UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Year Ended December 31, 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)
(631) 293-4650
(Issuer's telephone number)
Securities registered under section 12(b) of the Exchange Act: None.
Securities registered under section 12 (g) of the Exchange Act:
COMMON STOCK, PAR VALUE $.001
REDEEMABLE COMMON STOCK PURCHASE WARRANTS.
Check whether the Issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 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 ____
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B is contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB.
YES ___ NO _X_
The issuer's net sales for the most recent fiscal year were $4,919,095.
The aggregate market value of the voting stock held by non-affiliates based upon
the last sale price on March 20, 2000 was approximately $ 27,064,000. AS OF
MARCH 26, 2000, the Registrant had 3,382,500 shares of its Common Stock, $0.001
par value, issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive Proxy Statement to be issued in
connection with the 2000 annual meeting of stockholders are incorporated by
reference into Part III
PART I
1
<PAGE>
ITEM 1. DESCRIPTION OF BUSINESS
THE COMPANY
The Company, through its principal subsidiary, Electronic Hardware Corp., a New
York Corporation ("EHC"), has over 29 years of experience in the design,
marketing and manufacture of injection molded plastic components and assemblies,
including consumer, industrial and military knobs and custom and mechanical
assemblies, including micro verniers, push or pull-to-turn clutch knobs and
detent knobs. EHC also produces hardware items, including shaft locks, mounting
brackets, test jack covers, cabinet bumpers and captive screws. The Company
believes that EHC's long-term success is due to the average 30-year experience
of its management team, strategic acquisitions of complementary companies,
products and product lines and its ability to adapt new technologies and
advanced manufacturing concepts to produce high-quality products at competitive
prices.
EHC meets a full range of its clients' needs by maintaining early and total
involvement, from the design and development to the ultimate manufacture and
packaging of the product. When a custom-made product is initially requested,
experienced EHC application engineers assist the customer during the concept
design stage, which the Company considers critical to the success of the
manufacturing process. During this stage, EHC application engineers draw upon
the Company's experience, expertise and technological innovation to assist
clients in reducing costs, meet accelerated market schedules and ensure high
quality workmanship.
The Company is currently having its facility certified for International Quality
Standard ("ISO") 9002, a manufacturing certification required by European
companies and looked upon favorably throughout the world. ISO 9002 requires the
Company to meet certain stringent requirements established in Europe to ensure
that the facility's manufacturing processes, equipment, and associated quality
control systems will satisfy specific customer requirements. The Company
believes that obtaining ISO 9002 certification will benefit the Company in the
plastic manufacturing market, both nationally and internationally. The Company
has contracted a registrar and will seek certification in 2000.
The Company's factory is divided into manufacturing cells, which the Company
believes accounts for a more efficient workplace and improved quality. Each cell
is responsible for a complete manufacturing process, from machining to assembly
and from indicia marking to the ultimate packaging of the product. The cells are
operated by teams of cross-trained employees knowledgeable of both the product
and the manufacturing process. The cell teams meet regularly to solve problems
and develop more efficient manufacturing methods.
The Company believes that this consolidated manufacturing approach results in
high quality, on-time delivery, competitive pricing, and a loyal customer base.
Additionally, the Company believes that it has created a cost-effective
workplace by decreasing inventory costs. The Company's "pull" (also known as
"JIT," which stands for Just-in-Time) system is designed to introduce raw
materials and components at the time necessary to fulfill customer orders. This
system eliminates costs associated with the storage and handling of large
amounts of inventory. The Company believes that it also accounts for a more
timely rate of delivery. The "pull" system depends on long-term relationships
with suppliers. The Company believes that due to its strong relationships with
suppliers and its well-trained workforce, the system will continue to provide
efficient and prompt delivery.
The Company offers secondary operations on its molded products. Services such as
hand painting, pad printing, hot stamping and engraving are provided at a
customer's request. These marking systems can be used on most materials and
varying contours. The Company believes that these extra manufacturing services
allow for greater flexibility and increased customer satisfaction.
2
<PAGE>
The Company was originally formed in 1970 as EHC, a New York corporation, and
was reorganized as of December 24, 1998 as a Delaware holding company for its
two wholly owned subsidiaries, EHC and Compact Disc Packaging Corp., a Delaware
Corporation ("CDP"). As part of the Reorganization, the stockholders of each of
the subsidiaries exchanged the following percentage ownership in the respective
subsidiaries for the percentage of shares of the Company: David Kassel exchanged
33% of EHC and 90% of CDP for 46.3% of the company; Andrew Franzone exchanged
33% of EHC for 25.7% of the Company; Harry Goodman exchanged 33% OF EHC FOR
25.7% of the Company; and David Cowan exchanged 10% of CDP for 2.3% of the
Company.The Company changed its name from International Plastic Technologies,
Inc. to International Smart Sourcing, Inc. on December 7, 1998. On May 7, 1999 a
newly formed company called International Plastic Technologies Inc., a Delaware
Corporation (IPT) was formed for the purpose of developing manufactured
injection molded plastic products or assemblies, redesigning the product to
improve function and appearance, by using its relationships with vendors in
China, to manufacture the products offshore in order to deliver them at lower
prices and improve profit margins.
GROWTH STRATEGY
The Company through IPT, intends to expand its operations through (i)
specializing in assisting small to mid-sized companies to reduce their cost of
manufacture by outsourcing work to china, and (ii) developing the infrastructure
necessary to assist the companies outsourcing. Through a consultant who is also
an independent director of the Company ("the Consultant"), the Company has
established direct contact with manufacturers in China and has initiated
overseas manufacturing projects in China of full-scale production runs of
various products, including separate projects through an affiliated company,
AFC. Additionally, IPT has opened an office in Shanghai through the Consultant
to facilitate outsourcing. Currently, the Company has purchase orders with ten
different suppliers in China. There can be no assurance that the Company will be
able to consummate, maintain or establish additional manufacturing relationships
in China or achieve any of its growth strategies.
PRODUCTS
CONTROL KNOBS AND ASSEMBLIES
The Company, through EHC, a wholly owned subsidiary, manufactures a full line of
instrument control knobs, handles, value-added custom molding, dials and similar
devices for consumer, industrial and military electronics equipment. EHC's knobs
are used for precise setting of switches, on/off switches, volume controls and
critical setting of instrumentation switches. EHC manufactures many of the knobs
to order based on the customers' exacting specifications as well as its standard
line. Customers of EHC order the knobs by specifying particular descriptions and
features, including the shaft diameter, outer diameter, overall size, height,
color, illumination, dials and markings, such as lines, dots or numbers. EHC
also has a standard product line of consumer, industrial and military knobs
available for sale through catalogs.
Overall, the number of different types of knobs EHC has manufactured in its
history is in the order of tens of thousands. Some knobs are manufactured with
mechanical devices built into the knob. For example, one of the Company's
locking knobs turns freely and sets upon depression, resisting shock, vibration,
or accidental movement. A clutch knob is one that continues to turn even after
the device has reached a pre-set limit so that the pressure of the turning knob
does not damage the equipment. Most knobs are resin-based and injection molded.
Some knobs are painted and some are delivered "as molded." Certain knobs are
made with aluminum inlays, caps, dials, or skirts and may have fittings of
screws, bushings, springs, or set screws.
3
<PAGE>
The knobs and assemblies can be sold in lots of as few as one knob or as large
as 500,000 units or more. EHC requires a $150 per order minimum charge. Knob
prices to the customer range from as low as $.09 per unit to as much as $150 per
unit.
EHC has been awarded a government contract valued at an average of approximately
3 million dollars per year for a possible 5-year period. The government has the
option to extend the contract on a yearly basis. The Company believes, with no
assurance that the contract will run for the full 5 years.
The Pull Pack TM
The Company, through CDP, a wholly-owned subsidiary, has entered into an
exclusive international licensing agreement to manufacture, market, sell and
sub-license the Pull Pack TM, a proprietary disc packaging system. The Pull Pack
TM is a redesigned "jewel box," the packaging used currently for compact discs,
cd roms and dvd. the pull pack TM implements a drawer-like mechanism, avoiding
the problems associated with currently available Disc packaging involving
fragile hinges, difficulty in opening and the removal of Discs and descriptive
literature. The drawer carries the Disc, and a tray above the drawer holds the
descriptive booklet. When the drawer is opened, the tray is pushed forward
one-half inch beyond the outer housing, providing the user with the option of
removing the Disc or the booklet or both. The drawer also holds an inlay card,
which provides the graphics for the spine and the bottom of the package.
A prototype version of the Pull Pack TM won the International Design Magazine
Award for Packaging in 1993. Between 1993 and 1997, Inch, Inc., the inventor of
the Pull Pack TM, explored various design concepts and manufacturing methods and
processes to reduce production costs in order to enable the Pull Pack TM to
become economically competitive. Late in 1997, the Company proposed to Inch,
Inc. a more cost-efficient method of producing the Pull Pack TM by utilizing the
company's sources in China. the company believes that by utilizing its contacts
with Chinese manufacturers, it can produce the Pull Pack TM on a cost-efficient
and competitive basis.
The Company acquired CDP by means of an agreement and plan of reorganization
effective December 24, 1998, whereby the Company issued 445,000 shares of its
Common Stock for all of the issued and outstanding stock of CDP. The purchased
cost of such acquisition was $2,238,000, based upon the proposed initial public
offering price of the shares issued. The Company has allocated $500,000 to the
value of the exclusive license agreement, which grants CDP the right to
manufacture, market and sell the Pull Pack TM. The license agreement will be
amortized over a period of 10 years. Additionally, the Company has allocated
$1,738,000 to the value of the goodwill attributed to the acquisition of CDP.
Such charge to goodwill will be amortized over a period of 10 years. As a result
of the amortization for both the license agreement and goodwill, there will be a
charge to the Company's operating and net income in the approximate amount of
$225,000 for each year during the next 10 years. Such charge will adversely
affect the results of the Company's future operating and net income.
The company has negotiated to manufacture the Pull Pack TM in China, and plans
with no assurance, to market the product as a specialty packaging system to a
targeted niche market, including CD ROM, special production, retail replacement
packaging and rental and institutional markets such as video stores, lending
libraries and technical research facilities.
4
<PAGE>
The company believes that the Pull Pack TM is well positioned to be sold in
specialty niche markets. The Company believes that the Pull Pack TM receives
favorable reviews because it complements what has made the Compact Disc the
preferred format in both the entertainment and educational industries, ease of
use and durability.
The company intentionally relies upon current technologies and materials used
for the Pull Pack TM so that it can be interchangeable with current jewel boxes.
The Pull Pack TM is the same size as the standard Jewel Box and is made from the
same clear plastic. It also uses the same graphic inserts as Jewel Boxes, a
booklet and inlay card, which allows Compact Disc distributors to use jewel
boxes or the Pull Pack TM interchangeably without requiring special graphics to
be printed. The company believes that this complete compatibility will also
allow the Pull Pack TM to be sold directly to consumers who want To replace
their broken jewel boxes with a more durable and convenient package. a
pre-production model of the Pull Pack TM was developed in june 1998 for market
research and small production runs. concurrently, the production tooling of the
Pull Pack TM is complete and the product has been produced in limited
quantities. The Company believes, with no assurance, that it will commence
commercial production of the Pull PacK TM in the second quarter of 2000.
However, due to the early manufacturing stage of the product, there are only
small orders from customers, which are trying the product for the first TIME.
The Company will initially target market opportunities such as replacement
packaging, CD ROM packaging, rental and institutional markets, such as video
stores, lending libraries and technical research facilities, special production
markets and newly developed discs. as consumers become familiar with the Pull
Pack TM, the Company intends to sell directly to the OEMs, who are the original
content providers in both the music and CD ROM industries.
Competition
Knob and Assembly Manufacturing/Injection Molding
The Company believes that its segment of the plastic injection molding industry
is highly fragmented and that no one participant is dominant in the industry.
The Company believes that the most important competitive factor in this industry
is investment in tooling, as the high cost of tooling relative to the low
revenue of individual products is a barrier to entry in this market. The Company
currently owns approximately 1,500 tools, which gives it the ability to
manufacture over 10,000 products and assemblies. Other key competitive factors
in this industry include quality of products, depth of industry knowledge, a
sizable customer base, ability to provide products on a timely basis, level of
experience, breadth of products and services offered, responsiveness to customer
requests and ability to produce a wide variety of projects in a timely manner
and at a competitive price. The Company believes that its main competitors in
the control knobs and components segment of the injection molding industry are
the following: Rogan Corporation, which produces instrument and consumer knobs;
Philips Plastic Manufacturing Corporation, which produces consumer knobs; Davies
Molding Company, which produces instrument knobs; and Aerospace Knob Company,
which produces military avionic knobs. With its range of consumer, instrument,
and military knobs, EHC strives to provide the broadest and most extensive line
of knobs and assemblies in order to maintain an advantage over its competitors.
Pull Pack TM
The company believes that the primary competition for the Pull Pack TM is the
current Jewel Box manufactured by Atlanta Precision Molding, Auriga and
International Packaging Corp. Other companies have developed alternative Compact
Disc packaging, but the Company believes that none have proved to be a challenge
at this time because production costs are prohibitive or the designs have not
been accepted by the general public or OEMs. Three of these packages are the
Laserfile, from Laserfile Inc., the Utmost Rotary CD Case, from Co-Joint Corp.
and the Alpha Pak, from Alpha Enterprise, Inc.
5
<PAGE>
Suppliers And Raw Materials
EHC's principal raw materials consist of Lexan (polycarbonate), nylon, ABS, and
polypropylene. Such materials are generally available commodities sold to the
injection molding industry by a variety of suppliers in China; the Company does
not have any oral or written contracts or agreements with any suppliers. No one
vendor accounts for more than 10% of the Company's purchases, except for
Shanghai Foodstuffs Export & Import Corporation and Royal Screw Machine
Products. The loss of the Company's business relationship with either principal
supplier could have a material adverse effect on the Company. Notwithstanding,
while a shortage of a particular supplier's raw materials would not materially
affect the Company, a general shortage of raw materials could adversely affect
the Company. The Company has never experienced a shortage in raw materials and
does not anticipate any shortages to occur in the reasonably foreseeable future,
however, there can be no assurance that there will not be a shortage of raw
materials.
The company is currently manufacturing products in China, including the Pull
Pack TM. in such manufacturing projects the Chinese manufacturers will arrange
for all raw materials from local suppliers. While the Company believes that
there will be no shortage of such materials overseas and that prices will remain
comparatively low, there can be no assurance that no shortages will occur. In
addition, the Company is subject to the risk of political or economic
dislocation in China, which could affect the availability, or cost of raw
materials. the company anticipates that the raw materials used for the Pull Pack
TM will consist of either crystal styrene, general-purpose styrene,
polypropylene or zylar.
Distribution methods
EHC sells its products solely to industrial customers either directly or through
major distributors. EHC never sells directly to retail consumers. Approximately
20% of EHC's products are principally sold through the following distributors:
Newark Electronics, Allied Electronics, Inc., Bisco Industries, Inc., Alatec
Electronics, Inc. and Peerless Electronics, Inc. The Company does not have oral
or written contracts or agreements with such distributors.
Research and development
The Company believes that its commitment to research and development has
distinguished the Company among its competitors. In 1999, the Company spent
approximately $ 184,000 on research and development of new tooling and
development for a switch built into a knob, Pull Pack, and a "Quick Draw" rack
system for the Pull Pack. The Company spent approximately $225,000 on research
and development in 1998, including expenditures on new knob designs, computer
aided design technology and engineering feasibility studies on potential new
product lines. The Company's customers do not bear research and development
costs, as all research and development is funded solely by the Company, some of
which is through federal or state funding.
Patents, Trademarks, Licenses And Royalty Rights
The company, through CDP, a wholly-owned subsidiary, entered into a minimum
five-year license agreement dated as of March 1, 1998 with inch, inc., to obtain
the exclusive worldwide licensing rights to make, use, sell and sublicense the
Pull Pack TM. In consideration of the exclusive license, the Company agreed to
pay Inch, Inc. royalties of (i) 2% of the annual gross sales OF Pull Pack less
any returns, credits and allowances; (II) 25% of sublicenses or fees from
sublicenses payable within 30 days of receipt; and (iii) a $30,000 reimbursement
payment for expenses incurred in obtaining a patent. The Company is entitled to
exclusive license rights of Pull Pack TM for a minimum of five years and a
maximum of the United States life of the patent, which expires in 2012. The
Company paid to Inch Inc a royalty payment of $ 30,000 for the period of
February 1, 1999 to February 1, 2000. If royalties paid to Inch, Inc. do not
equal or exceed a minimum total of $40,000 from February 1, 2000 TO February 1,
2001 and $50,000 for each 12 month period thereafter Inch, Inc. shall have the
right to terminate the exclusive license agreement upon 30 days' notice. in the
event that the exclusive license is terminated, CDP shall continue to hold a
non-exclusive license at the above referenced royalty rate. Inch, Inc. has also
agreed to provide consulting services to CDP At the rate of $50 per hour prior
to the sale of 10,000 units and $110 per hour after the sale of 10,000 units.
CDP has agreed to indemnify and hold harmless Inch, Inc. against all damages and
liabilities arising out of the manufacture of the Pull Pack.In 1995, Pull Pack
was issued Patent No.5,383,544, which expires in January 2012. On June 16, 1998,
EHC was issued patent no.5,765,449, which expires on June 16, 2015. EHC has
submitted a patent application on a tactile detent knob. However, there can be
no assurance that such patent will issue.
6
<PAGE>
The Company may apply for additional patents relating to other aspects of its
production. There can be no assurance as to the degree of protection, which
existing or future patents, if any, may afford the Company, or that competitors
will not develop similar or superior methods or products outside the protection
of any patent issued to the Company.
Employees
As of December 31,1999, the Company had a total of 83 employees. 13 of these
employees work on a part-time basis. 38 of the Company's employees are
represented in collective bargaining agreements by Local 531, International
Brotherhood of Teamsters, AFL-CIO. 14 employees work in Sales and Administration
while 64 employees are factory workers.
The Company believes it has a satisfactory relationship with its unionized labor
and has never experienced a work stoppage. The current collective bargaining
agreement was amended by means of a Memorandum of Agreement dated as of May 10,
1998 and was extended until May 9, 2001. Union employees are covered by the Sick
& Welfare Fund, Local 531, to which the Company contributes a specified amount
each year.
Item 2. Property
The Company operates from an approximately 20,000 square foot facility located
in Farmingdale, New York. The facility is owned and operated by K&G Realty
Associates, a partnership owned by David L. Kassel, the Company's Chairman, and
Harry Goodman, the Company's Vice President. The mortgage on the facility is
guaranteed by EHC. The Company's lease, currently under a 10-year extension,
expires in December 2005. The annual rent is currently $146,000 per year, and
provides for annual adjustments equal to the greater of the increase in the
Consumer Price Index or 5%. Pursuant to a rider to the lease agreement dated as
of March 1, 1998, EHC shall pay as additional rent, any and all real property
taxes for the demised premises in excess of $26,000 per annum. In 1999, the real
estate taxes were approximately $34,000. The Company believes that the property
is suitable for its presently foreseen use. The Company leases approximately
1,000 square feet of office space in Shanghai, China for $ 1,500 a month though
the Consultant on a month to month basis.
7
<PAGE>
Item 3. 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 submitted an answer to the
complaint on May 4, 1999. 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 4. Submission of Matters to a vote of Security Holders.
Not Applicable.
8
<PAGE>
PART II
Item 5. Market for Common Equity and Related Matters
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. As of March 26,2000, the Company had outstanding 3,382,500 shares of
its Common Stock $ .001 par value ("Common Stock"). The Company's Common Stock
is traded on the Nasdaq Small Cap Market ("Nasdaq Small Cap") under the symbol
ISMT. Effective December 30 1999 the Company's Common Stock and Common Stock
Purchase Warrants were delisted from the Boston Stock Exchange due to its
failure to obtain a minimum of 600 beneficial stockholders within six months of
listing.The following table sets forth the high and low bid prices for the
Common Stock as reported on the Nasdaq Small Cap. The high and low bid prices
reflect inter-dealer prices, without mark-up, mark-down or commission, and may
not represent actual transaction.
COMMON STOCK SALE PRICES
---------------------------
FISCAL 1999 HIGH LOW
- - --------------------------------------------------------------------------------
Second Quarter (from April 23, 1999) 5.50 3.9375
Third Quarter 7.063 4.188
Fourth Quarter 9.00 5.50
On March 26, 2000 there were approximately 175 holders of record of the
company's 3,382,500 outstanding shares of Common Stock.
On March 26, 2000, the last sale price of the Common Stock as reported on the
Nasdaq SmallCap Market was $ 8.00.
Dividend Policy
The Company intends, for the foreseeable future, to retain future earnings for
use in the Company's business. The payment of cash dividends, if any, in the
future is within the discretion of the Board of Directors and will depend upon
the Company's earnings, its capital requirements, financial condition, and other
relevant factors.
Item 6. Management's Discussion and Analysis
The following discussion should be read in conjunction with the historical
financial statements, including the notes thereto, of the Company included
elsewhere herein.
9
<PAGE>
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.
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.
10
<PAGE>
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.
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.
11
<PAGE>
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 $1,250,000and 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 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 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.
12
<PAGE>
ITEM 7. Financial Statements
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>
F-1
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, 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>
<PAGE>
Item 8.Changes in and Disagreements with Accountants on Accounting and Financial
-------------------------------------------------------------------------
Disclosure
----------
Not Applicable
<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
- - --------------------------------------------------------------------------------
WITH SECTION 16(A) OF THE EXCHANGE ACT
- - --------------------------------------
Incorporated by reference from the Registrant's definitive proxy statement, to
be filed in accordance with rule 14a-101 with the Commission not later than 120
days after the end of the fiscal year covered by this form.
ITEM 10. EXECUTIVE COMPENSATION
Incorporated by reference from the Registrant's definitive proxy statement, to
be filed in accordance with rule 14a-101 with the Commission not later than 120
days after the end of the fiscal year covered by this form.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated by reference from the Registrant's definitive proxy statement, to
be filed in accordance with rule 14a-101 with the Commission not later than 120
days after the end of the fiscal year covered by this form.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated by reference from the Registrant's definitive proxy statement, to
be filed in accordance with rule 14a-101 with the Commission not later than 120
days after the end of the fiscal year covered by this form.
ITEM 13. EXHIBITS, AND REPORTS ON FORM 8-K
(A) EXHIBITS (NUMBERED IN ACCORDANCE WITH ITEM 601 OF REGULATION S-B)
EXHIBIT
NO. Description of Exhibit
2.1 Agreement and Plan of Reorganization between International Plastic
Technologies, Inc. and CDP and Amendment No.1 effective as of December
24, 1998 (Incorporated by reference to Exhibit 2.1 to the Company's
Registration Statement on Form SB-2 (Registration Statement No.
333-48701 declared effective on April 23, 1999.)
2.2 Agreement and Plan of Reorganization between International Plastic
Technologies, Inc. and EHC and Amendment No.1 effective as of December
24, 1998 (Incorporated by reference to Exhibit 2.2 to the Company's
Registration Statement on Form SB-2 (Registration Statement No.
333-48701 declared effective on April 23, 1999.)
3.1 Certificate of Incorporation of International Plastic Technologies Inc
and Amendment to the Certificate of Incorporation dated December 7,
1998(Incorporated by reference to Exhibit 3.1 to the Company's
Registration Statement on Form SB-2 (Registration Statement No.
333-48701 declared effective on April 23, 1999.)
3.2 By-Laws of International Plastic Technologies, Inc. (Incorporated by
reference to Exhibit 3.2 to the Company's Registration Statement on
Form SB-2 (Registration Statement No. 333-48701 declared effective on
April 23, 1999.)
4.1 Form of Common Stock Certificate (Incorporated by reference to Exhibit
4.1 to the Company's Registration Statement on Form SB-2 (Registration
Statement No. 333-48701 declared effective on April 23, 1999.)
4.2 Form of Warrant Certificate (Incorporated by reference to Exhibit 4.2
to the Company's Registration Statement on Form SB-2 (Registration
Statement No. 333-48701 declared effective on April 23, 1999.)
4.3 Form of Warrant Agreement between the Company and Continental Stock
Transfer and Trust Company (Incorporated by reference to Exhibit 4.3 to
the Company's Registration Statement on Form SB-2 (Registration
Statement No. 333-48701 declared effective on April 23, 1999.)
4.4 Form of Underwriter's Warrant Agreement (Incorporated by reference to
Exhibit 4.4 to the Company's Registration Statement on Form SB-2
(Registration Statement No. 333-48701 declared effective on April 23,
1999.)
10.1 Employment Agreement between the Company and Andrew Franzone
(Incorporated by reference to Exhibit 10.1 to the Company's
Registration Statement on Form SB-2 (Registration Statement No.
333-48701 declared effective on April 23, 1999.)
10.2 Employment Agreement between the Company and David L. Kassel
(Incorporated by reference to Exhibit 10.2 to the Company's
Registration Statement on Form SB-2 (Registration Statement No.
333-48701 declared effective on April 23, 1999.)
10.3 Employment Agreement between the Company and Harry Goodman
(Incorporated by reference to Exhibit 10.3 to the Company's
Registration Statement on Form SB-2 (Registration Statement No.
333-48701 declared effective on April 23, 1999.)
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 (Incorporated by reference to
Exhibit 10.4 to the Company's Registration Statement on Form SB-2
(Registration Statement No. 333-48701 declared effective on April 23,
1999.)
10.5 Consulting Agreement between the Company and Network 1 Financial
Securities, Inc. (Incorporated by reference to Exhibit 10.5 to the
Company's Registration Statement on Form SB-2 (Registration Statement
No. 333-48701 declared effective on April 23, 1999.)
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, l998 and May
14,1998 (Incorporated by reference to Exhibit 10.6 to the Company's
Registration Statement on Form SB-2 (Registration Statement No.
333-48701 declared effective on April 23, 1999.)
10.7 Licensing Agreement between CDP and Inch, Inc. (Incorporated by
reference to Exhibit 10.7 to the Company's Registration Statement on
Form SB-2 (Registration Statement No. 333-48701 declared effective on
April 23, 1999.)
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. (Incorporated by reference to Exhibit 10.8 to the
Company's Registration Statement on Form SB-2 (Registration Statement
No. 333-48701 declared effective on April 23, 1999.)
10.9 Promissory Notes payable to Harry Goodman dated September 1, 1994 and
August 1, 1996 (Incorporated by reference to Exhibit 10.9 to the
Company's Registration Statement on Form SB-2 (Registration Statement
No. 333-48701 declared effective on April 23, 1999.)
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 (Incorporated by
reference to Exhibit 10.10 to the Company's Registration Statement on
Form SB-2 (Registration Statement No. 333-48701 declared effective on
April 23, 1999.)
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(Incorporated by reference to Exhibit 10.11 to the Company's
Registration Statement on Form SB-2 (Registration Statement No.
333-48701 declared effective on April 23, 1999.)
10.12 Demand Grid Note between Republic National Bank of New York and EHC
dated July 29, 1996 (Incorporated by reference to Exhibit 10.12 to the
Company's Registration Statement on Form SB-2 (Registration Statement
No. 333-48701 declared effective on April 23, 1999.)
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 Latter dated
July 13, 1998 (Incorporated by reference to Exhibit 10.13 to the
Company's Registration Statement on Form SB-2 (Registration Statement
No. 333-48701 declared effective on April 23, 1999.)
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 Lease
and Rent (Incorporated by reference to Exhibit 10.14 to the Company's
Registration Statement on Form SB-2 (Registration Statement No.
333-48701 declared effective on April 23, 1999.)
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 (Incorporated by reference to
Exhibit 10.15 to the Company's Registration Statement on Form SB-2
(Registration Statement No. 333-48701 declared effective on April 23,
1999.)
10.16 Stockholders' Agreement between the Company, Andrew Franzone, David L.
Kassel and Harry Goodman and Amendment No.1 to the Stockholders'
Agreement (Incorporated by reference to Exhibit 10.16 to the Company's
Registration Statement on Form SB-2 (Registration Statement No.
333-48701 declared effective on April 23, 1999.)
10.17 International Plastic Technologies, Inc., 1998 Stock Option and Grant
Plan (Incorporated by reference to Exhibit 10.17 to the Company's
Registration Statement on Form SB-2 (Registration Statement No.
333-48701 declared effective on April 23, 1999.)
10.18 Agreement between AFC and EHC to engineer, manufacture and import
products(Incorporated by reference to Exhibit 10.18 to the Company's
Registration Statement on Form SB-2 (Registration Statement No.
333-48701 declared effective on April 23, 1999.)
10.19 Latter 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 (Incorporated by reference to Exhibit
10.19 to the Company's Registration Statement on Form SB-2
(Registration Statement No. 333-48701 declared effective on April 23,
1999.)
10.20 Demand Negotiable Promissory Note payable to David L. Kassel dated
October 27, 1998 (Incorporated by reference to Exhibit 10.20 to the
Company's Registration Statement on Form SB-2 (Registration Statement
No. 333-48701 declared effective on April 23, 1999.)
10.21 Demand Negotiable Promissory Notes payable to Harry Goodman dated
October 22, 1998 and December 7, 1998 (Incorporated by reference to
Exhibit 10.21 to the Company's Registration Statement on Form SB-2
(Registration Statement No. 333-48701 declared effective on April 23,
1999.)
10.22 Agreement between EHC and David L. Kassel to extend maturity date of
January 1, 1998 Promissory Note, dated December 8, 1998 (Incorporated
by reference to Exhibit 10.22 to the Company's Registration Statement
on Form SB-2 (Registration Statement No. 333-48701 declared effective
on April 23, 1999.)
10.23 Agreement between CDP and David L. Kassel to extend maturity date of
January 1, 1998 Promissory Note, dated December 8, 1998 (Incorporated
by reference to Exhibit 10.23 to the Company's Registration Statement
on Form SB-2 (Registration Statement No. 333-48701 declared effective
on April 23, 1999.)
10.24 Promissory Note payable by CDP to David Kassel dated May 29, 1998 and
Guarantee of Promissory Note by the Company (Incorporated by reference
to Exhibit 10.24 to the Company's Registration Statement on Form SB-2
(Registration Statement No. 333-48701 declared effective on April 23,
1999.)
10.25 Exclusive Supply Agreement between the Company and Azurel LTD
(Incorporated by reference to Exhibit 10 to the Company's 10-QSB filed
on November 9,1999.)
10.26 Leter Agreeement with European American Bank regarding borrowing base
line of credit and term loan.
21 List of Subsidiaries of the Company
27 Financial Data Schedule
99.1 Agreement by and between EHC and the U.S. Government - Defense Supply
Center Philadelphia (Incorporated by reference to Exhibit 99(I) to the
Company's 10-QSB filed on August 9,1999.)
(B) REPORTS ON FORM 8-K
None
<PAGE>
SIGNATURES
In accordance with Section 13 or 15 (d) of the Securities Exchange Act of 1934,
the Registrant has duly caused this Annual Report on Form 10-KSB to be signed on
its behalf by the undersigned, thereunto duly authorized.
INTERNATIONAL SMART SOURCING, INC.
MARCH 30, 2000 /S/ ANDREW FRANZONE
- - --------------
Date Andrew Franzone
Chief Executive Officer
and President
In accordance with the Exchange Act, this report has been signed below by the
following persons and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
- - --------- ----- ----
/S/ ANDREW FRANZONE Chief Executive Officer March 30, 2000
- - ----------------------- and President, Director
/S/ DAVID KASSEL Chairman of the Board March 30, 2000
- - ----------------------- of Directors
/S/ HARRY GOODMAN Vice President and Secretary, March 30, 2000
- - ----------------------- Director
/S/ STEVEN SGAMMATO Chief Financial Officer March 30, 2000
- - -----------------------
/S/ BAO-WEN CHEN Director March 30, 2000
- - -----------------------
/S/ CARL SELDIN KOERNER Director March 30, 2000
- - -----------------------
/S/ MITCHELL SOLOMON Director March 30, 2000
- - -----------------------
EAB HAUPPAUGE BRANCH
730 Veteran's Memorial Highway
Hauppauge NY 11788
Phone: 516-360-7110
Fax: 516-360-7112
International Smart Sourcing, Inc. December 1, 1999
320 Broad Hollow Road
Farmingdale, NY 1 1735
Re: $1,250,000 borrowing base line of credit
$500,000 term loan line
Gentlemen:
European American Bank ("EAB") is pleased to advise you it holds
available for International Smart Sourcing, Inc. (the "Borrower"), a
corporation organized and in good standing under the laws of the State of
New York, (I) a borrowing base line of credit (the "Line") in the amount
of $1,250,000 and (ii) a $500,000 term loan line (the "Term Loan Line";
together with the Line being collectively, the "Credit Faculties"),
subject to the following terms and conditions:
1. DESCRIPTION OF THE LINE:
-----------------------
Loans provided under the Line shall be evidenced by EAB's
standard Master Note (the "Note") in the amount of $1,250,000, which Note
shall bear interest at a rate equal to 1/4% in excess of EAB's Prime Rate
(the rate of interest stated by EAB to be its Prime Rate in effect from
time to time and adjusted when said Prime Rate changes) computed on the
basis of actual days elapsed in a 360 day year.
Interest on the unpaid principal balance of the Note from
time to time outstanding shall be payable monthly in arrears commencing on
the first day of the month following the date of the first advance under
the Note. Any advance under the Line made by EAB in its discretion shall
be in an amount not less than $50,000 and the Borrower may prepay, in part
or in full, AT ANY TIME any loans outstanding under the Line in increments
of not less than $50,000 without premium or penalty.
Notwithstanding any provisions herein to the contrary,
the maximum availability under the Credit Facilities shall not exceed an
amount determined with application to the following borrowing base formula
(the "Formula"):
The sum of (i) eighty percent (80%) of the borrower's
"Eligible Accounts Receivable", that is, all accounts of the Borrower
dated not more than ninety (90) days from their respective invoice dates,
excluding those accounts deemed ineligible by EAB in its soles reasonable
discretion; and (ii) the lesser of fifty percent (50%) of the sum of
Borrower's "Eligible Inventory" or $500,000 (the "Formula"). In addition,
if fifty percent (50%) of an account is dated more than Ninety (90) days
then
<PAGE>
the entire amount shall be deemed ineligible. Terms used in this paragraph
shall have the meaning given to such terms in the Borrowing Base
Certificate, Identified herein. The aggregate of all advances and loans
under the Line shall at no time exceed the availability under the Formula
and the Borrower shall pay to EAB promptly after demand such amounts as may
be necessary from time to time to reduce the aggregate of all such loans
and advances to an amount below the availability under the Formula.
2. Description of the Term Loan Line:
---------------------------------
Availability under the Term Loan Line shall be for term
loans from EAB or WASCO Funding Corp. ("WASCO"), EAB's subsidiary.
Term Loans provided under the Term Loan Line shall be
evidenced by EAB's standard Commercial Note in the amount of each term
loan thereunder and shall bear interest, payable monthly in arrears, at a
rate equal to l~2% in excess of EAB's Prime Rate computed on the basis of
actual days elapsed in a 360 day year. Each term loan provided under the
Term Loan Line shall mature five (5) years after its closing and shall be
repayable in sixty (60) equal, consecutive monthly installments of
principal and interest.
The purpose of the Term Loan Line shall be to finance equipment purchases.
The Borrower acknowledges and agrees that the Credit
Facilities are uncommitted and requests for advances or EXTENSIONS OF
CREDIT THEREUNDER SHALL BE APPROVED IN THE DISCRETION OF EAB, WHICH MAY
REFUSE TO MAKE AN EXTENSION of credit under the Credit Facilities at any
time without prior notice to the Borrower, and that the performance or
compliance by the Borrower of the agreements contained in this letter, or
in any other document or agreement evidencing or securing such advances or
extensions of credit, shall not obligate EAB to make an advance or provide
an extension of credit thereunder.
Subject to the terms and conditions hereof, the Credit
Facilities shall be available until June 30, 2000.
3. Guarantors:
Repayment of all loans, extensions of credit and
financial accommodations provided under the Credit Facilities together with
interest and costs thereon shall be guaranteed, by Electronic Hardware
Corp, ("Electronic"), International Smart Sourcing Corp. ("International',)
and Compact Disk Packaging Corp. ("Compact") (the "Corporate Guarantors")
pursuant to EAB's standard Guarantee of All Liability.
Repayment of all term loans, extensions of credit and
financial accommodations provided under the Term Loan Line together with
interest and costs thereon shall be guaranteed, by Andrew L. Franzone,
Sr., Harry Goodman and David L. Kassel (collectively, the "Individual
Guarantors") pursuant to EAB's standard Guarantee of All Liability.
4. Purpose of the Line:
The purpose of the Line shall be to provide working
capital support for all inventory and accounts.
5. Security for the Credit Facilities:
The Credit Facilities shall be secured by a first
priority security interest in all inventory and accounts of the Borrower
and the Corporate Guarantors pursuant to EAB's standard General Security
Agreement and duly filed UCC-I Financing Statements
In addition, the Credit Facilities shall also be secured
by the pledge and assignment of an EAB issued certificate of deposit in
the amount of $1,000,000 or such other liquid collateral as shall be
acceptable to EAB in its sole discretion, pursuant to EAB's standard
Assignment and Security Agreement.
The Term Loan Line shall be secured by a first priority
interest in all equipment that is financed by EAB pursuant to EAB's
General Security Agreement and duly filed UCC-1 Financing Statements.
6. Conditions Precedent:
Prior to the Borrower's initial request for an advance
under the Credit Facilities:
a. It shall have provided to EAB:
(I) A copy of the resolutions passed by the
Borrower's Board of Directors certified by its Secretary as being in full force
and effect authorizing the borrowing described herein and the execution of all
documents and agreements required by EAB to evidence and secure the Credit
Facilities; and
(ii) A certified copy of the certificate of
incorporation of the Borrower.
b. EAB shall have conducted a field audit of the
Borrower's Books and records, at the Borrower's sole cost and expense,
which audit shall reveal no materially adverse facts or circumstances not
currently known by EAB.
c. EAB shall have conducted favorable litigation and
lien, trade and bank checkings of the Borrower.
7. FINANCIAL REPORTING:
The Borrower shall provide to EAB:
(i) As soon as available, but in any event within
one hundred twenty (120)days after the last day of each fiscal year,
the consolidated and consolidating 10K report of the Borrower and the
Corporate Guarantors,filed or to be filed with the Securities and Exchange
Commission, which shall include statements of income and retained earnings
and cash flows for such fiscal year, each prepared in accordance with
generally accepted accounting principles consistently applied,in reasonable
detail, such statements to be audited by a firm of independent certified
public accountants satisfactory to EAB.
(ii) As soon as available, but in any event
within sixty(60)days after the end of each of the Borrower's first three
fiscal quarters, the 10Q reports filed or to be filed with the
Securities and Exchange Commission.
Each of the financial statements specified in
Sections (i) and (ii) above shall be accompanied by a certificate
signed by the president or chief financial officer of the Borrower
to the effect that such statements fairly present the financial condition
of the Borrower and the Corporate Guarantors as of the statement date and
results of the operations of the Borrower and the Corporate Guarantors
for the period(s) then ended in accordance with generall accepted
accounting principles consistently applied.
(iii) As soon as available, but in any event
within fifteen (15) days after the end of each calendar month, a schedule
of accounts receivable aged to show the number of days each such account
has been outstanding from its invoice date, in form atisfactory to EAB
and accompanied by a Statement signed by the Borrower's president or
chief financial officer to the effect that such statement is true, correct
and complete.
(iv) As soon as available, but in any event
within fifteen (15) days after the end of each calend a month, a
"Borrowing Base Certificate", in form satisfactory to EAB.
(v) Within one hundred twenty (120) days after
the last day of each calendar year, the personal financial statement of
each Guarantor, on EAB's standard form.
(vi) Such other financial or additional
information as EAB may from time to time request.
8. SPECIAL REQUIREMENTS:
a. The Borrower agrees to maintain on a consolidated and
consolidating basis at all times:
(I) a capital base (the sum of capital surplus,
earned surplus, capital stock and such other items as are allowable under
generally accepted accounting principles and subordinated liabilities minus
deferred charges, intangibles, receivables due from stockholders, officers or
affiliates and treasury stock) in an amount not less than $3,400,000 at
December 31, 1999.
(ii) a maximum leverage ratio (the ratio of
total unsubordinated liabilities to capital base) of not greater than 1.00 to
1.0 at December 31, 1999
b. The Borrower shall maintain hazard insurance on its
inventory with a financially sound and reputable insurance company in such
amounts as are necessary to cover not less than the replacement cost of
such inventory and covering such risks as are usually carried by companies
engaged in the same or similar business which insurance policy shall be
endorsed to name EAB lender loss payee.
C. The Borrower agrees that EAB or its designee shall be
permitted access to its premises to conduct a field examination of the
Borrower's books and records and its operations, at the Borrower's sole
cost and expense but not more frequently than once in any twelve month
period.
d. The Borrower shall maintain, to the satisfaction of
EAB, its, primary account relationship with EAB.
e. EAB agrees to release the $1,000,000 certificate of
deposit described in paragraph 5 hereof at such time as the Borrower
delivers to EAB either audited fiscal year end or interim financial
statements which evidence, in the sole reasonable determination of EAB, a
year to date net operating profit of $100,000.
9. ACCEPTANCE:
If the foregoing is acceptable, please so indicate by signing
and returning this letter before December 14, 1999, the date this letter will
otherwise expire, unless extended in writing by EAB.
Very truly yours,
EUROPEAN AMERICAN BANK
Jason A. Quinn
Assistant Vice President
Robert Stratford
Group Vice President
Agreed and Accepted this day of December, 1999
INTERNATIONAL SMART SOURCING, INC.
By:
Exhibit 21
List of Subsidiaries of International Smart Sourcing, Inc.
Compact Disc Packaging Corp.
Incorporated in Delaware on January 31, 1995
Electronic Hardware Corporation
Incorporated in New York January 28, 1970
International Plastic Technologies, Inc
Incorporated in Delaware on May 7, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0001057695
<NAME> INTERNATIONAL SMART SOURCING, INC.
<MULTIPLIER> 1
<CURRENCY> U.S.DOLLARS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> DEC-27-1998
<PERIOD-END> DEC-31-1999
<EXCHANGE-RATE> 1
<CASH> 1,992,265
<SECURITIES> 0
<RECEIVABLES> 1,149,833
<ALLOWANCES> (11,000)
<INVENTORY> 787,331
<CURRENT-ASSETS> 4,216,690
<PP&E> 5,214,682
<DEPRECIATION> 4,547,630
<TOTAL-ASSETS> 7,419,167
<CURRENT-LIABILITIES> 1,695,448
<BONDS> 699,144
0
0
<COMMON> 3,383
<OTHER-SE> 5,021,192
<TOTAL-LIABILITY-AND-EQUITY> 7,419,167
<SALES> 4,919,095
<TOTAL-REVENUES> 4,919,095
<CGS> 3,631,143
<TOTAL-COSTS> 3,631,143
<OTHER-EXPENSES> 3,306,930
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 201,493
<INCOME-PRETAX> (2,039,678)
<INCOME-TAX> (70,310)
<INCOME-CONTINUING> (1,969,368)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,969,368)
<EPS-BASIC> (0.67)
<EPS-DILUTED> (0.67)
</TABLE>
