Actrade ACRTQ W
October 06, 2003 - 8:55am EST by
john771
2003 2004
Price: 0.95 EPS
Shares Out. (in M): 0 P/E
Market Cap (in $M): 11 P/FCF
Net Debt (in $M): 0 EBIT 0 0
TEV ($): 0 TEV/EBIT

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Description

I apologize if the sight of this ticker symbol caused you to spew your morning beverage. It’s true that they lied, they cheated, and they stole. And they went bankrupt. But an orderly liquidation process has left the company with $29mm in cash and $3mm in liabilities. The bar date for claims passed. A Plan of Reorganization was filed. The company will pay the liabilities and distribute its remaining cash over its 12mm shares. Shareholders should receive about $2 per share in liquidation proceeds. Between $1-$2 could be paid as soon as three months from now. The current share price fully discounts any potential adverse developments.

ILLIQUID

Actrade shares are illiquid. Sorry about that. Average volume for the past 3 months is 45K shares. I hope that period-end selling creates some supply of shares for members who like the idea. Some of the details about the amount and timing of liquidating distributions are unclear, but I don’t think you’ll be able to buy the stock once the uncertainties are resolved.

BACKGROUND

Actrade conducted a high-risk short-term commercial finance business. A full description of the business is available in old SEC filings and media coverage, but it’s no longer especially relevant to shareholders because all assets have been liquidated and all ordinary liabilities settled. The IP associated with the business was also sold. Actrade is still pursuing collection of a small amount of defaulted loans.

The company ran into trouble early in 2002 when the market became increasingly aware of the difference between the true nature and risk of Actrade’s business in comparison to the company’s description in public statements and regulatory filings. In August 2002, Actrade’s audit committee disclosed that an internal investigation was being conducted. The SEC also began a formal investigation. The company chairman, Amos Aharoni, resigned and fled the country. It was soon discovered that he had transferred $31.6mm of company funds to unknown counterparties. The presumption is that he stole the money.

Within months the company declared bankruptcy and the remaining senior executives were terminated. The company’s initial bankruptcy filings showed substantial net assets, but the bankruptcy of a large counterparty, concern over potential legal liabilities, and general panic drove the stock as low as $0.01.

In May an official Committee of Equity Security Holders was appointed by the Bankruptcy Court. The Committee has helped to maximize the value of the company assets and ensure good corporate governance.

In June Actrade negotiated a $13mm settlement of a claim against a bankrupt counterparty and its insurers. Final court approvals were received on 9/11/03 and Actrade received the money later in September.

THE PLAN OF REORGANIZATION

The Bar Date for claims against Actrade passed on 9/8/3 and Actrade filed a Plan of Reorganization and Disclosure Statement on 9/25/3. The Plan proposes full payment to creditors and the transfer of all remaining assets to a liquidating trust. The trust will make an initial distribution of all its cash less reserves to cover any unresolved contingent liabilities, ongoing administrative expenses, and the cost of pursuing legal claims. If the Disclosure Statement is approved at a scheduled hearing on 10/30 then balloting will take place for a Confirmation Hearing on 12/15. If approved then the plan would be declared effective and shareholders could receive an initial liquidating distribution in January. The key financial elements of the plan are:

$29mm in cash on hand (including the settlement received in September). It does not include any potential recoveries from other collection actions - none of which would have a major impact on the liquidation value. It does not include any potential recoveries from lawsuit against Amos Aharoni.

$0.5mm-$3mm in claims. Previous filings disclose unsecured claims of $0.4mm, of which $0.3mm is owed to Deloitte and Touche. Actrade’s bankruptcy attorney has submitted a bill of $2.5mm that is being disputed.

$?K in ongoing administrative expenses. Staffing has been reduced to a minimal level. A consultant was hired as Chief Restructuring Officer in order to supervise the wrap-up of the bankruptcy proceedings and Actrade’s other unfinished legal business.

$0K in SEC claims. See SEC INVESTIGATION

$?K in Securities litigation Claims. Currently it appears that Actrade will not have any liability. See CLASS ACTION LAWSUIT

This appears to leave $26mm in cash. Setting aside an additional $2mm to cover ongoing legal fees and administrative expenses leaves $24mm or approximately $2 per share (see SHARE COUNT).


CLASS ACTION LAWSUIT

The biggest risk is that the company will have some legal liability related to its apparently fraudulent conduct. A Class Action lawsuit was filed against the company in 2002, but it was amended in February to exclude Actrade. It now lists only Actrade’s former officers and auditors (Deloitte & Touche) as defendants.

Actrade maintained a $10mm D&O insurance policy with National Union Fire Insurance (a sub of AIG). The insurer disputes $9mm of this coverage on the grounds that Actrade officers were aware of their own fraudulent conduct at the time the increased $9mm coverage was obtained. Actrade does not appear to have an interest in the outcome of this dispute since Actrade is not a defendant in the class action lawsuit.

Actrade indemnified its officers and directors for all good faith actions they made while working for the company. 2 of the defendants (Stonkus and D’Alessandris) were terminated with cause by Actrade and 1 (Aharoni) is being sued by Actrade. If proven, the allegations in the class action lawsuit would be actions taken in bad faith. In addition, the SEC does not permit a company to provide indemnification for violations of the Securities Act. I do not believe that Actrade will have any liability for damages assessed against its former officers.

The lawsuit was originally filed in 02/02 and amended 02/03. A motion to dismiss the suit was heard in 07/03, but no ruling has been made.

The plaintiffs would likely claim average losses of $20-$30 for each of approximately 7mm shares owned by unaffiliated shareholders. A rule of thumb is that securities fraud class action settlements average 10% of the losses, but this will vary depending on the strength of the case and the availability of money to pay the damages. From $1mm-$10mm would be covered by Actrade’s insurance. It appears that D&T is now the primary target of the lawsuit. The main difference between the Complaint as originally filed and as amended in 02/03 is an expanded description of D&T’s errors.

As indicated, Actrade is not a defendant in the lawsuit, but I’m still sensitive to the risk that Actrade’s cash could serve as a magnet that sucks liability back to the company. However, during bankruptcy a securities settlement interest ranks equal to other shareholder interests. Any lawsuit liability could dilute, but could never eliminate funds available for Actrade shareholders.

Class action plaintiffs made no attempt to revive claims against Actrade prior to the Bar Date for claims. If no objections to the Plan and Disclosure Statement are filed by 10/27 then it will be certain that Actrade has no class action lawsuit liability aside from legal fees incurred as a party to the case.


SEC INVESTIGATION

The SEC is conducting a formal investigation of Actrade and its former officers. The Bar Date for SEC claims in the Actrade bankruptcy was extended to 11/10. This provides additional time for a negotiated conclusion to the SEC investigation. The Plan of Reorganization provides no money for SEC settlement and I do not expect any significant punitive damages to be assessed. Actrade is dead and you can’t punish somebody any worse than that.

The Plan of Reorganization currently shows $0 assigned to Class 4 (Impaired) – SEC Claims. This appears to be a temporary classification that will be adjusted or removed depending on whether the SEC asserts a financial claim.

SHARE COUNT

Actrade’s bankruptcy filing shows 12.4mm shares outstanding as of 11/14/02. Monthly operating reports filed since 01/03 show 11.8mm shares outstanding. I believe the difference results from cancellation of restricted stock. I have not been able to get the company to explain the difference between these numbers.

The bankruptcy filing stated that 31.55% (or 3.9mm shares) were owned by ex-Chairman Amos Aharoni. One of the allegations made in the class action lawsuit is that Aharoni made undisclosed stock sales. To the extent that Aharoni still owns shares, the strong evidence of his illegal actions makes it unlikely that he would benefit from any liquidating distributions made to those shares. The money that would have been paid to those shares could either be paid to the beneficiaries of the class action lawsuit or redistributed to other Actrade shareholders.

The Plan of Reorganization makes provision for the subordination of some equity interests by requiring each equity holder to submit a “Certificate of Ownership.” As yet unspecified shareholders (such as Aharoni) may have their interest moved to Class 7 (subordinated) and receive no distribution.

If Aharoni didn’t sell any of his stock and his shares are subordinated then Actrade’s estimated $24mm of cash would be distributed over 8.6mm shares resulting in a per share value of $2.79.

AHARONI LAWSUIT

Actrade has filed suit to recover $31.6mm that was allegedly transferred from Actrade International accounts to entities controlled by Aharoni shortly prior to his resignation from Actrade. Aharoni fled the country and is believed to be in Israel. Media reports suggest that Israeli law would not permit extradition in a case like this.

Ironically, Aharoni originally moved to the United States in the 1980s to hide from creditors of his bankrupt Israeli business. In the late 1990s he used profits from Actrade to settle with those creditors.

I can't predict whether any money can be recovered from Aharoni, but to the extent that he still owns shares, the liquidating distributions payable to those shares can be redistributed to other shareholders and/or used to compensate the Class action plaintiffs.


CORPORATE GOVERNANCE

The current Directors were elected at the annual meeting on 01/15/02, but the Committee of Equity Security Holders is effectively supervising Actrade. It appears that all of the company’s actions during bankruptcy have been properly directed towards maximizing the value remaining for shareholders. Upon court confirmation of the Plan of Reorganization, the current Board of Directors will resign and the current Committee of Equity Security Holders will become a Liquidation Trust Committee supervising the Trustee and conduct of the Trust.

Actrade has made regular 8-K filings to keep shareholders informed of developments during bankruptcy. I contacted Actrade several times to try to seek additional information or clarification of public information. The company was polite and professional, but generally unhelpful. All questions are referred to their lawyers. And then the lawyers don’t answer them. You can try reaching Chief Restructuring Officer John Fioretti or his assistant Wayne Desantis at 732-868-3100.

REFERENCES

Actrade Financial Technologies bankruptcy is case 02-16212 in the Southern District Court of New York. Key Documents from the court docket (available on PACER) are:

#1 – Initial Filing
#42 & #44 Schedules of Assets & Liabilities
#43 & #45 Statement of Financial Affairs
#152 – Insurer Disputes D&O coverage and Exhibit D is a copy of the amended Class Action Complaint.
#208 – Employment contract with Chief Restructuring Officer (John Fioretti).
#209-#210 Latest monthly Operating Reports.
#214 Disclosure Statement.
#215 Plan of Reorganization.
#219 Motion to approve the disclosure statement.

The monthly operating reports, plan of reorganization, and disclosure statement were also filed as 8-Ks on EDGAR.

The Class Action Complaint is case 02-cv-1263 in the Southern District Court of New York. A copy of the complaint was filed as Document 152 (exhibit 4) in Actrade’s bankruptcy case. SDNY civil cases are not on PACER and I’m not sure if you can see them online anywhere. You can read the docket and documents in the Public Reference at 500 Pearl Street in Manhattan.

If you want to know more about the $13mm settlement received in September then the full details are available in Northern District Court of Texas bankruptcy case 02-80906 (Venturelink Holdings) Documents #502 and #619

The lawsuit against Amos Aharoni is case 20168 in Delaware Chancery Court. You can read the docket for free by registering here:
http://www.virtualdocket.com/login.asp?court=chancery
The case documents are available at modest cost, or I could email them to you.

Catalyst

1) Hearing to approve the Disclosure Statement on 10/30 (lack of objections would clarify that Actrade has no significant contingent liabilities)
2) Confirmation Hearing tentatively scheduled for 12/15
3) Initial Liquidating Distribution (Probably between $1-$2 and probably paid in January)
4) Additional liquidating distributions (cumulative value about $2)
5) Possible subordination of ex-insider shares (could increase the distribution to remaining shares as high as $2.79)
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