SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
(X) Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended December 31, 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 December 31, 1997
Common Stock, par value $0.0001
per share 8,263,751
<PAGE>
INDEX
Part I. Financial information
Item 1. Condensed consolidated financial statements:
Balance sheet as of December 31, 1997 and
June 30, 1997 F-2
Statement of operations for six and three
months ended December 31, 1997 and 1996 F-3
Statement of shareholders' equity F-4
Statement of cash flows for the six months
ended December 31, 1997 and 1996 F-5
Notes to consolidated condensed financial statements F-6 - F-13
Item 2. Management's discussion and analysis of financial
condition F-14-F17
Part II. Other information
Signatures
F-1
<PAGE>
ACTRADE INTERNATIONAL, LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1997 AND JUNE 30, 1997
(Unaudited)
ASSETS
December 31, June 30,
1997 1997
Current assets:
Cash at December 31, 1997 $ 2,532,068 $ 7,352,465
Accounts receivable, less allowance for
doubtful accounts of $35,000 13,389,460 5,269,516
Accounts receivable, trade acceptance drafts 5,383,194 6,477,424
Prepaid expenses 12,903 9,010
----------- -----------
Total current assets 21,317,625 19,108,415
----------- -----------
Property and equipment:
Furniture and fixtures 412,422 308,717
Leasehold improvements 143,915 142,672
----------- -----------
556,337 451,389
Less accumulated depreciation 247,266 213,084
----------- -----------
309,071 238,305
----------- -----------
Other asset, security deposits 26,542 17,742
----------- -----------
$21,653,238 $19,364,462
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Cash advance from bank $ 1,019,392
Customer deposits 26,587
Accounts payable $ 1,995,808 1,995,148
Accrued expenses 44,425 11,759
Payroll taxes payable 6,862
Income taxes payable 174,071 67,432
----------- -----------
Total current liabilities 2,214,304 3,127,180
----------- -----------
Commitments
Deferred rent liability 38,657 45,165
----------- -----------
Shareholders' equity:
Common stock, $.0001 par value; authorized 100,000,000 shares, issued and
outstanding 8,263,751 shares at December 31,1997 and
7,470,681 at June 30, 1997 826 747
Common stock purchase warrants
Additional paid in capital 13,676,921 12,505,787
Retained earnings 5,722,530 3,685,583
----------- -----------
19,400,277 16,192,117
---------- ----------
$21,653,238 $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 SIX AND THREE MONTHS ENDED DECEMBER 31, 1997 AND 1996
(Unaudited)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Six Months Ended Three Months Ended
December 31, December 31,
1997 1996 1997 1996
---- ---- ---- ----
Net sales $43,117,444 $16,458,567 $23,115,859 $8,880,533
Cost of sales 39,307,247 14,860,738 21,013,001 7,956,924
----------- ----------- ----------- ----------
Gross profit 3,810,197 1,597,829 2,102,858 923,609
Selling, general and
administrative expenses 1,589,073 903,359 903,006 517,997
----------- ----------- ----------- ----------
Income from operations 2,221,124 694,470 1,199,852 405,612
----------- ----------- ----------- ----------
Other income (charges):
Miscellaneous income 9,435
Interest income 62,220 15,881 11,852 5,382
Interest expense ( 62,540) ( 31,562) ( 58,056) ( 6,050)
----------- ----------- ----------- ----------
9,115 ( 15,681) ( 46,204) ( 668)
----------- ----------- ----------- ----------
Income before income
taxes 2,230,239 678,789 1,153,648 404,944
Income tax expense 193,292 46,735 69,555 32,765
----------- ----------- ----------- ----------
Net income $ 2,036,947 $ 632,054 $ 1,084,093 $ 372,179
=========== =========== =========== ==========
Earnings per common share:
Primary $ .24 $ 0.10 $ .13$ 0.06
=========== =========== =====================
Fully diluted $ .24 $ 0.10 $ .13$ 0.06
=========== =========== =====================
Weighted average common shares outstanding:
Primary 8,434,256 6,120,337 8,615,574 6,465,153
=========== =========== =========== ==========
Fully diluted 8,434,256 6,120,337 8,615,574 6,465,153
=========== =========== =========== ==========
</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 DECEMBER 31, 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 793,070 79 1,171,134 1,171,213
Net income for the six
months ended December
31, 1997 2,036,947 2,036,947
--------- ---- ----------- ----------- -----------
Balance at December 31,
1997 8,263,751 $826 $13,676,921 $5,722,530 $19,400,277
========= ==== =========== ========== ===========
</TABLE>
See notes to condensed consolidated financial statements.
F-4
<PAGE>
ACTRADE INTERNATIONAL, LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
SIX MONTHS ENDED DECEMBER 31, 1997 AND 1996
(Unaudited)
<TABLE>
<CAPTION>
<S> <C> <C>
1997 1996
---- ----
Cash flow from operating activities:
Net income $2,036,947 $ 632,054
Adjustments to reconcile net income
to cash provided by operating activities:
Depreciation 34,182
Changes in assets and liabilities:
Accounts receivable ( 7,025,714) ( 3,211,690)
Accounts receivable, other 59,785
Prepaid expenses ( 3,893) ( 10,238)
Interest receivable 2,719
Accounts payable 660 ( 310,838)
Accrued expenses 32,666 ( 4,719)
Payroll taxes payable ( 6,862)
Income taxes payable 106,639 25,433
Customer deposits ( 26,587) ( 55,954)
Security deposits ( 8,800) ( 950)
Deferred rent ( 6,508) ( 5,031)
---------- ----------
Net cash used in operating activities ( 4,867,270) ( 2,879,429)
---------- ----------
Investing activities:
Purchase of property and equipment ( 104,948) ( 52,771)
---------- ----------
Net cash used in investing activities ( 104,948) ( 52,771)
---------- ----------
Financing activities:
Proceeds from issuance of common stock 1,171,213 2,038,800
Decrease in cash advances, bank ( 1,019,392) ( 502,846)
---------- ----------
Net cash provided by financing activities 151,821 1,535,954
---------- ----------
Net increase (decrease) in cash ( 4,820,397) ( 1,396,246)
Cash, beginning of period 7,352,465 1,924,805
---------- ----------
Cash, end of period $2,532,068 $ 528,559
========== ==========
Supplemental disclosures from cash flow information: Cash paid during the year
for:
Interest $ 62,540 $ 37,251
========== ==========
Income taxes $ 101,446 $ 15,973
========== ==========
</TABLE>
See notes to condensed consolidated financial statements.
F-5
<PAGE>
ACTRADE INTERNATIONAL, LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED DECEMBER 31, 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. 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. Amworld Credit, Inc. was
incorporated in 1994 and was inactive at September 1994. 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.
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
SIX MONTHS ENDED DECEMBER 31, 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., American Cooling, Inc. and TAD International, Ltd. are
included as the subsidiaries of Actrade International, Ltd.
4. 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 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.
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
SIX MONTHS ENDED DECEMBER 31, 1997
(Unaudited)
5. 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. 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. This lease terminated January 31, 1998.
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.
Future minimum lease payments required under non-cancelable operating
leases by fiscal year are as follows:
December 31, 1998 $104,118
December 31, 1999 $ 51,002
December 31, 2000 $ 30,908
Rent expense amounted to $79,165 and $41,713 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,
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
SIX MONTHS ENDED DECEMBER 31, 1997
(Unaudited)
6. Income taxes:
The components of income tax expense are:
Six months Six months
Ended Ended
December 31 December 31
1997 1996
---- ----
Income taxes currently payable:
Federal $126,095 $ 33,134
State 67,197 17,006
-------- --------
193,292 50,140
-------- --------
Deferred tax expense arising from:
Excess of Financial accounting
depreciation over tax ( 2,024) ( 1,443)
Excess of tax deductible rent over rent
expense for financial accounting purposes ( 976) ( 1,962)
-------- --------
( 3,000) ( 3,405)
-------- --------
Total income tax expense $193,292 $ 46,735
======== ========
Deferred income tax provisions resulting from differences between accounting
for financial statement purposes and accounting for tax purposes are
reflected above.
Areconciliation of income tax expense at the statutory rate to income tax
expenses at the Company's effective rate is as follows:
Six months Six months
Ended Ended
December 31 December 31
1997 1996
---- ----
Computed tax at the expected
statutory rate $843,587 $259,351
Surtax exemption ( 16,750) ( 16,750)
State income taxes 67,197 17,006
Foreign income ( 697,742) ( 209,467)
Other ( 3,000) ( 3,405)
-------- --------
Income tax expense $193,292 $ 46,735
======== ========
F-9
<PAGE>
ACTRADE INTERNATIONAL, LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED DECEMBER 31, 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
$5,548,539 at December 31, 1997 and $2,495,444 at December 31, 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 December 31, 1997, 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 $5,383,194 at
December 31, 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, Actrade Capital, Inc. has granted a security interest in all TAD's
purchased by the bank for all accounts represented by the TAD's together with
all guaranties and collateral. As each TAD is collected, the face amount will be
credited to the Actrade account. 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
SIX MONTHS ENDED DECEMBER 31, 1997
(Unaudited)
8. Reconciliation of shares used in computation of earnings per share:
Six months ended Three months ended
December 31, December 31,
1997 1996 1997 1996
---- ---- ---- ----
Weighted average of shares
actually outstanding 8,076,470 5,985,337 8,257,788 5,985,337
Common stock purchase
warrants and options 357,786 135,000 357,786 135,000
--------- --------- --------- ---------
Primary and fully diluted
weighted average common
shares outstanding 8,434,256 6,120,337 8,615,574 6,120,337
========= ========= ========= =========
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 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
---------
1,034,401
---------
John Woerner 02/06/97 2,500 (w) 5.00 12/31/00
---------
F-11
<PAGE>
ACTRADE INTERNATIONAL, LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED DECEMBER 31, 1997
(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
Leon Schorr 02/06/97 3,000 (o) 5.00 12/31/00
---------
8,000
---------
Elizabeth Melnick 11/30/95 20,000 (o) 1.50 11/29/99
Elizabeth Melnick 08/08/96 5,000 (o) 3.00 08/08/96
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
---------
33,000
---------
Other employees various 60,660 (o) 1.50 2000
---------
to 12.55
Total 1,138,561
=========
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.
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.
11. Subsequent events:
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.
F-12
<PAGE>
ACTRADE INTERNATIONAL, LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED DECEMBER 31, 1997
(Unaudited)
11. Subsequent events (continued):
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 Option 25 must take 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.
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 six months of fiscal 1998, ended December 31, 1997, the Company
had combined gross revenues of $43,117,444, as compared to $16,458,587 for the
first six months of fiscal 1997, an increase of almost 162%. During this period,
cost of revenues totaled $39,307,247, as compared to $14,860,738 for the same
period last year, virtually unchanged at approximately 91% of total revenues.
This resulted in gross profits from operations of $3,810,197 for the first half
of fiscal 1998, an increase of $2,212,368 (or approximately 138% higher than the
first half of fiscal 1997), with net profits from operations, after provision
for interest and taxes, of $2,036,947 for this period, as compared to $632,054
for the same period last year, an increase of approximately 222% over last year.
Based upon the Company's currently issued and outstanding shares, the Company's
earnings per share for the first half of fiscal 1998, ended December 31, 1997,
reached $0.24 per share, as compared to $0.10 per share for the first quarter of
fiscal 1997, an increase of 140%.
The substantial increase in gross revenues during the first half of fiscal 1998,
which equaled over 99% of the Company's total revenues during 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 December 31, 1997, gross revenues reached
$23,115,859 (up over 160% from the second quarter of fiscal 1997; gross profits
climbed to $2,102,858 (an increase of over 128% from the second quarter of
fiscal 1997); income from operations totaled $1,199,852 (up approximately 196%
from the same period in fiscal 1997); and net earnings after interest income and
interest expense and allowance for taxes reached $1,084,093 (an increase of 192%
from fiscal 1997), or approximately $0.13 per share for the second quarter of
fiscal 1998 as compared to $0.06 per share for the second quarter of fiscal
1997. The cost of revenues during the second quarter of fiscal 1998, expressed
as a percentage of gross revenues was 90.9%, as compared to 89.6% for the same
period last year.
As a result of the foregoing factors, the Company's net operating income
expressed as a percentage of gross revenues continued to increase from 4.2% at
the end of the first half of fiscal 1997 to almost 4.8% at the end of the first
quarter of fiscal 1998 and reaching a new high of almost 5.2% at the end of the
first half 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.
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
91.5% for 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.
Continuing the trend first established at the end of the first quarter of fiscal
1998, the major portion of the Company's revenues, over 57.5% at the end of the
first half of fiscal 1998, are now derived from Capital's TAD Program
($24,806,174 during the first half of fiscal 1998), with the international
trading division accounting for slightly over 33% ($14,420,358) 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 half of fiscal 1998, Allstate's total
sales aggregated only $16,446 which amounted for less than 1/10 of 1% of the
Company's total revenue.
F-14
<PAGE>
II. Discussion of Financial Condition
On a consolidated basis, at December 31, 1997 the Company had total assets of
$21,653,238 (compared with $19,364,462 at June 30, 1997, the end of fiscal 1997)
with total current liabilities of $2,214,304 (compared with $3,127,180 at June
30, 1997). Of the Company's assets at December 31, 1997, $2,532,068 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 December 31, 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, $9,573,742 represents trade accounts receivable, and
$9,198,912 represented TADs receivable (including $5,383,194 of TADs, which have
been sold to a bank). The increase in the Company's assets at December 31, 1997
over fiscal year end 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.
At December 31, 1997, the Company's total stockholders' equity increased to
$19,400,277, 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. 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 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 December 31, 1997 the Company also had property, less accumulated
depreciation, of $309,071, (compared to $238,305 at June 30, 1997) and security
deposits, prepaid expenses and loans to employees of $26,542, $7,517 and $5,386
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 December 31, 1997 the Company continued to show $38,657 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.
At December 31, 1997, the Company had totally 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 its bank but which have not yet been collected. Consequently, the
payment of these outstanding loans is not expected to have an impact upon the
Company's liquidity. 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 its bank. As of December 31, 1997, no part of this facility
was being used by Capital.
F-15
<PAGE>
During June, 1997, Capital secured an additional credit facility from a major
US bank, in the amount of $3 Million. At December 31, 1997 this facility
remained unused and management is now negotiating to extend and expand the
credit facility. If these negotiations are successful, 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 equal to Libor plus 2 points.
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.
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 over-head 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 half of fiscal 1998, Capital's revenues reached $24,806,174, as
compared with $7,312,871 for the first half of fiscal 1997 (ended December 31,
1996), an increase of over 239%. Cost of revenues totaled $23,234,002 resulting
in gross profits of $1,572,172 during the first half as compared to $6,853,928
and $458,943 respectively. This represented an increase in gross profits of more
than 242% over last year. After general and administrative expenses of
$1,071,823, interest expense of $62,392 and provision for taxes of $65,694,
Capital realized net income from its operations of $372,263, as compared to net
income of only $91,064 an increase of over 308%. During the first quarter,
management began implementation of the next phase of its expansion program. It
remains too early for management to make any forecast with respect to the impact
upon the Company earnings resulting from these new efforts.
F-16
<PAGE>
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
Actrade International Corp. - Export Division.
Over the years, 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 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" export division and has been a major factor
in the growth of this division.
This trend is now being affected by a number of other 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.
Actrade S.A. - International Trade Division.
To meet the changing conditions in the international marketplace, the Company
initiated an expansion of the operations of Actrade S.A., which compliments
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. To meet this changing market
demand, during fiscal 1997 the Company initiated 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 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 $14,420,358 for the first half of fiscal 1998 (compared to $5,379,169
for the first half 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.
C. 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.
Management knows of no other trends reasonably expected to have a material
impact upon the Company's operations or liquidity in the foreseeable future.
F-17
<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: February 4, 1998
ACTRADE INTERNATIONAL, LTD.
BY:_/s/Alexander C. Stonkus
Alexander C. Stonkus,
Chief Financial Officer
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