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 1934
For the transition period from to _____
Commission file number 1-3916
ARTRA GROUP INCORPORATED
(Exact name of registrant as specified in its charter)
Pennsylvania 25-1095978
- --------------------------------------------- ---------------------
State or other jurisdiction I.R.S. Employer
of incorporation or organization Identification No.
500 Central Avenue, Northfield, IL 60093
- --------------------------------------------- ---------------------
Address of principal executive offices Zip Code
Registrant's telephone number, including area code: (847) 441-6650
Not Applicable
-------------------------------------------------------------------------------
Former name, former address and former fiscal year, if changed since last report
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 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.
Class Outstanding at April 30, 1999
- ------------------------------- -----------------------------
Common stock, without par value 8,729,895
<PAGE>
ARTRA GROUP INCORPORATED
INDEX
Page
Number
------
PART I FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets
March 31, 1999 and December 31, 1998 2
Condensed Consolidated Statements of Operations
Three Months Ended March 31, 1999 and March 31, 1998 3
Condensed Consolidated Statement of Changes
in Shareholders' Equity (Deficit)
Three Months Ended March 31, 1999 4
Condensed Consolidated Statements of Cash Flows
Three Months Ended March 31, 1999 and March 31, 1998 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of 13
Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures 16
About Market Risk
PART II OTHER INFORMATION
Item 1. Legal Proceedings 17
Item 6. Exhibits and Reports on Form 8-K 17
SIGNATURES 18
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited in thousands, except share data)
March 31, December 31,
1999 1998
-------- --------
ASSETS
Current assets:
Cash and equivalents $ 9,317 $ 11,753
Restricted cash and equivalents 962 1,045
Available-for-sale securities 5,816 8,200
Other 154 270
-------- --------
Total current assets 16,249 21,268
Other assets:
Advances to NA Acquisition Corp. 967 --
Other 335 --
-------- --------
$ 17,551 $ 21,268
======== ========
LIABILITIES
Current liabilities:
Accrued expenses $ 574 $ 568
Income taxes 1,123 1,854
Common stock put warrants 1,394 1,705
Liabilities of discontinued operations 9,398 10,328
-------- --------
Total current liabilities 12,489 14,455
-------- --------
Commitments and contingencies
Redeemable preferred stock 2,921 2,857
SHAREHOLDERS' EQUITY (DEFICIT)
Common stock, no par value;
authorized 20,000,000 shares;
issued 8,603,348 shares in 1999
and 8,302,110 shares in 1998 6,453 6,227
Additional paid-in capital 44,409 42,734
Unrealized appreciation of investments 8,536 10,920
Accumulated deficit (55,632) (54,300)
-------- --------
3,766 5,581
Less treasury stock, 437,882 shares, at cost 1,625 1,625
-------- --------
2,141 3,956
-------- --------
$ 17,551 $ 21,268
======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
2
<PAGE>
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended
------------------
March 31, March 31,
1999 1998*
------- -------
<S> <C> <C>
Net sales $ -- $ --
------- -------
Costs and expenses:
Cost of goods sold, exclusive of depreciation and amortization -- --
Selling, general and administrative 1,354 622
------- -------
1,354 622
------- -------
Operating loss (1,354) (622)
------- -------
Other income (expense):
Interest income (expense), net 86 (1,134)
Realized gain on disposal of available-for-sale securities -- 53
Other income (expense), net -- (76)
------- -------
86 (1,157)
------- -------
Loss from continuing operations before income taxes (1,268) (1,779)
Provision for income taxes -- --
------- -------
Loss from continuing operations (1,268) (1,779)
Loss from discontinued operations -- (138)
------- -------
Net loss (1,268) (1,917)
Dividends applicable to redeemable preferred stock (64) (124)
------- -------
Loss applicable to common shares ($1,332) ($2,041)
======= =======
Per share loss applicable to common shares:
Basic
Continuing operations ($ 0.17) ($ 0.24)
Discontinued operations -- (0.02)
------- -------
Net loss ($ 0.17) ($ 0.26)
======= =======
Weighted average number of shares of common stock outstanding 7,965 7,952
======= =======
Diluted
Continuing operations ($ 0.17) ($ 0.24)
Discontinued operations -- (0.02)
------- -------
Net loss ($ 0.17) ($ 0.26)
======= =======
Weighted average number of shares of common stock and
common stock equivalents outstanding 7,965 7,952
======= =======
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
- ---------------------------
* As reclassified for discontinued operations.
3
<PAGE>
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
(Unaudited in thousands, except share data)
<TABLE>
<CAPTION>
Accumulated Total
Common Stock Additional Other Treasury Stock Shareholders'
------------------ Paid-in Comprehensive Accumulated ----------------- Equity
Shares Dollars Capital Income (Deficit) Shares Dollars (Deficit)
--------- ------- --------- ------------ ------------ -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1998 8,302,110 $6,227 $42,734 $10,920 ($54,300) 437,882 ($1,625) $3,956
----------
Comprehensive income (loss):
Net loss - - - (1,268) - - (1,268)
Net decrease in unrealized
appreciation of investments - - - (2,384) - - - (2,384)
----------
Comprehensive income (loss) (3,405)
----------
Other changes in
shareholders' equity:
Exercise of warrants to
purchase common stock 263,841 198 940 - - - - 1,138
Exercise of options to
purchase common stock 37,397 28 124 - - - - 152
Outstanding stock optons - - 300 - - - - 300
Reverse put liability
for warrants exercised - - 311 - - - - 311
Redeemable preferred
stock dividends - - - - (64) - - (64)
----------
Other changes in
shareholders' equity 1,837
----------
--------- ------- ---------- ----------- ----------- ------- ------- ----------
Balance at March 31, 1999 8,603,348 $6,453 $44,409 $8,536 ($55,632) 437,882 ($1,625) $1,841
========= ======= ========== =========== =========== ======= ======= ==========
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
4
<PAGE>
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited in thousands)
Three Months Ended
---------------------
March 31, March 31,
1999 1998
-------- --------
Net cash flows used by operating activities ($ 2,074) ($ 2,492)
-------- --------
Cash flows from investing activities:
Advances to NA Acqusition Corp. (1,400) --
Decrease in restricted cash 83 --
Additions to property, plant and equipment -- (449)
Proceeds from sale of COMFORCE common stock -- 28
Other (335) --
-------- --------
Net cash flows used by investing activities (1,652) (421)
-------- --------
Cash flows from financing activities:
Proceeds from exercise of stock options and warrants 1,290 17
Net decrease in short-term debt -- (1,850)
Proceeds from long-term borrowings -- 36,514
Reduction of long-term debt -- (35,788)
Repurchase of common stock previously issued
to pay down short-term notes -- (1,518)
Redeem detachable put warrant -- (400)
Other -- 18
-------- --------
Net cash flows used by financing activities 1,290 (3,007)
-------- --------
Decrease in cash and cash equivalents (2,436) (5,920)
Cash and equivalents, beginning of period 11,753 5,991
-------- --------
Cash and equivalents, end of period $ 9,317 $ 71
======== ========
Supplemental schedule of noncash
investing and financing activities:
ARTRA/BCA redeemable preferred stock
received as payment ofPeter Harvey advances -- 12,787
The accompanying notes are an integral part of the condensed consolidated
financial statements.
5
<PAGE>
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
ARTRA Group Incorporated, (hereinafter "ARTRA" or the "Company"), is a
Pennsylvania corporation incorporated in 1933. Through November 20, 1998, ARTRA
operated in one industry segment as a manufacturer of packaging products
principally serving the food industry. The packaging products business was
conducted by the Company's wholly-owned subsidiary, Bagcraft Corporation of
America ("Bagcraft"), which business was sold on November 20, 1998.
As discussed in Note 2, on February 23, 1999, ARTRA entered into an agreement
with NA Acquisition Corp. ("NAAC") and WorldWide Web NetworX Corporation
("WWWX") providing for the merger of a subsidiary of NAAC with ARTRA. NAAC, a
90% owned subsidiary of WWWX, owns all of the outstanding capital stock of
entrade.com, Inc. ("entrade.com") and 25% of the Class A Common Stock of
asseTrade.com, Inc. ("asseTrade.com").
entrade.com is an Internet business-to-business electronic commerce
("e-commerce") company seeking to provide asset disposition solutions for the
utility and large industrial manufacturing sectors. asseTrade.com proposes to
develop and implement comprehensive asset/inventory recovery, disposal,
remarketing and management solutions for corporate clients through advanced
Internet electronic business applications, including on-line auctions.
Consummation of the merger is subject to the approval of the shareholders of
ARTRA. The Company expects to complete the transaction during the third quarter
of 1999.
These condensed consolidated financial statements are presented in accordance
with the requirements of Form 10-Q and consequently do not include all the
disclosures required in the Company's annual report on Form 10-K. Accordingly,
the Company's annual report on Form 10-K for the fiscal year ended December 31,
1998, as filed with the Securities and Exchange Commission, should be read in
conjunction with the accompanying consolidated financial statements. The
condensed consolidated balance sheet as of December 31, 1998 was derived from
the audited consolidated financial statements in the Company's annual report on
Form 10-K.
In the opinion of the Company, the accompanying condensed consolidated financial
statements reflect all normal recurring adjustments necessary to present fairly
the financial position as of March 31, 1999, and the results of operations and
changes in cash flows for the three month periods ended March 31, 1999 and March
31, 1998. Reported interim results of operations are based in part on estimates
that may be subject to year-end adjustments. In addition, these quarterly
results of operations are not necessarily indicative of those expected for the
year.
2. CHANGE OF BUSINESS
NA Acquisition Corp.
On February 23, 1999, ARTRA entered into an Agreement and Plan of Merger (the
"Merger Agreement") with WWWX, NAAC, a 90% owned subsidiary of WWWX, and WWWX
Merger Subsidiary, Inc. ("Merger Sub"), a wholly owned subsidiary of NAAC,
pursuant to which Merger Sub will merge into the Company (the "Merger"), with
the Company being the surviving corporation. As a result of the Merger, the
Company will become a wholly owned subsidiary of NAAC, and the shareholders of
the Company will become shareholders of NAAC. Under the terms of the Merger
Agreement, the Company's shareholders will receive one share of NAAC Common
Stock in exchange for each share of the Company's Common Stock. Additionally,
the ARTRA preferred stock shareholders, which shall include persons who elect to
exchange their BCA Holdings, Inc. ("BCA", a wholly-owned subsidiary and parent
of Bagcraft) preferred stock prior to the merger, will receive shares of NAAC
Common Stock in exchange for shares of their respective preferred stock
issuances (see Note 4 for a further discussion of preferred stock issuances).
All stock options and warrants issued by the Company and outstanding on the
closing date of the Merger will be converted into NAAC stock options and
warrants. NAAC owns all of the outstanding capital stock of entrade.com and 25%
of the Class A Common Stock of asseTrade.com.
6
<PAGE>
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (continued)
In connection with the execution of the Merger Agreement, on February 23, 1999,
NAAC acquired certain software and intellectual property and 25% of the shares
of Class A Voting Common Stock of asseTrade.com (collectively, the "Purchased
Assets") from WWWX, in exchange for 1,800,000 shares of NAAC Common Stock,
$800,000 in cash and a note for $500,000, payable upon the consummation of the
Merger or the earlier termination of the Merger Agreement. On February 19, 1999,
NAAC had agreed with Energy Trading Company ("ETCO"), a wholly owned subsidiary
of Peco Energy Company, to issue to ETCO 200,000 shares of NAAC Common Stock,
and to pay ETCO $100,000 in exchange for certain retained rights ETCO held in
the Purchased Assets. NAAC also agreed with both WWWX and ETCO that it would
provide a minimum of $4,000,000 in funding for entrade.com. Under separate loan
agreements, ARTRA agreed to loan NAAC up to $2,000,000 to fund the $800,000 cash
payment to WWWX and to provide funding for entrade.com until the consummation of
the Merger or the earlier termination of the Merger Agreement. Under the Merger
Agreement, the Company agreed to guaranty the $4,000,000 funding for entrade.com
if the Merger is consummated.
Consummation of the merger is subject to the approval of the shareholders of
ARTRA. The Company expects to complete the transaction during the third quarter
of 1999.
Bagcraft
Effective August 26, 1998, ARTRA and its wholly-owned BCA subsidiary, the parent
of Bagcraft, agreed to sell the business assets of Bagcraft. Additionally, the
buyer agreed to assume certain Bagcraft liabilities. The disposition of the
Bagcraft business resulted in a net gain of $35,985,000.
The Company's 1998 consolidated financial statements have been reclassified to
report separately the results of operations of Bagcraft. The operating results
(in thousands) for three months ended March 31, 1998 of the discontinued
Bagcraft subsidiary consist of:
Net sales $ 30,839
==========
Earnings from operations before income taxes
and minority interest $ 63
Provision for income taxes (12)
Minority interest (189)
----------
Loss from discontinued operations $ (138)
==========
Liabilities of discontinued operations at March 31, 1999 and December 31, 1998
of $9,398,000 and $10,328,000, respectively, include BCA/Bagcraft redeemable
preferred stock issues (see Note 4), contractual obligations, environmental
matters and other future estimated costs for various discontinued operations.
7
<PAGE>
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (continued)
3. INVESTMENT IN COMFORCE CORPORATION
At March 31, 1999 ARTRA's investment in COMFORCE Corporation ("COMFORCE"),
1,525,500 shares, currently a common stock ownership interest of approximately
9%, was classified in the Company's condensed consolidated balance sheet in
current assets as "Available-for-sale securities." At March 31, 1999 the gross
unrealized gain relating to ARTRA's investment in COMFORCE, reflected as a
separate component of shareholders' equity, was $8,536,000. The investment in
COMFORCE common stock, which represents a significant portion of the Company's
assets at March 31, 1999 and December 31, 1998, is subject to liquidity and
market price risks.
In January 1996, the Company's Board of Directors approved the sale of 200,000
of ARTRA's COMFORCE common shares to certain officers, directors and key
employees of ARTRA for non-interest bearing notes totaling $400,000. The notes
are collateralized by the related COMFORCE common shares. Additionally, the
noteholders have the right to put their COMFORCE shares back to ARTRA in full
payment of the balance of their notes. Based upon the preceding factors, the
Company had concluded that, for reporting purposes, it had effectively sold
options to certain officers, directors and key employees to acquire 200,000 of
ARTRA's COMFORCE common shares. Accordingly, in January 1996 these 200,000
COMFORCE common shares were removed from the Company's portfolio of
"Available-for-sale securities" and were classified in the Company's condensed
consolidated balance sheet as other receivables with an aggregate value of
$400,000, based upon the value of proceeds to be received upon future exercise
of the options. The disposition of these 200,000 COMFORCE common shares resulted
in a gain that was deferred and will not be recognized in the Company's
financial statements until the options to purchase these 200,000 COMFORCE common
shares are exercised. During the first quarter of 1998, options to acquire
14,000 of these COMFORCE common shares were exercised resulting in a realized
gain of $53,000. At March 31, 1999, options to acquire 55,750 COMFORCE common
shares remained unexercised and were classified in the Company's condensed
consolidated balance sheet as other current assets with an aggregate value of
$112,000, based upon the value of proceeds to be received upon future exercise
of the options.
4. REDEEMABLE PREFERRED STOCK
ARTRA
In March 1990, ARTRA issued 3,750 shares of $1,000 par value junior
non-convertible payment-in-kind redeemable Series A Preferred Stock with an
estimated fair value of $1,012,000, net of unamortized discount of $2,738,000 as
partial consideration for the acquisition of the discontinued Bagcraft
subsidiary.
At March 31, 1999 and December 31, 1998, 1,849.34 shares of Series A Preferred
Stock were outstanding with carrying values of $2,921,000 and $2,857,000,
respectively, including accumulated dividends, net of unamortized discount of
$205,000 and $239,000, respectively. The Series A Preferred Stock accrues
dividends at the rate of 6% per annum and is redeemable by ARTRA on March 1,
2000 at a price of $1,000 per share plus accrued dividends. Accumulated
dividends of $1,276,000 and $1,246,000 were accrued at March 31, 1999 and
December 31, 1998, respectively.
BCA Holdings/ Bagcraft
During 1992 and 1993, in exchange for cash consideration of $3,675,000, a former
related party received 3,675 shares of BCA Series A preferred stock (6%
cumulative, redeemable preferred stock with a liquidation preference equal to
$1,000 per share). At March 31, 1999 and December 31, 1998, liabilities of
discontinued operations included 1,672.18 BCA Series A redeemable preferred
shares with accumulated dividends of $514,000.
8
<PAGE>
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (continued)
Effective February 15, 1996, BCA, Bagcraft and a former related party entered
into an agreement to exchange certain preferred stock between the Companies. Per
terms of the exchange agreement BCA issued 8,135 shares of BCA Series B
preferred stock (13.5% cumulative, redeemable preferred stock with a liquidation
preference equal to $1,000 per share) to the former related party in exchange
for 41,350 shares of Bagcraft redeemable preferred stock. At March 31, 1999 and
December 31, 1998, liabilities of discontinued operations included 1,675.79 BCA
Series B redeemable preferred shares with accumulated dividends of $650,000.
At March 31, 1999 and December 31, 1998, liabilities of discontinued operations
included 8,650 shares of Bagcraft 13.5% cumulative, redeemable preferred stock
(liquidation preference equal to $100 per share). Accumulated dividends of
$1,315,000 were accrued at March 31, 1999 and December 31, 1998.
On February 23, 1999, ARTRA entered into a Merger Agreement with WWWX and NAAC
(see Note 2). As a result of the Merger, the Company will become a wholly owned
subsidiary of NAAC, and the shareholders of the Company will become shareholders
of NAAC. Under the terms of the Merger Agreement, if approved by the Company's
shareholders, the ARTRA preferred stock shareholders, which shall include
persons who elect to exchange their BCA preferred stock prior to the merger,
will receive shares of NAAC Common Stock in exchange for shares of their
respective preferred stock issuances.
5. INCOME TAXES
No income tax benefit was recognized in connection with the Company's 1998 and
1997 pre-tax losses due to the Company's tax loss carryforwards and the
uncertainty of future taxable income.
At December 31, 1998, the Company and its subsidiaries had Federal income tax
loss carryforwards of approximately $10,000,000 expiring principally in 2010 -
2012, available to be applied against future taxable income, if any. In recent
years, the Company has issued shares of its common stock to repay various debt
obligations, upon exercise of stock options and warrants, as consideration for
acquisitions, to fund working capital obligations and as consideration for
various other transactions. Section 382 of the Internal Revenue Code of 1986
limits a corporation's utilization of its Federal income tax loss carryforwards
when certain changes in the ownership of a corporation's common stock occurs. In
the opinion of management, the Company is not currently subject to such
limitations regarding the utilization of its Federal income tax loss
carryforwards. Should the Company continue to issue a significant number of
shares of its common stock, it could trigger a limitation on its ability to
utilize its Federal income tax loss carryforwards.
6. EARNINGS PER SHARE
Effective December 31, 1997, the Company adopted SFAS No. 128, "Earnings per
Share". Basic earnings (loss) per share is computed by dividing the income
available to common shareholders, net earnings (loss), less redeemable preferred
stock dividends and redeemable common stock accretion, by the weighted average
number of shares of common stock outstanding during each period.
Diluted earnings (loss) per share is computed by dividing the income available
to common shareholders, net earnings (loss), less redeemable preferred stock
dividends and redeemable common stock accretion, by the weighted average number
of shares of common stock and common stock equivalents (stock options and
warrants), unless anti-dilutive, during each period.
9
<PAGE>
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (continued)
Earnings (loss) per share for the three months ended March 31, 1999 and 1998 was
computed as follows (in thousands, except per share amounts):
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
March 31, 1999 March 31, 1998
-------------------- ------------------
Basic Diluted Basic Diluted
-------- -------- -------- -------
AVERAGE SHARES OUTSTANDING:
<S> <C> <C> <C> <C>
Weighted average shares outstanding 7,965 7,965 7,952 7,952
Common stock equivalents
(options/warrants) -- -- -- --
======== ======== ======== =======
7,965 7,965 7,952 7,952
======== ======== ======== =======
EARNINGS (LOSS):
Net loss $ (1,268) $ (1,268) $ (1,917) $(1,917)
Dividends applicable to
redeemable preferred stock (64) (64) (124) (124)
======== ======== ======== =======
Loss applicable to common shareholders $ (1,322) $ (1,332) $ (2,041) $(2,041)
======== ======== ======== =======
PER SHARE AMOUNTS:
Net loss applicable to common shares $ (0.17) $ (0.17) $ (0.26) $ (0.26)
======== ======== ======== =======
</TABLE>
7. LITIGATION
The Company and its subsidiaries are the defendants in various business-related
litigation and environmental matters. At March 31, 1999 and December 31, 1998,
the Company had accrued current liabilities of $1,500,000 for potential
business-related litigation and environmental liabilities. While these
litigation and environmental matters involve wide ranges of potential liability,
management does not believe the outcome of these matters will have a material
adverse effect on the Company's financial statements.
The discontinued Bagcraft subsidiary's Chicago facility has been the subject of
allegations that it violated laws and regulations associated with the Clean Air
Act. The facility has numerous sources of air emissions of volatile organic
materials ("VOMs") associated with its printing operations and was required to
maintain and comply with permits and emissions regulations with regard to each
of these emission sources.
In November of 1995, the EPA issued a Notice of Violation ("NOV") against
Bagcraft's Chicago facility alleging numerous violations of the Clean Air Act
and related regulations. In May 1998 Bagcraft paid $170,000 to formally
extinguish this claim.
In April 1994, the EPA notified the Company that it was a potentially
responsible party for the disposal of hazardous substances (principally waste
oil) at a disposal site in Palmer, Massachusetts generated by a manufacturing
facility formerly operated by the Clearshield Plastics Division ("Clearshield")
of Harvel Industries, Inc. ("Harvel"), a majority owned subsidiary of ARTRA. In
1985, Harvel was merged into ARTRA's Fill-Mor subsidiary. This site has been
included on the EPA's National Priorities List. In February 1983, Harvel sold
the assets of Clearshield to Envirodyne. The alleged waste disposal occurred in
1977 and 1978, at which time Harvel was a majority-owned subsidiary of ARTRA. In
May 1994, Envirodyne and its Clearshield National, Inc. subsidiary sued ARTRA
for indemnification in connection with this proceeding. The cost of clean-up at
the Palmer, Massachusetts site has been estimated to be approximately $7 million
according to proofs of claim filed in the adversary proceeding. A committee
formed by the named potentially responsible parties has estimated the liability
respecting the activities of Clearshield to be $400,000. ARTRA has not made any
independent investigation of the amount of its potential liability and no
assurances can be given that it will not substantially exceed $400,000.
10
<PAGE>
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (continued)
In a case titled Sherwin-Williams Company v. ARTRA GROUP Incorporated, filed in
1991 in the United States District Court for Maryland, Sherwin-Williams Company
("Sherwin-Williams") brought suit against ARTRA and other former owners of a
paint manufacturing facility in Baltimore, Maryland for recovery of costs of
investigation and clean-up of hazardous substances which were stored, disposed
of or otherwise released at this manufacturing facility. This facility was owned
by Baltimore Paint and Chemical Company, formerly a subsidiary of ARTRA from
1969 to 1980. Sherwin-William's current projection of the cost of clean-up is
approximately $5 to $6 million. The Company has filed counterclaims against
Sherwin-Williams and cross claims against other former owners of the property.
The Company also is vigorously defending this action and has raised numerous
defenses. Currently, the case is in its early stages of discovery and the
Company cannot determine what, if any, its liability may be in this matter.
ARTRA was named as a defendant in United States v. Chevron Chemical Company
brought in the United States District Court for the Central District of
California respecting Operating Industries, Inc. site in Monterey Park,
California. This site is included on the EPA's National Priorities List. ARTRA's
involvement stemmed from the alleged disposal of hazardous substances by The
Synkoloid Company ("Synkoloid") subsidiary of Baltimore Paint and Chemical
Company, which was formerly owned by ARTRA. Synkoloid manufactured spackling
paste, wall coatings and related products, certain of which generated hazardous
substances as a by-product of the manufacturing process. ARTRA entered into a
consent decree with the EPA in which it agreed to pay $85,000 for one phase of
the clean-up costs for this site; however, ARTRA defaulted on its payment
obligation. ARTRA is presently unable to estimate the total potential liability
for clean-up costs at this site, which clean-up is expected to continue for a
number of years. The consent decree, even if it had been honored by ARTRA, was
not intended to release ARTRA from liability for costs associated with other
phases of the clean-up at this site. The Company is presently unable determine
what, if any, additional liability it may incur in this matter.
In recent years, the Company has been a party to certain product liability
claims relating to the former Synkoloid subsidiary. The Company's product
liability insurance has covered all such claims settled to date. As of March 31,
1999, the Company anticipates that its product liability insurance is adequate
to cover any additional pending claims.
Several cases have arisen from ARTRA's purchase of Dutch Boy Paints which owned
a facility in Chicago which it purchased from NL Industries. In a case titled
City of Chicago v. NL Industries, Inc. and ARTRA GROUP Incorporated, filed in
the Circuit Court of Cook County, Illinois, the City of Chicago brought a
nuisance action and alleged that ARTRA (and NL Industries, Inc.) had improperly
stored, discarded and disposed of hazardous substances at the Dutch Boy site,
and that ARTRA had conveyed the site to Goodwill Industries to avoid clean-up
costs. At the time the suit was filed, the City of Chicago claimed that it would
cost $1,000,000 to remediate the site. The Company is currently negotiating with
the City of Chicago to settle this claim.
ARTRA and NL Industries, Inc. have counter sued each other and have filed third
party actions against the subsequent owners of the property. The Company is
presently unable to determine its liability, if any, in connection with this
case. The parties were conducting discovery but the case was stayed pending the
resolution of the EPA action described below.
On November 17, 1995, the EPA issued letters to ARTRA, NL Industries and others
alleging that they were potentially responsible parties with respect to releases
at the Dutch Boy facility in Chicago and demanding that they remediate the site.
NL Industries entered into a consent decree with EPA in which it agreed to
remediate the site. The Company is presently unable to determine its liability,
if any, in connection with this case.
8. OTHER INFORMATION
On February 23, 1999, the Company entered into three-year employment agreements
with three individuals to manage the Company's entry into the Internet
business-to-business e-commerce and on-line auction business. In connection with
such employment, the three individuals will receive nonqualified stock options
for the purchase of 1,800,000 shares of the Company's Common Stock at an
exercise price of $2.75 per share. The options vest in three equal installments
over a period ending February 18, 2001. During the three months ended March 31,
1999, the Company recognized compensation expense of $300,000 related to these
stock options.
11
<PAGE>
ARTRA GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (continued)
ARTRA has fallen below certain of the New York Stock Exchange's quantitative and
other continued listing criteria. Pursuant to the New York Stock Exchange's
request, ARTRA has provided a definitive action plan demonstrating ARTRA's
ability to achieve compliance with the New York Stock Exchange's listing
standards, including the succession of NAAC common stock to such listing after
the merger. Based upon a review of that plan, the New York Stock Exchange is
continuing the listing of ARTRA common stock. ARTRA will be subject to ongoing
quarterly monitoring for compliance with the plan. Failure to meet any of the
quarterly plan projections could result in the suspension from trading and
subsequent delisting of ARTRA common stock. ARTRA's plan is dependent upon
consummation of the merger during the third quarter of 1999. If the merger is
not consummated, ARTRA may not be able to satisfy the listing requirements of
the New York Stock Exchange, and ARTRA common stock may be delisted from the New
York Stock Exchange.
9. SUBSEQUENT EVENTS
On April 19, 1999, ARTRA entered into a letter of intent to purchase all of the
issued and outstanding common stock of Public Liquidations Systems, Inc. and
Asset Liquidation Group, Inc., d/b/a as Nationwide Auction Systems Corp. The
purchase price shall consist of cash of $10,800,000 payable at closing,
1,570,000 shares of ARTRA common stock and a $14,000,000 note, subject to
adjustment, payable over a two year period subsequent to the closing of the
transaction. Consummation of the transaction is subject to certain conditions,
including performance of the buyer's and seller's due diligence and negotiation
of a definitive asset purchase agreement. The letter of intent, as extended,
expires on May 24. This potential acquisition is not as yet deemed probable as
no assurance can be given that the parties will complete their due diligence or
enter into a definitive agreement by that date.
During April 1999, warrants were exercised to purchase approximately 560,000
shares of ARTRA common stock, resulting in proceeds to the Company of
approximately $2,400,000. These warrants were issued principally as additional
compensation for various short-terms loans, all of which were repaid before the
end of 1998.
12
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion supplements the information found in the financial
statements and related notes:
Results of Operations
We significantly changed the business focus of the company during the fourth
quarter of fiscal year 1998. We exited our then one industry segment, the
packaging products business, conducted by the discontinued Bagcraft subsidiary.
We are actively investigating new business opportunities starting with the NAAC
transaction discussed below. Our consolidated financial statements for the three
months ended March 31, 1998 have been reclassified to report separately the
results of operations of the Bagcraft subsidiary in discontinued operations.
Three Months Ended March 31, 1999 vs. Three Months Ended March 31, 1998
Continuing Operations
Selling, general and administrative expenses from continuing operations were
$1,134,000 for the three months ended March 31, 1999 as compared to $622,000 for
the three months ended March 31, 1998. We incurred a compensation charge of
$300,000 during the first quarter of 1999 relating to stock options granted to
certain individuals employed to manage our entry into the Internet
business-to-business e-commerce and on-line auction business and also had
$433,000 of losses incurred by NAAC.
During the three moths ended March 31, 1999, we had net interest income of
$86,000 as compared to net interest expense of $1,134,000 during the three
months ended March 31, 1998. We used a significant portion of the cash proceeds
received from the November 1998 sale of the assets of the discontinued Bagcraft
subsidiary to pay off borrowings on our various loan agreements. We have
invested a substantial portion of the remaining net proceeds in interest bearing
cash equivalents.
We were unable to recognize an income tax benefit in connection with the
company's 1999 and 1998 pre-tax losses due to the company's tax loss
carryforwards and the uncertainty of future taxable income.
Discontinued Operations
During the three months ended March 31, 1998, we incurred a loss of $138,000 at
the discontinued Bagcraft subsidiary.
Liquidity and Capital Resources
Cash and Cash Equivalents and Working Capital
Our cash and cash equivalents decreased $2,436,000 during the three months ended
March 31, 1999. Cash flows used by operating activities of $2,074,000 and cash
flows used by investing activities of $1,652,000 exceeded cash flows from
financing activities of $1,290,000. Operating activities used cash flows to fund
the Company's net loss for the quarter ended March 31, 1999 and to pay
liabilities of the discontinued Bagcraft subsidiary. Investing activities used
cash flows for our investment in and advances to NAAC. Financing activities
provided cash flows from the exercise of stock options and warrants.
Our consolidated working capital decreased to $3,760,000 at March 31, 1999 as
compared to consolidated working capital of $6,813,000 at December 31, 1998. We
used working capital to pay of liabilities of the discontinued Bagcraft
subsidiary and for our investment in and advances to NAAC.
13
<PAGE>
Operating Plan
On February 23, 1999, we entered into a merger agreement with WWWX and NAAC, a
90% owned subsidiary of WWWX. As a result of the merger agreement, we will
become a wholly owned subsidiary of NAAC, and the shareholders of the company
will become shareholders of NAAC. Under the terms of the merger agreement, the
company's shareholders will receive one share of NAAC common stock in exchange
for each share of the company's common stock. Additionally, the ARTRA preferred
stock shareholders, which shall include persons who elect to exchange their BCA
preferred stock prior to the merger, will receive shares of NAAC common stock in
exchange for shares of their respective preferred stock issuances. All stock
options and warrants issued by the company and outstanding on the closing date
of the Merger will be converted into NAAC stock options and warrants.
NAAC owns all of the outstanding capital stock of entrade.com, Inc.
("entrade.com") and 25% of the Class A Common Stock of asseTrade.com, Inc.
("asseTrade.com").
entrade.com is an Internet business-to-business e-commerce company seeking to
provide asset disposition solutions for the utility and large industrial
manufacturing sectors. asseTrade.com proposes to develop and implement
comprehensive asset/inventory recovery, disposal, remarketing and management
solutions for corporate clients through advanced Internet electronic business
applications, including on-line auctions.
In connection with the execution of the Merger Agreement, on February 23, 1999,
NAAC acquired certain software and intellectual property and 25% of the shares
of Class A Voting Common Stock of asseTrade.com (collectively, the "Purchased
Assets") from WWWX, in exchange for 1,800,000 shares of NAAC Common Stock,
$800,000 in cash and a note for $500,000, payable upon the consummation of the
Merger or the earlier termination of the Merger Agreement. On February 19, 1999,
NAAC had agreed with Energy Trading Company ("ETCO"), a wholly owned subsidiary
of Peco Energy Company, to issue to ETCO 200,000 shares of NAAC Common Stock,
and to pay ETCO $100,000 in exchange for certain retained rights ETCO held in
the Purchased Assets. NAAC also agreed with both WWWX and ETCO that it would
provide a minimum of $4,000,000 in funding for entrade.com. Under separate loan
agreements, ARTRA agreed to loan NAAC up to $2,000,000 to fund the $800,000 cash
payment to WWWX and to provide funding for entrade.com until the consummation of
the Merger or the earlier termination of the Merger Agreement. Under the Merger
Agreement, the Company agreed to guaranty the $4,000,000 funding for entrade.com
if the Merger is consummated.
Consummation of the merger is subject to the approval of the shareholders of
ARTRA. The Company expects to complete the transaction during the third quarter
of 1999.
The company has adequate funds available to fund its obligations under the
merger agreement and to fund entrade.com's operations for the remainder of 1999.
Capital Expenditures
ARTRA's corporate entity has no material commitments for capital expenditures.
Investment in COMFORCE Corporation
ARTRA, along with its wholly owned Fill-Mor subsidiary, owns a significant
minority interest in COMFORCE Corporation ("COMFORCE"), consisting of 1,525,500
shares or approximately 9% of the outstanding common stock of COMFORCE as of
December 31, 1998 with an aggregate value as of that date of $8,200,000.
The COMFORCE shares constitute unregistered securities under the Securities Act
of 1933 (the "Act"). As a result of ARTRA's former involvement in the operations
and management of COMFORCE, ARTRA was considered an "affiliate" of COMFORCE
under the Act, and because of this, the number of shares that ARTRA could sell
without registration under the Act within any three-month period was limited.
For the reasons set forth below, the Company believes that an exemption from
registration under Rule 144(k) promulgated under the Act is now available to it,
and therefore the limitations under Rule 144 on the number of restricted shares
that ARTRA could sell within any three-month period without registrations are no
longer applicable to it.
14
<PAGE>
There can be no assurance that the Securities and Exchange Commission would
concur with our position. Notwithstanding this, we do not believe that our
ability to sell COMFORCE shares, or eventually to realize on the value of our
COMFORCE shares, will be affected in a material adverse way, although we may not
be able to sell our COMFORCE shares as quickly as we could if we were to use
Rule 144(k), and in any event, an attempt to sell a large number of our COMFORCE
shares over a limited period could be expected to result in a reduction in the
value of such shares.
In January 1996, our Board of Directors approved the sale of 200,000 of ARTRA's
COMFORCE common shares to certain officers, directors and key employees of ARTRA
for non-interest bearing notes totaling $400,000. The notes are collateralized
by the related COMFORCE common shares. Additionally, the noteholders have the
right to put their COMFORCE shares back to ARTRA in full payment of the balance
of their notes. Based upon the preceding factors, we have concluded that, for
reporting purposes, we have effectively sold options to certain officers,
directors and key employees to acquire 200,000 of our COMFORCE common shares.
Accordingly, in January 1996 these 200,000 COMFORCE common shares were removed
from the our portfolio of "Available-for-sale securities" and were classified in
the our condensed consolidated balance sheet as other receivables with an
aggregate value of $400,000, based upon the value of proceeds to be received
upon future exercise of the options. The disposition of these 200,000 COMFORCE
common shares resulted in a gain that was deferred and will not be recognized in
the our financial statements until the options to purchase these 200,000
COMFORCE common shares are exercised. During the first quarter of 1998, options
to acquire 14,000 of these COMFORCE common shares were exercised resulting in a
realized gain of $53,000. At March 31, 1999, options to acquire 55,750 COMFORCE
common shares remained unexercised and were classified in our condensed
consolidated balance sheet as other receivables with an aggregate value of
$112,000, based upon the value of proceeds to be received upon future exercise
of the options.
Redeemable Preferred Stock
As discussed in Note 4 to our condensed consolidated financial statements, we
have outstanding redeemable preferred stock with a carrying value of $2,921,000
at March 31, 1999. Certain redeemable preferred stock issues of the BCA and
Bagcraft subsidiaries are included in liabilities of discontinued operations at
March 31, 1999.
Under the terms of the Merger Agreement with WWWX and NAAC (See Note 2 to our
condensed consolidated financial statements), if approved by the Company's
shareholders, the ARTRA preferred stock shareholders, which shall include
persons who elect to exchange their BCA preferred stock prior to the merger,
will receive shares of NAAC Common Stock in exchange for shares of their
respective preferred stock issuances.
Litigation
We are the defendants in various business-related litigation and environmental
matters. See Note 7 to our condensed consolidated financial statements. At March
31, 1999 and December 31, 1998, we had accrued current liabilities of $1,500,000
for potential business-related litigation and environmental liabilities. While
these litigation and environmental matters involve wide ranges of potential
liability, we do not believe the outcome of these matters will have a material
adverse effect on the our financial statements.
Net Operating Loss Carryforwards
At December 31, 1998, we had Federal income tax loss carryforwards of
approximately $10,000,000 expiring principally in 2010 - 2012, available to be
applied against future taxable income, if any. In recent years, we have issued
shares of our common stock to repay various debt obligations, upon exercise of
stock options and warrants, as consideration for acquisitions, to fund working
capital obligations and as consideration for various other transactions. Section
382 of the Internal Revenue Code of 1986 limits a corporation's utilization of
its Federal income tax loss carryforwards when certain changes in the ownership
of a corporation's common stock occurs. In our opinion, we not currently subject
to such limitations regarding the utilization of its Federal income tax loss
carryforwards. Should we continue to issue a significant number of shares of our
common stock, it could trigger a limitation on our ability to utilize our
Federal income tax loss carryforwards.
15
<PAGE>
Impact of Inflation and Changing Prices
Inflation has become a less significant factor in our economy; however, to the
extent permitted by competition, we have generally passed increased costs to our
customers by increasing sales prices over time.
Recently Issued Accounting Pronouncements
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement establishes accounting and
reporting standards for derivative instruments and requires recognition of all
derivatives as assets or liabilities in the balance sheet and measurement of
those instruments at fair value. The statement is effective for fiscal years
beginning after June 15, 1999. We have not determined what impact this standard,
when adopted, will have on the our financial statements.
Year 2000 Compliance
The Year 2000 ("Y2K") issue refers to the inability of many computer programs
and systems to process accurately dates later than December 31, 1999. Unless
these programs are modified to handle the century change, they will likely
interpret the Year 2000 as the year 1900. We anticipate that the Year 2000 Issue
will not have a material adverse effect on our financial position or results of
operations. We have not incurred any significant costs for Y2K compliance to
date and do not expect to incur any significant additional costs to complete
such compliance. Additionally, we believe the technology and internal computer
systems of entrade.com are Y2K compliant.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
There have been no material changes in reported market risks faced by the
Registrant since December 31, 1998. The Company's investment in COMFORCE common
stock is subject to liquidity and market price risks.
16
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
- ------- -----------------
The information required by Part II, Item 1 of Form 10-Q is hereby
incorporated by reference to Note 7 to the Company's condensed
consolidated financial statements for the quarter ended March 31, 1999
included in Part I, Item 1 of this Form 10-Q.
Item 6. Exhibits and Reports On Form 8-K
- ------- --------------------------------
(a) Exhibits:
None.
(b) Reports on Form 8-K:
On March 2, 1999, the Company filed Form 8-K to report the
agreement with NA Acquisition Corp. ("NAAC") and WorldWide
Web NetworX Corporation providing for the merger of a
subsidiary of NAAC with the Company.
17
<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 thereunder duly authorized.
ARTRA GROUP INCORPORATED
------------------------
Registrant
Dated: May 17, 1999 /s/ James D. Doering
- ---------------------- -----------------------
JAMES D. DOERING
Vice President and
Chief Financial Officer
18
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