SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(X) Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended September 30, 1997
or
( ) Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1939
For the transition period from to
Commission File Number: 0-18711
ACTRADE INTERNATIONAL, LTD.
(Exact name of small business issuer as specified in its charter)
Delaware 13-3437739
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
7 Penn Plaza, New York, NY 10001
(Address of principal executive offices)
Issuer's telephone number, including area code: (212) 563-1036
-----------------
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act 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
Indicate the number of Shares outstanding of each of the Issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at October 31, 1997
Common Stock, par value $0.0001
per share 8,043,352
<PAGE>
INDEX
Part I. Financial information
Item 1. Consolidated condensed financial statements:
Balance sheet as of September 30, 1997 and
June 30, 1997 F-2
Statement of operations for three
months ended September 30, 1997 and 1996 F-3
Statement of changes in shareholders' equity F-4
Statement of cash flows for the three
months ended September 30, 1997 and 1996 F-5
Notes to consolidated condensed financial statements F-6 - F-12
Item 2. Management's discussion and analysis of financial
condition F-13 - F-16
Part II. Other information
Signatures
F-1
<PAGE>
ACTRADE INTERNATIONAL, LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1997 AND JUNE 30, 1997
(Unaudited)
ASSETS
<TABLE>
<CAPTION>
<S> <C> <C>
September 30, June 30,
1997 1997
Current assets:
Cash, including time deposits of $2,606,847 at
September 30, 1997 $ 2,924,109 $ 7,352,465
Accounts receivable, less allowance for
doubtful accounts of $35,000 11,157,228 5,269,516
Accounts receivable, trade acceptance drafts 7,270,841 6,477,424
Prepaid expenses 37,370 9,010
----------- -----------
Total current assets 21,389,548 19,108,415
----------- -----------
Property and equipment:
Furniture and fixtures 333,095 308,717
Leasehold improvements 143,915 142,672
----------- -----------
477,010 451,389
Less accumulated depreciation 228,190 213,084
----------- -----------
248,820 238,305
----------- -----------
Other asset, security deposits 23,742 17,742
----------- -----------
$21,662,110 $19,364,462
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Cash advance from bank $ 339,815 $ 1,019,392
Customer deposits 26,587
Accounts payable 3,262,682 1,995,148
Accrued expenses 7,116 11,759
Payroll taxes payable 2,764 6,862
Income taxes payable 107,636 67,432
----------- -----------
Total current liabilities 3,720,013 3,127,180
----------- -----------
Commitments
Deferred rent liability 41,912 45,165
----------- -----------
Shareholders' equity:
Common stock, $.0001 par value; authorized 100,000,000 shares, issued and
outstanding 8,014,251 shares at September 30, 1997 and
7,470,681 at June 30, 1997 801 747
Common stock purchase warrants
Additional paid in capital 13,260,946 12,505,787
Retained earnings 4,638,438 3,685,583
----------- -----------
17,900,185 16,192,117
$21,662,110 $19,364,462
</TABLE>
See notes to condensed consolidated financial statements.
F-2
<PAGE>
ACTRADE INTERNATIONAL, LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(Unaudited)
<TABLE>
<CAPTION>
<S> <C> <C>
1997 1996
---- ----
Net sales $20,001,585 $7,578,034
Cost of sales 18,294,246 6,903,814
----------- ----------
Gross profit 1,707,339 674,220
Selling, general and administrative
expenses 686,067 385,362
----------- ----------
Income from operations 1,021,272 288,858
----------- ----------
Other income (charges):
Miscellaneous income 9,436
Interest income 50,368 10,499
Interest expense ( 4,484) ( 25,512)
----------- ----------
55,320 ( 15,013)
----------- ----------
Income before income taxes 1,076,592 273,845
Income tax expense 123,737 13,970
----------- ----------
Net income $ 952,855 $ 259,875
=========== ==========
Earnings per common share:
Primary $ 0.12$ 0.05
=====================
Fully diluted $ 0.12$ 0.05
=====================
Weighted average common shares
outstanding
Primary 8,059,416 5,811,621
=========== ==========
Fully diluted 8,059,416 5,811,621
=========== ==========
</TABLE>
See notes to condensed consolidated financial statements.
F-3
<PAGE>
ACTRADE INTERNATIONAL, LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE PERIOD JULY 1, 1995 TO SEPTEMBER 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Common Stock Additional
$.0001 Par Value Paid in Retained
Shares Amount Capital Earnings Total
Balance at June 30, 1995 5,330,681 $533 $ 2,041,873 $1,024,628 $ 3,067,034
Issuance of common stock 352,500 35 1,065,264 1,065,299
Net income for the year
ended June 30, 1996 757,374 757,374
--------- ---- ---------- ---------- ----------
Balance at June 30, 1996 5,683,181 568 3,107,137 1,782,002 4,889,707
Issuance of common stock 652,500 65 1,922,214 1,922,279
Issuance of common stock on
exercise of stock purchase
options 450,000 45 987,455 987,500
Issuance of common stock 685,000 69 6,488,981 6,489,050
Net income for the year
ended June 30, 1997 1,903,581 1,903,581
--------- ---- ----------- ----------- -----------
Balance at June 30, 1997 7,470,681 747 12,505,787 3,685,583 16,192,117
Issuance of common stock on
exercise of stock purchase
options 543,570 54 755,159 755,213
Net income for the three
months ended September
30, 1997 952,855 952,855
--------- ---- ----------- ----------- -----------
Balance at September 30,
1997 8,014,251 $801 $13,260,946 $4,638,438 $17,900,185
========= ==== =========== ========== ===========
</TABLE>
See notes to condensed consolidated financial statements.
F-4
<PAGE>
ACTRADE INTERNATIONAL, LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
THREE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(Unaudited)
<TABLE>
<CAPTION>
<S> <C> <C>
1997 1996
---- ----
Cash flow from operating activities:
Net income $ 952,855 $ 259,875
Adjustments to reconcile net income
to cash provided by operating activities:
Depreciation 15,106 6,802
Changes in other operating assets and liabilities:
Accounts receivable ( 6,681,129) ( 831,000)
Accounts receivable, other ( 99,242)
Prepaid expenses ( 28,360) ( 37,433)
Interest receivable ( 3,397)
Accounts payable 1,267,534 ( 291,897)
Accrued expenses ( 4,643) ( 1,953)
Payroll taxes payable ( 4,098)
Income taxes payable 40,204 7,475
Customer deposits ( 26,587) ( 55,954)
Security deposits ( 6,000) ( 949)
Deferred rent ( 3,253) ( 2,516)
---------- ----------
Net cash used in operating activities ( 4,478,371) ( 1,050,189)
---------- ----------
Investing activities:
Decrease in loans receivable, affiliates 77,164
Purchase of property and equipment ( 25,621) ( 7,973)
---------- ----------
Net cash provided by (used in) investing
activities ( 25,621) 69,191
---------- ----------
Financing activities:
Proceeds from issuance of common stock 755,213 1,608,005
Decrease in cash advances, bank ( 679,577) ( 630,936)
---------- ----------
Net cash provided by financing activities 75,636 977,069
---------- ----------
Net decrease in cash ( 4,428,356) ( 3,929)
Cash, beginning of period 7,352,465 1,924,805
---------- ----------
Cash, end of period $2,924,109 $1,920,876
========== ==========
Supplemental disclosures from cash flow information:
Cash paid during the year for:
Interest $ 4,484 $ 27,465
========== ==========
Income taxes $ 88,946 $ 15,973
========== ==========
</TABLE>
See notes to condensed consolidated financial statements
F-5
<PAGE>
ACTRADE INTERNATIONAL, LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED SEPTEMBER 30, 1997
(Unaudited)
1. The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q.
Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments
considered necessary for a fair presentation have been included. The
results of operations for the three months ended is not necessarily
indicative of the results to be expected for the full year. For further
information, refer to the consolidated financial statements and footnotes
thereto included in the Company's annual report for the year ended June
30, 1997, included in its Annual Report filed on Form 10-K. All
reference to Actrade in these footnotes, relate to Actrade International,
Inc., the Company's wholly owned subsidiary. Actrade International,
Ltd., "The Company," is referred to as ACI.
2. Organization of the Company:
The Company, formerly Acquisition Capability, Inc., was incorporated in the
State of Delaware on April 3, 1987. On September 2, 1988, the Company
acquired 100% of the issued and outstanding shares of Allstate Travel
Corp., a New York corporation incorporated on August 13, 1985 and
Actrade International, Corp., a New York corporation incorporated on
July 18, 1985. Allstate operates as a travel agency. Actrade represents
various U. S. manufacturers and distributors by buying and exporting
their products overseas. Actrade Capital, Inc., a wholly owned
subsidiary of Actrade International, Ltd., was incorporated in Delaware
in May of 1991. Amworld offers alternatives to existing accounts
receivable financing to both domestic and foreign companies. Standard
Corporation, a wholly owned foreign corporation and subsidiary of
Actrade International, Corp., was incorporated in Antigua and Bermuda on
February 12, 1988 and was acquired in January 1990. On December 22,
1991, Standard Corporation changed its corporate name to Actrade South
America. American Cooling, Inc., a wholly owned subsidiary of Actrade
International, Ltd. was incorporated in Delaware in 1992 and was
inactive. American Care Industries, was incorporated in 1993 and was
inactive. American Care Industries, Inc. is a wholly owned subsidiary of
Actrade International, Ltd. Amworld Credit, Inc. was incorporated in
1994 and was inactive at September 1994.
The Company sells predominantly in the foreign market through its wholly
owned foreign subsidiary, Actrade South America. There is no guarantee
that the foreign market will continue to develop since the possibility
of foreign and domestic government intervention, economic conditions
world wide and any other unforeseen situations may occur.
F-6
<PAGE>
ACTRADE INTERNATIONAL, LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED SEPTEMBER 30, 1997
(Unaudited)
3. Principles of consolidation:
The consolidated financial statements of Actrade International, Ltd. and
subsidiaries include the accounts of all significant wholly owned
subsidiaries, after elimination of all significant intercompany
transactions and accounts. The accounts of Allstate Travel Corp.,
Actrade South America, a foreign corporation, Actrade Capital, Inc. and
American Cooling, Inc. are included as the subsidiaries of Actrade
International, Ltd.
4. Related party transactions:
During each of the three years ended September 30, 1997, the Company and its
subsidiaries have advanced and received funds to and from related
parties. Such receivable and payables are non-interest bearing and are
due on demand.
The Company has entered into several employment agreements with its
officers and shareholders.
5. Leases:
From March 1, 1989 to February 28, 1990, the Company and its subsidiaries
used office facilities under a non-cancelable operating sublease which
commenced March 1, 1989 and was to expire February 28, 1992. The related
sublease agreement provided for monthly rentals of $4,000 and gave a
subsidiary of the Company the option to renew, for an additional three
years (to February 28, 1995), at the same monthly rental.
In February 1990, the Company agreed with the lessor and sublessor of its
facilities to discontinue its sublease. In the year ended June 30, 1991
the Company received $12,750 in settlement of the lease. The amount was
recorded as a reduction in selling, general and administrative expenses.
In February 1990, the Company executed a lease agreement with a related
corporation who was the lessor of the facility from an unrelated third
party. The lease in August 1991 was assigned to the Company from the
related party. The Company simultaneously assigned said lease to Actrade
in accordance with the terms of the lease. The agreement provides for
monthly rentals of $4,200 (commencing June 1, 1991) and annual increases
of 4.5% and expires February 28, 2000.
In lieu of rent for the first fifteen (15) months, the Company incurred
costs totaling approximately $87,000 for leasehold improvements. The
leasehold improvements and the total rent concessions are being
amortized using the straight line method over the entire term of the
lease. The resulting unpaid rent over the abatement period is included
in deferred rent liability.
F-7
<PAGE>
ACTRADE INTERNATIONAL, LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED SEPTEMBER 30, 1997
(Unaudited)
5. Leases (continued):
In December 1991, Actrade entered into a non-cancelable 36 month operating
lease to house its Florida office. The lease provides for monthly
payments of $734 plus cost of living increases annually, capped @ 5% per
annum. The lease was renewed on December 24, 1994 for a three year term
under the above terms and expires on December 24, 1997.
In August 1996, Actrade Capital, Inc. entered into a 12 month lease
expiring on August 31, 1997 for space in an Illinois office suite. Both
parties have the option to terminate the lease with thirty days written
notice to either party. The lease provides for monthly payments of
$1,100 on the first day of each month. This lease was extended until
October 31, 1997.
In May 1997, Actrade Capital, Inc. entered into a 15 month lease for
office space in Utah. The lease expires July 31, 1998 and calls for
monthly rent payments in the amount of $329. In April 1997, Actrade
Capital, Inc. entered into a lease agreement for additional space in its
New York office. The lease expires on March 31, 2000 and calls for rent
of $1,628 per month in the first year, $1,672 per month in the second
year and $1,716 per month in the third year.
Beginning July 1, 1997, Actrade entered into a lease agreement for
additional space in its New York facility. The lease, which carries rent
at $3,000 per month, expires on October 31, 1998.
Beginning November 1, 1997, Actrade Capital, Inc. entered into a lease
agreement for office space in Illinois. The lease is for a one year
period and carries rent at $2,502 per month.
On October 15, 1997, Actrade Capital, Inc. entered into a lease in
Pennsylvania for a six and one-half month period with monthly rentals of
$1,400 per month.
Future minimum lease payments required under non-cancelable operating
leases by fiscal year are as follows:
September 30, 1998 $131,154
September 30, 1999 $ 96,645
September 30, 2000 $ 29,023
Rent expense amounted to $32,507 and $18,329 for 1997 and 1996,
respectively.
Actrade South America, maintains a separate sales office in Israel, held
by a commissioned sales agent of the Company. The terms of the agreement
are reviewable yearly and the annual fee was $9,000 in 1997 and $6,000
in 1996 and 1995, subject to adjustment based upon the commissions paid
to the agent during such year.
F-8
<PAGE>
ACTRADE INTERNATIONAL, LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED SEPTEMBER 30, 1997
(Unaudited)
6. Income taxes:
The components of income tax expense are:
Three months Three months
Ended Ended
September 30 September 30
1997 1996
Income taxes currently payable:
Federal $ 80,967 $ 7,218
State 44,270 6,652
-------- --------
125,237 13,870
-------- --------
Deferred tax expense arising from:
Excess of Financial accounting
depreciation over tax ( 1,012) ( 277)
Excess of rent expense for financial
accounting over tax deductible rent ( 488) 377
-------- --------
( 1,500) 100
-------- --------
Total income tax expense $123,737 $ 13,970
======== ========
Deferred income tax provisions resulting from differences between accounting
for financial statement purposes and accounting for tax purposes are
reflected above.
A reconciliation of income tax expense at the statutory rate to income tax
expenses at the Company's effective rate is as follows:
Three months Three months
Ended Ended
September 30 September 30
1997 1996
---- ----
Computed tax at the expected
statutory rate $410,254 $106,799
Surtax exemption ( 16,750) ( 14,544)
State income taxes 44,270 6,652
Foreign income ( 312,537) ( 85,037)
Other ( 1,500) 100
-------- --------
Income tax expense $123,737 $ 13,970
======== ========
F-9
<PAGE>
ACTRADE INTERNATIONAL, LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED SEPTEMBER 30, 1997
(Unaudited)
6. Income taxes (continued):
The effective statutory rate for 1997 was 39% for federal tax purposes.
The Company has made adjustments to eliminate the tax provisions for foreign
earnings since said earnings are undistributed and will be permanently
invested. The cumulative amounts of foreign undistributed earnings are
$4,542,751 at September 30, 1997 and $2,176,384 at September 30, 1996.
The Company has adopted SFAS 109 for the fiscal year beginning July 1, 1993.
SFAS 109 changes accounting for income taxes from the deferred method,
required by APB-11 to the asset/liability method, commonly referred to
as the liability method. The deferred method places primary emphasis on
the matching of revenues and expenses. The liability method places
primary emphasis on the valuation of current and deferred tax assets and
liabilities. The significance of the impact that SFAS 109 will have on
the financial statements is expected to be immaterial and will have no
impact on any other significant matters of the Company. The effect of
initially adopting SFAS 109 will be reported as the cumulative effect of
a change in accounting principle in accordance with APB-20.
The Company has adopted SFAS 109 for the fiscal year beginning July 1,
1993. SFAS 109 changes accounting for income taxes from the deferred
method, required by APB-11 to the asset/liability method, commonly
referred to as the liability method. The deferred method places primary
emphasis on the matching of revenues and expenses. The liability method
places primary emphasis on the valuation of current and deferred tax
assets and liabilities.
7. Accounts receivable, trade acceptance drafts:
As of March 31, 1996, Actrade Capital, Inc., formerly Amworld Commerce,
Inc., a wholly owned subsidiary of Actrade International, Ltd., had sold
and assigned all outstanding Trade Acceptance Drafts (TAD's) to Banco
Portuguese De Atlantico (Bank). The total TAD amounts due from the banks
were $7,270,841 at September 30, 1997. The bank purchases the TAD's at
the face value and advances these amounts to Actrade Capital, Inc. The
bank purchases the TAD's without recourse and Actrade Capital, Inc. has
granted a security interest in all TAD's purchased by the bank and all
accounts represented by the TAD's together with all guaranties and
collateral, and all proceeds of the above. The bank will purchase each
TAD by advancing to Actrade Capital, Inc. 75% of the face amount of each
TAD assigned and delivered by overdraft on the Actrade Capital, Inc.
account. At September 30, 1997 the advances on the overdraft account
amounted to $339,815. As each TAD is collateralized, the face amount
will be credited to the Actrade account to reduce the advanced
overdraft. Interest is payable at 1% over prime per annum on the
outstanding advances, which will be charged on the first day of each
month.
F-10
<PAGE>
ACTRADE INTERNATIONAL, LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED SEPTEMBER 30, 1997
(Unaudited)
8. Reconciliation of shares used in computation of earnings per share:
1997 1996
---- ----
Weighted average of shares
actually outstanding 7,663,755 5,701,621
Common stock purchase warrants and
options 395,661 110,000
--------- ---------
Primary and fully diluted weighted average
common shares outstanding 8,059,416 5,811,621
========= =========
9. Pending litigation:
The Company is currently engaged in litigation against a former consultant
retained to assist in introducing the Company to the brokerage community
and with it's investor relations. The consultant was paid a cash
retainer and was to receive common stock purchase warrants for services
rendered. The consultant, to the detriment of the Company, terminated
services on behalf of Actrade. As a result of the termination, Actrade
has refused to honor the warrants.
10. Common stock purchase warrants and options outstanding:
Summary of warrants (w) and options (o) outstanding:
Warrants (w) Exercise Expiration
Date Options (o) Price Date
Amos Aharoni 06/30/95 238,318 (w) $1.35 06/30/98
Amos Aharoni 06/30/96 200,000 (w) 3.35 06/30/99
Amos Aharoni 06/06/97 132,915 (w) 5.00 09/30/99
Amos Aharoni 06/06/97 176,629 (w) 6.05 12/31/99
Amos Aharoni 06/06/97 207,157 (w) 9.70 03/31/00
Amos Aharoni 02/06/97 3,000 (o) 5.00 12/31/00
---------
958,019
-------
John Woerner 01/21/97 2,500 (o) 6.40 01/20/01
John Woerner 02/06/97 2,500 (o) 5.00 12/31/00
John Woerner 02/06/97 3,000 (o) 5.00 12/31/00
---------
8,000
-----
F-11
<PAGE>
ACTRADE INTERNATIONAL, LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED SEPTEMBER 30, 1997
(Unaudited)
10. Common stock purchase warrants and options outstanding (continued):
Summary of warrants (w) and options (o) outstanding (continued):
Leon Schorr 01/21/97 2,500 (o) 6.40 01/20/01
Leon Schorr 02/06/97 2,500 (o) 5.00 12/31/00
Leon Schorr 02/06/97 3,000 (o) 5.00 12/31/00
---------
8,000
-----
Mitch Menik 03/12/97 12,500 (w) 2.50 03/11/00
Mitch Menik 09/12/96 12,500 (o) 2.50 09/12/00
Mitch Menik 02/06/97 1,000 (o) 5.00 12/31/00
---------
26,000
------
Other employees 01/21/97 10,000 (o) 6.40 01/20/01
Other employees 02/06/97 45,500 (o) 5.00 12/31/00
---------
55,500
------
Total 1,055,519
=========
In the quarter ended September 30, 1997, 543,570 warrants were exercised at
prices ranging from $1.25 to $6.40, resulting in net proceeds to the
Company of $755,213 and the issuance of 543,570 common shares.
The Company has elected to continue use of the methods of accounting
described by APB-25 "Accounting for Stock Issued to Employees" which is
based on the intrinsic value of equity instruments and has not adopted
the principles of SFAS-123 "Accounting for Stock Based Compensation"
effective for fiscal year beginning after December 15, 1995, which is
based on fair value. There is no significant difference between
compensation cost recognized by APB-25 and the fair value method of
SFAS-123. The Company has not recognized compensation on the granting of
options or warrants to employees and consultants since the fair value of
warrants or options is the same as or less than the exercise price.
F-12
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
I. Results of Operations
During the first three months of fiscal 1998, ended September 30, 1997, the
Company had combined gross revenues of $20,001,585, as compared to $7,578,034
for the first three months of fiscal 1997, an increase of almost 164%. During
this period, cost of revenues totaled $18,294,246, as compared to $6,903,814 for
the same period last year, virtually unchanged at approximately 91% of total
revenues. This resulted in gross profits from operations of $1,707,339 for the
first quarter of fiscal 1998, an increase of $1,033,119 (or approximately 153%
higher than the first quarter of fiscal 1997), with net profits from operations,
after provision for taxes, of $952,855 for this period, as compared to $259,875
for the same period last year, an increase of approximately 267% over last year.
Based upon the Company's currently issued an fiscal 1998 reached $0.12 per
share,as compared to $0.05 per share for the first quarter of fiscal 1997.
The substantial increase in gross revenues during the first quarter of fiscal
1998, which equaled approximately 46% of the Company's total revenues during all
of fiscal 1997, was primarily due to the expansion of the Company's operations
through (i) the increased sales by its subsidiary Actrade S.A. and (ii)
significantly increased revenues by Actrade Capital Inc. ("Capital") through its
TAD Program, discussed separately below (see "III. Actrade Capital, Inc. And The
Trade Acceptance Draft Program"). The increase in revenues during the first
quarter of fiscal 1998 was the result of increased product sales by Actrade
S.A., rather than from price increases for the Company's products, and
substantially increased operating revenues derived from Capital.
As a result of the foregoing factors, the Company's net operating income
expressed as a percentage of gross revenues increased from 3.4% at the end of
the first quarter of fiscal 1997 to a new high of almost 4.8% at the end of the
first quarter of fiscal 1998. This continued the trend experienced during fiscal
1997 and, in significant part, reflected the success of the Company's commitment
to Capital's TAD Program. Although management believes that continued increases
in revenues by Capital and by Actrade S.A. during the balance of fiscal 1998
will help this ratio to remain stable, management cannot predict the impact
thereon of the substantial expenditures anticipated in connection with the next
phase of Capital's expansion program.
For the first time in the Company's history, the major portion ,over 57%, of the
Company's revenues are derived by Capital ($11,505,082 during the first quarter
of fiscal 1998), with Actrade S.A., the Company's international trading
subsidiary, representing slightly over 33% ($6,673,976) of the Company total
gross revenues for this period.
As stated in the Company's Annual Report on Form 10-K for fiscal 1997, in light
of management's continued emphasis on the expansion of Actrade's export
operations and the ongoing expansion of Capital's TAD Program, management may
elect to terminate Allstate's operations and to phase out this aspect of its
operations during fiscal 1998. During the first quarter of fiscal 1998,
Allstate's total sales aggregated only $10,486, which accounted for less than
1/10 of 1% of the Company's total revenues. II. Discussion of Financial
Condition
On a consolidated basis, at September 30, 1997 the Company had total assets of
$21,662,110 (compared with $19,364,462 at June 30, 1997, the end of fiscal 1997)
with total current liabilities of $3,720,013 (compared with $3,127,180 at June
30, 1997). Of the Company's assets at September 30, 1997, $2,924,109 was in the
form of cash and cash equivalent (compared to $7,352,465 at June 30, 1997). The
substantial decrease in cash and cash equivalent at September 30, 1997 reflects
the utilization of a significant portion of the proceeds of a private placement
of the Company's common stock completed on June 30, 1997, wherein the Company
realized $6,850,000 in gross proceeds, most of which remained in the form of
cash at the Company's fiscal year-end. For the most part, the proceeds from this
private placement were utilized to purchase TADs as part of Capital's TAD
Program.
In addition to cash, $7,249,757 represents trade accounts receivable, and
$11,213,312 represented TADs receivable (including $7,270,841 of TADs, which
have been sold to a bank). The increase in the Company's assets at September 30,
1997 was principally due to the increase in cash on hand, an increase in trade
acceptance drafts receivable, including both "TADs in safe" and "Due from
banks," and trade accounts receivable.
F-13
<PAGE>
At September 30, 1997, the Company's total stockholders' equity increased to
$17,900,185 as compared to $16,192,117 at June 30, 1997. The principal source
of funds for the Company's operations are revenues earned by its operating
subsidiaries. On May 30, 1997, the Company commenced a private placement of its
common stock pursuant to Regulation D promulgated under the Securities Act of
1933. As of June 30, 1997, the end of the fiscal year, the Company had received
gross proceeds from this private placement of $6,850,000, virtually all of which
has been designated by the Company for the continued expansion of Capital's TAD
Program. The Company terminated this private placement effective the close of
business on June 30, 1997. As mentioned above, a significant portion of these
proceeds were utilized during the first quarter of fiscal 1998 in the purchase
of TADs by Capital.
During the balance of the current fiscal year, ending June 30, 1998, the Company
projects no significant additional capital expenditures in connection with any
of the Company's operations except in connection with the continued expansion of
the operations of Capital. Management plans to establish a number of additional
Sales and Marketing Offices in connection with the marketing of Capital's TAD
Program and has during the first quarter established definitive plans for three
new sales offices for Capital. However, no estimate can be made at this time of
the total cost of such expansion or the potential impact, either positive or
negative, upon revenues or profits during fiscal 1998.
At September 30, 1997 the Company also had property, less accumulated
depreciation, of $248,820, (compared to $238,305 at June 30, 1997) and security
deposits and prepaid expenses of $23,742 and $37,370 respectively.
In connection with the Company's relocation during fiscal 1990, it
received an 18-month rent abatement from its landlord. To conform to applicable
accounting procedures, the value of this abatement is being amortized over the
life of the lease. At September 30, 1997 the Company continued to show $41,912
in deferred rent liability.
Based upon available cash on hand and expected revenues from operations,
management is of the opinion that it will have adequate available funds to meet
its anticipated capital expenditures and cash needs for the balance of fiscal
1998. Thereafter, future capital expenditures will be decided based upon
operating results and available revenues from operations. Apart from expenses
associated with the implementation of Capital's operations, which cannot be
estimated at this time, management projects no significant additional capital
expenditures in connection with its operations during the next twelve months.
On a consolidated basis, management believes that operations from its
subsidiaries will continue to reflect a profit in fiscal 1998 and management
expects that revenues will be adequate to meet the Company's operating cash
needs. The Company plans to draw working capital from cash on hand and operating
revenues.
The Company's outstanding loans payable to Banco Portugues do Atlantico ("BPA")
in the amount of $339,815, represent advances against Capital's credit line
which is fully secured by the proceeds due from TADs which have been sold to BPA
but which have not yet been collected. This loan amount is constantly changing
based upon a number of factors including the total amount of TADs sold to BPA
and the extent to which Capital needs to utilize this credit facility. As of the
date of this Report, the Company has a total credit facility of $4.5 Million, in
the aggregate, with BPA. During June, 1997, Capital secured an additional credit
facility, similar to the one it has with BPA, from Summit Bank, New Jersey, in
the amount of $3 Million. This facility will be available to finance the
continued purchase of TADs by Capital from its customers in much the same manner
as the BPA facility. Consequently, the payment of these outstanding loans is not
expected to have an impact upon the Company's liquidity.
Actrade Capital Inc. And The Trade Acceptance Draft Program.
Following a complete revision of the operating plan for Capital in late fiscal
1993, management developed new trade financing programs intended to be marketed
to domestic companies in the United States. In late fiscal 1993, Capital offered
its first financial program to assist companies in the management and collection
of small open accounts receivable - The TAD Program. During fiscal 1994, the
first full year of operations for this Program, although still in its
development stage, Capital generated gross revenues of $927,757, as compared to
$247,809 during fiscal 1993. During fiscal 1994 the Company incurred general and
administrative expenses directly attributable to Capital's operations of
$180,469 resulting in a loss from Capital's operations, before interest income
and expenses, of $76,649. After interest income of $28,956, interest expense of
$1,918 and provision for taxes of $779, the net loss from operations for Capital
during fiscal 1994 was $50,390. Although showing a modest loss, Capital's
operating results for fiscal 1994 exceeded management's expectations.
F-14
<PAGE>
During fiscal 1995, management decided to implement an aggressive new marketing
plan for the TAD Program, principally in response to the perceived need to
educate potential participants in the Program about how trade acceptances work
and how they could benefit from the TAD Program. As a result, during fiscal
1995, Capital generated total gross revenues of $3,703,493, almost 300% higher
than in fiscal 1994. Direct general and administrative expenses for Capital
totaled $120,175 during fiscal 1995 and, had management not elected to make a
year-end allocation of indirect general and administrative overhead costs, net
income before taxes would have been approximately $215,153. However, due the
year-end allocation to Capital of a share of the Company's indirect general and
administrative costs in the amount of $208,000, Capital reflected net pre-tax
income of only $7,153. During fiscal 1996, Capital generated gross revenues of
$7,993,932, over 116% higher than fiscal 1995, with direct general and
administrative expenses of $274,265, a decrease of over 16% from fiscal 1995 (as
adjusted to include the 1995 year-end allocation). For fiscal 1996, Capital
operations reflected a gross profit of $526,386, with net pre-tax income of
$106,377, an increase of more than 1,387% from fiscal 1995.
During fiscal 1997, ended June 30, 1997, Capital generated gross revenues of
$21,668,573, over 171% higher that fiscal 1996, with direct general and
administrative expenses of $993,197, an increase of 262% over fiscal 1996. The
dramatic increase in both gross revenues and general and administrative expenses
during fiscal 1997 were the direct result of management's aggressive expansion
of its marketing efforts for its TAD Program during fiscal 1997, which included
the opening of two Regional Sales and Marketing offices. For fiscal 1997,
Capital's operations reflected a gross profit of $1,366,322 (up more than 159%
from fiscal 1996), with net pre-tax income of $224,669 (up more than 111% over
fiscal 1996).
During the first quarter of fiscal 1998, Capital's revenues reached $11,505,082,
over 54% of Capital's total revenues during fiscal 1997. Cost of revenues
totaled $10,804,324 resulting in gross profits of $700,759 during the first
quarter. After general and administrative expenses of $445,256, interest expense
of $4,484 and provision for taxes of $43,500, Capital realized net income from
its operations of $207,519, over 92% of Capital's total net income for fiscal
1997. During the first quarter, management began implementation of the next
phase of its expansion program.
IV. Trends Affecting Liquidity, Capital Resources and Operations
Over the years, management has observed a substantial increase in demand for
American made products. In management's opinion, this is due to a renewed
confidence in the quality of American products and the relative weakness in
recent years of the US dollar as compared to other major foreign currencies.
This formed the basis of the Company's operating philosophy since 1989 and, in
management's opinion, continues to favor growth over the foreseeable future.
Combined with recent changes in world political structures, management believes
the demand for American products will continue to increase at least in the
foreseeable future.
Over the past decade, economic conditions in the United States have caused many
American manufacturers to seek new markets for their products and, in
particular, to turn to foreign markets to boost domestic sales. Management
believes this trend, coupled with renewed demand for American products and
improved buying power of foreign currencies, has been beneficial to the Company
and has been a major factor in its growth over the past four years. This trend,
although expected to continue for the foreseeable future, is now being affected
by a number of other factors which could adversely affect future growth rates
for the Company's present operations.
However, recently management has observed that, with the collapse of traditional
political and ideological barriers, the demand for products from all parts of
the world has increased perceptibly with many developing and third world nations
now looking for products from many different countries. This has been
particularly true of countries with "soft" currencies (i.e. currencies not
readily exchangeable into established currencies such as British pounds, US
dollars, etc.), which at present are unable to pay for their purchases in US
dollars. Management believes that the greatest demand for all kinds of foreign
products (including those from the US and other industrial nations) will come
from these new developing third world countries over the next few years. To meet
this changing market demand, the Company initiated an expansion of Actrade's
operations through the establishment of Actrade S.A., which is intended to
compliment current operations by providing foreign sources for products.
As the US economy continues to improve and the dollar strengthens with respect
to other currencies, foreign buying power for American products may decrease
with foreign buyers looking for comparable, but less expensive, products from
other sources.
F-15
<PAGE>
Although it is impossible to predict the extent to which this trend may affect
the competitiveness of American products overseas, it is likely that any
significant decline in buying power of foreign currencies will have an adverse
impact upon Actrade's present operations. Although no assurances can be given,
management believes that by utilizing its foreign network both to promote new
sales of American products and as a source of comparable, less expensive foreign
made products, the Company will gain the flexibility needed to meet changing
product demands over the coming years.
A review of the Company's Statement of Operations shows that the cost of goods
sold, as a percentage of total sales, has increased from approximately 83% in
fiscal 1990 to approximately 90.7% for fiscal 1997 (which is slightly lower than
the 91.7% level reached in fiscal 1996) and 91.5% for the first quarter of
fiscal 1998. This increase is the result of three principal factors. First, the
recessionary factors which influenced economic conditions both in the United
States and other major industrial nations worldwide over the past decade
resulted in a significant increase in competition for a shrinking market. This
resulted in the need to reduce profit margins in order to remain competitive in
the world markets. Second, as the Company's operations have expanded the nature
and mix of the products sold by the Company it has also changed from smaller,
less expensive products to larger or more expensive products, such as the
commercial and industrial air conditioning and refrigeration equipment which
made up a significant proportion of the Company's total sales since fiscal 1992.
With such higher priced products, the profit margins are typically less.
Finally, the sales by Actrade S.A. have typically consisted of larger orders
primarily for computer systems and related equipment from foreign sources, which
typically are based upon lower profit margins. In combination, these factors
resulted in a higher percentage cost of sales for the Company.
Management believes that for the foreseeable future the greatest demand for all
kinds of foreign products (including those from industrialized nations including
the US) will continue to come from the new developing and third world countries.
As a result of the elimination of old political and ideological barriers, many
other factors now have an effect upon the markets for US products overseas
including, among others, lower foreign labor costs and, probably most important,
the availability of (or lack of) trade financing. In management's opinion, the
real "key" to success in international trading has, at least at present, become
the ability to provide trade financing in addition to competitive pricing for
products.
To meet this changing market demand, during fiscal 1997 the Company initiated an
expansion of the international trading operations of Actrade S.A., which was
originally formed to compliment current operations by providing foreign sources
for products to meet foreign demand. Due to the financial strength of the
Company, Actrade S.A. has been in a position to fill the financing void created
by the dramatic increase in worldwide demand, thereby allowing it to capture a
larger share of the current market demand.
The effects of this trend are evident in the Company's operating results for
both fiscal 1997 and during the current period. Sales by Actrade S.A. rose
dramatically from $7,689,000 during fiscal 1996 to $14,743,695 during fiscal
1997 and $6,673,976 for the first quarter of fiscal 1998. Apart from proving
management's assumption that as sales of US products decrease, sales of foreign
products will increase, these results also point out another important factor,
to wit, that worldwide demand for all types of products is increasing. However,
management cannot predict whether the extraordinary rise in sales revenues
experienced by Actrade S.A. will continue. At present, while product demand is
high and the availability of trade financing is low, Actrade S.A. enjoys a
favorable position in the market. As these factors stabilize and as trade
financing becomes more readily available, it is likely that this advantage will
decrease.
Management knows of no other trends reasonably expected to have a material
impact upon the Company's operations or liquidity in the foreseeable future.
VI Inflation.
During the past few years inflation in the United States has been relatively
stable which, coupled with the relative strength of foreign currencies discussed
above, has had a beneficial effect upon the Company's operations in that the
products it offers have been competitively priced in relation to comparable
foreign made products. In management's opinion, this is expected to continue for
the foreseeable future. However, should the American economy again experience
double digit inflation rates, as was the case in the past, the impact upon
prices for American goods could adversely affect the Company's ability to
effectively compete in its overseas markets.
F-16
<PAGE>
Part II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
None during this period.
<PAGE>
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.
Dated: October 31, 1997
ACTRADE INTERNATIONAL, LTD.
BY:_/s/Alex Stonkus___________________
Alex Stonkus,
Chief Financial Officer
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