Form of Warrant Agreement between the Company and Continental
Stock Transfer and Trust Company
*4.4 Form of Underwriter's Warrant Agreement
*5. Opinion of Koerner Silberberg & Weiner, LLP
*10.1 Employment Agreement between the Company and Andrew Franzone
*10.2 Employment Agreement between the Company and David L. Kassel
*10.3 Employment Agreement between the Company and Harry Goodman
*10.4 Consulting Agreement between the Company and B.C. China Business
Consulting, Inc. and Letter Agreement between the Company and
Bao-Wen Chen dated March 1, 1998, as amended
*10.5 Consulting Agreement between the Company and Network I Financial
Securities, Inc.
*10.6 Lease Agreement between the Company and K&G Realty Associates
dated December 19,1989, Rider to Lease Agreement dated January
1, 1990, Letter Agreement between the Company and K&G Realty
Associates dated March 16,1995 and Riders to Lease Agreement
dated March 1, 1998 and May 14, 1998
*10.7 Licensing Agreement between CDP and Inch, Inc.
*10.8 Promissory Notes payable to David L. Kassel dated September 13,
1994, August 1, 1996, December 31, 1997 and January 1, 1998, and
Guarantee of CDP Promissory Note dated January 1, 1998 by
International Plastic Technologies, Inc.
*10.9 Promissory Notes payable to Harry Goodman dated September 1,
1994 and August 1, 1996
*10.10 Demand Grid Note between AFC and Republic National Bank of New
York dated December 1, 1997, Term Loan Agreement Promissory Note
between AFC and Republic National Bank of New York dated July
29, 1996 and Guaranty and Security Agreement by EHC dated July
25, 1996
*10.11 Term Loan Agreement between EHC and Republic National Bank of
New York dated July 29, 1996 and Term Loan Agreement Promissory
Note dated July 29, 1996
*10.12 Demand Grid Note between Republic National Bank of New York and
EHC dated July 29,1996
*10.13 Loan Agreement between EHC and Long Island Development
Corporation dated February 21, 1997, Loan Promissory Note dated
February 21, 1997, Security Agreement dated February 21, 1997
and Waiver Letter dated July 13, 1998
<PAGE>
*10.14 Mortgage between K&G Realty Associates and Long Island
Commercial Bank dated November 28, 1995, Rider to Mortgage dated
November 28, 1995, Mortgage Note, Guaranty of Mortgage Note by
EHC and Assignment of Leases and Rent
*10.15 Collective Bargaining Agreement between EHC and Local 531,
International Brotherhood of Teamsters, AFL-CIO and Memorandum
of Agreement dated as of May 10, 1998
*10.16 Stockholders' Agreement between the Company, Andrew Franzone,
David L. Kassel and Harry Goodman and Amendment No. I to the
Stockholders' Agreement
*10.17 International Plastic Technologies, Inc., 1998 Stock Option and
Grant Plan
*10.18 Agreement between AFC and EHC to engineer, manufacture and
import products
*10.19 Letter agreement between EHC and Republic National Bank of New
York to release the personal guarantees of Andrew Franzone,
David Kassel and Harry Goodman dated May 14, 1998
*10.20 Demand Negotiable Promissory Note payable to David L. Kassel
dated October 27, 1998
*10.21 Demand Negotiable Promissory Notes payable to Harry Goodman
dated October 22, 1998 and December 7, 1998
*10.22 Agreement between EHC and David L. Kassel to extend maturity
date of January 1, 1998 Promissory Note, dated December 8, 1998
*10.23 Agreement between CDP and David L. Kassel to extend maturity
date of January 1, 1998 Promissory Note, dated December 8, 1998
*10.24 Promissory Note payable by CDP to David Kassel dated May 29,
1998 and Guarantee of the Promissory Note by the Company
**10.25 Exclusive Supply Agreement between the Company and Azurel LTD
***10.26 Letter Agreement with European American Bank regarding borrowing
base line of credit and term loan
***21 List of Subsidiaries of the Company
*23.1 Consent of Koerner Silberberg & Weiner, LLP (contained in its
opinion filed as Exhibit 5 hereto).-
23.2 Consent of Feldman Sherb Horowitz & Co., P.C. (filed herewith)
***27.1 Financial Data Schedule
* Incorporated by reference to the Company's Registration Statement on Form SB-2
( File No. 333-48701) declared effective on April 23, 1999.
** Incorporated by reference to the Company's Form 10-QSB filed on November 9,
1999.
*** Incorporated by reference to the Company's Form 10-KSB filed on March 30,
2000.
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, this
Post-Effective Amendment No. 1 to the Registration Statement was signed by the
following persons in the capacities and on the dates stated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<S> <C> <C>
/S/ ANDREW FRANZONE Chief Executive Officer, President and April 10, 2000
- ----------------------------------------- Director
Andrew Franzone
/S/ DAVID L. KASSEL Chairman of the Board April 10, 2000
- -----------------------------------------
David L. Kassel
/S/ HARRY GOODMAN Vice President and Director April 10, 2000
- -----------------------------------------
Harry Goodman
/S/ STEVEN SGAMMATO Chief Financial Officer and Controller April 10, 2000
- -----------------------------------------
Steven Sgammato
/S/ CARL SELDIN KOERNER Director April 10, 2000
- -----------------------------------------
Carl Seldin Koerner
/S/ BAO-WEN CHEN Director April 10, 2000
- -----------------------------------------
Bao-Wen Chen
/S/ MITCHELL SOLOMON Director April 10, 2000
- -----------------------------------------
Mitchell Solomon
</TABLE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the use in this Post-Effective Amendment No. 1 to the
Registration Statement on Form SB-2 to the use of our report dated March 2, 2000
(March 30, 2000 with respect to the last paragraph of Note 7) relating to the
financial statements of International Smart Sourcing, Inc. and subsidiaries as
of December 31, 1999 and the related consolidated statements of operations,
stockholder's equity and cash flows for the years ended December 31, 1999 and
December 26, 1998.
/s/ Feldman Sherb Horowitz & Co., P.C.
Feldman Sherb Horowitz & Co., P.C.
Certified Public Accountants
New York, New York
April 10, 2000
