<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------------------
FORM 10-Q
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
----------------------------------
For the quarterly period ended September 30, 1999
Commission File Number 0-18711
ACTRADE INTERNATIONAL, LTD.
Incorporated under the laws of the State of Delaware
I.R.S. Employer Identification Number 13-3437739
7 Penn Plaza, Suite 422, New York, N.Y. 10001
Telephone Number (212) 563-1036
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes _X__ No____
Indicate the number of Shares outstanding of each of the Issuer's classes of
common stock, as of the latest practicable date. As of November 12, 1999 there
were outstanding 8,611,738 shares of Common Stock, par value $.0001.
<PAGE>
INDEX
<TABLE>
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Page
Item 1. Consolidated Financial Statements (Unaudited)
Consolidated balance sheets as of September 30, 1999 and
June 30, 1999 3
Consolidated statements of income for the
three months ended September 30, 1999 and 1998 4
Consolidated statement of stockholders' equity, for the three months ended
September 30, 1999 5
Consolidated statements of cash flows for
the three months ended September 30, 1999 and 1998 6
Notes to consolidated financial statements 7-10
Item 2. Management's discussion and analysis of financial condition and
results of operations 11-18
PART II. OTHER INFORMATION 18
EXHIBITS AND REPORTS ON FORM 10Q
Signatures 19
</TABLE>
<PAGE>
ACTRADE INTERNATIONAL, LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
Dollars in thousands except per share amounts (Unaudited)
<TABLE>
<CAPTION>
September 30, June 30,
1999 1999
------------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 4,621 $ 5,199
Accounts receivable - trade 16,888 12,414
Trade acceptance drafts receivable and other (net of deferred income
and allowance for doubtful accounts of $1,413 and $2,012 at
September 30, 1999 and $1,276 and $1,560 at June 30, 1999 41,848 25,180
Deferred income taxes and other assets 932 398
-------- --------
Total Current Assets 64,289 43,191
-------- --------
Property and equipment (net of accumulated depreciation and
amoritization of $341 at September 30, 1999 and $291 at June 30, 1999) 1,320 954
Other assets 387 306
-------- --------
Total Assets $ 65,996 $ 44,451
======== ========
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings $ 32,258 $ 14,262
Accounts payable and customer reserves payable 1,323 683
Accrued expenses 1,419 997
Income taxes payable 4 0
-------- --------
Total Current Liabilities 35,004 15,942
-------- --------
Shareholders' equity:
Common stock, $0001 par value; authorized
100,000,000 shares, issued, and outstanding 8,611,738 shares
at September 30, 1999 and 8,528,051 shares at June 30, 1999 1 1
Additional paid-in capital 15,279 14,614
Retained earnings 16,844 14,336
Accumulated other comprehensive income (15) 10
Treasury stock at cost, 80,728 shares at September 30, 1999 and 31, 500
shares at June 30, 1999 (1,117) (452)
-------- --------
Total Shareholders' equity 30,992 28,509
-------- --------
Total Liabilities & Shareholders' Equity $ 65,996 $ 44,451
======== ========
</TABLE>
See notes to consolidated financial statements.
3
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ACTRADE INTERNATIONAL, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Dollars in thousands except per share amounts
(Unaudited)
<TABLE>
<CAPTION>
Three Months ended September 30,
1999 1998
---- ----
<S> <C> <C>
Gross sales - Trade acceptance drafts $ 65,360 $ 22,306
Gross sales - International merchandising trade 31,101 15,845
----------- -----------
Total Gross Sales $ 96,461 $ 38,151
=========== ===========
Gross sales - International merchandising trade $ 31,101 $ 15,845
Cost of sales - International merchandise trade (28,421) (14,338)
----------- -----------
Gross profit- International merchandising trade 2,680 1,507
Gross profit - Trade acceptance drafts 4,073 786
----------- -----------
Total gross profit 6,753 2,293
----------- -----------
General, and administrative expenses 2,039 1,202
Bad debt expense 931 50
----------- -----------
Income from Operations 3,783 1,041
Other income (expenses):
Interest income 9 45
Interest expense (931) (51)
----------- -----------
Other income (expense), net (922) (6)
----------- -----------
Income before Provision for Income Taxes 2,861 1,035
Provision for Income Taxes (Benefit) 353 (96)
----------- -----------
Net Income $ 2,508 $ 1,131
=========== ===========
Net Income per Common Share:
Basic $ 0.29 $ 0.13
Diluted $ 0.29 $ 0.13
Weighted Average Number of Shares Outstanding:
Basic 8,528,051 8,436,849
Diluted 8,780,414 8,790,959
</TABLE>
See notes to consolidated financial statements.
4
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ACTRADE INTERNATIONAL LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Dollars in thousands except per share amounts
(Unaudited)
<TABLE>
<CAPTION>
Common Stock
-------------
Additional Accum. Other Total Total
Paid-in Retained Comp Treasury Stockholders' Comp.
Shares Amount Capital Earnings Income Stock Equity Income
------ ------ ------- -------- ------ ----- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, June 30, 1999 8,528,051 $1 $14,614 $14,336 $10 ($452) $28,509
Comprehensive Income, Net of Tax:
Net Income 2,508 2,508 2,508
Other Comprehensive Income:
Foreign Currency
Translation Adjustments -25 (25) (25)
Total Comprehensive Income $2,483
======
Issuance of Common Stock upon
Exercise of Options 132,915 5 665 670
Purchase of Treasury Stock (49,228) (5) (665) (670)
Balance, September 30, 1999 8,611,738 $1 $15,279 $16,844 ($15) ($1,117) $30,992
========= == ======= ======= ==== ======= =======
</TABLE>
See notes to consolidated financial statements
5
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ACTRADE INTERNATIONAL, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Dollars in thousands
(Unaudited)
<TABLE>
<CAPTION>
Three months ended September
----------------------------
1999 1998
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income $ 2,508 $ 1,131
Adjustments to reconcile net income to net cash used in
operating activities:
Depreciation and amortization 66 24
Bad debt expense 931 50
Deferred income 137 566
Changes in operating assets and liabilities:
Accounts receivable - trade and trade acceptance
drafts receivable, and other (22,235) (17,280)
Deferred income taxes and other assets (534) (327)
Other assets (97) (12)
Accounts payable and customer reserves payable 640 1,129
Accrued expenses 422 44
Income taxes payable 4 (245)
Other liabilities 0 (4)
-------- --------
Net cash used in operating activities (18,158) (14,924)
-------- --------
Cash flows from investing activities:
Purchase of property and equipment (416) (31)
-------- --------
Net cash used in investing activities (416) (31)
-------- --------
Cash flows from financing activities:
Proceeds from issuance of common stock 665 25
Purchase of treasury stock (665) (452)
Change in short-term borrowings 17,996 2,744
-------- --------
Net cash provided by financing activities 17,996 2,317
-------- --------
Net (decrease) in cash and cash equivalents (578) (12,638)
Cash, beginning of period 5,199 13,382
-------- --------
Cash, end of period $ 4,621 $ 744
======== ========
Supplemental disclosures of cash flow information:
Interest paid during the fiscal period $ 309 $ 180
======== ========
Income taxes paid during the fiscal period $ 508 $ 346
======== ========
</TABLE>
See notes to consolidated financial statements.
6
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ACTRADE INTERNATIONAL, LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS
1. Basis of Presentation:
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 are 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
Annual Report of Actrade International, Ltd. and subsidiaries (the "Company")
Form 10-K for the year ended June 30, 1999.
The consolidated financial statements include the accounts of the Company and
its subsidiaries. Significant inter-company balances and transactions have been
eliminated in consolidation.
The preparation of financial statements in conformity with generally accepted
accounting principals requires management to make certain estimates and
assumptions that affect the reported amounts of assets and liabilities, and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from these estimates.
Amounts reported as September 30, 1998 have been restated, see Form 10Q/A for
the period ended September 30, 1998.
Certain prior period amounts have been reclassified to conform to the current
presentation.
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2. Net Income Per Share:
The Company applies SFAS No. 128, EARNINGS PER SHARE. In accordance with SFAS
No. 128, basic net income per share has been computed based on the weighted
average of common shares outstanding. Diluted income per share gives the effect
to outstanding stock options. The treasury stock method is used to calculate the
dilutive effect of stock options issued. All of the net income reported in the
financial statements is available to common shareholders.
Net income per common share has been computed as follows:
<TABLE>
<CAPTION>
Three months ended September 30,
-------------------------------------------------
1999 1998
----------------------- -----------------------
Basic Diluted Basic Diluted
----- ------- ----- -------
<S> <C> <C> <C> <C>
Net Income $ 2,508 $ 2,508 $ 1,131 $ 1,131
---------- ---------- ---------- ----------
Weighted average of
shares outstanding 8,528,051 8,528,051 8,436,849 8,436,849
Options utilized
in calculation 252,363 354,110
---------- ----------
Total equivalent shares 8,528,051 8,780,414 8,436,849 8,790,959
---------- ---------- ---------- ----------
Net income per common share $ 0.29 $ 0.29 $ 0.13 $ 0.13
========== ========== ========== ==========
</TABLE>
3. Common Stock and Stock Options:
In the quarter ended September 30, 1999, an officer exercised 132,915
warrants at $ 5.00. Also on September 29, 1999, the Company purchased
49,228 shares of stock from the same officer as Treasury stock at a price
of $13.50.
On October 1, 1999, the Company issued 100,000 warrants to its president
and chief operating officer at an exercise price of $13.75 expiring on
September 30, 2004.
4. Subsequent Events
On October 21, 1999 the Company entered into a new credit agreement with a bank
in the amount of $10 million expiring September 30, 2000, replacing an existing
$8.5 million credit agreement.
8
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5. Segment Information:
The Company's business operations are divided into two principal business
segments: TAD program and international merchandise trade activities. The
Company's business segments are based on business units or entities that offer
different products and services. The TAD program is operated by Capital in the
United States and Actrade Canada in Canada. The international merchandise trade
activities are conducted by International, Actrade SA and Resources. They are
managed separately because each business segment requires different strategic
initiatives and marketing.
The Company's gross sales, gross profit, income before provision for income
taxes, depreciation and amortization, interest expense and total assets for each
segment for the years ended June 30, 1999, 1998 were as follows:
9
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The following is a summary of the Company's segment information:
<TABLE>
<CAPTION>
Three Months Ended
September 30,
---------------------------------
1999 1998
<S> <C> <C>
Gross Sales:
Trade Acceptance Drafts $ 65,360 $ 22,306
International Merchandise Trade 31,101 15,845
-------- --------
$ 96,461 $ 38,151
======== ========
Gross Profit:
Trade Acceptance Drafts $ 4,073 $ 786
International Merchandise Trade 2,680 1,507
-------- --------
$ 6,753 $ 2,293
======== ========
Income before Provision for
Income Taxes:
Trade Acceptance Drafts $ 849 $ (180)
International Merchandise Trade 2,012 1,215
-------- --------
$ 2,861 $ 1,035
======== ========
Depreciation and Amortization:
Trade Acceptance Drafts $ 62 $ 20
International Merchandise Trade 4 4
-------- --------
$ 66 $ 24
======== ========
Interest Expense:
Trade Acceptance Drafts $ 407 $ 13
International Merchandise Trade 524 38
-------- --------
$ 931 $ 51
======== ========
<CAPTION>
September 30, 1999 June 30, 1999
------------------ -------------
Total Assets:
Trade Acceptance Drafts $ 34,914 $ 16,727
International Merchandise Trade 31,082 27,724
-------- --------
$ 65,996 $ 44,451
======== ========
</TABLE>
10
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION.
GENERAL STATEMENT - FACTORS THAT MAY AFFECT FUTURE RESULTS.
With the exception of historical information, the matters discussed in
Management's Discussion and Analysis of Financial Condition and Results of
Operations contain forward looking statements under the 1995 Private Securities
Litigation Reform Act (the "Reform Act") that involve various risks and
uncertainties. Typically, these statements are indicated by words such as
"anticipates," "expects," "believes," "plans," "could," and similar words and
phrases. Factors that could cause the Company's actual results to differ
materially from management's projections, forecasts, estimates and expectations
include but are not limited to, the following:
Changes in the Company's currently available credit facilities;
The inability of the Company to extend or secure additional credit
facilities to fund the anticipated expansion of sales under its TAD
Program;
Unexpected economic changes both in the United States and overseas;
The imposition of new restrictions or regulations affecting either the
Company's international merchandise trade activities or its TAD Program,
either in the US or in Canada.
To the extent possible, the following discussion will highlight the relative
needs of the Company with respect to both its international merchandise trade
activities and in connection with the ongoing expansion of its TAD Program.
- SEGMENT REPORTING DISCLOSURES.
The Company's sales are generated from two major business segments: the TAD
Program and international merchandise trade. A "TAD" is a post-dated payment
draft prepared by the seller or goods or services ("Suppliers") and accepted by
the buyer of the goods or services ("Buyers") by the Buyers signing and
delivering the draft back to the supplier. The TAD Program is operated by
Actrade Capital, Inc. ("Capital") in the United States and Actrade Capital
Canada, Inc. ("Actrade Canada") in Canada. The Company's international
merchandise trade operations are conducted through Actrade International Corp.
("International"), which is engaged in the re-sale of American made products to
foreign buyers and Actrade S.A., including its wholly owned subsidiary Actrade
Resources, Inc. ("Resources"), which engage in the sale of non-US products to
foreign buyers. See discussion immediately below.
All figures included in the following discussion have been rounded to the
nearest $1,000 for presentation purposes.
I. RESULTS OF OPERATIONS - FIRST QUARTER, FISCAL 2000 COMPARED TO FIRST
QUARTER, FISCAL 1999.
CONSOLIDATED SALES AND GROSS PROFIT
11
<PAGE>
As of September 30, 1999, the Company had combined gross sales of $96,461,000 as
compared to $38,151,000 for the same period in fiscal 1999, representing an
increase of 153%. As a result, the Company reflected gross profit from
operations of $6,753,000 during this period, as compared to $ 2,293,000 in the
first quarter of fiscal 1999, representing an increase of 195%.
The increase in gross sales during the first quarter of fiscal 2000 was
primarily due to the expansion of the Company's operations through (i)
significantly increased sales by Capital and Actrade Canada through the TAD
Program and (ii) the increased international merchandise trade activities by
Actrade S.A and Resources. With respect to its international merchandise trade
activities, this increase was the result of increased product sales by both
Actrade S.A. and Resources, rather than from price increases for the products
sold.
TAD PROGRAM SALES AND GROSS PROFIT
Total gross sales for the first quarter of fiscal 2000 included gross sales from
the TAD Program, which represent the face value of TADs transacted, of
$65,360,000 (as compared to $22,306,000 during the same period last year). The
gross sales amounts for the TAD Program are reported herein for information
purposes only and are not a part of the basic financial statements of the
Company.
Gross profit from the TAD Program, which represent revenues earned on TAD
activities by both Capital and Actrade Canada, totaled $4,073,000 for the
current quarter, as compared to $786,000 in the first quarter of fiscal 1999, an
increase of 418%. The significant increase in gross profit from the TAD Program
is due to a substantially increased number of TAD transactions that were a
direct benefit of the accelerated marketing and expansion program begun during
the prior fiscal year and which continues today.
INTERNATIONAL MERCHANDISE TRADE SALES AND GROSS PROFIT
Gross sales from international merchandise trade during this period climbed to
$31,101,000, as compared to $15,845,000 in the first quarter of fiscal 1999, an
increase of 96%. Management attributes the continued growth in this business
sector to the ability to provide immediate payment to foreign suppliers as well
as facilitating access to flexible payment terms for the buyers. During the
first quarter of fiscal 2000, the Company's principal overseas markets continued
to be (i) South America (ii) Europe, (iii) the Pacific Rim and (iv) Middle East.
See "FINANCIAL STATEMENTS - NOTE 1- BASIS OF PRESENTATION - GROSS SALES" AND
" - NOTE 5, SEGMENT INFORMATION" for additional information.
CONSOLIDATED EXPENSES
General and administrative expenses for the quarter ended September 30, 1999
were $2,039,000, as compared to $1,202,000 for the same period last year, an
increase of 70%. Essentially the entire increase in general and administrative
expenses over fiscal 1999 is
12
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attributable to the expansion of operations of Capital, Actrade Canada and
increased costs related to the TAD Program. The most significant of these
increase included:
1. salaries, payroll and commissions totaling $1,105,000 in the first
quarter of fiscal 2000, compared to $681,000 in the first quarter of
fiscal 1999;
2. office rent of $144,000 in the first quarter of fiscal 2000, compared
to $55,000 in the first quarter of fiscal 1999;
3. consulting costs and professional fees of $293,000 in the first quarter
of fiscal 2000, compared to $108,000 for the first quarter of fiscal
1999;
4. depreciation and amortization of $66,000 in the first quarter of fiscal
2000, compared to $24,000 in the first quarter of fiscal 1999.
The majority of these increased costs are directly attributable to the TAD
Program's expansion that required a significant expansion of both sales force
and back-office personnel. With respect to the balance of fiscal 2000,
management projects the costs related to the TAD Program operations, both in the
United States and in Canada will continue to escalate, particularly as marketing
efforts for the TAD Program increase and Capital begins implementation of its
E-Commerce program. However, management believe the impact of these continued
increased costs will be offset as Capital begins to see significantly increased
sales volume as the benefits of the fiscal 1999 expenditures mature into new TAD
business.
BAD DEBT, INTEREST EXPENSE AND NET INCOME
In the first quarter of fiscal 2000, the Company incurred bad debt expense in
the amount of $931,000, as compared to only $50,000 in the first quarter of
fiscal 1999. The principal reason for the substantial increase in this expense
is because of the significant expansion of sales relating to the TAD Program and
the greater diversity of industries into which the TAD Program has expanded.
In the first quarter of fiscal 2000, the Company incurred interest costs of
$931,000 as compared to $51,000 in the same period last year. This increase is
due to the growth in operations of the TAD Program as well as Actrade S.A.,
Resources and results in part from the costs associated with the new credit
facilities secured by Capital during fiscal 1999. With these new facilities
approaching full utilization, and management's expectation of adding additional
credit facilities in the near term, management expects that this expense item
will continue to escalate as TAD Program operations continue to grow during the
balance of fiscal 2000.
During fiscal 1999, Capital entered into an asset-backed securitization program
of up to $25 Million with a financial institution providing for the transfer and
sale of TADs by Capital to Actrade Funding, Inc. ("Funding") a wholly owned
special purpose vehicle, formed expressly for that purpose.
After interest income, other expenses and provision for income taxes, the
Company realized
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net income for the first quarter of fiscal 2000 of $2,508,000, or approximately
$0.29 per share (diluted), as compared to $1,131,000 or $0.13 per share
(diluted), for the first quarter of fiscal 1999. This represented an increase in
net income of 122% over the same period last year, and an increase in earnings
per share of approximately 123% over last year.
However, the Company's net income expressed as a percentage of gross profit fell
to approximately 37% during the first quarter of fiscal 2000, as compared to
approximately 49% for the first quarter of fiscal 1999. This decrease had been
expected and was the direct result of the substantial increase in general and
administrative expenses associated with Capital and the TAD Program discussed
above.
TAD PROGRAM NET INCOME
Despite slight losses reflected by both Capital and Actrade Canada for fiscal
1999, due to the substantial increase in gross profit generated by TAD Program,
both Capital and Actrade Canada showed net profits for the first quarter of
fiscal 2000. Capital's operations resulted in net income for the first quarter
of fiscal 2000 of $485,000, as compared to a net loss of $5,000 for the first
quarter of fiscal 1999. Actrade Canada also showed net income of $15,000 for the
first quarter of fiscal 2000, for a combined net income from the TAD Program of
$500,000 for the first quarter of fiscal 2000. Management believes the
significant improvement in net income from the TAD Program reflects the
investment made in the expansion of the program during fiscal 1999 and will
continue to improve during the balance of fiscal 2000.
INTERNATIONAL MERCHANDISE TRADE NET INCOME
Net income at September 30, 1999, before provision for income taxes, from the
Company's international merchandise trade operations totaled $2,012,000 as
compared to $1,215,000 for the first quarter of fiscal 1999, an increase of just
over 66%. Management believes that its international merchandise trade
operations will continue to grow during the foreseeable future although no
assurance can be given that the rate of growth will continue to be sustained at
current growth rates.
II. DISCUSSION OF FINANCIAL CONDITION - LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1999, the Company had working capital of approximately
$29,285,000 as compared to working capital of $ 27,249,000 at September 30,
1998. On a consolidated basis, as of September 30, 1999 the Company had cash and
cash equivalents on hand of $4,621,000 as compared to $5,199,000 at June 30,
1999. The decrease of approximately $577,000 in cash and cash equivalents
resulted from normal variations in the utilization of cash by Capital in its
operations, and not due to any trend which is expected to have a continuing
effect upon operations in the future.
At September 30, 1999, Capital had approximately $31.8 Million in Surety bonds
guaranteeing payment of TADs it had purchased, in addition to $12.5 Million in
credit insurance.
14
<PAGE>
Total current liabilities in at September 30, 1999 increased $19,062,000
compared to June 30, 1999. The substantial increase in current liabilities over
the prior fiscal period is primarily due to the addition of "short-term
borrowings," representing financing utilized by Capital for its TAD purchases
owed to various credit facilities.
At September 30, 1999 the Company had total accounts payable of $1,323,000 as
compared to $683,000 at September 30, 1998. The substantial increase in accounts
payable is due principally to the normal fluctuations in the status of trade
transactions by Actrade S.A. and Resources and not to any trend expected to have
an ongoing impact upon the Company.
In recent years, the Company has experienced growth in its accounts receivable
due to the nature of the sales made by its international merchandise trade
division. Sales by International principally involve larger, higher priced
products. Consequently, the average invoice amount, as well as the average per
item cost, is relatively high, resulting in higher cost of goods sold as well as
higher accounts receivable and payable. Similarly, the sales generated by
Actrade S.A. are from the sale of less expensive foreign made products where the
typical gross margins are much lower than for similar American products. These
factors continued to be true throughout the first quarter of fiscal 2000 and are
expected to continue for the foreseeable future.
At September 30, 1999, the Company's total stockholders' equity increased to
$30,992,000 as compared to $28,509,000 at June 30, 1999. The principal source of
funds for the Company's operations continues to be revenues earned by its
operating subsidiaries.
During the balance of fiscal 2000, the Company projects no significant
additional capital expenditures in connection with any of the Company's
international merchandise trade operations. Management plans to utilize current
cash on hand in connection with its international merchandise trading operations
principally for (i) general working capital reserves to meet any extraordinary
or unexpected expenses; (ii) and to finance, if required, the Company's trading
operations.
However, in connection with the TAD Program, management expects that it will
have significant additional capital expenditures relating to the ongoing
expansion of sales and marketing operations by Capital and Actrade Canada,
including implementation of its E-Commerce initiative. Further, with respect to
the TAD Program, in order to sustain a future growth rate comparable to that
experienced in the past few years, management will need to further expand its
credit facilities and other means for financing its purchase of TADs.
At September 30, 1999, there existed several credit facilities through which the
purchase of TADs were financed, including (1) a $25 million securitization
facility between Funding and ING Baring Capital Markets; (2) a $15 million
credit facility between Capital and Summit Bank; and (3) a $10 Million credit
facility between Capital and Banco Potuguese do Atlantico, in the United States.
In addition, Actrade Canada had a $5 million (Canadian) credit facility with a
financial institution in Canada.
Management expects that the TAD Program will continue to grow, in which case
it will require additional credit facilities to sustain the projected growth
in TAD purchases.
15
<PAGE>
Although discussions are ongoing with several other financial institutions to
add additional credit facilities to fund the future expansion of the TAD
Program, no assurance can be given that such discussions will result in the
completion of any new financing facilities for Capital or Actrade Canada.
However, based upon its experience with its present banks, as well as
discussions with other financial institutions, management believes that it
will be able to secure adequate financing means to sustain the growth of the
TAD Program in the foreseeable future.
Management knows of no other trends reasonably expected to have a material
impact upon the Company's operations or liquidity in the foreseeable future.
III INFLATION.
During the past few years inflation in the United States has been relatively
stable which, coupled with the relative strength of foreign currencies, has
had a beneficial effect upon the Company's operations in that the products it
offers have been competitively priced in relation to comparable foreign made
products. In management's opinion, this is expected to continue for the
foreseeable future. However, should the American economy again experience
double digit inflation rates, as was the case in the past, the impact upon
prices for American goods could adversely affect the Company's ability to
effectively compete in its overseas markets.
IV. "YEAR 2000" COMPLIANCE.
OVERVIEW
The Year 2000 issue is the result of computer programs being written using two
digits, rather than four to define the applicable year. Beginning in the Year
2000, and in certain instances prior to the Year 2000, these date code fields
will need to accept four digit entries to distinguish 21st century dates from
20th century dates. Any of the Company's computer programs that have
data-sensitive software may recognize a date using "00" as the year 1900
rather than the year 2000. This could result in a system failure or
miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices, or
engage in similar normal business activities.
INTERNAL SYSTEMS AND EQUIPMENT
Based upon an assessment made during fiscal 1999, the Company assessed and
identified all of its systems and equipment that may be vulnerable to Year
2000 problems. The Company has prioritized the identified items as either
critical or non-critical to the operations of the Company. During fiscal 1999,
the Company began, and as of the date of this Report has substantially
completed, upgrading and/or replacing the equipment and systems it had
identified as being non-compliant. Management expects that it will have
completed the required updated of all versions of operations and financial
software before December 1999 so that all of its systems will utilize dates
beyond December 31, 1999 properly. In addition, the Company has completed the
evaluation and substantially
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<PAGE>
completed the upgrade of all of its auxiliary computer application systems for
Year 2000 compliance. The Company believes that the planned modifications,
upgrades and conversions, are expected to be completed and initiated before
December 1999, will allow it to fully mitigate the Year 2000 issue.
THIRD PARTY RELATIONSHIPS
The Company also initiated formal communications with all of its significant
suppliers, financial institutions and major customers to determine the extent
to which the Company may be vulnerable to any third parties' failure to
remediate their own Year 2000 issues. Based upon the response received,
management believes that all of the Company's major suppliers and financial
institutions are also Year 2000 compliant. There can be no assurance, however,
that the systems of other companies, or a conversion that is incompatible with
the Company's systems, would not have an impact on the Company's operations.
Of all such third parties, management is of the opinion that the only segment
that would have a materially adverse impact upon the Company's operations
would be the various financial institutions with whom it currently has credit
facilities that are critical to the operation of the TAD Program. As to this
sector, management has received what it believes to be dependable assurances
that no disruption in the Company's credit facilities will occur due to Year
2000 problems.
COSTS/RISKS
Management currently estimates that the total cost in connection with bringing
its own systems and equipment into compliance was approximately $130,000
during fiscal 1999 and $10,000 in the first quarter of fiscal 2000. Management
does not expect the additional cost to complete its modifications an upgrade
to exceed an additional $10,000. As such, the financial impact to the Company
of bringing its equipment and systems into Year 2000 compliance is not
anticipated to be material to its financial position or results of operations.
Although the Company is not aware of any material operational issues or costs
associated with the completion of this process, there can be no assurance that
there will not be a delay in, or increased costs associated with, the
implementation of the necessary systems and changes to address the Year 2000.
The principal risk associated with Year 2000 compliance include, but are not
necessarily limited to, (i) the inability by Capital or Actrade Canada to
utilize its credit facilities in connection with their purchase of TAD from
customers under the TAD Program; (ii) the inability of Capital or Actrade
Canada to properly process TADs for collection on their due dates; (iii) the
inability to pay suppliers in a timely manner for TADs purchased by Capital or
Actrade Canada; and (iv) interruption of payments under letters of credit or
other financial instruments in connection with the Company's international
merchandise trade operations.
Provided that there is no material disruption of services among the Company's
several financial institutions, as to which the Company has received what it
believes to be reliable assurances, management does not believe that any Year
2000 problems that may occur will be material or cause any material adverse
consequence to the Company or any of its
17
<PAGE>
operations.
All statements concerning Year 2000 issues other than historical statements,
including, without limitation, estimated costs and the projected timetable of
Year 2000 compliance, constitute "forward-looking statements" as defined in
the Private Securities Litigation Reform Act of 1995. Such forward-looking
statements should be read in conjunction with the Company's disclosures under
the heading "GENERAL STATEMENT - FACTORS THAT MAY AFFECT FUTURE RESULTS."
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
None during this period.
18
<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: November 12, 1999
ACTRADE INTERNATIONAL, LTD.
BY: /s/ Joseph P. D'Alessandris
----------------------------
Chief Financial Officer
19
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