FORM 10-Q
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
----------------------------------
For Quarter Ended September 30, 1998
Commission File Number 0-18711
ACTRADE INTERNATIONAL, LTD.
(Exact name of Registrant as specified in its Charter)
Delaware 13-3437739
(State or other Jurisdiction (I.R.S. Employer Ident-
of incorporation or organization) ification Number)
7 Penn Plaza, Suite 422, New York, N.Y. 10001
(Address of principal executive offices) (Zip Code)
Same
(Former Address) (Zip Code)
(212) 563-1036
(Registrant's telephone number, including area code)
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 and 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____
Indicate the number of Shares outstanding of each of the Issuer's classes
of common stock, as of the latest practicable date. As of October 25, 1998 there
were outstanding 8,549,051 shares of Common Stock, par value $.0001.
<PAGE>
INDEX
Part I. Financial information
Item 1. Condensed consolidated financial statements:
Balance sheet as of September 30, 1998 and
June 30, 1998 F-2
Statement of operations for the three months
ended September 30, 1998 and 1997 F-3
Statement of cash flows for the three months
ended September 30, 1998 and 1997 F-4
Notes to condensed consolidated financial
statements F-5 - F-10
Item 2. Management's discussion and analysis of financial
condition
Part II. Other information
Signatures
<PAGE>
ACTRADE INTERNATIONAL, LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1998 AND JUNE 30, 1998
(Unaudited)
ASSETS
<TABLE>
<CAPTION>
<S> <C> <C>
September 30, June 30,
1998 1998
---- ----
Current assets:
Cash $ 743,579 $13,381,678
Trade acceptance draft receivable, bank 12,257,246 1,248,368
Accounts receivable, less allowance for
doubtful accounts of $111,700 and $61,700
at September 30, 1998 and June 30, 1998,
respectively 16,111,902 11,031,201
Trade acceptance drafts, on hand 1,140,000
Prepaid expenses 164,474 74,669
----------- -----------
Total current assets 30,417,201 25,735,916
----------- -----------
Property and equipment:
Furniture and fixtures 555,181 524,282
Leasehold improvements 143,916 143,916
----------- -----------
699,097 668,198
Less accumulated depreciation 318,066 293,519
----------- -----------
381,031 374,679
----------- -----------
Other assets:
Patent right 1 1
Security deposit 29,387 26,806
----------- -----------
29,388 26,807
----------- -----------
$30,827,620 $26,137,402
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Cash advance from bank $ 2,743,706
Accounts payable and customer reserves
payable 4,324,176 $ 3,195,691
Accrued expenses 24,031 17,439
Deferred income 118,474 14,190
Income taxes payable 40,744 285,441
----------- -----------
Total current liabilities 7,251,131 3,512,761
----------- -----------
Commitments
Deferred rent liability 27,907 31,721
----------- -----------
Shareholders' equity:
Common stock, $.0001 par value, authorized 100,000,000 shares issued and
outstanding 8,549,051 at September 30, 1998 and 8,541,051
at June 30, 1998 855 854
Common stock purchase warrants
Additional Paid in capital 14,514,348 14,489,668
Retained earnings 9,485,735 8,102,398
----------- -----------
24,000,938 22,592,920
Common stock held in treasury, 31,500 shares 452,356
----------- -----------
23,548,582 22,592,920
$30,827,620 $26,137,402
=========== ===========
See notes to condensed consolidated financial statements.
F-2
</TABLE>
<PAGE>
ACTRADE INTERNATIONAL, LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(Unaudited)
<TABLE>
<CAPTION>
<S> <C> <C>
September 30, September 30,
1998 1997
---- ----
Net sales $38,150,936 $20,001,585
Cost of sales 35,220,847 18,294,246
----------- -----------
Gross profit 2,930,089 1,707,339
Selling, general and administrative
expenses 1,251,644 686,067
----------- -----------
Income from operations 1,678,445 1,021,272
----------- -----------
Other income (charges):
Interest income 45,665 50,368
Interest expense ( 189,506) ( 4,484)
Miscellaneous income 9,436
----------- -----------
( 143,841) 55,320
----------- -----------
Income before income taxes 1,534,604 1,076,592
Income tax expense 141,376 123,737
----------- -----------
Net income $ 1,393,228 $ 952,855
=========== ===========
Earnings per common share:
Primary $ 0.16 $ 0.12
=========== ===========
Fully diluted $ 0.16 $ 0.12
=========== ===========
Weighted average common shares outstanding:
Primary 8,695,254 8,059,416
=========== ===========
Fully diluted 8,695,254 8,059,416
=========== ===========
</TABLE>
See notes to condensed consolidated financial statements.
F-3
<PAGE>
ACTRADE INTERNATIONAL, LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
THREE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(Unaudited)
<TABLE>
<CAPTION>
<S> <C> <C>
September 30, September 30,
1998 1997
---- ----
Operating activities:
Net income $ 1,393,228 $ 952,855
Adjustments to reconcile net income to
cash provided from operating activities:
Depreciation 24,537 15,106
Changes in assets and liabilities:
Accounts, bank and trade acceptances
receivable ( 16,089,579) ( 6,681,129)
Prepaid expenses ( 89,805) ( 28,360)
Inventory, trade acceptance drafts ( 1,140,000)
Accounts payable 1,128,485 1,267,534
Accrued expenses 6,592 ( 8,741)
Deferred income 104,284
Income taxes payable ( 244,697) 40,204
Deferred rent ( 3,814) ( 3,253)
Security deposits ( 2,581) ( 6,000)
Customer deposits ( 26,587)
----------- -----------
Net cash used in operating activities ( 14,913,350) ( 4,478,371)
----------- -----------
Investing activities:
Purchase of treasury stock ( 452,356)
Property and equipment ( 30,899) ( 25,621)
----------- -----------
Net cash used in investing activities ( 483,255) ( 25,621)
----------- -----------
Financing activities:
Proceeds from issuance of common stock 14,800 755,213
Cash advances from bank 2,743,706 ( 679,577)
----------- -----------
Net cash provided from financing
activities 2,758,506 75,636
----------- -----------
Net decrease in cash ( 12,638,099) ( 4,428,356)
Cash, beginning of year 13,381,678 7,352,465
----------- -----------
Cash, end of year $ 743,579 $ 2,924,109
=========== ===========
Supplemental disclosures of cash flow
information:
Cash paid during the year for:
Interest $ 180,446 $ 4,484
=========== ===========
Income taxes $ 346,462 $ 88,946
=========== ===========
See notes to condensed consolidated financial statements.
F-4
</TABLE>
<PAGE>
ACTRADE INTERNATIONAL, LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED SEPTEMBER 30, 1998
(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, 1998, included in its Annual Report filed on Form 10-K. All reference
to Actrade in these footnotes, relate to Actrade International, Ltd., the
Company's wholly owned subsidiaries.
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., formerly
Amworld Commerce, Inc., a wholly owned subsidiary of Actrade International,
Ltd., was incorporated in Delaware in May of 1991. Actrade Capital, Inc. offers
alternatives to existing accounts receivable management to domestic companies.
Actrade South America, Inc., formerly Standard Corporation, a wholly owned
foreign corporation and subsidiary of Actrade International, Corp., was
incorporated in Antigua and Bahamas on February 12, 1988 and was acquired in
January 1990. American Cooling, Inc., a wholly owned subsidiary of Actrade
International, Ltd. was incorporated in Delaware in 1992 and was liquidated in
1996. On August 14, 1997, TAD International Ltd. and on May 29, 1998, Actrade
Forfaiting Inc. were incorporated under the laws of the Commonwealth of the
Bahamas. Both Companies are wholly owned subsidiaries of Actrade South America,
Inc. TAD International, Ltd. has been inactive since inception. Actrade
Forfaiting, Inc. deals with trade acceptance drafts (TAD's) on the foreign
market and began operations in June of 1998. In July of 1998, Actrade Capital
Canada, Ltd. was incorporated under the laws of Canada. The Company is a wholly
owned subsidiary of Actrade Forfaiting, Inc. and deals with trade acceptance
drafts (TAD's) on the Canadian market, beginning operations in October of 1998.
F-5
<PAGE>
ACTRADE INTERNATIONAL, LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED SEPTEMBER 30, 1998
(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 International Corp., Actrade Capital, Inc., and American Cooling, Inc.
are included as the subsidiaries of Actrade International, Ltd. Actrade
Forfaiting, Inc. and TAD International, Ltd. are included as subsidiaries of
Actrade South America. Actrade Capital Canada, Ltd. is included as a subsidiary
of Actrade Forfaiting, Inc.
4. Risks and uncertainties:
The Company sells in foreign markets. There is no guarantee that the
foreign market will continue to develop since the incorporation of foreign and
domestic government intervention, economic conditions world wide and any other
unforeseen situations may occur.
With respect to Actrade Capital, Inc. and its TAD Program, the Company
faces strong competition from many established financial institutions, including
banks, insurance companies and receivables financing (factoring) companies.
Actrade Capital, Inc.'s TAD Program (see Note 8) is based upon the introduction
of a Trade Acceptance Draft (TAD). There is no assurance that management will be
successful in either gaining the necessary market acceptance for the TAD Program
or in securing adequate additional capital to expand to its full commercial
potential.
5. Related party transactions:
During each of the three years ended September 30, 1998, 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.
F-6
<PAGE>
ACTRADE INTERNATIONAL, LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED SEPTEMBER 30, 1998
(Unaudited)
6. Leases:
Monthly
Location Term Payment
New York 03/01/90 to 03/31/00 $5,715.58 to $6,241.58
New York 10/01/96 to 10/31/98 3,000.00
New York 04/01/97 to 03/31/00 1,628.63 to 1,716.28
Illinois 11/01/97 to 10/31/00 2,502.00 to 2,576.00
Pennsylvania month to month 1,400.00
Houston 03/15/98 to 03/15/99 850.00
Florida 12/25/97 to 12/25/98 1,223.75
California month to month 350.00
Georgia 09/01/98 to 08/31/01 3,274.38 to 3,474.20
Israel month to month 500.00 to 1,100.00
Bahamas month to month 500.00
Canada 11/01/98 to 10/31/01 2,260.00
Future minimum lease payments required under the non cancelable operating
leases by fiscal year are as follows:
September 30, 1999 $200,106
September 30, 2000 148,300
September 30, 2001 43,052
--------
$391,458
========
Rent expense amounted to $54,944 and $32,507 for 1998 and 1997,
respectively.
7. Income taxes:
The components of income tax expense are:
1998 1997
---- ----
Income taxes currently payable:
Federal $ 55,704 $ 80,967
State 61,066 44,270
-------- --------
116,770 125,237
-------- --------
Deferred tax expense arising from:
Excess of Financial accounting
depreciation over tax ( 2,930) ( 1,012)
Allowance for doubtful accounts 17,000
Other 10,536 ( 488)
-------- --------
24,606 ( 1,500)
-------- --------
Total income tax expense $141,376 $123,737
======== ========
F-7
<PAGE>
ACTRADE INTERNATIONAL, LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED SEPTEMBER 30, 1998
(Unaudited)
7. Income taxes (continued):
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:
1998 1997
---- ----
Computed tax at the expected
statutory rate $514,010 $410,254
Surtax exemption ( 16,750) ( 16,750)
State income taxes 60,991 44,270
Foreign income ( 441,481) ( 312,537)
Other 24,606 ( 1,500)
-------- --------
Income tax expense $141,376 $123,737
======== ========
The effective statutory rate for 1998 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 $9,045,232 at September 30, 1998 and $4,542,751 at
September 30, 1997.
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.
F-8
<PAGE>
ACTRADE INTERNATIONAL, LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED SEPTEMBER 30, 1998
(Unaudited)
8. Trade Acceptance Drafts receivable, bank:
As of September 30, 1998, the Company had total TAD amounts due from banks
of $7,866,656. The bank purchases the TAD's at the face value and advances these
amounts to Actrade. The bank purchases the TAD's without recourse and the
Company has granted a security interest in all TAD's purchased by the bank and
all accounts represented by the TAD's together with all proceeds of the above.
The bank will purchase each TAD by advancing to Actrade 100% of the face amount
of each TAD assigned and delivered by overdraft on the Actrade account. At
September 30, 1998 there were advances of $2,743,706 on the overdraft. As each
TAD is collateralized, the face amount will be credited to the Actrade account
to reduce the advance overdraft. Interest is payable at 1% over prime per annum
on the first day of each month.
As of September 30, 1998, the Company had sold TAD's to a banking
institution in the amount of $4,390,590. This amount was due from the bank at
September 30, 1998 and collected in October.
As of September 30, 1998, Actrade Capital, Inc. has recorded in income all
TAD's issued with a 90 day expiration date. Any TAD's issued for over 90 days
have been recorded with deferred income at September 30, 1998. Deferred income
from TAD's over 90 days amounted to $118,474.
9. Reconciliation of shares used in computation of earnings per share:
Three months ended
September 30,
1998 1997
---- ----
Weighted average of shares
actually outstanding 8,523,763 7,663,755
Common stock purchase
warrants and options 171,491 395,661
--------- ---------
Primary and fully diluted
weighted average common
shares outstanding 8,695,254 8,059,416
========= =========
F-9
<PAGE>
ACTRADE INTERNATIONAL, LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED SEPTEMBER 30, 1998
(Unaudited)
10. Common stock purchase warrants and options:
In the quarter ended September 30, 1998, 8,000 warrants were exercised at
prices ranging from $3.00 to $5.00, resulting in net proceeds to the Company of
$30,000 and the issuance of 8,000 common shares.
In the quarter ended September 30, 1998, the Company refunded an
overpayment from the exercise of certain warrants in June of 1998. This refund
amounted to $15,200.
In October 1995, the FASB issued Statement 123, Accounting for Stock-based
Compensation (SFAS 123). This statement is effective for transactions that are
entered into in fiscal years beginning after December 15, 1995. SFAS 123
establishes a fair value-based method of accounting for employee stock options.
This method provides for compensation cost to be charged to results of
operations at the grant date. However, the statement allows companies to
continue to follow the accounting treatment prescribed by Accounting Principles
Board Opinion 25. Opinion 25 generally requires compensation cost to be
recognized only for the excess of the quoted market price at the grant date over
the price that an employee must pay to acquire stock. Companies electing to
continue with Opinion 25 must make disclosure of net income as if SFAS 123 had
been adopted.
The Company has determined the method of accounting that it will follow for
stock options by continuing the use of Opinion 25. However, the Company does not
expect that adoption of the requirements of SFAS 123 would have a material
impact on the financial position, results of operations or cash flows.
Accordingly, no compensation cost will be recognized in 1998.
11. Patent rights:
In January 1998, Amos Aharoni assigned to the Company all patent rights for
the trade acceptance draft process for $1.
F-10
<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 1999, ended September 30, 1998, the
Company had combined gross revenues of $38,150,936, as compared to $20,001,585
for the first three months of fiscal 1998, an increase of $18,149,351 or almost
91%. Cost of sales during this period totaled $35,220,847, or approximately 92%
of gross revenues, as compared to cost of goods sold for the same period in
fiscal 1998 of $18,294,246, or slightly less than 92% of gross revenues. This
resulted in gross profit from operations of $2,930,089 for the three month
period ended September 30, 1998, compared to $1,707,339 for the same period in
fiscal 1998, an increase of $1,222,750 (or approximately 72% higher) from the
first quarter of fiscal 1998. After general and administrative expenses of
$1,251,644, income from operations increased to $1,678,445, as compared to
$1,021,272 for the same period last year, an increase of over 64%. After
interest income and expenses and provisions for income taxes, the Company
experienced net earnings of $1,393,218, as compared to $952,855 for the first
three months of fiscal 1998 (an increase of over 46%), or $0.16 per share as
compared to $0.12 per share for the same period last year.
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 1998 to approximately 90.7% for fiscal 1997 (which is slightly lower
than the 91.7% level reached in fiscal 1996) and approximately 91.4% for fiscal
1998. For the first quarter of fiscal 1999, cost of goods sold reached 92.3% of
gross revenues, up from 91.5% during the same period last year. This increase is
the result of the markup experienced by Capital being lower than the markup
associated with the Company's international trade operations.
The increase in gross revenues during this period continues to be due primarily
to the expansion of Actrade's operations through (i) the continued growth of
Capital's TAD Program, discussed separately below (see "III. Impact of Trade
Acceptance Draft Program and the Operations of Capital"), and (ii) the continued
growth within Actrade's existing product lines, in particular with the
operations of Actrade S.A. As was the case during past periods, the increase in
revenues during this period resulted from increased product sales rather than
from price increases for the Company's products and increased operating revenues
derived from Capital.
Continuing the trend first established at the end of the first quarter of fiscal
1998, the major portion of the Company's revenues, almost 58.5% at the end of
the first three months of fiscal 1999, are now derived from Capital's TAD
Program ($22,306,043 during the first quarter of fiscal 1999), with Actrade
S.A., the international trading division, accounting for slightly over 38%
($14,505,105) of total gross revenues for this period.
Included in revenues for Actrade S.A. are figures for Actrade Resources,
Inc. (formerly Actrade Forfaiting, Inc.) which commenced operations in June,
1998. During the first quarter of fiscal 1999, Actrade Resources, Inc.
("Resources") had total gross revenues of $5,559,341, or approximately 14.6% of
the Company's total revenues. After cost of revenues of $5,164,453, general and
administrative expenses of $38,740 and interest income of $15,264, Resources had
net income for the period of $371,412. Management expects that revenues for
Resources will continue to increase during the balance of fiscal 1999 as it
continues to expand its operations.
<PAGE>
II. Discussion of Financial Condition
On a consolidated basis, at September 30, 1998 the Company had total current
assets of $30,417,201, compared with $25,735,916 at June 30, 1998, the end of
fiscal 1998, (an increase of $4,681,285 or 18.2%). Total current liabilities at
September 30, 1998 increased to $7,251,131, compared with $3,512,761 at June 30,
1998, (an increase of $3,738,370 or approximately 106%). The major component of
this increase in current liabilities is "cash advance from bank" which
represents Capital's partial utilization of the overdraft line provided by
Capital" bank (see discussion below) and increases in trade accounts payable.
With respect to the cash and cash equivalent component of the Company's Assets,
since Capital typically utilizes available cash on hand for the purchase of
TADs, the comparison of this item should more properly be made with respect to
combined cash plus accounts receivable-bank plus trade acceptance drafts on hand
("Cash Plus TADs"). When viewed in this fashion, at September 30, 1998, the
Company had Cash Plus TADs of $14,140,825 as compared to Cash Plus TADs of
$14,630,046 at June 30, 1998, a decrease of only $489,221 in total Cash plus
TADs. This decrease in Cash Plus TADs at September 30, 1998 reflects the ongoing
utilization of available cash by both Capital and the Company's export division
in the ordinary course of business. In addition, it must be remembered that
shortly before the end of fiscal 1998, Capital had sold virtually all of then
outstanding TADs and had received the proceeds of such sale from the bank. This
resulted in the large cash on hand at June 30, 1998 (in the amount of
$13,381,678) and the relatively low receivable-bank (in the amount of
$1,248,368). At September 30, 1998 Capital had elected not to receive the full
proceeds from the sale of TADs to its bank in order to reduce finance charges.
This resulted in a receivable-bank of $12,257,246 (representing the full
proceeds of sale available to Capital) and the relatively low cash on hand
($743,579). During the first quarter of fiscal 1999, in addition to having fully
utilized its available cash on hand, Capital used approximately $2,743,000 from
the total available funds due from its bank as a result of the sale of TAD that
resulted in the liability "cash advance from bank."
Apart from Cash Plus TADs, $16,111,902 represents accounts receivable at
September 30, 1998, as compared to $11,031,201 at June 30, 1998, an increase of
$5,080,701. The substantial increase in the Company's accounts receivable during
the first quarter is, in significant part, due to the activities of Actrade S.A.
which, at September 30, 1998 had accounts receivable of $8,945,764 and accounts
payable of $2,760,000.
Other significant changes in the components of the Company's balance sheet at
September 30, 1998 as compared to June 30, 1998, included (i) an increase of
$89,805 in prepaid expenses; (ii) a decrease of income taxes payable, resulting
from the payment of the Company's year-end tax liability; (iii) an increase of
$104,284 in deferred income; and (iv) an increase of $452,356 in common stock
held in treasury, which represents shares repurchased by the Company in the open
market.
<PAGE>
At September 30, 1998, total stockholders' equity increased to $23,548,582,
as compared to $22,592,920 at June 30, 1998. The principal source of funds for
the Company's operations continues to be revenues earned by its operating
subsidiaries.
During the balance of the current fiscal year, ending June 30, 1999, the Company
expects to incur significant capital expenditures in connection with the
continued expansion of the domestic TAD Program of Capital and the continued
implementation and expansion of the international TAD program by Resources.
Consequently, no estimate can be made at this time of the potential impact,
either positive or negative, that this expansion efforts will have upon revenues
or profits during fiscal 1999.
At September 30, 1998 the Company also had property, less accumulated
depreciation, of $381,031 (compared to $374,679 at June 30, 1998) and security
deposits and Patent rights of $29,387 and $1 respectively. The Company's Patent
rights resulted from the sale by Mr. Amos Aharoni, CEO of the Company, of all
his right title and interest in the Patent obtained for the TAD Program process.
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, 1998 the Company continued to show $27,907 in deferred
rent liability.
The Company's accounts payable are current.
As mentioned above, at September 30, 1998, the Company had outstanding loans
payable to its bank totaling $2,743,706, representing advances against Capital's
credit facility representing advances against the sale of TADs to a major
European Bank. Due to the Company's utilization of approximately $13,000,000 in
available cash during this period, Capital only needed to draw against a portion
of this credit facility thereby eliminating the interest expense associated
therewith.
With respect to the Company's working capital needs, management believes that
operating revenues from its subsidiaries will continue to reflect a profit, on a
consolidated basis, during the balance of fiscal 1999 and management expects
revenues and cash flow will be adequate to meet the Company's operating needs
for the foreseeable future.
As of the date of this Report, of the Company's total accounts receivable
at June 30, 1997, in the amount of $11,031,201, approximately 85% have been
collected. Further, of the balance remaining uncollected as of the date hereof,
none are past due.
III. Impact of the Trade Acceptance Draft Program and the Operations of Capital.
Since fiscal 1994, the first full year of operations for the TAD Program,
Capital's gross sales have increased significantly from $927,757 in 1994 to over
$55.5 Million in fiscal 1998. This growth continues today with Capital's
operating revenues during the first quarter of fiscal 1999 climbing to
$22,306,043, or approximately 58.5% of the Company's total sales during this
period, as compared to total sales of $11,505,082, or approximately 57.5% of
total sales, during the first quarter of fiscal 1998. Perhaps most importantly
however, Capital's gross sales during this period were $10,800,961 higher than
in the same period last year, an increase of almost 94%.
<PAGE>
During this period cost of sales reached $20,882,811, compared to
$10,804,324 for the same period in fiscal 1998, with gross profits from
operations of $1,423,231, compared to $700,759 for the first quarter of fiscal
1998. This represents an increase of approximately 103%. However, due to the
continued expansion of operations by Capital, direct selling, general and
administrative expenses climbed to $965,746, compared to $445,256 for fiscal
1998, an increase of almost 117%. After interest income of $12,993 and interest
expense of $189,400, Capital had net operating income before taxes of $281,079,
with net income of $219,089 after an allowance for taxes of $61,990.
With respect to Capital's expansion plans, based upon management's experience
with the TAD Program to date, Capital will continue to place its primary
emphasis on development of a domestic force of aggressive new sales
representatives with a solid background in sales and with the experience and
ability to present the TAD Program to large domestic and multi-national
companies.
IV. Trends Affecting Liquidity, Capital Resources and Operations.
A. Actrade Capital, Inc.
With respect to the TAD Program, management has not identified any trends
which have had, or which can reasonably be expected in the future to have, any
adverse impact upon the operations of Capital or the TAD Program in general. As
of the date of this Report, management is not aware of any company operating a
program similar to the TAD Program. As demonstrated by Capital's growth since
introduction of the TAD Program (see discussion above), Capital's sales and
profits have reach new record levels each quarter since the Program was first
introduced.
Actrade International Corp. - Export Division.
Over the years, economic conditions in the United States have caused
American manufacturers to seek new markets for their products and, in
particular, to turn to foreign markets to boost domestic sales. Management
believes that over the past several years this trend, coupled with renewed
demand for American products and improved buying power of foreign currencies,
has been beneficial to the Company's export division and has been a major factor
in the growth of this division.
This trend is now being affected by a number of factors that could
adversely affect future growth rates for the Company's export operations. Most
importantly among these has been the renewed strength of the American Dollar
compared to other currencies which has had the effect of making American
products too expensive to compete with foreign-made products. Principally this
is due to the impact that reduced foreign labor costs have upon the price of
competitive merchandise.
In addition, recent turmoil in the Asian and Eastern European financial
markets is expected to translate into a slow down in orders for American made
products in these regions which is expected to adversely affect the Company's
export division. However, to date, the Company has been able to offset this
negative trend with increased orders from other markets around the world,
although no assurance can be given as to future results, particularly if the
crisis in the Asian and Eastern European markets continue.
<PAGE>
Actrade S.A. - International Trade Division.
The operations of Actrade S.A. were originally designed to compliment the
Company's export operations by providing foreign sources for products.
Management believes that the network of suppliers established by Actrade S.A.
provides a source of comparable, less expensive foreign made products. When
coupled with its financial ability, management believes that Actrade S.A. has
the flexibility needed to meet changing product demands over the coming years
and adequately offset any decline in its export operations. These changing
trends have been the principal reason for the increase in sales by Actrade S.A.
Perhaps most importantly, another result of these changing world conditions,
which have had, and continue to have, an adverse impact on foreign markets for
US products, has been the impact of the availability of trade financing or, more
accurately, the lack of such 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. Recognizing the importance of these factors, in fiscal 1997 the
Company further expanded the operations of Actrade S.A. to provide trade
financing in the international market. During fiscal 1998, the Company completed
initial plans to establish an international counterpart to Capital's TAD Program
and, in June 1998, Actrade Resources, Inc. (formerly Actrade Forfaiting, Inc.)
began operations. Due to the financial strength of the Company, Actrade S.A. and
Resources have been in a position to benefit from the financing void created by
the dramatic increase in worldwide demand for commercial and consumer products
coupled with the need for available, innovative financing methods.
The effects of this trend are evident in the Company's operating results for
both fiscal 1998 and during the current period. Sales by Actrade S.A. have risen
dramatically in the past few years from $7,689,000 during fiscal 1996, to
$14,743,695 during fiscal 1997 and $31,558,737 for fiscal 1998. For the first
three months of fiscal 1998, Actrade S.A. had total sales revenues, excluding
revenues of Resources discussed earlier, of $8,945,764 (compared to $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 indicate that worldwide demand for all types
commercial and consumer products is increasing. Management cannot predict
whether the extraordinary rise in sales revenues experienced by Actrade S.A.
over the past few years 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.
With respect to the activities of Resources, management believes that the demand
for the type of financing offered by Resources will be unaffected by the
foregoing since plans call for Resources to ultimately provide a TAD Program
equivalent in a number of foreign countries. As of October 1, 1998, the Company
established an office in Canada and is currently in the process of establishing
an office in the United Kingdom. Further, management is evaluating the legal and
banking systems in various other countries within the European Economic
Community.
<PAGE>
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. Although the recent strength of the American dollar
abroad has served to diminished the demand for American products, in
management's opinion, the impact on its export sales is not expected to be
significant within 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.
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 29, 1998
ACTRADE INTERNATIONAL, LTD.
BY:__/s/Alexander C. Stonkus_________
Chief Operating Officer and Chief
Financial Officer
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