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, 1999
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, 1999
Common Stock, par value $0.0001
per share 8,559,551
<PAGE>
INDEX
Part I. Financial information
Item 1. Condensed consolidated financial statements:
Balance sheet as of March 31, 1999 and
June 30, 1998 F-2
Statement of operations for nine and three
months ended March 31, 1999 and 1998 F-3
Statement of cash flows for the nine months
ended March 31, 1999 and 1998 F-4
Notes to consolidated condensed financial statements F-5 - F-10
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
(Unaudited)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
ASSETS
March 31, June 30,
1999 1998
Current assets:
Cash $ 445,768 $13,381,678
Trade acceptance draft receivable, bank 14,075,941 1,248,368
Accounts receivable, less allowance for
doubtful accounts of $461,700 and $61,700
at March 31, 1999 and June 30, 1998,
respectively 23,337,383 11,031,201
Trade acceptance drafts, on hand 432,223
Interest only strip, net of amortization 740,652
Retained interest in trade acceptance drafts 2,432,701
Prepaid expenses and taxes 192,815 74,669
----------- -----------
Total current assets 41,657,483 25,735,916
----------- -----------
Property and equipment:
Furniture and fixtures and computer equipment 1,017,529 524,282
Leasehold improvements 177,500 143,916
----------- -----------
1,195,029 668,198
Less accumulated depreciation 401,140 293,519
----------- -----------
793,889 374,679
----------- -----------
Other assets:
Investment in subsidiary, Actrade Funding, Inc. 800
Patent right 1 1
Finance costs, net of amortization 289,788
Security deposit 29,805 26,806
----------- -----------
320,394 26,807
----------- -----------
$42,771,766 $26,137,402
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Cash advance from bank $ 7,032,369
Notes payable, bank 2,041,269
Accounts payable and customer reserves
payable 6,630,262 $ 3,195,691
Accrued expenses 19,834 17,439
Deferred income 14,190
Income taxes payable 169,949 285,441
----------- -----------
Total current liabilities 15,893,683 3,512,761
----------- -----------
Commitments
Deferred rent liability 20,170 31,721
----------- -----------
Shareholders' equity:
Common stock, $.0001 par value, authorized 100,000,000 shares issued and
outstanding 8,559,551 at March 31, 1999 and 8,541,051
at June 30, 1998 856 854
Common stock purchase warrants
Additional Paid in capital 14,550,466 14,489,668
Retained earnings 12,758,947 8,102,398
----------- -----------
27,310,269 22,592,920
Common stock held in treasury, 31,500 shares ( 452,356)
----------- -----------
26,857,913 22,592,920
---------- ----------
$42,771,766 $26,137,402
=========== ===========
</TABLE>
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, 1999 AND 1998
(Unaudited)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Nine months ended Three months ended
March 31, March 31,
1999 1998 1999 1998
---- ---- ---- ----
Net sales $137,104,604 $68,671,402 $52,890,170 $25,553,958
Cost of sales 126,240,319 62,655,911 48,704,034 23,348,664
------------ ----------- ----------- -----------
Gross profit 10,864,285 6,015,491 4,186,136 2,205,294
Selling, general and
administrative
expenses 4,757,351 2,544,461 1,910,155 955,388
------------ ----------- ----------- -----------
Income from operations 6,106,934 3,471,030 2,275,981 1,249,906
------------ ----------- ----------- -----------
Other income (charges):
Interest income 55,047 68,599 3,203 6,379
Interest expense ( 951,017) ( 148,265) ( 479,933) ( 85,725)
Miscellaneous income 30,508 21,073
------------ ----------- ----------- -----------
( 895,970)( 49,158) ( 476,730) ( 58,273)
------------ ----------- ----------- -----------
Income before income
taxes 5,210,964 3,421,872 1,799,251 1,191,633
Income tax expense 554,416 277,709 174,630 84,414
------------ ----------- ----------- -----------
Net income $ 4,656,548 $ 3,144,163 $ 1,624,621 $ 1,107,219
============ =========== =========== ===========
Earnings per common
share:
Primary $ 0.54 $ 0.37 $ 0.19 $ 0.13
============ =========== =========== ===========
Fully diluted $ 0.54 $ 0.37 $ 0.19 $ 0.13
============ =========== =========== ===========
Weighted average common shares outstanding:
Primary 8,697,215 8,496,387 8,703,092 8,625,248
============ =========== =========== ===========
Fully diluted 8,697,215 8,496,387 8,703,092 8,625,248
============ =========== =========== ===========
</TABLE>
See notes to condensed consolidated financial statements.
F-3
<PAGE>
ACTRADE INTERNATIONAL, LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
NINE MONTHS ENDED MARCH 31, 1999 AND 1998
(Unaudited)
<TABLE>
<CAPTION>
<S> <C> <C>
March 31, March 31,
1999 1998
Operating activities:
Net income $ 4,656,548 $ 3,144,163
Adjustments to reconcile net income to
cash provided from operating activities:
Depreciation 107,621 55,796
Changes in assets and liabilities:
Accounts, bank and trade acceptances
receivable ( 25,133,755) ( 3,570,573)
Prepaid expenses ( 118,146) ( 34,319)
Inventory, trade acceptance drafts ( 432,223)
Interest only strip and retained interest ( 3,173,353)
Accounts payable 3,434,571 ( 72,828)
Accrued expenses 2,395 ( 8,977)
Deferred income ( 14,190) 47,131
Income taxes payable ( 115,492) 139,507
Deferred rent ( 11,551) ( 26,587)
Security deposits ( 2,999) ( 9,393)
Customer deposits ( 9,761)
----------- -----------
Net cash used in operating activities ( 20,800,574) ( 345,841)
----------- -----------
Investing activities:
Finance costs ( 289,788)
Purchase of treasury stock ( 452,356)
Investment in subsidiary, Actrade Funding Inc. ( 800)
Property and equipment ( 526,830) ( 160,465)
----------- -----------
Net cash used in investing activities ( 1,269,774) ( 160,465)
----------- -----------
Financing activities:
Proceeds from issuance of common stock 60,800 1,201,213
Cash advances from bank 9,073,638 ( 1,019,392)
----------- -----------
Net cash provided by financing activities 9,134,438 181,821
----------- -----------
Net decrease in cash ( 12,935,910) ( 324,485)
Cash, beginning of period 13,381,678 7,352,465
----------- -----------
Cash, end of period $ 445,768 $ 7,027,980
=========== ===========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 951,017 $ 148,265
=========== ===========
Income taxes $ 669,908 $ 138,202
=========== ===========
</TABLE>
See notes to condensed consolidated financial statements.
F-4
<PAGE>
ACTRADE INTERNATIONAL, LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED MARCH 31, 1999
(Unaudited)
1. The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q. Accordingly, they do not
include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments considered necessary for a fair presentation have
been included. The results of operations for the three months ended is not
necessarily indicative of the results to be expected for the full year. For
further information, refer to the consolidated financial statements and
footnotes thereto included in the Company's annual report for the year ended
June 30, 1998, included in its Annual Report filed on Form 10-K. All reference
to Actrade in these footnotes, relate to Actrade International, Ltd., the
Company's wholly owned subsidiaries.
2. Organization of the Company:
The Company was incorporated in the State of Delaware on April 3, 1987.
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 management to domestic companies.
Actrade International Corp., a New York corporation, was incorporated on July
18, 1985. Actrade represents various U. S. manufacturers and distributors by
buying and exporting their products overseas. Actrade South America, Inc. a
wholly owned foreign corporation and subsidiary of Actrade International, Corp.,
was incorporated in Antigua and Bahamas on February 12, 1988 and was acquired in
January 1990. On August 14, 1997, TAD International Ltd. and on May 29, 1998,
Actrade Forfaiting, Inc. were incorporated under the laws of the Commonwealth of
the Bahamas. Both Companies are wholly owned subsidiaries of Actrade South
America, Inc. TAD International, Ltd. has been inactive since inception. Actrade
Forfaiting, Inc. deals with trade acceptance drafts (TAD's) on the foreign
market and began operations in June of 1998. In October 1998, Actrade
Forfaiting, Inc. changed its name to Actrade Resources, Inc. In July of 1998,
Actrade Capital Canada, Ltd. was incorporated under the laws of Canada. The
Company is a wholly owned subsidiary of Actrade Capital, Inc. and deals with
trade acceptance drafts (TAD's) on the Canadian market, beginning operations in
October of 1998.
F-5
<PAGE>
ACTRADE INTERNATIONAL, LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED MARCH 31, 1999
(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 Actrade South America, a foreign corporation, Actrade International
Corp. and Actrade Capital, Inc. are included as the subsidiaries of Actrade
International, Ltd. Actrade Resources, Inc. (formerly Actrade Forfaiting, Inc.)
and TAD International, Ltd. are included as subsidiaries of Actrade South
America. Actrade Capital Canada, Ltd. is included as a subsidiary of Actrade
Capital, Inc.
4. Risks and uncertainties:
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.
A portion of the Company's sales are 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.
5. Related party transactions:
During each of the three years ended March 31, 1999, the Company and its
subsidiaries have advanced and received funds to and from related parties. Such
receivable and payables are non-interest bearing and are due on demand.
The Company has entered into several employment agreements with its
officers.
F-6
<PAGE>
ACTRADE INTERNATIONAL, LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED MARCH 31, 1999
(Unaudited)
6. Leases:
Monthly
Location Term Payment
New York 03/01/90 to 03/31/00 $5,715.58 to $6,241.58
New York 11/01/98 to 03/31/99 5,131.38
New York 04/01/97 to 03/31/00 1,628.63 to 1,716.28
Illinois 11/01/97 to 10/31/00 2,502.00 to 2,576.00
Florida month to month 1,223.75
California 11/20/98 to 11/30/99 1,448.00
Georgia 09/01/98 to 08/31/01 3,274.38 to 3,474.20
Israel month to month 500.00 to 1,100.00
Bahamas month to month 500.00
Canada 11/01/98 to 10/31/01 2,260.00
New Jersey 04/01/99 to 03/31/04 20,806.04
Future minimum lease payments required under the non cancelable operating
leases by fiscal year are as follows:
March 31, 2000 $ 442,926
March 31, 2001 311,692
March 31, 2002 265,492
March 31, 2003 249,672
March 31, 2004 249,672
----------
$1,519,454
Rent expense amounted to $231,318 and $122,973 for 1999 and 1998,
respectively.
7. Income taxes:
The components of income tax expense are:
1999 1998
---- ----
Income taxes currently payable:
Federal $320,802 $176,417
State 217,094 102,864
-------- --------
537,896 279,281
-------- --------
Deferred tax expense arising from:
Excess of Financial accounting
depreciation over tax ( 11,658) ( 3,036)
Other 28,178 1,464
-------- --------
16,520 ( 1,572)
-------- --------
Total income tax expense $554,416 $277,709
======== ========
F-7
<PAGE>
ACTRADE INTERNATIONAL, LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED MARCH 31, 1999
(Unaudited)
7. Income taxes (continued):
Deferred income tax provisions resulting from differences between accounting
for financial statement purposes and accounting for tax purposes are
reflected above.
A reconciliation of income tax expense at the statutory rate to income tax
expenses at the Company's effective rate is as follows:
1999 1998
---- ----
Computed tax at the expected
statutory rate $1,698,596 $1,271,013
Surtax exemption ( 16,750) ( 16,750)
State income taxes 217,094 102,864
Foreign income ( 1,361,044) ( 1,077,846)
Other 16,520 ( 1,572)
---------- ----------
Income tax expense $ 554,416 $ 277,709
========== ==========
The effective statutory rate for 1999 and 1998 was 34% 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
$11,702,281 at March 31, 1999 and $6,571,412 at March 31, 1998.
The Company has adopted SFAS 109 for the fiscal year beginning July 1,
1993. SFAS 109 changes accounting for income taxes from the deferred method,
required by APB-11 to the asset/liability method, commonly referred to as the
liability method. The deferred method places primary emphasis on the matching of
revenues and expenses. The liability method places primary emphasis on the
valuation of current and deferred tax assets and liabilities.
F-8
<PAGE>
ACTRADE INTERNATIONAL, LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED MARCH 31, 1999
(Unaudited)
8. Trade Acceptance Drafts receivable, bank:
As of March 31, 1999, the Company had total TAD amounts due from banks of
$14,075,941. The bank purchases the TAD's at the face value and advances these
amounts to Actrade. The bank purchases the TAD's without recourse and the
Company has granted a security interest in all TAD's purchased by the bank and
all accounts represented by the TAD's together with all proceeds of the above.
The bank will purchase each TAD from Actrade that has been assigned and
delivered, whereby providing financing in an overdraft or loan agreement. At
March 31, 1999 there were advances of $7,032,369 and $2,041,269, respectively.
As each TAD is collateralized, the face amount will be credited to the Actrade
account to reduce the advance overdraft or loan payable on a as needed basis.
As of March 31, 1999, the Company had sold TAD's to a banking institution in
the amount of $2,432,257. This amount was due from the bank at March 31, 1999
and collected in April.
9. Reconciliation of shares used in computation of earnings per share:
Nine and three months ended
March 31,
1999 1998
---- ----
Weighted average of shares
actually outstanding 8,522,174 8,528,051 8,139,501 8,268,362
Common stock purchase
warrants and options 175,041 175,041 356,886 356,886
--------- --------- --------- ---------
Primary and fully diluted
weighted average common
shares outstanding 8,697,215 8,703,092 8,496,387 8,625,248
========= ========= ========= =========
F-9
<PAGE>
ACTRADE INTERNATIONAL, LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED MARCH 31, 1999
(Unaudited)
10. Common stock purchase warrants and options:
In the nine months ended March 31, 1999, 18,500 warrants were exercised at
prices ranging from $3.00 to $6.40, resulting in net proceeds to the Company of
$76,000 and the issuance of 18,500 common shares.
In the quarter ended December 31, 1998, the Company refunded an overpayment
from the exercise of certain warrants in June of 1998. This refund amounted to
$15,200.
In October 1995, the FASB issued Statement 123, Accounting for Stock-based
Compensation (SFAS 123). This statement is effective for transactions that are
entered into in fiscal years beginning after December 15, 1995. SFAS 123
establishes a fair value-based method of accounting for employee stock options.
This method provides for compensation cost to be charged to results of
operations at the grant date. However, the statement allows companies to
continue to follow the accounting treatment prescribed by Accounting Principles
Board Opinion 25. Opinion 25 generally requires compensation cost to be
recognized only for the excess of the quoted market price at the grant date over
the price that an employee must pay to acquire stock. Companies electing to
continue with Opinion 25 must make disclosure of net income as if SFAS 123 had
been adopted.
The Company has determined the method of accounting that it will follow for
stock options by continuing the use of Opinion 25. However, the Company does not
expect that adoption of the requirements of SFAS 123 would have a material
impact on the financial position, results of operations or cash flows.
Accordingly, no compensation cost will be recognized in 1999 or 1998.
11. Patent rights:
In January 1998, Amos Aharoni assigned to the Company all patent rights for
the trade acceptance draft process for $1.
12. Receivables, loan and security agreement:
On March 4, 1999, the Company entered into a five year agreement with a
major financial institution (a) providing for the transfer and sale by the
Company to a wholly-owned subsidiary of the Company of a designated pool of
domestic trade acceptance drafts receivables, and (b) allowing the Company to
sell to the financial institution an ownership interest in the trade acceptances
drafts for proceeds up to $25 million. The agreement includes fees the borrower
shall pay the lender (facility fees) in the amounts and on the dates set forth
in a fee letter executed between the borrower and the lender. During the third
quarter of fiscal 1999, the Company sold $14,285,755 of trade acceptance drafts.
F-10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
I. Results of Operations
General
During the first nine months of fiscal 1999, ended March 31, 1999, the Company
had combined gross sales of $137,104,604, as compared to $68,671,402 for the
first nine months of fiscal 1998, an increase of $68,433,202 or 99% above the
same period in fiscal 1998. Cost of sales during this period totaled
$126,240,319, or approximately 92% of gross sales, as compared to cost of sales
for the same period in fiscal 1998 of $62,655,911, or approximately 91% of gross
revenues. One of the principal reason for this slight increase in cost of sales
expressed as a percentage of total sales was the fact that an increasing
percentage of the Company's overall sales is derived from Capital's TAD Program
where profit margins are lower than in other areas. This resulted in gross
profits from operations of $10,864,285 for the nine month period ended March 31,
1999, compared to $6,015,491 for the same period in fiscal 1998, an increase of
$4,848,794 (or approximately 81%) over the first nine months of fiscal 1998.
After general and administrative expenses of $4,757,351, income from operations
increased to $6,106,934, as compared to $3,471,030 for the same period last
year, an increase of 76%. After interest income and expenses and provisions for
income taxes, the Company experienced net income of $4,656,548, as compared to
$3,144,163 for the first nine months of fiscal 1998 (an increase of 48%), or
$0.54 per share as compared to $0.37 per share for the same period last year.
The substantial increase in gross sales during this period was primarily due to
the expansion of the Company's operations through (i) significantly increased
sales by Actrade Capital Inc. ("Capital"), including its recently formed
subsidiary Actrade Capital Canada, Inc. ("Canada"), through its TAD Program,
discussed separately below (see "III. Actrade Capital, Inc. And The Trade
Acceptance Draft Program") and (ii) the increased sales by Actrade S.A, which
includes the results of its subsidiary Actrade Resources, Inc. ("Resources")
discussed below. Continuing the trend of recent fiscal periods, the major
portion of the Company's sales, over 61% at the end of the first nine months of
fiscal 1999 are now derived from Capital's TAD Program ($84,814,280 in the US
market). However, apart from direct sales made by Capital in the US market, it
is important to consider the commencement of sales in the Canadian market by
Canada (resulting in gross sales of $436,539 for this period) related to trade
financing activities. In combination, the total sales from the TAD Program and
related activities in Canada total $85,250,819 or 62% of the Company's total
sales for this period.
During the third quarter of fiscal 1999, the operations of Resources began to
contribute significantly to the Company's overall sales. Resources, a wholly
owned subsidiary of Actrade S.A., is engaged in a specialized area of
international trade and finance. Resources buys merchandise from suppliers
through the purchase of the bill of lading for the merchandise, paying the
supplier in full at the time of purchase. Resources will then sell the bill of
lading to a buyer with extended payment terms. The sale to the buyer is made
against delivery of bills of exchange that typically will be payable at dates
certain in the future according to the payment terms required by the buyer and
agreed to by Resources. Resources then collects the sale price of the
merchandise under the bills of exchange on their due dates or, in most cases,
sell the bills of exchange to financial institutions without recourse. During
the third quarter, Resources generated $23,251,489 in gross sales. After cost of
sales of $21,475,498 and general and administrative expenses of $75,020,
Resources realized $1,700,971 in income from operations. The operating results
for Resources have been consolidated with the results of Actrade S.A.
- - Third Quarter Results
With respect to the three months ended March 31, 1999 the Company continued
to show substantial growth on a par with recent fiscal periods. Gross sales
reached $52,890,170 (up $27,336,212 or 107% from the third quarter of fiscal
1998). After costs of sales of $48,704,034 (compared to $23,348,664 for the
third quarter of fiscal 1998) gross profit climbed to $4,186,136. This
represents an increase of $1,980,842 or slightly less than 90% above the third
quarter of fiscal 1998. Net earnings after interest income and expenses and
allowances for income taxes reached $1,624,621 (an increase of $517,402 or
approximately 47% higher than the same period of fiscal 1998). Per share
earnings for the third quarter of fiscal 1999, climbed to $0.19 per share (as
compared to $0.13 for the third quarter of fiscal 1998), a 46.2% increase over
the third quarter of fiscal 1998.
During the third quarter selling, general and administrative expenses continued
to escalate and reached $1,910,155, as compared to $955,388 for the same period
in fiscal 1998. However, when viewed as a percentage of gross sales, selling,
general and administrative expenses remained relatively stable with these
expenses represented 3.6% of total gross sales during the third quarter of
fiscal 1999, as compared to 3.7% during the same period last year. This slight
increase is in part due to the restructuring of the Company's marketing strategy
away from the development of regional offices in favor of a nation-wide
marketing approach from more strategically located sales offices.
II. Discussion of Financial Condition
On a consolidated basis, at March 31, 1999 the Company had total assets of
$42,771,766, compared with $26,137,402 at June 30, 1998, the end of fiscal 1998,
(an increase of $16,634,364). Total current liabilities at March 31, 1999
increased to $15,893,683, compared with $3,512,761 at June 30, 1998, (an
increase of $12,380,922). Of the Company's assets at March 31, 1999, $445,768
was in the form of cash and cash equivalent (compared to $13,381,678 at June 30,
1998). The decrease in cash and cash equivalent at March 31, 1999 reflects the
ongoing utilization of available cash by Capital in connection with its TAD
Program. At March 31, 1999 virtually all of the Company's available cash was
invested in TADs therefore the cash on hand at that date was low. At June 30,
1998 the opposite situation was true in that the Company had recently sold
virtually all of its TAD inventory and, not having yet reinvested this cash in
the purchase of new TADs, there remained a large cash balance on hand at the end
of fiscal 1998.
In addition to cash, $23,337,383 represents accounts receivable. Of the
Company's accounts receivable $16,937,724 (net of allowance for bad debts) are
trade receivables not related to the TAD program including $14,322,339 due to
Actrade S.A., 2,540,598 due to Resources and $74,787 (net of allowance for bad
debts) due to Actrade International Corp. The balance of $6,399,659 represent
TADs and TAD related receivables including $2,432,257 in TADs held by Capital
and not sold to any third party, and $3,967,402 (net of allowance for bad debt)
of TAD related receivables due to Capital.
On March 4, 1999, Capital concluded the negotiation of a new, 5-year $25 Million
credit facility with ING Barings (the "ING facility"), which was an extension of
the $10 Million interim facility granted by ING in December 1998. Under this
facility, Capital periodically will sell TADs received by it to Actrade Funding,
Inc., a new wholly owned subsidiary that, in turn, pledges the TADs to ING under
the ING facility. The Company pays a commitment fee on the unused portion of the
facility in addition to the fees payable with respect to TADs sold under the
facility. In connection with the ING facility, the Company has adopted the FAS
125 with respect to the accounting procedures for transaction thereunder. This
has resulted in two additional line items on the Company's balance sheet under
current assets. These include $2,432,701, representing the present value of
Capital's retained interest in TADs pledged under the ING facility and $740,652
as interest only strip, net of amortization. The principal advantage of the ING
facility for the Company has been to increase its financing sources and reduce
its cost of capital.
At March 31, 1999 the Company also had $14,075,941 in "Trade Acceptance Drafts
receivable, bank" representing receivables due in connection with Capital's sale
of TADs to Banco Portuguese do Atlantico ("BPA") and Summit Bank ("Summit"), but
not ING which are accounted for separately. The increase in the Company's assets
at March 31, 1999 over the fiscal year end was principally due to the increase
in trade acceptance drafts receivable, including both TADs held by Capital and
amounts due from banks for TADs sold by Capital.
At March 31, 1999, total stockholders' equity increased to $26,857,913, as
compared to $22,592,920 at June 30, 1998. The principal source of funds for the
Company's operations continues to be revenues earned by its operating
subsidiaries and the several credit facilities established by Capital with banks
and other financial institutions.
During the balance of the current fiscal year, ending June 30, 1999, 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, Canada and Resources.
At March 31, 1999 the Company had property, less accumulated depreciation, of
$793,889 (compared to $374,679 at June 30, 1998) and security deposits and
prepaid expenses of $29,805 and $164,027, respectively, compared to $26,806 and
$74,669, respectively, at June 30, 1998. A major portion of the increases in
these items resulted from the Company's establishment of new office facilities
in New Jersey during the third quarter.
The Company also continued to reflect Patent rights at a value of $1. 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. At March 31, 1999, the Company also reflected as a capital
asset $289,788 of "Finance costs, net of amortization" representing the costs
associated with finalizing the ING facility.
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, 1999 the Company continued to show $20,170 in
deferred rent liability.
The Company's accounts payable are current.
At March 31, 1999, the Company had current liabilities of $7,032,369,
representing advances against Capital's credit line with BPA which is fully
secured by TADs sold to BPA but not yet collected. There was also included
therein $2,041,269 representing notes payable to Summit that are also fully
secured by TADs pledged to Summit under a recently instituted credit facility.
The balance of $6,630,262 represents trade accounts payable and customer
reserves payable. However, with respect to the amounts due to BPA and Summit,
outstanding balances under those facilities are constantly changing based upon a
number of factors including the total amount of TADs sold or pledged to the bank
and the extent to which Capital needs to utilize the credit facilities provided.
At March 31, 1999, management continues to discuss the possible addition of
new credit facilities with several other major domestic and international
financial institutions. If these discussions come to fruition, of which there is
no assurance, these facilities will be available to finance the continued
purchase of TADs by Capital and Canada and for the trade financing activities of
Resources in much the same manner as the existing bank facilities.
Due to the Company's available cash being fully invested in TAD purchases
during this period, management elected to draw against its credit line. This
election contributed to the increase in interest expense during the periods
discussed herein. In addition, the Company had higher selling, general and
administrative expenses ($4,757,351 as compared to $2,544,461 for the nine month
period last year) attributable in part to the increased activities of the
Company and expansion costs, including its new Capital corporate office in
Somerset New Jersey, during this period.
With respect to the Company's working capital needs, management believes that
operating revenues from its subsidiaries will continue to reflect a profit, on a
consolidated basis, during the balance of fiscal 1999 and management expects
revenues will be adequate to meet the Company's operating cash needs for the
foreseeable future.
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 sales 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 sales 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 sales 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
sales 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. During the three months ended
March 31, 1999, Capital's sales continued to increase reaching $34,352,025 for
the third quarter of fiscal 1999, as compared to $15,337,639 for the third
quarter of fiscal 1998 an increase of approximately 124%.
Capital's operating revenues during the first nine months of fiscal 1999 totaled
$84,814,280 or approximately 61% of the Company's total revenues during this
period.
Perhaps equally important, during fiscal 1999 Canada commenced operations
in October, 1998 although no sales were recorded until the third quarter of
fiscal 1999. Canada had gross revenues of $436,539 and reflected a modest loss
from operations of $56,794. As had been the case in the United States, Canada's
market requires an education process to introduce the trade acceptance draft in
commercial transactions. Consequently, management has been greatly encouraged by
the operating results in Canada to date and expect acceptance of its program to
increase during the balance of fiscal 1999. However, no estimate can be made as
to the profit or loss that Canada will show by fiscal year end.
During the nine months ended March 31, 1999, Capital also had total interest
expenses of $915,812, while incurring direct selling, general and administrative
expenses of $3,804,931, which resulted in net operating income before taxes of
$1,127,863 (44% higher than for all of fiscal 1998), with net income of $942,383
after an allowance for taxes of $185,480.
With respect to Capital's expansion plan, based upon management's experience
with the TAD Program since its inception, 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. Management has
also elected to change its marketing focus away from regional sales offices in
favor of fewer offices with nation-wide marketing efforts.
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 sales and gross profits continue to reach new record levels each
quarter.
B. Actrade Canada, Inc.
During the first six months of operations, management has not identified
any specific trends which have had or that can reasonably be expected to have an
adverse impact upon the operations of Canada. However, as was the case in the
United States, management recognizes that an educational process will be
required in order to fully realize the potential of the Canadian market. Unlike
the US, however, Canada does not have the benefits of patent protection for the
Program being offered. Despite this, management believes that a substantial
market exists in Canada for this financial service and that the presence of
competition is not expected to adversely affect the ability of Canada to develop
profitable operations in the future.
Actrade International Corp. - Export Division.
Over the past year, a number of factors have developed that have adversely
affected the export operations of Actrade International Corp. ("International").
Among the external factors, perhaps the most important has been the renewed
strength of the American Dollar compared to other currencies. This 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 and South American financial
markets has translated into a slow down in orders for American made products
from these market segments. This has adversely affected International's export
operations. Although International had been able to offset this negative trend
with increased orders from other markets around the world, certain events during
the third quarter have caused management to re-evaluate its existing export
operations.
Principal among these events was the retirement of Mr. Leon Schorr in
mid-January 1999. Mr. Schorr, together with Mr. Woerner, was in charge of
International's export operations. Following Mr. Schorr's retirement
International agreed to the termination of its sale of air conditioning products
manufactured by Bard Manufacturing, who had been a major supplier of cooling
products in the telecommunications industry, a market developed by International
over the past several years. This was not unexpected given the fact that it had
been Mr. Schorr's personal relationship with Bard that led to International's
representation of its products overseas.
Although not material when considering the Company's revenues as a whole,
the loss of Bard as a supplier will have a significant adverse impact upon the
future operations of International. Currently, management is evaluating the
feasibility of continuing International's remaining export operations in light
of the Company's priority in expanding Capital's TAD Program and continuing the
expansion of the international trade and finance operations of Actrade S.A. and
Resources.
D. Actrade S.A. and Actrade Resources Ltd.: International Trade and Finance.
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.
As mentioned above, a result of changing world conditions has been a
significant, adverse impact on foreign markets for US products. Probably the
most important change management has identified 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 become the ability to provide
trade financing in addition to competitive pricing for products.
Beginning in fiscal 1997, management decided that the time had arrived to
change the approach to its international trade and financing operations. Relying
upon the financial strength of the Company, Actrade S.A. utilized management's
expertise in financing to develop its international trade operations. By
providing to its international customers special, innovative financing in
connection with those trading activities, management believed that it could fill
the void created by increasing worldwide demand, thereby allowing it to capture
a larger share of the current international market.
In response to these conditions, Actrade S.A. recently established a wholly
owned subsidiary, Actrade Resources, Ltd. Although Resources is in every sense a
trading company that buys merchandise from suppliers and re-sells it to
commercial buyers (see discussion above), management has successfully adapted
certain of the founding concepts behind the TAD Program to the needs of foreign
companies engaged in international trade.
The effects of this trend are evident in the Company's operating results
for both fiscal 1998 and during the current period. Sales by Actrade S.A. rose
to $35,098,753 during fiscal 1998 and $48,094,881 for the first nine months of
fiscal 1999 (compared to $22,918,264 for the first nine months of fiscal 1998),
including $23,251,489 in revenues earned by Resources.
With respect to the trading operations of both Actrade S.A. and Resources,
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. Worldwide demand for all types of products is
increasing, particularly where extended terms are offered to buyers.
However, management believes it is too early to predict whether the
extraordinary rise in sales revenues experienced by Actrade S.A. and Resources
will continue. At present, while product demand is high and the availability of
trade financing is low, Actrade S.A. and Resources enjoy 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 Company's
ability to effectively compete in its overseas markets.
VI. "Year 2000" Compliance.
The Year 2000 issue is the result of computer programs being written using
two digits, rather than four to define the applicable year. 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.
Based upon an assessment made during fiscal 1998, the Company is currently
updating all versions of operations and financial software so that all of its
systems will utilize dates beyond December 31, 1999 properly. This updating is
being performed by independent consultants retained by the Company for this
purpose and is expected to cost approximately $150,000. In addition, the Company
has evaluated all of its auxiliary computer application systems for Year 2000
compliance and believes that the planned modifications and conversions will
allow it to mitigate the Year 2000 issue.
The Company has had communications with its significant suppliers,
financial institutions and major customers to determine the extent to which it
may be vulnerable to any third parties' failure to remediate their own Year 2000
issues. 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.
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: May 10, 1999
ACTRADE INTERNATIONAL, LTD.
BY:__/s/Alexander C. Stonkus_________
Chief Operating Officer and Chief
Financial Officer
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