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 March 31, 1998
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 March 31, 1998
Common Stock, par value $0.0001
per share 8,273,751
<PAGE>
INDEX
Part I. Financial information
Item 1. Condensed consolidated financial statements:
Balance sheet as of March 31, 1998 and
June 30, 1997 F-2
Statement of operations for nine and three
months ended March 31, 1998 and 1997 F-3
Statement of shareholders' equity F-4
Statement of cash flows for the nine months
ended March 31, 1998 and 1997 F-5
Notes to consolidated condensed financial statements F-6 - F-13
Item 2. Management's discussion and analysis of financial
condition
Part II. Other information
Signatures
F-1
<PAGE>
ACTRADE INTERNATIONAL, LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
MARCH 31, 1998 AND JUNE 30, 1997
(Unaudited)
ASSETS
March 31, June 30,
1998 1997
---- ----
Current assets:
Cash $ 7,027,979 $ 7,352,465
Accounts receivable, less allowance for
doubtful accounts of $35,000 13,524,446 5,269,516
Accounts receivable, trade acceptance drafts 1,793,067 6,477,424
Prepaid expenses 43,329 9,010
----------- -----------
Total current assets 22,388,821 19,108,415
----------- -----------
Property and equipment:
Furniture and fixtures 467,939 308,717
Leasehold improvements 143,915 142,672
----------- -----------
611,854 451,389
Less accumulated depreciation 268,880 213,084
----------- -----------
342,974 238,305
---------- -----------
Other assets:
Patent right 1
Security deposits 27,135 17,742
----------- -----------
27,136 17,742
----------- -----------
$22,758,931 $19,364,462
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Cash advance from bank $ 1,019,392
Customer deposits 26,587
Accounts payable $ 1,922,320 1,995,148
Accrued expenses 9,644 11,759
Deferred income 47,131
Payroll taxes payable 6,862
Income taxes payable 206,939 67,432
----------- -----------
Total current liabilities 2,186,034 3,127,180
----------- -----------
Commitments
Deferred rent liability 35,404 45,165
----------- -----------
Shareholders' equity:
Common stock, $.0001 par value; authorized 100,000,000 shares, issued and
outstanding 8,273,751 shares at March 31, 1998 and
7,470,681 at June 30, 1997 827 747
Common stock purchase warrants
Additional paid in capital 13,706,920 12,505,787
Retained earnings 6,829,746 3,685,583
----------- -----------
20,537,493 16,192,117
----------- -----------
$22,758,931 $19,364,462
=========== ===========
See notes to condensed consolidated financial statements.
F-2
<PAGE>
ACTRADE INTERNATIONAL, LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE NINE AND THREE MONTHS ENDED MARCH 31, 1998 AND 1997
(Unaudited)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Nine Months Ended Three Months Ended
March 31, March 31,
1998 1997 1998 1997
---- ---- ---- ----
Net sales $68,671,402 $29,456,296 $25,553,958 $12,997,729
Cost of sales 62,655,911 26,846,681 23,348,664 11,985,943
----------- ----------- ----------- -----------
Gross profit 6,015,491 2,609,615 2,205,294 1,011,786
Selling, general and
administrative expenses 2,544,461 1,436,053 955,388 532,694
----------- ----------- ----------- -----------
Income from operations 3,471,030 1,173,562 1,249,906 479,092
----------- ----------- ----------- -----------
Other income (charges):
Miscellaneous income 30,508 21,073
Interest income 68,599 15,957 6,379 76
Interest expense ( 148,265) ( 34,839) ( 85,725) ( 3,277)
----------- ----------- ----------- -----------
( 49,158) ( 18,882) ( 58,273) ( 3,201)
----------- ----------- ----------- -----------
Income before income
taxes 3,421,872 1,154,680 1,191,633 475,891
Income tax expense
(benefit) 277,709 18,905 84,414 ( 27,830)
----------- ----------- ----------- -----------
Net income $ 3,144,163 $ 1,135,775 $ 1,107,219 $ 503,721
=========== =========== =========== ===========
Earnings per common share:
Primary $ .37 $ 0.18 $ .13$ 0.08
=========== =========== ============= =========
Fully diluted $ .37 $ 0.18 $ .13$ 0.08
=========== =========== ============= =========
Weighted average common shares outstanding:
Primary 8,496,387 6,351,547 8,625,248 6,635,125
=========== =========== =========== ==========
Fully diluted 8,496,387 6,351,547 8,625,248 6,635,125
=========== =========== =========== ==========
</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 MARCH 31, 1998
(Unaudited)
<TABLE>
<CAPTION>
<S> <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 803,070 80 1,201,133 1,201,213
Net income for the nine
months ended March
31, 1998 3,144,163 3,144,163
--------- ---- ----------- ---------- -----------
Balance at March 31, 1998 8,273,751 $827 $13,706,920 $6,829,746 $20,537,493
========= ==== =========== ========== ===========
</TABLE>
See notes to condensed consolidated financial statements.
F-4
<PAGE>
ACTRADE INTERNATIONAL, LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
NINE MONTHS ENDED MARCH 31, 1998 AND 1997
(Unaudited)
1998 1997
---- ----
Cash flow from operating activities:
Net income $3,144,163 $1,135,775
Adjustments to reconcile net income
to cash provided by operating activities:
Depreciation 55,796 28,178
Changes in assets and liabilities:
Accounts receivable ( 3,570,573) ( 4,856,340)
Accounts receivable, other 70,783
Prepaid expenses ( 34,319) ( 20,489)
Interest receivable 3,162
Accounts payable ( 72,828) ( 165,404)
Accrued expenses ( 8,977) 827
Deferred income 47,131
Income taxes payable 139,507 ( 12,840)
Customer deposits ( 26,587) ( 55,954)
Security deposits ( 9,393) ( 950)
Deferred rent ( 9,761) ( 7,546)
---------- -----------
Net cash used in operating activities ( 345,841) ( 3,880,798)
---------- ----------
Investing activities:
Patent right ( 1)
Purchase of property and equipment ( 160,465) ( 101,246)
---------- ----------
Net cash used in investing activities ( 160,466) ( 101,246)
---------- ----------
Financing activities:
Proceeds from issuance of common stock 1,201,213 2,938,800
Decrease in cash advances, bank ( 1,019,392) ( 552,627)
---------- ----------
Net cash provided by financing activities 181,821 2,386,173
---------- ----------
Net decrease in cash ( 324,486) ( 1,595,871)
Cash, beginning of period 7,352,465 1,924,805
---------- ----------
Cash, end of period $7,027,979 $ 328,934
=========== ==========
Supplemental disclosures from cash flow information: Cash paid during the year
for:
Interest $ 148,265 $ 15,957
========== ==========
Income taxes $ 138,202 $ 39,361
========== ==========
See notes to condensed consolidated financial statements.
F-5
<PAGE>
ACTRADE INTERNATIONAL, LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED MARCH 31, 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, 1997, 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., 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 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. On August 14, 1997, TAD
International Ltd. was incorporated under the laws of Antiqua and Barluda. TAD
International, Ltd. is a wholly owned subsidiary of Actrade International, Ltd.
and has been inactive since formation.
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., American Cooling, Inc. and
TAD International, Ltd. are included as the subsidiaries of Actrade
International, Ltd.
F-6
<PAGE>
ACTRADE INTERNATIONAL, LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED MARCH 31, 1998
(Unaudited)
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 December 31, 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.
6. Leases:
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.
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. This
F-7
<PAGE>
ACTRADE INTERNATIONAL, LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED MARCH 31, 1998
(Unaudited)
6. Leases (continued):
lease was not renewed as the Company moved its offices under the terms of a
new lease signed December 16, 1997. The lease is for a one year period
expiring December 25, 1998 and carries rent at $14,685 per year or $1,224
per month.
In August 1996, Actrade Capital, Inc. entered into a 12 month lease expiring
on August 31, 1997 for space in an Illinois office suite which was extended
until October 31, 1997. 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, at which time the lease was terminated.
On October 13, 1997 Actrade Capital, Inc. entered into a three year lease
expiring October 31, 2000 in an illinois office suite. The lease provides
for monthly payments of $2,502.00 increasing annually at a rate of 1.5%.
In May 1997, Actrade Capital, Inc. entered into a 15 month lease for office
space in Utah. This lease was terminated in January 1998. 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.
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.
Beginning March 1, 1998, Actrade Capital, Inc. entered into a lease in
Kansas for a thirteen month period expiring March 31, 1999. The lease
calls for monthly rentals of $693.
Effective March 15, 1998, Actrade Capital, Inc. entered into a lease in
Houston, Texas. The lease, which expires March 15, 1999, carries a rent
of $850 per month.
Future minimum lease payments required under non-cancelable operating leases
by fiscal year are as follows:
March 31, 1999 $163,817
March 31, 2000 $113,757
March 31, 2001 $ 12,890
Rent expense amounted to $122,973 and $65,516 for 1998 and 1997,
respectively.
F-8
<PAGE>
ACTRADE INTERNATIONAL, LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED MARCH 31, 1998
(Unaudited)
6. Leases (continued):
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 1998 and $6,000 in 1997,
subject to adjustment based upon the commissions paid to the agent during
such year.
7. Income taxes:
The components of income tax expense are:
Nine months Nine months
Ended Ended
March 31 March 31
1998 1997
---- ----
Income taxes currently payable:
Federal $176,417 $ 7,750
State 102,864 8,462
-------- --------
279,281 16,212
-------- --------
Deferred tax expense arising from:
Excess of Financial accounting
depreciation over tax ( 3,036) ( 2,165)
Excess of tax deductible rent over rent
expense for financial accounting purposes 1,464 4,858
-------- --------
( 1,572) 2,693
-------- --------
Total income tax expense $277,709 $ 18,905
======== ========
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:
Nine months Nine months
Ended Ended
March 31 March 31
1998 1997
---- ----
Computed tax at the expected
statutory rate $1,271,013 $442,952
Surtax exemption ( 16,750) ( 16,750)
State income taxes 102,864 8,462
Foreign income ( 1,077,846) ( 418,452)
Other ( 1,572) 2,693
---------- --------
Income tax expense $ 277,709 $ 18,905
========== ========
F-9
<PAGE>
ACTRADE INTERNATIONAL, LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED MARCH 31, 1998
(Unaudited)
7. Income taxes (continued):
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
$6,571,412 at March 31, 1998 and $3,049,642 at March 31, 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.
8. Trade Acceptance Drafts receivable, bank:
As of March 31, 1998, Actrade Capital, Inc.'s, formerly Amworld Commerce,
Inc., a wholly owned subsidiary of Actrade International, Ltd., total TAD
amounts due from the bank were $1,793,067. 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 guarantees 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 March 31,
1998, there were no advances on the overdraft. 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 shall be charged on the 1st day of each month.
As of March 1, 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 as deferred income at March 31, 1998. Deferred
income from TAD's over 90 days amounted to $47,131.
F-10
<PAGE>
ACTRADE INTERNATIONAL, LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED MARCH 31, 1998
(Unaudited)
9. Reconciliation of shares used in computation of earnings per share:
Nine months ended Three months ended
March 31, March 31,
1998 1997 1998 1997
---- ---- ---- ----
Weighted average of shares
actually outstanding 8,139,501 6,216,547 8,268,362 6,500,125
Common stock purchase
warrants and options 356,886 135,000 356,886 135,000
--------- --------- --------- ---------
Primary and fully diluted
weighted average common
shares outstanding 8,496,387 6,351,547 8,625,248 6,635,125
========== ========= ========= =========
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 38,318 (w) $ 1.35 06/30/98
Amos Aharoni 06/30/96 200,000 (w) 3.35 06/30/99
Amos Aharoni 10/01/96 132,915 (w) 5.00 09/30/99
Amos Aharoni 01/01/97 176,629 (w) 6.05 12/31/99
Amos Aharoni 04/01/97 207,157 (w) 9.70 03/31/00
Amos Aharoni 06/01/97 3,000 (o) 5.00 12/31/00
Amos Aharoni 07/01/97 220,000 (o) 11.20 06/30/00
Amos Aharoni 10/01/97 56,382 (o) 13.53 09/30/00
Amos Aharoni 01/06/98 2,500 (o) 14.30 01/05/02
Amos Aharoni 01/09/98 44,430 (o) 19.50 12/31/00
---------
1,081,331
---------
John Woerner 01/06/98 2,500 (o) 14.30 01/05/02
---------
F-11
<PAGE>
ACTRADE INTERNATIONAL, LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED MARCH 31, 1998
(Unaudited)
10. Common stock purchase warrants and options outstanding (continued):
Summary of warrants (w) and options (o) outstanding (continued):
Warrants (w) Exercise Expiration
Date Options (o) Price Date
Leon Schorr 01/21/97 2,500 (w) 6.40 01/20/01
Leon Schorr 02/06/97 2,500 (o) 5.00 12/31/00
---------
5,000
-----
Elizabeth Melnick 11/30/95 20,000 (o) 1.50 11/29/99
Elizabeth Melnick 08/08/96 5,000 (o) 3.00 08/08/99
Elizabeth Melnick 01/01/97 2,500 (o) 5.00 12/31/00
Elizabeth Melnick 01/01/97 3,000 (o) 5.00 12/31/00
Elizabeth Melnick 01/21/97 2,500 (w) 6.40 01/20/01
Elizabeth Melnick 01/06/98 2,500 (o) 14.30 01/05/02
---------
35,500
Other employees various 120,407 (o) 1.50 2000-2002
--------- to 14.30
Total 1,244,738
=========
In the quarter ended December 31, 1997, 793,070 warrants were exercised at
prices ranging from $1.25 to $6.40, resulting in net proceeds to the Company
of $1,171,213 and the issuance of 793,070 common shares.
In the quarter ended March 31, 1998, 10,000 options were exercised at a
price of $3.00 resulting in net proceeds to the Company of $30,000 and the
issuance of 10,000 common shares.
On January 22, 1998, the Company issued Amos Aharoni, as part of a
compensation agreement, an option for 1,000,000 shares of the Company's
common stock at an exercise price of $15.40 per share with an expiration
date of January 22, 2005. The exercise price of the option is equal to the
market value on the date of grant. This option was subsequently cancelled in
February of 1998.
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.
F-12
<PAGE>
ACTRADE INTERNATIONAL, LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED MARCH 31, 1998
(Unaudited)
10. Common stock purchase warrants and options outstanding (continued):
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-13
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
I. Results of Operations
During the first nine months of fiscal 1998, ended March 31, 1998, the Company
had combined gross revenues of $68,671,402, as compared to $29,456,296 for the
first nine months of fiscal 1997, an increase of over $39,215,106 or 133%. Cost
of sales during this period totaled $62,655,911, or 91% of gross revenues, as
compared to cost of goods sold for the same period in fiscal 1997 of
$26,846,681, or 91.1% of gross revenues. This resulted in gross profits from
operations of $6,015,491 for the nine month period ended March 31, 1998,
compared to $2,609,615 for the same period in fiscal 1997, an increase of
$3,405,876 (or approximately 130%) from the first nine months of fiscal 1997.
After general and administrative expenses of $2,544,461, income from operations
increased to $3,471,030, as compared to $1,173,562 for the same period last
year, an increase of 190%. After interest income and expenses and provisions for
income taxes, the Company experienced net earnings of $3,144,163, as compared to
$1,135,775 for the first nine months of fiscal 1997 (an increase of 177%), or
$0.37 per share as compared to $0.18 per share for the same period last year.
The substantial increase in gross revenues during the nine months of fiscal
1998, which equaled 157% of the Company's total revenues for all of fiscal 1997,
was primarily due to the expansion of the Company's operations through (i)
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") and (ii) the increased sales by its subsidiary
Actrade S.A.
With respect to the three months ended March 31, 1998, gross revenues reached
$25,553,958 (up 97% from the third quarter of fiscal 1997); gross profit climbed
to $2,205,294 (an increase of 118% from the third quarter of fiscal 1997);
income from operations totaled $1,249,906 (up 161% from the same period in
fiscal 1997); and net earnings after interest income and expenses and allowances
for income taxes reached $1,107,216 (an increase of 120% from fiscal 1997), or
$0.13 per share for the quarter ended March 31, 1998 (as compared to $0.08 for
the third quarter of fiscal 1997. Management believes that any analysis of
operating results for the first nine months of fiscal 1998 must consider the
escalating costs associated with the ongoing expansion of operations by Capital,
including both increased personnel and the opening of new regional sales offices
associated with the TAD Program which are discussed separately below.
During the nine months ended March 31, 1998, the Company's operating income
expressed as a percentage of gross revenues decreased slightly to 5.1% from 5.2%
at the end of the first half of fiscal 1998. However, this ratio remained
substantially improved from the 4.2% level at the end of the first nine months
of fiscal 1997. This continued the trend which began 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 Capital's ongoing
expansion program.
In addition, 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 approximately
91% for the first nine months of fiscal 1998 (which is down from 91.5% at the
end of the first half of fiscal 1998). This increase is the result of the markup
experienced by Capital being lower than the markup associated with the Company's
international trade operations. As revenues from the TAD Program increase as a
percentage of overall revenues, the Company's overall profit margins will
decrease.
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 fiscal 1997, the increase in
revenues during this period resulted from increased product sales rather than
from price increases for the Company's products and 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, over 58% at the end of the
first nine months of fiscal 1998, are now derived from Capital's TAD Program
($40,143,813 during the first nine months of fiscal 1998), with the
international trading division accounting for slightly over 33.3% ($22,918,264)
of the Company's total gross revenues for this period.
As stated in the Company's Annual Report on Form 10-K for fiscal 1997,
management may elect to terminate Allstate's operations and to phase out this
aspect of its operations during fiscal 1998. No final decision on this issue has
yet been reached. During the first nine months of fiscal 1998, Allstate's total
sales aggregated only $23,184, 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 March 31, 1998 the Company had total assets of
$22,758,931, compared with $19,364,462 at June 30, 1997, the end of fiscal 1997,
(an increase of $3,394,469 or 17.5%). Total current liabilities at March 31,
1998 decreased to $2,168,393, compared with $3,127,180 at June 30, 1997, (a
decrease of $958,787 or almost 31%). Of the Company's assets at March 31, 1998,
$7,027,979 was in the form of cash and cash equivalent (compared to $7,352,465
at June 30, 1997). The decrease in cash and cash equivalent at March 31, 1998
reflects the ongoing utilization of available cash by Capital in connection with
its TAD Program. Shortly before the end of the third quarter, Capital sold
approximately $5 Million of TADs to a private overseas financial institution.
This sale was without recourse to Capital. Most of the proceeds received from
this sale remained in the form of cash at March 31, 1998.
In addition to cash, $8,335,771 represents trade accounts receivable, and
$7,016,742 represented TADs receivable (including $1,793,067 of TADs, which have
been sold to a bank). The increase in the Company's assets at March 31, 1998
over fiscal year end was principally due to the increase in trade acceptance
drafts receivable, including both "TADs in safe" and "Due from banks," and trade
accounts receivable.
At March 31, 1998, total stockholders' equity increased to $20,537,493, as
compared to $16,192,117 at June 30, 1997. The principal source of funds for the
Company's operations is revenues earned by its operating subsidiaries. As
previously reported, on June 30, 1997, the Company concluded a private placement
of its common stock pursuant to Regulation D promulgated under the Securities
Act of 1933 and received gross proceeds therefrom of $6,850,000. Virtually all
the proceeds from this offering were designated by the Company for the continued
expansion of Capital's TAD Program. A significant portion of the proceeds
received were utilized for 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. During the third quarter of fiscal 1998 Capital opened two new sales
offices, in Houston and Kansas City, which are not expected to contribute to
Capital's revenues until late in the fourth quarter, although much of the set-up
costs of these offices were incurred during the third quarter. Consequently, no
estimate can be made at this time of the potential impact, either positive or
negative, that these new offices will have upon revenues or profits during
fiscal 1998.
At March 31, 1998 the Company also had property, less accumulated depreciation,
of $342,974 (compared to $238,305 at June 30, 1997) and security deposits,
prepaid expenses and Patent rights of $27,135, $43,329 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 (see discussion below). 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 March 31, 1998 the
Company continued to show $35,404 in deferred rent liability.
The Company's accounts payable are all current.
At December 31, 1997, the Company had eliminated outstanding loans payable to
its bank, which had totaled $339,815 at September 30, 1997, representing
advances against Capital's credit line. This credit line from a major European
Bank is fully secured by the proceeds due from TADs which have been sold to the
bank but which have not yet been collected. Due to the Company's available cash,
management elected not to draw against this credit line thereby eliminating the
interest expense associated therewith. However, this loan amount is constantly
changing based upon a number of factors including the total amount of TADs sold
to the bank 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
available of $3.5 Million, in the aggregate, with this bank. As of March 31,
1998, no part of this facility was being used by Capital.
During June, 1997, Capital secured an additional credit facility from a major US
bank, in the amount of $3 Million which was never used by the Company. At March
31, 1998 management continues to discuss the possible extension of the credit
facility. If these discussions come to fruition, this facility will be available
to finance the continued purchase of TADs by Capital from its customers in much
the same manner as its other existing bank facility.
Effective December 15, 1997, the Company secured a third facility for up to $5.5
Million from a private financial overseas institution. This facility permits
Capital to sell TADs received from qualified customers to this institution
without recourse to Capital. During any period where this facility is used,
Capital will be charged interest on open amount during the time TADs remain
unpaid.
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 1998 and management expects
revenues will be adequate to meet the Company's operating cash needs for the
foreseeable future.
As of the date of this Report, all of the Company's total accounts receivable at
June 30, 1997, in the amount of $3,361,821 have been collected.
III. Impact of the Trade Acceptance Draft Program and the Operations of Capital.
During fiscal 1994, the first full year of operations for the TAD Program,
Capital generated gross revenues of $927,757 (compared to $247,809 during fiscal
1993). During fiscal 1995, management implemented an aggressive new marketing
plan for the TAD Program, which resulted in gross revenues of $3,703,493 for
fiscal 1995, almost 300% higher than fiscal 1994. During fiscal 1996, as Capital
continued to step-up its marketing program, Capital generated gross revenues of
$7,993,932, almost 116% higher than fiscal 1995.
By fiscal 1997 Capital began to expand its sales force and added new regional
sales offices. As a result, gross revenues increased to $21,668,573, over 171%
higher than fiscal 1996. For fiscal 1997, Capital's operations reflected a gross
profit from operations of $1,366,322 with net pre-tax income of $224,669.
Capital's operating revenues during the first nine months of fiscal 1998 totaled
$40,143,813, or approximately 58.5% of the Company's total revenues during this
period, as compared to total revenues of $14,066,755, or approximately 47.8% of
total revenues, during the first nine months of fiscal 1997. Perhaps most
importantly however, Capital's gross revenues during this period were
$26,077,058 higher than in the same period last year, an increase of more than
185%.
During this period, Capital also had interest expenses of $147,804, while
incurring direct selling, general and administrative expenses of $1,816,734
(which included both a percentage of indirect overhead costs and the costs
associated with the addition of two new sales offices), which resulted in net
operating income before taxes of $606,909, with net income of $517,472 after an
allowance for taxes of $89,437.
With respect to Capital's expansion plan, based upon management's experience
with the TAD Program over the past four years, management has determined to
place its primary emphasis on developing a domestic force of aggressive new
sales representatives with a solid background in sales and the experience to
present the TAD Program to large domestic and multi-national companies.
During the third quarter of fiscal 1998, two new sales offices were opened. Due
to the need to train personnel and to promote the TAD Program to the target
market in each region, neither office generated any revenues during the period
ended March 31, 1998. It has been management's experience that a newly
established sales office will require from 3 to 6 months to begin generating
revenues. Consequently, although both the Houston and Kansas City office are
expected to begin generating revenues during the fourth quarter of fiscal 1998,
no projection of the extent of such revenues can be made at this time.
As previously reported, on December 2, 1997 the United States Patent Office
officially granted to Mr. Amos Aharoni a patent with respect to the use of trade
acceptance drafts in Capital's TAD Program. Mr. Aharoni has assigned all of his
right, title and interest in and to said patent to Actrade International, Ltd.
in consideration of the payment of $1.00. Mr. Aharoni will not be entitled to
receive any other form of compensation or royalty in connection with said
patent.
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 other company operating a
program similar to the TAD Program and, as demonstrated by Capital's growth rate
since the introduction of the TAD Program (see discussion above), Capital's
revenues and profits continue to reach new record levels each quarter.
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 which 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, the recent turmoil in the Asian financial markets is expected to
translate into a slow down in orders for American made products from this market
segment 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 markets
continues.
Actrade S.A. - International Trade Division.
The operations of Actrade S.A. have been designed to compliment the Company's
export operations by providing foreign sources for products. Management believes
that by utilizing the foreign network available to Actrade S.A. 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 and
adequately offset any decline in its export operations. These changing trends
have been the principal reason for the dramatic increase in sales revenues by
Actrade S.A.
Another result of these changing world conditions, which recently have had an
adverse impact on foreign markets for US products (and probably most
importantly) has been the impact of 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. During fiscal 1997 the Company
experienced a further expansion of the international trading operations of
Actrade S.A. Due to the financial strength of the Company, Actrade S.A. has been
in a position to benefit from 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 $22,918,264 for the first nine months of fiscal 1998 (compared to
$10,436,453 for the first nine months of fiscal 1997). 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. 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 export
division'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: April 23, 1998
ACTRADE INTERNATIONAL, LTD.
BY:__/s/Alexander C. Stonkus_________
Chief Operating Officer and Chief
Financial Officer
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