10-Q 1 qmar02.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-QSB (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE THREE MONTHS ENDED MARCH 29, 2002 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) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. YES X NO _____ As of May 1, 2002, the Registrant had 3,760,934 shares of its Common Stock, $0.001 par value, issued and outstanding. INTERNATIONAL SMART SOURCING, INC. AND SUBSIDIARIES FORM 10-QSB MARCH 29, 2002 INDEX Page Number PART I - FINANCIAL INFORMATION Item 1 - Financial Statements (Unaudited) Consolidated Balance Sheet 1 Consolidated Statements of Operations 2 Consolidated Statements of Cash Flows 3 Notes to Consolidated Financial Statements 4 - 5 Item 2 - Management's Discussion and Analysis or Plan of Operation 6 - 10 PART II - OTHER INFORMATION Item 1 - Legal Proceedings 11 Item 2 - Changes in Securities and Use of Proceeds 11 Item 3 - Defaults upon Senior Securities 11 - 12 Item 4 - Submission of Matters to a Vote of Security Holders 12 Item 5 - Other Information 12 Item 6 - Exhibits and reports on Form 8-K 12 SIGNATURE 13 INTERNATIONAL SMART SOURCING, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET (Unaudited) March 29, 2002 ASSETS CURRENT ASSETS: Cash $ 167,943 Accounts receivable - net of allowance for doubtful accounts of $15,000 784,129 Note receivable-related party 51,665 Inventories 1,391,722 Prepaid expenses and other current assets 336,033 -------------- TOTAL CURRENT ASSETS 2,731,492 Property and equipment - net 587,026 Note receivable-related party 95,811 Other assets 120,346 -------------- $ 3,534,675 ============== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable and accrued expenses $ 1,364,960 Deferred revenue 53,851 Line of credit 800,324 Current portion of long tem debt (including $37,682 to officer/shareholders) 120,881 Current portion of obligations under capital leases 64,067 -------------- TOTAL CURRENT LIABILITIES 2,404,083 Long term debt (including $112,384 to officer/shareholders) 273,206 Obligations under capital leases 78,134 -------------- TOTAL LIABILITIES 2,755,423 -------------- CONTINGENCY STOCKHOLDERS' EQUITY: Common Stock, $0.001 par value, 10,000,000 shares authorized, issued and outstanding 3,760,934 3,761 Additional paid-in capital 7,971,928 Accumulated deficit (7,196,437) -------------- TOTAL STOCKHOLDERS' EQUITY 779,252 -------------- $ 3,534,675 ============== See notes to consolidated financial statements. 1 INTERNATIONAL SMART SOURCING, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)

Three Months Ended ------------------------------------------- March 29, March 30, 2002 2001 ------------------- -------------------- NET SALES $ 2,313,363 $ 2,145,966 COST OF GOODS SOLD 1,593,188 1,448,495 ------------------- -------------------- GROSS PROFIT 720,175 697,471 ------------------- -------------------- OPERATING EXPENSES Selling and shipping 222,976 283,856 General and administrative 738,743 702,521 ------------------- -------------------- TOTAL OPERATING EXPENSES 961,719 986,377 ------------------- -------------------- LOSS FROM OPERATIONS (241,544) (288,906) Interest and other income 2,063 4,314 Interest and other expenses (20,100) (18,741) ------------------- -------------------- NET LOSS $ (259,581) $ (303,333) =================== ==================== NET LOSS PER SHARE - BASIC AND DILUTED $ (0.07) $ (0.08) =================== ==================== WEIGHTED AVERAGE COMMON SHARES 3,760,934 3,725,934 =================== ====================

See notes to consolidated financial statements. 2 INTERNATIONAL SMART SOURCING, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

Three Months Ended -------------------------------------- March 29, March 30, 2002 2001 ---------------- ------------------ Cash flows from operating activities: Net loss $ (259,581)$ (303,333) ---------------- ------------------ Adjustments to reconcile net loss to net cash used in operating activities: Depreciation 45,575 63,848 Amortization 6,555 942 Changes in assets and liabilities: Accounts receivable (7,729) 152,565 Receivable from related party - (16,929) Inventories (152,101) 23,200 Prepaid expenses and other current assets 112,131 36,835 Other assets (40,832) 17,146 Accounts payable and accrued expenses 216,743 (38,521) Due to related party - 17,416 Deferred revenue (147,781) (3,714) ---------------- ------------------ Total adjustments 32,561 252,788 ---------------- ------------------ Net cash used in operating activities (227,020) (50,545) ---------------- ------------------ Cash flows from investing activities: Note receivable from related parties 8,217 - Expenditures for property and equipment (8,748) (18,497) ---------------- ------------------ Net cash used in investing activities: (531) (18,497) ---------------- ------------------ Cash flows from financing activities: Capital lease repayments (11,368) (22,546) Proceeds from borrowings 288,516 109,000 Principal payments and repayment of loans (28,132) (30,723) ---------------- ------------------ Net cash provided by financing activities 249,016 55,731 ---------------- ------------------ Increase (decrease) in cash 21,465 (13,311) Cash - beginning of year 146,478 188,213 ---------------- ------------------ Cash - end of period $ 167,943 $ 174,902 ================ ==================

See notes to consolidated financial statements. 3 INTERNATIONAL SMART SOURCING, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS THREE MONTHS ENDED MARCH 29, 2002 (UNAUDITED) 1. BASIS OF PRESENTATION The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial statements and with the instructions to Form 10-QSB. Accordingly, they do not include all of the information and disclosures required for annual financial statements. These financial statements should be read in conjunction with the consolidated financial statements and related footnotes included in the Company's annual report on form 10-KSB for the year ended December 28, 2001. In the opinion of the Company's management, all adjustments (consisting of normal recurring accruals) necessary to present fairly the Company's financial position as of March 29, 2002 and the results of operations and cash flows for the three month periods ended March 29, 2002 and March 30, 2001 have been included. The results of operations for the three month periods ended March 29, 2002, are not necessarily indicative of the results to be expected for the full year ended December 27, 2002. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. The Company has suffered recurring losses and is not in compliance with their credit line's minimum tangible net worth covenant. These conditions raise substantial doubt about the Company's ability to continue as a going concern. Management's plans with respect to this matter include, raising additional funds through equity or debt financing and ultimately achieving profitable operations. The Company is in discussions with the bank to amend the minimum tangible net worth requirement. The accompanying financial statements do not include any adjustments that might be necessary should the Company be unable to continue as a going concern. 2. CONTINGENCY The Company has been named as a defendant in an employment discrimination action which it believes is without merit, and is vigorously defending itself against such matter. Consequently, no provision for this matter has been made as of March 29, 2002. 4 3. SEGMENT AND GEOGRAPHIC INFORMATION The Company views its operations as principally two segments, the manufacturing and assembly of injection molded plastic components and outsourcing of injection molded plastic components and their assemblies. The segments share a common workforce and office headquarters, which preclude an allocation of all overhead components. Overhead items that are specifically identifiable to a particular segment are applied to such segment. The Company's segment information for the three months ended March 29, 2002 and March 30, 2001 are as follows:

Manufacturing Corporate and and Assembly Outsourcing Other Consolidated ---------------- -------------- ---------------- ---------------- Three Months ended March 29, 2002 Sales to unaffiliated customers $ 1,789,896 $ 521,967 $ 1,500 $ 2,313,363 Segment assets 2,440,838 990,248 103,589 3,534,675 Segment income (loss) $ 29,392 $ (199,790) $ (89,183) $ (259,581) Manufacturing Corporate and And Assembly Outsourcing Other Consolidated ---------------- -------------- ------------- ---------------- Three Months ended March 30, 2001 Sales to unaffiliated customers $ 1,658,548 $ 486,464 $ 954 $ 2,145,966 Segment assets 2,267,093 1,495,864 455,508 4,218,465 Segment income (loss) $ 128,718 $ (326,249) $ (105,802) $ (303,333)

5 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS GENERAL The Company International Smart Sourcing, Inc. was organized as a holding company for its three wholly-owned subsidiaries (collectively, "ISS" or the Company): o International Plastic Technologies, Inc. (IPT) which does business as International Smart Sourcing o Electronic Hardware Corp. (EHC) and o Compact Disc Packaging Corp. (CDP). 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 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. On May 7, 1999, IPT, a Delaware Corporation was formed. We maintain our principal executive offices at 320 Broad Hollow Road, Farmingdale, New York 11735. Our telephone number is (631) 293-0750 and our Internet address is http://www.smart-sourcing.com. International Plastic Technologies (IPT) At IPT, we specialize in assisting companies reduce their cost of manufacturing by outsourcing work to China. Through our offices in the United States and China, IPT has put in place the system necessary to simplify the transition of moving work to China. IPT's product specialization includes: o tooling o injection molding and secondary operations o castings o mechanical assemblies o electromechanical assemblies o metal stampings IPT generated revenue of $521,967 for the three months ended March 29, 2002. IPT has established an office in Shanghai, with engineering, quality, production control and administrative personnel who provide: 6 o project management o source selection o engineering coordination o quality assurance o logistics o cost reduction. There are thirty-eight manufacturers in China presently providing products for our customers. We believe that our service provides our customers with significant competitive advantages. Savings for customers range from fifteen percent to as much as seventy-five percent. The more labor intensive the product, the more savings realized. Due to the low cost of tooling the customer's return on investment is improved, and its overhead costs are reduced. Electronic Hardware Corporation (EHC) Our EHC subsidiary has over 30 years of experience in the design, marketing and manufacture of injection molded plastic components used in industrial, consumer, and military products. We also offer secondary operations on our 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. EHC generated revenue of $1,789,896 for the three months ended March 29, 2002. EHC meets a full range of its customers' 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 we consider critical to the success of the manufacturing process. During this stage, EHC application engineers draw upon our experience, expertise and technological innovation to assist customers in reducing costs, meeting accelerated market schedules and ensuring high quality workmanship. Our Farmingdale, New York facility was certified in January 2001, for the International Quality Standard ("ISO") 9002, a manufacturing certification required by European companies and looked upon favorably throughout the world. ISO 9002 requires us 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. We believe that obtaining ISO 9002 certification will benefit EHC in the plastic manufacturing market, both nationally and internationally. 7 We believe that our consolidated manufacturing approach results in high quality, on-time delivery, competitive pricing, and a loyal customer base. Additionally, we believe that it has created a cost-effective workplace by decreasing inventory costs. Our "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. We believe that it also accounts for a timelier rate of delivery. The "pull" system depends on long-term relationships with suppliers. We believe that due to our strong relationships with suppliers and our well-trained workforce, the system will continue to provide efficient and prompt delivery. Over the past year EHC has increased its sales by 23% due to aggressive marketing efforts and to the success of the current government contract. EHC received an Award from the United States government based on this contract, for "Innovative Business Performer of the Year Award for Small Business" in 2000. Based on the success of the government contract, we believe that we have put in place the necessary infrastructure to provide superior service to the government not only on this contract but on other contracts the government might look to place in 2002. This same infrastructure will also provide the Company's commercial knob business with many advantages in our ability to provide superior service. The Company anticipates a user-friendly website which will allow customers to order directly and obtain stock and delivery information on the web by the third quarter of the year. Compact Disc Packaging Corp. (CDP) Our CDP subsidiary is currently inactive. It generated revenue of $1,500 for the three months ended March 29, 2002. Its business is the manufacturing, marketing and sale of a compact disc packaging system. RESULTS OF OPERATIONS For the three months ended March 29, 2002 compared to the three months ended March 30, 2000. NET SALES Net sales for the three month-period ended March 29, 2002 were $2,313,363 compared to sales of $2,145,966 and for the three-month period ended March 30, 2001. The increase of $167,397 or 8% was attributed to the continuation of the contract with the Defense Supply Center in Philadelphia (DSCP), and completion of tooling orders. 8 GROSS PROFITS The Company realized an overall gross profit margin percentage for the three-month period ended March 29, 2002 of 31.13%, as compared to 32.50% experienced during the three month period ended March 30, 2001. This decrease of 1.37%, can be attributed to the increase in sales of tooling. Orders for tooling are typically followed by productions orders. Tooling generally has a lower gross profit then product manufactured from tooling. OPERATING EXPENSES Selling and Shipping Selling and shipping expenses for the three-months ended March 29, 2002 were $222,976 as compared to $283,856 for the three-months ended March 30, 2002. The decrease of $60,880 or 21% for the period is primarily attributable to a decrease in consulting fees. General, and Administrative Expenses General and administrative expenses for the three months ended March 29, 2002 were $738,743 as compared to $702,521 for the three months ended March 30, 2002. The increase of $36,222 or 5% for the period is primarily attributable to an increase in insurance costs of approximately $8,000, an increase in rent expense of $13,700 and an increase in professional fees of approximately $14,500. 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 flows generated internally from operations. When cash flows have been insufficient to meet the Company's cash needs, the Company has supplemented its cash needs with bank borrowings and long term equipment financing. The Company's cash increased to $167,943 on March 29, 2002 from $146,478 on December 28, 2001. Cash flow used in operating activities was $227,020 for the three-months ended March 29, 2002 on a net loss of $259,581. The minimal increase in accounts receivable is the result of controlled collection efforts. The increase in inventory is the result of the Company's buildup of inventory to respond to increased government orders and shipments. The decrease in prepaid expenses and other current assets, is a result of the expensing of deposits on materials and molds associated with tooling and production orders that were completed during the three months ended March 29, 2002. Net cash used in investing activities for the three-month period March 29, 2002 was $531, this consisted of $8,748 in cash for the purchase of tooling, molds, machinery and equipment, and collections of $8,217 in cash from notes receivable from related parties. 9 Net cash provided by financing activities for the three-month period ended March 29, 2002 was $249,016. Cash of $288,516 was provided from the bank line of credit. Cash of $28,132 was used to make principal payments on loans and the bank credit line and $11,368 to make capital lease repayments. In April 2001, we closed on a revolving line of credit agreement with a bank that provides for a maximum borrowing of up to $1,500,000, subject to certain conditions, at an interest rate of prime plus 1.75%. The loan is secured by substantially all the assets of the company and is unconditionally guaranteed by three officers/shareholders, each limited to $250,000. The agreement provides that, among the other requirements, we maintain a tangible net worth of at least $1,750,000 from the date of the agreement to and including December 30, 2001 and $2,000,000 through April 2003, when the outstanding balance is due. At December 28, 2001 and March 29, 2002, the Company was below the minimum tangible net worth amount required in its covenant with the bank which constitutes a breach of the credit agreement. The Company and the bank are currently in discussions to amend the minimum tangible net worth covenant to the credit agreement. The amendment, when executed, would have the effect of curing the breach of the tangible net worth covenant for the last quarter of fiscal year 2001 and the first quarter of fiscal year 2002 and establishing a new tangible net worth covenant for the balance of fiscal year 2002. There is no assurance that the Company will be able to satisfactorily negotiate an amendment to the credit agreement with the bank. In the event that the Company is unable to do so, there can be no assurance that the Company will be able to find other sources of credit or working capital in which event operations of the Company would have to be limited. The auditors' report on the Company's financial statements, in our annual Form 10-KSB, included an explanatory paragraph about the Company's ability to continue as a going concern. The Company expects that it will require a minimum of $550,000 to fund its operations and meet its debt service obligation for the fiscal year ended December 27, 2002. As of May 1, 2002, the Company has approximately $190,000 of availability on its credit line. In addition, management is seeking to raise additional funds through additional debt and/or equity financing, although there is no assurance it will be successful in securing such financing. If the Company is not successful, the Company may need to make certain reductions in its operations to maximize its available cash resources until additional funds can be raised. CAUTIONARY FACTORS REGARDING FUTURE OPERATING RESULTS This report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. 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. 10 PART II OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The Company has been brought as a defendant in an employment discrimination action before the Division of Human Rights of the State of New York. The Company is vigorously defending this action. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS None ITEM 3. BANK DEBT In April, 2001, we, through our subsidiary EHC, entered into a credit agreement with the Connecticut Bank of Commerce to provide up to $1.5 million dollars in a revolving credit line for EHC's working capital purposes and to allow EHC to repay monies owed to approved affiliates. EHC is barred from obtaining loans under the revolving credit line if the aggregate amount of the loans exceeds a formula specified in the credit agreement. All monies loaned under the credit line are to be paid in full in April, 2003. Interest on the monies loaned is due in monthly installments at the rate of 1 3/4 % per annum above Connecticut Bank of Commerce's prime commercial lending rate (6.5% at March 29, 2002). The credit agreement will terminate in April, 2003, or earlier upon an event of default. However, the credit agreement may be renewed for periods of time up to one year after April, 2003, unless a party to the agreement notifies the other party that it does not wish to renew the agreement. The loan is secured by almost all of our assets and the obligations due under such loan are guaranteed (to the extent set forth in executed guarantee agreements) by ISS, IPT, and CDP. The loan is also guaranteed by Andrew Franzone, Harry Goodman and David L. Kassel, each guarantee limited to $250,000. The credit agreement requires us to provide the bank with financial reports and statements. The agreement provides that, among other requirements, we maintain a tangible net worth of at least $1,750,000 from the date of the agreement to and including December 30, 2001 and $2,000,000 through April 2003, when the outstanding balance is due. The credit agreement contains a formula, based on our accounts receivable that determines the portion of the $1.5 million dollars which we may borrow at any time. At March 29, 2002 based on this formula we were permitted to borrow up to approximately $800,000. The balance outstanding on the line of credit at March 29, 2002 amounted to $800,324. At March 29, 2002 and December 28, 2001, the Company was below the minimum tangible net worth amount required in its covenant with the bank which constitutes a breach of the credit agreement. The Company and the bank are currently in discussions to amend the minimum tangible net worth covenant to the credit agreement. he amendment, when executed, would have the effect of curing 11 the breach of the tangible net worth covenant for the last quarter of fiscal year 2001 and the first quarter of fiscal year 2002 and establishing a new tangible net worth covenant for the balance of fiscal year 2002. There is no assurance that the Company will be able to satisfactorily negotiate an amendment to the credit agreement with the bank. In the event that the Company is unable to do so, there can be no assurance that the Company will be able to find other sources of credit or working capital in which event operations of the Company would have to be limited. We and all of our subsidiaries are barred from taking on additional debt except for the following: o debt to the Connecticut Bank of Commerce; o trade payables in the ordinary course of business; o debt covered under the terms of a Debt Subordination Agreement with the Connecticut Bank of Commerce; o debt covered under the terms of an Intercreditor Agreement among the Long Island Development Company and the Connecticut Bank of Commerce; and o debt under a loan or equipment lease for the sole purpose of acquiring machinery and equipment not to exceed $50,000 in the aggregate during each fiscal year. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. None ITEM 5. OTHER INFORMATION None ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K Exhibits: None Reports on 8-K: No reports were filed on Form 8K during the quarter ended March 29, 2002. 12 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. INTERNATIONAL SMART SOURCING, INC. May ___ , 2002 /S/David Kassel -------------------------------- ------------ David Kassel Date Chairman and Chief Executive Officer May ___ , 2002 /S/Arthur Myers -------------------------------- ------------ Arthur Myers Date Chief Financial Officer 13